© Copyright 2006
US FlagMay 15, 2006 Edition
1stLifeSettlements


SHIFT CONTINUES - The shift away from traditional pension plans continues.  A Watson Wyatt survey of the FORTUNE 100 companies found that only 37 offered pensions in 2005, compared to nearly 90 in 1985.  As employers shift away from traditional pension plans, "the wealth that workers are able to accumulate during their working years in individual account plans will be, for many workers, the determining factor in their ability to maintain a comfortable standard of living in retirement," according to an analysis from the Employee Benefit Research Institute.

STOCK OPTION TROUBLES - We reported in the May 1 E-News that UnitedHealth was facing criticism and lawsuits over granting $2.4 billion in stock options to its top executives.  Now comes news that the SEC is conducting an "informal inquiry" into its stock options practices.  The company also announced that it might restate results that could reduce past earnings by as much as $268 million.  Why?  UnitedHealth may be required to pay additional taxes for compensation tied to certain stock options and may not be able to take additional deductions associated with certain options in the future.

LIKELY MERGER - Investment News reports that Charles Schwab Corp. is likely to purchase E*Trade.

BIDDING WAR? - Speculation is building that the Nasdaq and the NYSE may enter a bidding war to purchase the London Stock Exchange.

RATES UP - The Federal Reserve raised interest rates again, from 4.75% to 5%, and left the door open to more increases in the future.

BYE BYE - Morgan Stanley has fired 500 trainees from its four-year adviser training program...that's half the trainees in the program...because they "were not tracking toward long-term success in the business."

BROKER HIRING BONUS – In an attempt to bolster their top producer ranks, Morgan Stanley is offering advisers double their gross revenue from the previous year if they join the company.

SEC TO REDUCE FEES - The SEC will reduce the fees it levies on securities transactions by about $1 billion.  Charges for securities registration by will be cut about 71% and most other fees will be cut in half. Sure makes you wonder what they were doing with all those fees in the past.



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JUMP IN RIAs – A Schwab study shows many brokers are switching to the registered investment adviser (RIA) channel. New RIAs increased significantly in 2005 and are expected to double in 2006. The trend is being driven by captive brokers' desire for independence and RIA firms' need for help. This demand is helping drive banner recruiting efforts by asset management firms.

280,000 ADVISORS - Cerulli Associates says that at the end of 2004, the whole arena of advisers consisted of about 280,000 individuals.  RIAs and 81,412 reps at independent broker-dealers, 47,623 reps at insurance broker-dealers, 73,394 brokers at wirehouse firms, 22,725 brokers with bank-owned brokerage houses and 22,618 advisers with regional broker-dealers.

ALLIANZ DOMINANCE - Brokers and insurers that sell index annuities using independent marketing organizations are concerned about Allianz's market dominance. They claim Allianz provides incentives for independent marketing organizations to sell the company's proprietary contracts by offering higher overrides and other perks and that it also has controlling stakes in several of the marketers. Allianz has a one-third market share in index annuities and no other insurer has more than 10%. According to Allianz's CEO Pat Foley, the company acquired its market share through hard work and superior treatment of its producers. "We have ownership interests in several field marketing organizations that sell the products of a variety of insurance companies."

MAILMAN INVOLVED - In the April 14 E-News, we reported that "a Goldman Sachs analyst and a Merrill Lynch investment banker made more than $6.7 million through an insider trading ring by enlisting an analyst for information, bribing a forklift driver for advance copies of a market-moving magazine and getting strippers to coax stock tips from investment bankers about pending mergers and acquisitions."  Now we have the SEC filing fraud charges against a NJ mailman who served on a federal grand jury investigating this insider trading ring and leaked secret grand jury information to members of the ring.

AETNA FIGHTING ITS OWN INSURERS - The National Underwriter reports that Aetna "is having trouble collecting from its insurers."  In 2003, Aetna settled a class action suit brought by 900,000 doctors in its provider network.  Aetna is seeking reimbursement for the cost of the settlement from its insurers who, so far, are refusing to pay, saying that the losses Aetna suffered in the settlement are not covered by the policies Aetna has.

PRETTY GOOD PAY - William Kirsch unexpectedly resigned after 21 months as Conseco's chief executive to "spend more time with his family and explore other opportunities."  We guess he won't have any money problems doing so...Mr. Kirsch is receiving a $6.7 million severance package for his 21 months of service ($6.7 million/21 months = $319,048 per month).

HOME DEPOT BANK – Following Wal-Mart's lead, Home Depot, the nation's second largest retailer, has purchased a small bank so that it can offer loan services to contractors at the home-improvement chain.

WACHOVIA BUYS GOLDEN WEST – Wachovia continued its westward march by acquiring Golden West Financial for $25.5 billion.

OVERTIME FOR REPS? - Labor lawyer Mark Thierman is taking on Wall Street with an unusual legal threat. He thinks the average registered rep working on commission has been shortchanged by about $30,000 in overtime pay and plans to sue their broker dealers for unpaid overtime.

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TIPRA 2005 - That's the recently-passed Tax Increase Prevention and Reconciliation Act of 2005.  TIPRA extends and increases the AMT exemption for 2006 to $62,550 for married couples filing jointly and to $42,500 for single taxpayers.  Congress will have to face the AMT issue again in 2007 (and 2008...and 2009...etc., unless permanent action is taken).  The bill also extends the 2008 dividend and capital gains tax rate of 15% through 2010 (0% for taxpayers in the 10% and 15% tax brackets).  While the legislation provides about $90 billion in tax cuts, it also contains $20 billion in "revenue enhancers," for a net cost of $70 billion.  A couple of the "revenue enhancers" might be of interest to you:  Beginning in 2010, anyone can convert a traditional IRA to a Roth IRA (currently such conversions are limited to those with $100,000 or less of adjusted gross income).  While treated as a taxable distribution, the conversion is not subject to the early withdrawal penalty tax.  For conversions made in 2010, taxpayers can elect to recognize the conversion income in 2010 or average it over the next two years.  This could be an attractive option for high-income taxpayers.  As to the "revenue enhancer" part, these conversions may raise tax revenue in the short-term, but will probably be a long-term revenue drain.  Another "revenue enhancer" of interest deals with the kiddie tax.  The kiddie tax requires that a child's unearned income in excess of a stated amount ($1,700 in 2006) be taxed at the parents' usually higher tax rate.  Under current law, the kiddie tax applies to children under age 14.  TIPRA increases this to age 18 and is effective for the entire 2006 tax year.  This change may well raise tax revenue, particularly from families who were planning to sell the college stock portfolio of a child over age 13 in 2008 and benefit from the 0% capital gains tax rate.

LIFE INSURANCE AWARENESS MONTH - Senate Resolution 448 designates September 2006 as Life Insurance Awareness Month.  "The National Association of Insurance and Financial Advisors (NAIFA) and the Life and Health Insurance Foundation for Education (LIFE) are major sponsors of this annual, industry-wide initiative to help raise public awareness about the importance of life insurance and to encourage consumers to evaluate their life insurance needs."

BLOCKED - Democrats were successful in blocking passage of association health plan legislation because the plans would operate outside of state consumer protection systems.  According to The National Underwriter, Senate Democrats were also miffed at having been excluded from shaping the legislation.

COMPLETE STORY? – A recent NY Times article was titled "Analysis of Tax Bill Finds More Benefits for the Rich" and concluded, "The tax cut bill is expected to save Americans at the center of the income distribution an average of $20 each, according to estimates by the Tax Policy Center." Further, the NY Times article states that the "top tenth of 1% of Americans will save about $82,415." Doesn't sound fair, does it? But when you consider the bottom 50% of tax payers only pay 3.5% of the total income tax and the top 1% pays 33.7% of all income taxes, it only seems fair that the folks who pay the most should get the biggest savings.

KISS - When it comes to retirement products, keeping it simple is the advice from Hartford Financial Services.  "As the industry shifts to the income planning stage, from the savings accumulation stage, offering products that both meet a client's needs and are understandable is important."  Speaking of income planning products, Prudential Financial is expanding availability of its "Income Bridge" annuity product to any individual retiring with qualified plan or IRA assets.  This is a period certain immediate annuity designed to provide guaranteed income during a "bridge period," defined as the period of time from "retirement to the point that higher, delayed Social Security benefits begin."

HERO ACT - The House unanimously approved the Heroes Earned Retirement Opportunities (HERO) Act, which gives military personnel more opportunity to contribute to IRAs.  IRA contributions are linked to taxable income.  Since combat pay is tax-free, military personnel receiving only combat pay cannot contribute to an IRA.  The HERO Act would make combat pay eligible compensation for IRA contribution purposes.  The legislation now goes to the Senate for consideration.  Seems like a "no brainer" to us!

SQUASHING SENIOR SCAMS - The SEC and North American Securities Administrators Association are joining forces to protect seniors from abusive sales tactics, such as "free lunch" seminars aimed at the elderly.  More information is available here.

SEX, LOVE AND MONEY - According to a study by Fair Issac, a third of 1,022 people polled said that a lack of financial responsibility hurt their relationships even more than their significant other being unfaithful. The study also revealed that keeping the finances straight even trumped a good sex life. Respondents were twice as likely to select financial responsibility (22%) over sexual compatibility (10%) as a personal trait that has sustained their relationships over the years. In fact, the poll found that couples argue more about money than about sex. Click here to see the complete article. You might want to send it to some of your engaged and/or newlywed friends, relatives and clients.

YOUNG FINANCIAL ILLITERATES - Which tends to have the highest growth over periods as long as 18 years: (a) A U.S. government savings bond; (b) a savings account; (c) a checking account, or (d) stocks? This was one of 30 multiple-choice knowledge questions in a financial-literacy test given to 5,775 recent high school seniors.  Only 14% of the 12th-graders answered correctly...(d) stocks. Also, just 23% of the students in the latest test understand that interest on savings accounts may be taxable and only 40% realized they could lose their health insurance if their parents become unemployed. Combine this with the "Sex, Love and Money" abstract above and you may find one reason why there are so many divorces! See the complete survey here.

LIFE SETTLEMENTS UP – According to the WSJ, life settlement investors have bought an estimated $13 billion in life insurance policies. Regulators are investigating the growing market; the National Association of Insurance Commissioners will conduct a hearing about the possible need for state regulators to clamp down on individuals' selling policies to investors.  

ANNUITY SETTLEMENTS – It may not have as large a market as life settlements, but apparently annuity settlements do have a place. A secondary market for annuities is emerging, giving investors the opportunity to sell what was once unsalable or cash in their annuities for more than the insurer would give them. "We estimate that up to 10% of annuity holders would sell their policies if they could," says J.G. Wentworth, one of a handful of firms that buy annuities from individuals. In fact, an American Council of Life Insurers (ACLI) survey of 460 annuity holders reports that 27% are concerned that they may be unable to sell their annuity if they want the money for something else.

GOLD HIGH – Investors, looking for safe investments in times of political instability, are pouring money into gold. The price increased to more than $700 an ounce for the first time in 25 years.

CONSUMER CONFUSION - The Coalition for Investor Education has produced a free brochure, "Cutting through the Confusion," that explains the differences between brokers, investment advisers, and financial planners and identifies questions investors should ask themselves and potential providers before making a choice. Much of the confusion stems from the fact that, during the past few years, brokerage firms increasingly have been offering services that look like investment advisory or financial planning services – and they have begun charging asset-based fees instead of commissions for these services. A PDF version of the brochure is available on-line at the following sites:
www.consumerfed.org/publications.cfm#one
www.nasaa.org
www.investmentadviser.org
www.fpanet.org
www.cfainstitute.org

INHERITED IRAS – Many people believe that at the death of an IRA owner, the beneficiary must liquidate the IRA within five years of the owner's death. However, you can also make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of the beneficiary..."Joe Smith IRA (deceased May 10, 2006), F/B/O (for the benefit of) Pat Smith, beneficiary."  The beneficiary will still have to begin receiving distributions from the inherited IRA according to the "other than spouse" rules...essentially withdrawing the entire balance by the end of the fifth year following the owner's death or begin receiving distributions spread out over the beneficiary's lifetime.  If desired, the trustee-to-trustee transfer does, however, offer an opportunity to move the funds from one financial institution to another.

HOME, SWEET HOME EQUITY – Boomers as a group have done poorly in saving for retirement, but many live in homes that have appreciated greatly as real estate prices soared. Traditionally, the main sources of retirement income have been Social Security, pensions, savings and working during retirement, but many retirees will be able to "monetize" their homes by moving to a less expensive residence and investing proceeds, using reverse mortgage loans or creating some interfamily deals.

AARP TO ADD MORE FUNDS - AARP is planning to follow-up the launch of three mutual funds with a money market fund and is also considering a bond fund. One feature of the new AARP Funds, which sets them apart, is very low initial investment minimums. People can begin investing with as little as $100, or even $25 if they sign up for an automatic investment plan. The funds are sold no-load, with no up-front sales charge, and have an annual expense ratio of 0.5%.