Category Archives: Taxes

Shaken Investor Confidence – restoring faith in investment managers

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The article below on client satisfaction intrigues me. (And you can comment below or ask us for input Did you get the best investment advice before the crash?)

Typically, my clients are very candid about their views regarding investment selection. However, the article suggests that many investors may just be waiting to get back to even before switching…

What really makes me wonder is: (1) what more could advisors and investment managers have done to prove that there was no more that they could have known in time to act any differently, and (2) how do we rebuild confidence when so many people were rattled so much financially and emotionally?

Simply repeating the platitudes that investment allocation works over time is not enough to cure the shaken confidence.

What are your insights? What ideas do you have on the issue? Let me know.

Thanks,

Steven

02-19-10 | 12:51pm
Client Satisfaction

Since the beginning of the market downturn in August 2008 through June 2009, investor satisfaction with their advisors has fallen from 67% of households being satisfied to 55% of households, according to a Cerulli survey. In addition, investors’ trust in financial firms is at abysmal levels, with only 26% of households believing that financial firms are looking out for their best interests.

Based on these numbers, many industry experts predicted a deluge of client movement as clients left their advisors to find better service and performance. Cerulli, however, has detected only a slight uptick in the number of investors switching financial providers. In fact, most of the movement of clients between firms has been tied to advisors moving between firms and taking their book of business along.

In Cerulli’s view, this data should not necessarily re-assure advisors that their client relationships are safe. While most investors have not left their current advisors, many have been waiting until market conditions settle before making a move. In addition, investors indicated that they are less likely to turn to their existing advisor for a new financial product or service. In August 2008, 70% of investors surveyed indicated that they would seek new products and services from their primary advisor, but by June 2009, that number had fallen to 59% of investors.

Finally, among high-net-worth clients, Cerulli has found a notable trend of investors maintaining more advisory relationships than in the past. It appears that high-net-worth investors have generalized the idea of diversification beyond investments to apply to their advisory relationships. In light of the failure of some well-respected firms during the financial crisis, high-net-worth investors are less willing to rely on a single advisor or a single firm. This indicates that going forward advisors serving high-net-worth clients will maintain a lower share-of-wallet of their clients’ assets and may have a reduced role in influencing their client’s financial decisions.

While inertia will likely keep most investors in their current advisory relationships, advisors would be wise to assess their clients’ level of satisfaction as well as the role the advisor plays in clients’ financial decision-making. Advisors should work to re-assert their value proposition with their clients to show their clients the relationship is worth the cost.

Likelihood to Seek New Products or Services from Primary Advisor by Channel (graph not shown)

Source: Cerulli Associates, Phoenix Marketing International

Here is a related article:

What Are You Scared Of?

I’ve been thinking a lot about fear and the impact it has on our industry–specifically, the communication strategies we use as financial advisors; the nature of our advice and the ability to do our job; and investors and the public in general.

Maybe it’s just me, but it seems our industry is scared of having strong opinions. I understand that making public statements about market forecasts, performance predictions, and guarantees of any sort would be a legitimate cause for concern. But if you put all of those legitimate concerns in a bucket, it seems to me that it’s a rather small bucket. So why are we scared of strong opinions?

Is it possible that this small set of legitimate fears is having a greater impact than it should on the rest of our business? We seem to no longer know what we can have strong opinions about. For example, at what point is it OK for us to respond to criticism or to defend ourselves publicly? There have certainly been a lot of negative things written about us, so at what point is it OK for us to share all the positive things we’ve been doing? Certainly, it’s OK to share our opinions about how we charge for advice and wisdom, how we make decisions, and how we communicate with clients.

This fear isn’t isolated to how we run our businesses. Fear has always played a major role in how we make decisions about money, but the in the last two years, it seems to have become part of our national conversation. I can’t remember a time where there was more fear of the future, fear of the unknown, and fear of the “economy”–whatever that is–and all these issues are out of our control. So what can we do to help clients deal with them?

One of our primary goals (and one of the reasons why I think long-term relationships are so important in financial planning) is to give clients an opportunity to download their fears. But in helping them understand the difference between rational and irrational fear, how do we avoid the same problem ourselves?

Estate Planning Update – still no federal estate tax

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So far this year, there is no federal estate tax. This creates a planning quagmire.

Depending on how the estate tax clause is drafted in your estate plan, you could have the entire estate passing to children instead of a portion to the surviving spouse, or all of the estate passing to the surviving spouse, not using any state estate tax credit such that unnecessary state estate taxes become due at the first death.

Until Congress acts to pass a law to retroactively restore the federal estate tax, as expected, you should check your tax clause and review it with your attorney to see if a revision is in order.

You may find that your documents adequately deal with the combination of no federal estate tax and applicable state estate tax. Or, you may find that an amendment to your documents is needed to address this issue.

While reviewing the tax issue, make sure your durable powers of attorney and health care proxies or medial directives are also up to date.

Let us know if you have questions or comments. Thanks,

Steven

Investment Planning: fear index and your asset allocation

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Recent world events (China, banking regulations, Haiti, etc.), and corresponding market moves, have lead investors to become concerned about US stocks. The VIX index, also known as “the fear index”, is about as low as it was when Lehman Brothers collapsed in 2008 – a very low number.

Is this indicator rational and should act or should you continue to stick to your long-term investment strategy, and your asset allocation?

First, on volatility, there are hedges that some can buy but many are currently over-priced. That is, you can attempt to replicate the VIX Index and benefit from its contrary motion against the stock market as a form of “portfolio insurance”. However, because so many investors are concerned, they have over-bought this index, or its components, so it is not favorably priced, making this a bad time to buy.

Second, on stocks and ultimately on your asset allocation, does the index still tell you that you need to sell stocks? If you did, you always have the timing issue of when to buy back in (see the quotation below). Also, the fear index could, in fact, be a contrary indicator, indicating that you should not sell, just as when individual investors buy or sell, you should sell or buy.

Third, the worry is that the recent upswing means that stocks are over-priced now. However, the P/E ratio is neither as high as 2000 nor as low as the long-term average of 18. So the index does not necessarily sound a warning bell for mass sale of stocks.

A better response for arguing that you should adhere to your allocation is summarized by John Coumarianos, who is a mutual fund analyst with Morningstar: “Investors tend to time their allocation shifts poorly, doing themselves much harm along the way. That’s largely because they make such moves based on emotion rather than hard facts. For example, many investors abandoned stocks at the depth of the crisis in 2008, missing the big comeback in 2009. Our statistics on Investor Returns are grim. They prove that most investors do an awful job of timing the market, consistently selling low and buying high.”

He goes on to argue that you need to rely on mutual fund and other investment managers to go into cash when appropriate and then move back into stocks, based on their expertise and analysis, which is totally independent of the fear index.

As I have often said, having a long-term strategy and sticking to it is the key to achieving good returns over time. This often requires ignoring what others say, what the press or information like the fear index says, and your own sense of anxiety. A good portfolio will have both ups and downs, but it will work for you if you let it.

Thanks,

Steven

Tax planning: donations for Haiti

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Under a new rule, donations for the Haiti earthquake relief made in January and February of 2010 can be deducted on 2009 tax returns. The contributions that count include cash, check, credit card and cell phone text messages. The donation must be made to U.S. charities.

Be sure to let your tax preparer know if you made a contribution in 2010. The issue will be whether 2009 or 2010 is the best year to take the deduction.

Let us know if you have questions or comments. Thanks,

Steven

Tax planning: 2009 tips and traps, and 2010 changes

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Tax law changes for 2009 will require you to submit more information to your tax preparer to ensure that you get the most of tax credits and deductions. If the person working on your tax returns does not have all the proper information, you could pay too much or your return could be rejected.

Here is an overview of tax changes to consider when gathering your information:

* Making Work Pay Credit (“MWPC”), is a $400 credit to offset a reduction in withholdings enacted early in 2009. It is phased out for higher income and offset by the Economic Recovery Payment, described below. You could end up owing taxes if the credit does fully offset the reduction in withholdings (affects 2009 and 2010).
* Economic Recovery Payment (“ERP”) is a payment received as part of your social security benefits (for 2009 only), and affects the MWPC so that failing to report it could result in your tax return being rejected. The payment itself is not taxable.
* Government Retiree Credit (“GRC”) is for those not receiving social security, but affects the MWPC (2009 only). The new Schedule M reconciles the MWPC, ERP and GRC so you need all the information.
* First Time Home Buyer’s Credit is a $8,000 credit that applies to first time buyers purchasing between certain dates and requires a paper filing (electronic filings will not get the credit). If you buy the home in 2010, you have the option of amending your 2009 taxes for the credit. Note that this credit gets repaid over time on future tax returns beginning in 2010.
* Tax credit for long term home owners buying a new home, between certain dates, also requires a paper filing to avoid being rejected.
* American Opportunity Tax Credit (an expanded Hope Credit) allows use of the credit for two year more years than the Hope Credit, covering junior and senior years of college when the Hope Credit was not available.
* New Vehicle Purchase sales tax deduction (2009 only) is an additional Schedule A item, so long as your are not taking the general sales tax deduction.
* Energy Credit for solar power, fuel cells and certain energy efficient improvements are Schedule A deductions. There are two types of credit depending on what improvements were made to your home and taking the deductions requires you to have documentation.
* The Cash for Clunkers voucher is not considered income (2009 only).
* A tax refund can be used to buy U.S. Series I bonds.
* There is an AMT patch which helps for 2009, but falls back for 2010.
* There is an increased casualty and theft loss limit that helps for 2009.
* Note that a dependent child’s income is taxed when it exceeds $1,900.
* The Tuition and Fees Deduction applies to 2009.
* Unemployment Compensation has $2,400 excluded from taxable income (2009 only).
* Educator’s Expense enhanced for 2009.

Note that not all states accept the IRS changes, so the information and outcome could be different.

For 2010, some old provisions return and some new changes require action now:

* 2010 conversion to a Roth IRA has no income limit and two years to pay the taxes (please see To convert or not traditional IRA to Roth IRA).
* Certain changes lost for 2010 worth repeating (see What to watch out for in 2010 – investing, taxes and more):
* AMT patch falls back;
* Casualty and theft loss limits fall back;
* Educator and tuition and fees deductions against adjusted gross income are not available;
* Deduction of state and local sales taxes ends;
* Exclusion of $2,400 of unemployment income ends; and
* Exclusion of income from qualified distributions from IRAs to charities ends.
* The estate tax still has not been enacted retroactively, as expected (see Estate Planning – will we have a new tax law in time).

As we said before, tax planning involves a multi-year view to optimize what you end up paying (please see More Strategies – Three Year Planning…., Tax Credits and all Continued, and What to watch out for in 2010 – investing, taxes and more)

Let us know if you have questions or comments. Thanks,

Steven