FSO E-NEWS WEEKLY

October 1, 2006 Edition

PRECIPITIOUS LOSSES - Amaranth Advisors, one of the nation's largest hedge funds, reported massive losses to investors, rekindling worries that the unregulated hedge fund industry could cause financial chaos should it topple. Amaranth lost $6.5 billion in bad bets on natural gas and has now hired Fortress Investment Group to help liquidate its remaining assets.

HEDGE FUNDS AND POLITICS - With political contributions from hedge funds on the rise, lawmakers are discussing whether political contributions from hedge fund managers should be regulated as the industry continues to side-step SEC regulation.

MORE ON HEALTH INSURANCE - According to the Kaiser Family Foundation, the average cost of a family insurance plan that Americans get through their jobs has risen another 7.7% this year, to $11,500. In only seven years, the cost has doubled and more companies are deciding that they cannot afford pay for their employees' health insurance. So what has happened to create this crisis? In 1950, the average person's medical care cost less than $100 a year ($500 in today's dollars), but today the figure is almost $6,000. Since 1950, doctors figured out that high blood pressure and high cholesterol caused heart attacks, and they developed new treatments. Oncologists learned how to attack leukemia, enabling most children who receive a diagnosis of it today to triumph over a disease that was almost inevitably fatal a half-century ago. In the last few years, orphan drugs that combat rare diseases and medical devices like the implantable defibrillator have extended lives. There is a book about this situation titled "Your Money or Your Life." Looks like we have opted to pay the money!

ECONOMY DIRECTION – We are convinced that there are no experts in this arena. All we know is that it will always go up and down. Check these reports out:

The U.S. economy is the world's sixth most competitive according to the World Economic Forum's latest study. The Switzerland-based institute pointed to the country's budget deficit as a potential threat to the overall economy in its annual report; the U.S. had held the top spot for most of the decade.
The Consumer Confidence Index surpassed analysts' growth expectations for the month of September, gaining about 4 points to 104.5, compared with the previous month's reading of 100.2. Shoppers are becoming less pessimistic, thanks in large part to a dip in fuel prices.
The DOW just reached an all-time high.

REPEATING OURSELVES - We've mentioned this before, but it bears repeating...local and state governments will be facing a huge financial burden amounting to hundreds of billions of dollars over the next three decades in order to provide the generous pension and retiree health benefits promised to public employees. New accounting rules issued by the Government Accounting Standards Board, which require public agencies to disclose the future cost of health care and retirement benefits, are starting to shed light on the staggering bill being run up by public employers. JP Morgan estimates the present value of unfunded health care and other non-pension benefits at between $600 billion and $1.3 trillion, and that doesn't take unfunded pension liabilities into account. Why should you and I care? You guessed it...we're going to have to pay the bill, either through increased taxes and fees, reduced services or some combination.

EXISTING HOME PRICES FALL - Annual existing home prices declined in August for the first time in more than a decade, as sales fell for a fifth straight month. Some predict prices will tumble farther as home sellers struggle with a record glut of unsold homes. Unsold homes rose to a record 3.92 million units at the end of August. It would take 7.5 months to clear out the backlog of unsold homes, the longest since April 1993. The median price of a home sold last month fell to $225,000. That was down 2.2 percent from July and down 1.7 percent from August 2005, marking the first year-over-year drop in home prices since a 0.1 percent fall in April 1995.

U.S. HOUSING GLOBAL THREAT? – PIMCO predicts the U.S. economy will slow significantly over the next 12 months. Further, the biggest problem would be a sharper-than-expected slowdown in the U.S. housing market, which could have global implications.

FINES VS. PRISON - Senate Judiciary Committee chairman Arlen Specter is not happy with the SEC's prosecution of hedge funds and insider trading violations. Specter said he was "interested in indictments, even more interested in convictions, and most interested in jail sentences." And added, "Does $10 million really make much of an impact on a company...? Is that really effective for a company the size of Morgan Stanley?" We agree, fining stockholders for the actions of crooked executives and employees will never correct the ethical problems in American business.

TRYING TO STOP INSIDER TRADING BUT... - The New York Stock Exchange projects that it will refer 140 potential insider trading cases to the SEC, up 26% from last year. However, as above, if the crooked traders continue to get off by paying fines with OPM (Other People's Money), will we ever stop them?

MBA STUDENTS CHEAT – According to a study by the Center for Academic Integrity at Duke University, MBA students are more likely to cheat than are students in other subject areas. Some 56% of MBA students admitted to cheating at least once in the past year versus 47% of non-business students. Neither stat is encouraging for the future, especially since it's fair to conclude that the actual cheating percentages are higher.

ANNUITY SECONDARY MARKET - "With the growing number of investors looking for options in the market when considering selling their annuities, we believe there is a need for information on what is available in the secondary market," said Michael Vaughan, Managing Director of the J.G. Wentworth Annuity Purchase Program.

HALF FULL OR HALF EMPTY? - According to data from the Kaiser Family Foundation, consumer-driven health plans, such as HSAs, may now be covering more U.S. workers than conventional indemnity health plans. That sounds promising until you recognize that very few health plans today are the traditional indemnity plans that dominated the market through the 1980s. The bottom line is that about 4% of workers with job-related health coverage are enrolled in HSA accounts, about the same as last year.

TREASURY BOND MARKET MANIPULATION? - Forbes reports that increased activity in the past two years has "raised questions for the U.S. Treasury and the regulatory agencies that monitor these markets." Concern is that the increased trading volume of the past two years might be a sign of possible market manipulation.

SMITH BARNEY HIT WITH SEX DISCRIMINATION - Former and current Smith Barney employees have filed a discrimination lawsuit against the firm alleging that women are routinely denied the same financial opportunities as their male counterparts. Looks like everyone will get their "time in the box."

BISYS FUND SERVICES SETTLES – According to the SEC, BISYS Fund Services will pay $21.4 million in fines and interest for improperly using mutual fund assets to subsidize expenses over a 5-year period ending in June 2004. BISYS neither admitted nor denied the charges.

FED FREEZE – The Fed kept the prime interest rate at 5.25% for now and indications are they will hold the line until the housing market contraction eases and the inflation picture becomes clearer.

ONE WORD DISAGREEMENT - Prudential Financial has agreed to pay $600 million in fines and penalties for alleged improper trading in mutual funds, but is angered at the words used in the deal. Should it be a "nonprosecution agreement" or a "deferred prosecution agreement"? We assume Pru would prefer the former.

OIL PRICES AT 6 MONTH LOW – A combination of declining political tensions and evidence of ample supply pushed prices lower, and a barrel of crude hit a six-month low. Prices at the pump have also dramatically dropped in recent weeks.

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NASD FINES BROUGHT IN LINE WITH COMPANY SIZE – Long criticized for its penalties unfairly harming smaller firms, the NASD has changed its enforcement procedures, and will begin taking company size into consideration when imposing penalties and fines.

FPA AND CFP BOARD RIFT – The Financial Planning Association charges that proposed changes to the CFP Board's Code of Ethics and Professional Standards will "weaken, not strengthen, consumer protections" for 51,000 Certified Financial Planners. The proposed changes allow the use of a lower fiduciary standard if written into the client agreement. "The revised code would allow brokerage firms to heavily market the CFP certification to prospective clients while disclaiming a client's interest first type of standard in a written agreement," according to the FPA. The ACLI has also asked the CFP Board to use different definitions of "financial planning" and "client."

HOW TO REACH THE UNDERINSURED MIDDLE MARKET? - A new consumer research report from LIMRA says life insurance carriers need to change how they reach out to underinsured consumers if they want to capture more of the potentially large market for their products. Some suggestions:

Agent recruiting — Recruiting and retention are at all-time lows. Older agents are nearing retirement and the pool of younger agents is shrinking. Fewer agents means fewer sales opportunities. The life sales career may need to be repositioned to appeal to Generation X and Y recruits.
Agent training — Saving costs by cutting training may be backfiring. Companies seem to focus heavily on product training but consumer comments suggested that agents may not be adequately trained in fact-finding, need analysis, and relationship-building. All these are important to making more sales.
Product messages — The industry needs to generate memorable and wide-reaching messages about the importance of its product and to reemphasize the protection aspect of life insurance. Behind all the reasons for not buying more life insurance, there seemed to be no real understanding by consumers of the need or value of insuring risk in an environment preoccupied with accumulation.
Promote the good that life insurance does — When asked what might motivate them to buy life insurance, some consumers suggested that contrasting the good that life insurance accomplished for one family versus the struggles of a family without enough insurance could help motivate them.

MIDDLE MARKET AGAIN – Well, maybe it has sunk in to insurers that most rich people have life insurance, poor people can't afford it, but the middle-income families have the need and the money. New York Life, Guardian, and Hartford recently unveiled new products for the middle market. Further, a Conning study concluded that marketing failures have been the root cause of sales failures in the middle market. Expect MetLife, State Farm and others to be in this fray.

REGARDING AGENT RECRUITING AND TRAINING – If you want to penetrate the middle market or any market, the place to start is the Virtual Sales Assistant. The product is the most comprehensive sales support tool in the industry and, as such, will help you move to the small business market, charitable planning or that untapped middle market. The price is about the cost of a Starbuck's once a week! Take advantage of the 30-day free look to see if it will help you in your practice.

COLLEGE DREAMS DIE AT THE DEATH OF BREADWINNER – LIFE reports that when asked to assess the impact the death of the primary wage earner would have on their children's college plans, parents said that their children would have to alter their plans, with repercussions ranging from taking out additional loans to being unable to afford college altogether. The survey found that the stakes are dramatically higher for parents who have either no life insurance or little coverage. For instance, more than three in four (76%) parents with no life insurance coverage say that the death of the primary wage earner in their household would make it harder to afford college and one-third say college would be completely unaffordable.

ADVISOR: BEWARE OF LEAD GENERATING COMPANIES - States are beginning to take action against businesses using deceptive advertising practices to get prospects for financial advisers. Be very careful with whom you do business in this arena. You might want to check with your state insurance commission before proceeding.

ADVISOR: BEWARE OF SENIOR SEMINARS - The NASD is continuing to hammer home the theme of protecting seniors. Investment News reports that the "NASD, SEC and the states of California, Texas, North Carolina, South Carolina, Alabama and Florida are conducting a joint sweep looking for abusive 'free lunch' seminars targeting seniors." In addition, "designations meant to imply expertise in dealing with seniors are also under the regulatory spotlight."

LIMRA SAYS THE LIFE MARKET IS THERE - A recent study by LIMRA showed that about two-thirds of the 48 million people who either hadn't bought life insurance or thought they should own more didn't know where to buy it or who to see for help. The top reason given for avoiding the purchase of life insurance was "dreading high-pressure sales tactics." We suggest that you approach folks with the Virtual Sales Assistant's Priority Planning Concept...a low key and non-threatening way to start the sales process. Check it out by using the VSA's 30-day free look at vsa.fsonline.com.

AMERPRISE BANK - Ameriprise has established a bank to offer financial products through more than 10,000 financial advisors. The bank opened for business with about $1.1 billion in assets. Expect a home lending program as the initial offering. Based on some articles about the housing market, their timing may not be good!

SOME WEB BANK RATES BEAT BONDS – Several Internet-based banks are offering up to 5.5% in their online savings accounts. Very appealing since long-term U.S. bond yields are significantly below those rates. The 10-year Treasury is just over 4.5%. The online banks can offer better rates than competitors with branches, and other "brick and mortar" related expenses.

MEDICARE PREMIUMS - For the first time, Medicare will begin charging upper-income seniors a higher premium beginning in 2007. The basic Medicare Part B premium is increasing just $5 to $93.50 per month in 2007. Married couples filing jointly with AGI above $160,000 and singles with AGI above $80,000 will pay monthly premiums ranging from $106.00 to $162.10.

AGENTS FIRED - Investment News reports that New York Life has fired an undisclosed number of agents for selling investor-owned life insurance policies - policies which wealthy older people purchase by borrowing money for the sole purpose of selling them to investment groups. The company also rescinded the "life insurance policies purchased to satisfy one need - namely the speculative goals of unrelated third parties."

NURSING HOME COSTS – According to the annual survey by MetLife's Mature Market Institute, the average daily cost of a private room in a nursing home increased from $203 in 2005 to $206 in 2006. That is just a 1.5% increase, but the annual average cost is $75,190. Highest room cost is $578 with the lowest of $111 in Shreveport, La. The cost of home health care aides was unchanged from 2005 and averaged $19 per hour.

GI PROTECTION BILL PASSES - The Military Personnel Financial Services Protection Act was approved by the Senate in June. It just passed the House 418 to 3 and is expected to be signed by President Bush. Basic provisions are the banning of high-priced "contractual" mutual funds, disclosing that life insurance is available through the government before a private life insurance sale can be made and a list of barred brokers and agents will be established.

CHANGING BROKERAGE HOUSES? - Big producing advisors are being enticed to move their book of business by firms offering "hard to refuse" up front money. The trick to collecting is for the advisor to bring his old clients with him to the new firm. However, a survey of wealthy investors by Spectrem Group showed only a little more than half would follow their advisor to a new firm.

ANNUITIES AND SOCIAL SECURITY TAX – A tax-deferred annuity can help avoid that 50% to 85% taxation on Social Security benefits. Say a retired couple has $17,500 listed on line 8a of their joint return and adjusted gross income is $40,000. This means that they may have approximately $440,000 sitting in a savings account, CD, or a money market account, or a combination of all three. The $17,500 is added to other income, which may cause them to pay more income tax and tax on their Social Security benefits. The couple could take a portion of the taxable money and deposit it into one or more tax-deferred annuities. If $350,000 is moved to an annuity, the amount on 8a is reduced to $2,200. They still have the money, but now pay the government less. To recap, you have more money, pay less in taxes, and your Social Security benefit may not be taxed because taxable income is reduced to $24,700.

WILL WE LIVE FOREVER? – The Insurance Information Institute reports continued improvement in mortality rates, especially in the 25-44 age group. Of course, that will continue to push life insurance prices down. Increasing longevity has decreased the cost of term life rates to about half of the mid-1990s rate and a drop of another 4% is expected in 2007.

PRU PAYS BROKER - An NASD arbitration ruling awarded $3.8 million in damages to Frederick O'Meally, who was fired shortly after New York started a probe into improper mutual fund trading. O'Meally was the broker for several hedge funds that engaged in market timing, but he maintained that all of his activity was reviewed and approved by management at Prudential Securities, later Wachovia Securities.