© Copyright 2007
US FlagApril 1, 2007 Edition



ADVISORS BEWARE - According to an article in Investment News, "regulators are turning the spotlight on companies that specialize in using high-pressure marketing tactics to sell financial products and services to older Americans."  They are being accused of providing intimidating and deceptive marketing material to producers selling annuities and other financial products. Specifics cited included "ghost written" books and newsletters that give the impression that the producer has written them and is therefore an expert on the subject. If you've purchased and use marketing materials aimed at older Americans, you should review this article.  Also be aware that the combined NASD-NYSE self-regulatory organization plans to focus on issues that include "sales practices aimed at seniors" and the "emerging life settlement industry."

STRONG ADVICE TO THOSE SELLING ANNUITIES – If the regulators and the press are calling, can the lawyers be far behind? We encourage you to take a hard look at how you are marketing and what tools you are using. You may be very close to the line and not even know it. Further, if you want good, compliant sales support tools for all markets, take advantage of the Virtual Sales Assistant. For about 20 bucks a month, you might save yourself a lot grief and money in the future. Try it for free for 30 days.

SUBPRIME FALLOUT - Only time will tell the overall impact of the collapse of the subprime mortgage market, but federal regulators have asked Wall Street bankers and other players to attend an April 16 meeting in Washington to discuss the problems.  The Federal Reserve is also considering writing new rules to prohibit "predatory-lending practices."  The difficulty here, of course, is how "predatory" is defined.  In the "ripple effect" category, there are indications that the city of Irvine, CA, home to New Century and Ameriquest Mortgage, two hard-hit subprime lenders, will suffer economic damage from the collapse of the subprime market.

SUBPRIME SUSPECTS – The "blame game" has begun. The Senate Banking Committee is looking into the massive increase of defaults and foreclosures in the mortgage arena. Special criticism was handed out to the Federal Reserve, which senators said was "obliged to oversee mortgage lending," the Office of the Comptroller of the Currency and other regulators. This looks like part of the problem. What agency was specifically charged with the responsibility to prevent "abusive lending"? "If everyone is responsible, no one is responsible."

"MERRILL RULE" - The Financial Planning Association has written a letter to the SEC requesting that federal regulators do a better job of distinguishing fee-based brokerage services from true financial planning services.  In the letter, Duane Thompson, managing director of the FPA's Washington office notes that "some broker-dealers seem to be trying to avoid coming under the Investment Advisers Act by providing isolated elements of a financial plan, rather than a complete financial plan" and asking "whether an agent who provides an element of a financial plan should, in fact, come under the Investment Advisers Act."  There certainly exists a cloud of confusion over this matter.  We hope the FPA is successful in gaining some clarity.  More information is available at www.fpanet.org. 

TOUGH SUBJECT/SERIOUS TREATMENT - Click here to review comptroller general of the U.S. David Walker's "Fiscal, Retirement, and Health Care Challenges" slide presentation. 

STATE MANDATES - According to the Council for Affordable Health Insurance, there are now 1,901 state mandates requiring specific health insurance coverage.  A copy of the report is available at www.cahi.org.  This is kind of crazy at a time when affordable health insurance is a major concern. 

RESEARCH RIP OFFS - What do Merrill Lynch and the entertainment industry have in common?  Both are tired of their proprietary content being ripped off.  Merrill Lynch is taking aggressive steps to curb distribution of its research reports, including restricting and delaying media access and establishing licensing agreements. 

TORT TAX NEARS $10,000 – According to Pacific Research Institute, America's legal system cost $865 billion every year, or $9,827 per family. This figure is 27 times more than the government spends on homeland security, 30 times more than the money dedicated to finding cures for deadly diseases, and 13 times more than the U.S. Department of Education spends to help educate our children. More information on "Jackpot Justice: The True Cost of America's Tort System" is available here. 

GIVE AND TAKE - That's the conundrum facing the pharmaceutical industry.  The industry favors an expansion of healthcare coverage to the uninsured because it would translate into stronger sales for the drug makers.  On the other hand, there's concern that once government gets involved mandating wider insurance coverage, government may also step in to contain costs in a way that wouldn't necessarily be to the benefit of Big Pharma.  We guess that proves the old saying that you can't have your cake and eat it too!

EXECUTIVE PERKS - Investment News reports that, due to new SEC disclosure requirements, corporations are revealing more executive perks than in the past.  As an aside, here's a perk to envy: if Merrill Lynch chief executive Stanley O'Neal were to resign or be fired from the world's largest brokerage firm, he would take home a $251.4 million pay package.

THE SUPREMES - We'll spare you the details, but the Supreme Court is hearing arguments on a couple of cases that could result in new limits on shareholder lawsuits.  Of interest, a recently-released report indicates that securities class action settlements totaled $17.16 billion in 2006, the highest ever.  Of that amount, however, $6.6 billion comes from a partial settlement against Enron...the largest securities case settlement to date.

"NO MAS" FOR ENRON - A federal appeals court has ruled that Enron shareholders cannot proceed with a $40 billion class action against investment banks for their alleged roles in the now infamous fraud.

GOING PUBLIC - In a first of its kind, private equity firm Blackstone Group has filed for an initial public offering, aiming to raise $4 billion in public money.  The move opens a window into the secretive world of private equity investing. There is some discussion that the move may indicate the private equity market is nearing its peak, a time for Blackstone executives to cash out at the top.

WAL-MART BANK - With the approval process dragging on with no end in sight, Wal-Mart has withdrawn its application to open limited-service, Wal-Mart banks.  The company was unable to overcome suspicion that it intended to use the banks as the starting point into a broader financial services operation.

ASSOCIATION HEALTH CARE PLANS DWINDLE – Fewer than 25% of professional associations are offering association health plan coverage for their members and health insurers are dropping associations. Major problem is "adverse selection"...private insurers sell lower-cost individual policies to young and healthy people, which leaves the higher-risk, older and less-healthy in the association's plan. That results in higher and ever-increasing premiums for the remaining association plan members. Adverse selection trumps any gains from "economy of scale."

FED HOLDS RATES - The Fed will keep the federal funds rate at 5.25%, probably due to market volatility, inflation concern, subprime mess and portents of weaker economic growth.

CITIGROUP LAYOFFS – Word has it that Citigroup will cut 5% of its workforce, or about 15,000 jobs, and indications are that Wall Street is expecting the giant bank to announce deeper reductions in the coming weeks. Rumored cuts like this usually result in upward movement of the company's stock, but that's not been the case here. Reason: Investors are expecting even greater cuts. Also rumored is the possible spin off of Citigroup's Smith Barney brokerage subsidiary.

MODEL PRIVACY NOTICE - Federal regulators are floating a proposed model privacy notice for use by financial institutions.  You can take a look at it here.

MILKEN STILL A BILLIONARE - Michael Milken, the former junk bond chief from Drexel Burnham Lambert who served prison time for securities fraud, is certainly "back in the chips." He plans to sell a $1 billion stake in his group of educational companies called Knowledge Universe.
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INCOME TAX REMINDERS - Don't forget that 2006 IRA contributions can be made up until April 17.  While the regular contribution is $4,000, individuals age 50 and older can contribute an additional $1,000 catch-up contribution, for a total of $5,000.  Also, a reminder on some "hidden" 2006 tax breaks that are being overlooked: the higher education tuition and fees deduction (up to $4,000 of college tuition and fees paid in 2006; use line 35 of the 1040; enter a "T" in the blank space to the left), primary and secondary school teachers can deduct up to $250 for certain out-of-pocket classroom expenses (use line 23 of the 1040, entering an "E" on the dotted line to the left), sales tax deduction (available in states with no state/local income taxes; enter on line 5 of Schedule A, entering "ST" to indicate sales tax) and, finally, the telephone excise tax deduction of $30 to $60 depending on family size (line 71 on the 1040, line 9 on the 1040EZ or line 42 on the 1040A).

BAD LTC PUBLICITY - The New York Times ran a front-page article on March 26 titled "Aged, Frail and Denied Care by Their Insurers," alleging that the LTC industry as a whole appears to be rejecting valid claims.  According to the article, "A review of more than 400 of the thousands of grievances and lawsuits filed in recent years shows elderly policyholders confronting unnecessary delays and overwhelming bureaucracies. In California alone, nearly one in every four long-term-care claims was denied in 2005, according to the state."

ON THE RISE - Fidelity Investments has released their latest estimates of a retired couple's health care expenses...a 65-year-old couple retiring this year is estimated to need $215,000 to cover their medical costs in retirement, a 7.5% increase from last year's $200,000 estimate.  The estimate assumes the couple doesn't have employer-provided retiree health coverage and a life expectancy of 17 years for men and 20 years for women.

AVERAGE EARNINGS - The College of Financial Planning has released survey results indicating that financial planners averaged a little over $283,000 in gross earnings in 2006, up almost 18% from 2005.  The biggest impact on earnings?  Longevity in the profession.

COMPETITION FOR TALENT - Employers expect competition for talent to increase or remain at current levels, which explains why they are relying on employee benefits to recruit and retain employees.  That's one of the conclusions in the latest Metlife Study of Employee Benefits Trends.  For more, click here.

AFFLUENT USE INDEPENDENT ADVISORS - Fidelity reports that 22% of households with over $1,000,000 in investible assets use independent advisors and those advisers, on average, manage 56% of those investors' portfolios. Top reason is the perception that independent advisors put clients' interests ahead of those of a firm.

PROPOSALS FOR EASIER SAVING - The U.S. Chamber of Commerce reports that Washington is working on a couple of proposals designed to make saving for retirement easier. One would require companies with more than 20 employees that do not offer retirement plans to set up automatic-enrollment 401(k) plans and another would consolidate all 401(k)-type plans into a "401(x)" plan. Both seem to be good ideas and would present great opportunities for advisors.

ESTATE TAX MOVEMENT? - The Senate appears to have endorsed a moderate approach to the issue of estate taxes, voting 97-1 to approve a measure that could lead to estate taxes being continued at the 2009 rate in 2010 and beyond.  In 2009 the top estate tax rate is scheduled to be 45%, with a $3.5 million exemption.

RECORD ANNUITY SALES - According to LIMRA, 2006 annuity sales rose to $236.2 billion, up 9% over 2005.  Variable annuity sales were responsible for the increase, rising 17% in 2006 to $160.6 billion.

LOTS TO WORRY ABOUT - According to a survey by the American Society for Quality, Americans are more concerned about rising health care costs than about the war in Iraq.  For more on what's worrying us, click here. 

FERTILE GROUND - Banks and credit unions hold a good chunk of boomer retirement assets, making them fertile ground for annuity sales.  Some insurers, such as Principal, ING and MetLife, recognize this and are ramping up the annuity training and support they provide to bank and credit union employees.

LOWER VA COMMISSIONS - In order to give clients a fair deal and keep regulators at bay, some brokers are lowering the commissions paid on variable annuities.  Raymond James made changes last year.  Wachovia Securities and Bank of America's brokerage group are reported to have changes underway.

FEE REVIEW - The SEC is going to review the use of 12(b)-1 fees by mutual funds.  Why?  "It appears the purpose of 12(b)-1 fees has shifted from being fees intended to help no-load funds pay for distribution, to being a substitute for a sales fee."

IRA ROLLOVER OPPORTUNITY – Ed Slott's IRA Advisor reports that, "Money is just gushing out of retirement accounts like we've never seen before." However, the problem is many advisers aren't educated and prepared to get the IRA rollover business. Sounds like an endorsement for the "Knowledge is Power" axiom.

ABRIDGED PROSPECTUS? - The SEC is considering a proposal that would let mutual funds deliver a two-page document to prospective investors and it may be effective as soon as the second or third quarter of this year. The two-page documents would replace the fund prospectus, and would likely summarize a fund's strategies, objectives, performance, risks, conflicts and costs. Good idea since no one reads the current prospectuses, much less understands them.

FIDUCIARY RESPONSIBILITY AND LTC – According to Marquis Consulting, advisers who agree to be retirement plan fiduciaries are putting themselves in legal jeopardy for the future...just like accountants, fund companies and annuity insurers. Protection can be provided by developing clear investment policy statements, offering suitable products and providing clients with the opportunity to purchase LTC insurance.

AVAILABILITY OUTSTRIPS USE - Watson Wyatt research indicates that "large employers are much more likely to offer health savings accounts and health reimbursement arrangements than employees are to sign up for the accounts."