FSO E-NEWS WEEKLY

November 1, 2006 Edition

FUND ASSETS TOP $10 TRILLION – Bloomberg reports that U.S. mutual fund assets have passed the $10 trillion mark for the first time, with a 3.9% increase in the last quarter. The Big Three, Fidelity, Vanguard and American Funds, have nearly one-third of the assets, with over a trillion dollars each.

DOW TOPS 12,000 – The market seems unstoppable and maybe it is. Every large drop in the market has been followed by a return to and beyond the previous high.

SPITZER GOES AFTER LIFE SETTLEMENTS - In a civil suit, New York Attorney General Eliot Spitzer has charged Coventry First with making under-the-table payments to brokers and agents. Spitzer claims the payments were being made as enticements for brokers to withhold more competitive bids offered by competing settlement carriers.

GRASSO FIGHTS FOR PAY - The former chief of the New York Stock Exchange, Richard Grasso, is appealing a court ruling that he must pay back close to $100 million of the $185 million he was paid as NYSE head from 1995 to 2003.

SEC INVESTIGATION - This time it's the SEC that is being investigated...by the Government Accountability Office (GAO). The request came from Senator Charles Grassley (R-Iowa), who has previously questioned the SEC's commitment to protect investors.

FEDS HOLD INTEREST RATE - The Federal Reserve kept the prime unchanged for the third meeting in a row, but hinted that rate hikes remained a possibility. However, some analysts are predicting a stable interest rate scenario for the remainder of the year and perhaps through 2007. Who knows?

NEW HOME PRICE DROP LARGEST IN 35 YEARS – This may not be a bust, but new home prices fell last month by the largest amount in 35 years and further declines are expected...especially in formerly hot markets. The prices for existing homes also dropped on a year-over-year basis by 2.5%, the largest decline in records going back nearly four decades.

NO HOUSING RECESSION – Many experts believe the housing sector is not likely to drag the U.S. into a recession. They see the dramatic price fluctuations in the housing market as regional events and observe that housing is only a small part (4-5%) of GNP.

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MUTUAL FUND KICKBACKS – According the WSJ, the SEC is investigating 27 mutual fund companies for bribes worth hundreds of millions of dollars. We hope you're just half as sick about the ongoing corruption in American business as we are about having to report it.

WIDENING STOCK OPTIONS SCANDAL - While more than 140 companies are already implicated in misconduct with regard to the backdating of stock options, the general opinion was that the misconduct largely occurred prior to the Sarbanes-Oxley reforms of 2002 that required companies to disclose to the SEC their stock option awards within two days of options grants. We're now learning that the SEC did not enforce the two-day filing rule and, as a result, there may be many more instances of backdating, some as recently as 2005.

LAWSUITS AND JAIL TIME - A federal judge has vacated the conviction of Enron founder Ken Lay, since he died before being able to appeal his conviction. The U.S. Justice Department has since sued Lay's estate, demanding the forfeiture of more than $12 million that it considers the "proceeds of fraud." Meanwhile, former Enron CEO Jeff Skilling was sentenced to more than 24 years in prison and ordered to pay $45 million in restitution.

BERKSHIRE SHARES AT $100,000 PER - Berkshire Hathaway shares, already the highest priced stock shares in the U.S., closed at $100,000. The increase in value of shares of Warren Buffett's Omaha-based investment firm highlights the recovery of insurance firms, in which Berkshire is heavily invested, as catastrophe payouts have been far below projections for the year.

PUTNAM FOR SALE – Reports are that Marsh Mac is putting its Putnam mutual fund on the block. Possible buyers include Lincoln Financial, as well as some European companies.

BUSINESS IS GOOD ON WALL STREET - The New York State Comptroller reports the securities industry added 9,500 jobs in New York City between 2003 and 2005. Average salaries on Wall Street are up 28% to $289,664 during that same period. The average securities salary is now 5.1 times the average salary in other industries...up from 4.3 times in 2003.

NASD'S LARGEST INDIVIDUAL FINE - The NASD has levied a $2.25 million fine on Paul Saunders, CEO of hedge fund manager James River Capital. The fine is for unethical and deceptive market-timing practices and is the largest penalty ever against an individual. Don't feel too sorry for Paul...hedge fund managers make an average annual income of $1.5 million.

PRINTING PRESS EMPLOYEE TURNS "STATE'S EVIDENCE" - A printing press employee entered a guilty plea for insider trading and conspiracy to commit insider trading after admitting he leaked copies of the Inside Wall Street column from Business Week. He has forfeited the $20,000 he earned through the scheme and is expected to strengthen prosecutors' case against others accused of making more than $6.7 million from the illegal trades.

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ELDERCARE VERSUS CHILDCARE - Long-term care advocates say that America's changing demographics could make eldercare a bigger issue for employers and their workers than childcare. LTC Financial Partners says businesses lose about $34 billion each year while employees are off work to care for someone and, "with 77 million baby boomers set to retire, an ever greater percentage of workers will be distracted by elder-care needs." The MetLife Mature Market Institute published a study, Caregiving Cost Study, on this topic. Click here for a copy.

ONLINE TRADING AND IDENTITY THEFT – Apparently identity theft is increasing in the online trading arena. Ameritrade took a $4 million charge in the fourth quarter and E-Trade took an $18 million loss in the third quarter. Criminals use personal information to hack into users' accounts, sell securities and wire the proceeds outside the U.S. Thieves may also use customers' money to drive up prices of little-traded stocks and then sell shares they bought earlier at a profit.

EDUCATE CLIENTS ON 529s – According to a study by The Hartford, 55% of parents with children and 45% of grandparents had to ask their adviser for information about college savings plans. Suggestion: Send all your clients with children and all who are grandparents a brochure on options available for funding a child's education. A perfect tool for this is the Educational Funding Analysis found under presentations in the Virtual Sales Assistant. The VSA is the most comprehensive sales support tool in the industry and, with a 30-day free look as well as an incredibly low monthly subscription price, it should be part of every financial advisor's resources.

SOCIAL SECURITY RAISE - Social Security recipients will get a 3.3% increase starting next year. That increase will bring the average monthly SS check to $1,044 and, according the Washington Post, one in every six Americans is receiving Social Security benefits. That means about 50,000,000 people will be getting a raise in January...talk about an out-of-control, underfunded defined benefit pension plan!

REAL VALUE OF 3.3% - Well, that may not seem like much, but the Social Security cost-of-living increases are a very big deal. If a 65-year-old goes to the market to buy an immediate annuity to match his full $1,361 monthly Social Security payment, a very good inflation-adjusted annuity would cost about $263,000. A fixed $1,361 monthly payment would only cost about $192,000.

INVESTOR-ORIGINATED LIFE INSURANCE – IOLIs just don't seem to be good for the financial health of the life insurance industry. Speakers at the ACLI annual meeting believe that the IOLI industry is threatening favorable tax treatment of life insurance death benefits and could affect policy pricing. One of the challenges is weeding out policies bought with encouragement from investors from policies that are being sold because they are no longer needed.

NURSING HOME/ASSISTED LIVING INCREASES - MetLife has released their annual surveys on the costs of nursing homes and assisted living. In 2006, the average daily cost of a private room in a nursing home increased 1.5% to $206 per day or $75,190 annually. The nursing home survey is available here. The average cost of assisted living facilities increased a bit more - about 2.2% from 2005 - to $2,968 per month or $35,616 annually. A copy of the assisted living survey can be found here.

TOO MANY "BUY" RECOMMENDATIONS – Many are concerned that stock analysts are too optimistic with their "buy" recommendations, as the proportion of "buy" rated stocks is at its highest level since the conflict-of-interest scandal in 2002. Some would like to see the percentage of "buys" decreased, but how?

HSA THE NEXT IRA? - Some industry experts believe that Health Savings Accounts will rival IRAs as a method of saving for retirement. Currently there are about 1.7 million HSAs and that number could double in 2007. As one expert put it, "The HSA is really like another kind of IRA. The only difference between this and an IRA investment is you can use this for medical or long-term care." Once again, we have to recommend that you add the Virtual Sales Assistant to your business library. There are several great reports you can e-mail to clients and prospects about the value of HSAs. Find them off the Main Menu under Sales Presentations => Employee Benefit Planning Presentations.

LOWER LUMP-SUM PAYMENTS - The Pension Protection Act of 2006 may result in lower lump-sum payments for defined benefit plan participants who opt for a lump-sum payment instead of a monthly pension. Why? A specified interest rate must be used to calculate the lump-sum payment that is supposed to be equivalent to what the employee would have received in monthly pension benefits over his/her lifetime. The lower the interest rate used, the higher the lump sum payment and vice versa. Prior to this year's pension legislation, the interest rate used was based on Treasury bond yields. Starting in 2008, however, lump-sum distributions will be calculated using corporate-bond yields which are riskier than Treasury bonds and, as a result, typically yield more...higher interest rate, lower lump-sum payment.

HEALTH COST REDUCES SAVINGS – A survey by the Employee Benefit Research Institute shows that as health care costs go up, the ability of Americans to save for retirement goes down. Seems obvious but according to the survey, 36% of Americans reduced the amount they would save for retirement because they're spending more on health care.

PASSING OF DEFINED BENEFIT PLANS - A SEI poll indicates nearly a third (29%) of companies with currently active defined benefit plans will be closing, freezing or terminating these plans by the end of 2007. You have to wonder when politicians will step to the plate and address the crisis in public defined benefit plans, virtually all of which are drastically underfunded.

MERGING OF RETIREMENT ASSETS – A study by the TowerGroup predicts something all financial advisors need to know. That is, difficulties of retirement income planning and asset management will cause many retirees to consolidate assets with a single advisor.

WOMEN AND RETIREMENT - The 6th annual Allstate Retirement Reality Check focuses on women and retirement. The conclusion: while "women clearly have gotten the message that they are likely to spend at least some of their retirement years alone because of divorce or the high probability of outliving their husbands, this realization has not translated into concrete steps—including frank financial discussions with their husbands or partners." More information on the study is available here.

DISCOUNT TRADES, NOT FREE TRADES – Despite Bank of America Corp.'s offer to grant most customers with $25,000 or more in deposits 30 free trades a month, Schwab, E-Trade, Fidelity, Ameritrade do not plan on changing their fee schedules.

LIFE APPS DOWN - MIB reports 1% fewer individually underwritten life insurance applications in September 2006 than in September of last year. Unfortunately, the MIB activity index has fallen during most months during the past three years.

KEEPING UP WITH WAL-MART - Pharmacy benefit managers (PBMs) are beginning to react to the drop in prices for generic drugs announced by Wal-Mart and other large discount chains. For example, Medco Health Solutions is adding a program called Generics First, which provides a 90-day supply of generic drugs for a $10 copay.

WHERE TO ROLL ASSETS – According to Financial Research, the majority (about 65%) of financial advisors recommend putting retirement account rollovers into mutual funds. Fixed and variable annuities were second in popularity with the advisors.

PATENTS FOR TAX IDEAS – In 1998, a federal appeals court ruled that business methods could be patented and since then the U.S. Patent Office has issued patents to 49 tax strategies with at least 60 more pending. Tax attorneys say that licensing tax ideas has "mind-boggling potential," could lead to multiple legal challenges and might require licensing fees to be added to an accountant's bill just for providing standard tax advice. This is crazy!