US FlagJune 15, 2008 Edition


THE GREAT SEDUCTION – NYT’s Op-Ed columnist David Brooks has written an important piece called “The Great Seduction.”  Mr. Brooks focuses on what he calls “financial decadence, the trampling of decent norms about how to use and harness money.”  In his piece, he references “A Nation in Debt...How We Killed Thrift, Enthroned Loan Sharks and Undermined American Prosperity.”  Do yourself a favor and read both. 

UNDERINSURED – We’ve all heard about the roughly 47 million Americans without health insurance.  Now comes word that some 25 million adults in the U.S. are underinsured, meaning that while they have health insurance, they face financial stress due to insufficient coverage.  This is according to the Health Affairs journal, which also notes that health care premiums have skyrocketed by 91% between 2000 and 2007, compared to a 24% increase in wages.

COUNTER-CYCLIC INSURANCE INDUSTRY – Recent data from United States Bureau of Labor Statistics showed a hefty spike in the unemployment rate. In just one month the unemployment rate has increased .5%.  However, the data indicates that insurance firms appear to be going full-steam ahead, with U.S. insurance industry payrolls adding 3,200 job openings, and firms adding 20,000 positions.

WHAT’S UP (OR DOWN)? – Here are some interesting articles on our current economic state of affairs.  Take a few minutes and scan those of interest to you:
 KICKBACK INVESTIGATION – Expect the state of Connecticut to pursue more single premium annuity pension plan brokers who take kickbacks from insurance carriers. In May, the state reached a $1.7 million settlement with Mutual of Omaha and required the company to reimburse consumers' premiums and enact business reforms. The carrier and its brokers hid the incentive pay within an "expense reimbursement agreement," so that a lower commission was disclosed to the pension plans and the kickback (which was as high as 1% of the premium) remained hidden to the plan sponsors.

DOWNWARD MARKET PRESSURE - Financial markets are taking a hard look at banks and brokers due to growing concerns that more write-downs will be reported. Lehman Bros. posted a $2.8 billion loss for the second quarter and worries over other financial institutions abound as the quarter-end reporting season starts.

CHINA TRADE - U.S. Treasury Secretary Henry Paulson is pressing Beijing to stop using regulation and other barriers to protect Chinese companies from foreign competitors. Some want legislation to punish China for keeping its currency undervalued, but that is unlikely to pass Congress anytime soon.

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DERIVATIVE REGULATIONS - The Feds plan to overhaul the regulations regarding derivatives trading. The move is seen as an effort to ensure that the failure of a major bank or investment firm like Bear Stearns would not create a threat to the entire system.

MORE LEHMAN CONCERN – Not only did Lehman Bros. post a $2.8 billion quarterly loss and oust its CFO and COO, it also unloaded roughly $130 billion of assets during the quarter to reduce its market risks. Most believe this “de-leveraging” will be effective, but one analyst puts it this way, “Lehman is very different than Bear, but there's one similarity, and that's what could undo all the other positives: perceptions can become reality."

POETIC JUSTICE? – We don’t know if this qualifies as poetic justice or not, but disgraced former NY governor Eliot Spitzer is reported to be mulling investments in distressed real estate and, perhaps, starting a “vulture” fund.

CREDIT CARD PROBLEMS – With the economy slipping, Moody’s reports that the index of credit card charge-off rates has jumped to 6.27% and is likely to exceed the peaks that have followed other recessions. “There is little doubt that the credit card industry is in the midst of a challenging period, and that collateral performance will get worse before it gets better.”

WORST OVER? - Fed Chairman Ben Bernanke believes the worst days for the U.S. economy may have passed, but warns that inflation is an increasing risk.  Consequently, expect the key interest rate to remain at 2%, but an increase may come later this year. 

GLOBAL INFLATION – According to corporate executives and government officials, inflation is the main economic threat to the world. German Finance Minister Peer Steinbrueck says, “We are facing a very dangerous situation caused by these tremendously increasing prices for commodities, food and oil."  

GLOBAL REGULATION – According to Timothy Geithner, president of the Federal Reserve Bank of New York, banks and investment banks should operate under a unified and global regulatory framework. Further, the Fed, should take the lead in establishing the regulatory framework.  

THE DOLLAR – Due to increased exports spurred by a cheaper dollar, the tide may be turning for the “greenback.”  However, long-term problems are trade and budget deficits and the country's reliance on high-priced, imported energy.

OFF BALANCE SHEET - Analysts say changes to the rules regarding off-balance-sheet vehicles would force U.S. banks to take as much as $5 trillion of assets back onto their balance sheets. The situation would likely curtail the banks' ability to lend and could force new fundraising efforts.

SOROS OIL BUBBLE - Billionaire investor George Soros is set to tell U.S. lawmakers that oil prices represent a building bubble exaggerated by institutional investors' entering the futures market. He is probably correct. Many are beginning to say, “Drill here, drill now and save money.”

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FINRA IS WATCHING – The Financial Industry Regulatory Authority is watching carefully to see how marketers go about selling variable annuities. The key to doing it right is suitability and “acting in the customers’ best interests, taking into account all relevant factors -- including the customers’ ages and liquidity needs, surrender charges, product expenses and investment features.”  The head of the FINRA Enforcement Division has said that annuity products are a top priority this year, both in rulemaking and enforcement.

THE QUALIFIED TAX TRAP – The absolutely worse place for your clients to have their money when they die is in a qualified retirement plan. Reason? If the money isn't left to a spouse, up to 73% can be sucked up in income and estate taxes. There are lots of strategies that can be used to help your clients avoid this disaster. For example, use all or a portion of the plan’s funds to buy a single premium immediate life annuity (a tax-free transaction). Then, use the annuity amount to buy life insurance in an irrevocable life insurance trust. Here is another idea, have your client become the “toast of the town” by leaving the qualified plan proceeds to his/her favorite charity.

LONG TERM CARE DENIAL – A Lincoln National study reveals that nearly 60% of boomers think others should prepare for the possibility of needing long term care by buying insurance, but only 35% expect buy their own LTC insurance.  To help counter this resistance, the Social Security Administration recently modified their statement about Social Security and Medicare to read:
"Social Security pays retirement, disability, family and survivors benefits. Medicare, a separate program run by the Centers for Medicare & Medicaid Services, helps pay for inpatient hospital care, nursing care, doctors' fees, drugs and other medical services and supplies to people age 65 and older, as well as to people who have been receiving Social Security disability benefits for two years or more. Medicare does not pay for long-term care, so you may want to consider options for private insurance."

INCOME ANNUITIES INCREASE RETIREMENT INCOME – A study by Mass Mutual shows that retirement plan portfolios that include income annuities produce better results than portfolios filled only with stocks and bonds. An examination of the performance of a hypothetical $100,000 retirement account over 181 time periods between 1965 and 2006 finds that about 25% of the portfolios holding just stocks and bonds ran out of money, but all of the portfolios that used the strategy of “laddering” into annuities met the hypothetical income goals.  Here’s more information from Bloomberg about the use of annuities to provide retirement income.  

“FOR SECURITY, TRY AN ANNUITY” – No comment here...just thought this was a catchy phrase!

MEDICARE BILLS – The ranking Democrat and Republican on the Senate Finance Committee each unveiled different bills aimed at cutting Medicare Advantage program costs and creating new program marketing rules.  Senate Republicans promptly blocked Democratic Senator Max Baucus’s legislation.  It remains to be seen what treatment Republican Senator Charles Grassley’s bill will receive at the hands of the Democrats.  There is, however, one certainty...unless some Medicare cuts are enacted, Medicare physician fees will be cut by 11% effective July 1.

LESS CLIENT LOYALTY? – From OnWallStreet.com: About half of affluent investors are spending more time online handling financial matters compared to a year ago, with younger investors doing more online financially.  This trend may lead to a decrease in loyalty to advisors as affluent investors weigh the expertise and convenience of their advisors again their own ability to manage their investments.  Advisors should keep the following three points in mind. First, they must position themselves as focused on an investor's life needs, not on investable assets. Second, they must reposition themselves as experts and not as product pushers or transaction specialists. Third, as investors become more sophisticated, advisors should be available on the Internet to answer their questions.  

REAL TIME COSTS – Nasdaq has provided quotes on a 15-minute delay, but now plans to begin selling real-time data to selected Web sites...Wall Street Journal, CNBC and Google. Cost for that 15-minute head start will be as much as $100,000 a month. 

RETIREMENT TIPS - 1. Life’s about more than money. 2. Make life plans. It is important to plan for the non-financial aspect of retirement by considering what will make you happy. 3. Find a purpose. Find something on an ongoing basis that provides you with joy and structure to your life. 4. Keep sharp. 5. Volunteer. 6. Develop new friendships. 7. Spousal input. Retirement often means a shared experience. Therefore make time to share your dreams with your spouse. 8. Remain healthy. 9. Financial stability. If you can’t afford to retire yet, consider partial retirement. 10. What’s next in your life? Check out more ideas at http://www.WhatsNextInYourLife.com. 

GOLDEN COFFIN BENEFITS – The WSJ reports that so-called golden coffin benefits – corporate death benefits – are under scrutiny, what with the heirs of corporate chiefs in line for hundreds of millions of dollars.  Here’s our favorite...the CEO of Shaw Group “is in line to be paid $17 million for not competing with the company after he dies.”  That requirement should be pretty easy to meet!

BOOMERS FALLING SHORT – According to a new study from NAVA, the Association for Insured Retirement Solutions (aka, the National Association for Variable Annuities), boomers are failing to follow the retirement planning disciplines that enabled their parents to achieve a satisfying retirement. One problem could be perception...86% of boomers said they expect their retirement will better than their parents'.

HOW LONG WILL YOU LIVE? - Life expectancy at birth is about 78 years, but since most of us have already been born, that figure isn't too important when planning for retirement. Currently a 60-year-old man could expect to live another 20.8 years; a woman, 24 years. That means that 50% of 60-year-olds will live even longer.

SOCIAL SECURITY DEBIT CARD - Social Security and Supplemental Security Income recipients now have the option of getting a prepaid MasterCard debit card with their benefits instead of a paper check and thus avoid expensive check cashing operations. The switch to debit cards from paper checks could also save taxpayers as much as $42 million.

MUTUAL FUND ALTERNATIVE - The mutual-fund industry believes they have an alternative to annuities for providing retirement income. Traditionally, many retirees turned to insurance companies selling immediate annuities for a lifetime income. Enter the mutual-fund industry with a new product, "managed payout" or "target distribution" funds. These are designed to help provide steady income while allowing you to pass along any remaining assets at death. Advantages claimed are lower fees and asset ownership...but there's no guarantee that the payment will last as long as predicted.

THE HOME OFFICE MARKET – A MetLife report reveals that financial services company employees tend to have insurance coverage that is similar to the coverage owned by employees in other industries who earn less.  Further, many financial services employees were unfamiliar with basic insurance coverage concepts, such as the difference between disability insurance and workers’ compensation insurance. What this means to you is that there is a huge market in your carrier’s home office!

MEDICAL TOURISM – According to some reports, more than 500,000 Americans traveled overseas for surgeries in 2006 and that number is expected to double. Motivation? Cost, with savings on surgeries as high as 90%. The trend is getting so large that companies are beginning to look at the idea of medical tourism as an employee benefit.

FUNDING HEALTH CARE NEEDS IN RETIREMENT – Using a Monte Carlo simulation model, the Employee Benefits Research Institute (EBRI) has released a set of estimates of the amount of money individuals and couples will need to cover health care costs in retirement.  Click here for a summary of the report.  

GOOD NEWS FOR BOOZE - A Nielsen study indicates that alcoholic beverage purchases may be somewhat recession-proof, with the declining economy having only a mild impact on consumers’ alcoholic beverage purchases at off-premise locations, such as grocery, liquor, convenience stores, warehouse clubs and other stores.

PET INSURANCE BENEFIT – With U.S. spending on veterinary care, laboratory testing and pet insurance projected to increase 7.1% a year to $28.9 billion in 2011, pet insurance continues to grow as a workplace marketing product.

SYNTHETIC COLLATERALIZED DEBT OBLIGATIONS - Investors are seeing the downside of synthetic collateralized debt obligations linked to mortgages, but a new problem may be brewing.  Similar investments tied to companies (corporate synthetic CDOs) could be in trouble as the economy cools. That is just great.