Client wants pension planning right before the deadline!

[Golden Rocket]

Best interests

It has been inferred in this post that investment consultants do not have the best interests of their customers foremost on their agenda. We have some members who combine this service with their tax practice.

Brokerage industry does not stand alone as being described as greedy. Even tax practitioners have been accused. Not long ago I heard on radio of the "multi-million dollar tax preparation lobby" influencing the govt to pass complex tax laws. [Anyone know of this lobby? Give me a break!!!]. A guy from Wisconsin told me the diary industry was the most greedy and corrupt. Banking, etc. and the list can go on and on.

Sea-Tax, Josh, Veritas, by combining investment counseling with your tax practice, you have the opportunity to render a real service by focusing on the entire economic picture of your clientele. And you should be paid for your services.

Where I've seen the greed is in house accounts by insurance companies that sell mutual funds. By and large, they have the bulk of the 401k trustee business. They sell the "Magellan" fund to the enrollee, but the money actually goes into a "house" account which invests in Magellan but rakes 4-5% off the top for the insurance company. There is virtually no disclosure of this other than fine print. For that matter, the mutual fund industry has cloak and dagger disclosure practices -- you can read it all in the prospectus, but you'll never get a chart showing your account that tells the full story.

I got out of mutuals years ago, and have invested in 35 stocks instead. But that's just my preference. Most years I beat the funds in which I formerly invested, but it's a lot of hassle, too.

[Bees Knees]

There are very few metro markets that are going to see appreciation of 3% annually in the next 5 years. Most major metro markets are seeing price declines, not increases. The cover story of this week's BusinessWeek magazine chronicles the story of several families who bought during the boom and are now unable to sell just are their ARMs reset.

Well, the same can be said during the down turn of the mutual fund market. I once had a registered securities representative tell me my mutual fund that lost 6% last year was better than the average loss of all the other mutual funds. That was supposed to tell me I had a good investment?

I don't know for sure, but I can only remember two times in the past 25 years the real estate market took a down turn. Once in the late 80's and early 90's after Congress passed the passive activity and at-risk rules, killing limited partnerships that invested in real estate, and today. There have been more down turns in the mutual fund market over that same period.

And if your house is not an investment, why are some mutual funds invested in real estate and others invested in mortgages? Doesn't seem to make any sense.

[JoshinNC]

Your house is not an investment because you live in it.

Well, the same can be said during the down turn of the mutual fund market. I once had a registered securities representative tell me my mutual fund that lost 6% last year was better than the average loss of all the other mutual funds. That was supposed to tell me I had a good investment?

I don't know for sure, but I can only remember two times in the past 25 years the real estate market took a down turn. Once in the late 80's and early 90's after Congress passed the passive activity and at-risk rules, killing limited partnerships that invested in real estate, and today. There have been more down turns in the mutual fund market over that same period.

And if your house is not an investment, why are some mutual funds invested in real estate and others invested in mortgages? Doesn't seem to make any sense.

The same reason that you shouldn't buy your own company's stock in your 401k, you're putting too many eggs in one basket. If your company goes south you've lost your job and your investment. Same with your house. If your houses value drops and you're upside down in an economic emergency you've lost the roof over your head and your investment.

It seems to meet that I have just identified an untapped market for my next seminar series, tax pros. That might sound crazy, but from what I've heard over the last couple of days, it looks like a lot of people in this business are not too up to date on modern portfolio theory. And, if we're passing this along to our clients than there is a serious problem.

And yes, a fund that losses 6% in an environment where the average fund loses 10-12% is a good investment. Good investments don't always go up, they just don't go down as much as bad ones.

Golden, you are right. There are "funds" being sold by brokers that are wrap funds from insurance companies with exorbinant fees. These are junk, and we need to tell our clients so. HRB just got busted for putting clients in IRA's with the only investment option being a money market fund that earned 3-4% annually, so it didn't even keep pace with inflation.

I really think you will see a consolidation in the financial services market where you can go to one building and get a mortgage, a retirement account, a savings account, a tax return and many other services from the same company. Will everyone go this route. Most likely no, but it is going to be a larger force going forward, and I've got 35 years left in this business, so I'd better be ready.

Bob, investment advisors should be dealing with every age group. Your clients don't stop having you do their taxes when they're 60 because they've suddenly figured out the tax laws. Same with investing, you just move from the accumulation phase to the distribution phase. It is even more important at that age to work with a trusted, unscrupulous advisor because this age bracket is the key target for the seminar touting variable annuity crowd who are looking out for their pocket before yours.

[BOB W]

What I'm saying is, that If a person is age 60 and is now looking for financial planning but his debt is greater than his assets, it is too late to do "Investment Planning" without a complete restructering of his total portfolio. Like selling his house and buying a smaller one thus allowing his debt to be minimized in relation to his assets. Needless to say, but a total review of future retirement income needs to be considered.

If a 35 yr old is brought into the fold it will be easier to plan his future because of the amount of years need to complete the plan. A 60 year old has little of no time to accumulate any meaningful funds for retirement.

The 60 year old could have as his plan to sell his house and buy down after he retires, which is probably his only choice> Hello Western North Carolina Hills.

[Bees Knees]

The same reason that you shouldn't buy your own company's stock in your 401k, you're putting too many eggs in one basket. If your company goes south you've lost your job and your investment. Same with your house. If your houses value drops and you're upside down in an economic emergency you've lost the roof over your head and your investment.

I have yet to hear of a case where someone lost their house due to a down turn in the housing market...when the house was paid for.

Nobody loses their house when its paid for, even if the value drops to zero. Nobody goes bankrupt when they are debt free.

Investing in the payoff of your mortgage is not dependent upon the value of your real estate going up. You are already in the hole with a mortgage. Paying it off gets you to even. Any appreciation in the value after it is paid off is a bonus. Even if the house drops to zero value, paying off the mortgage is still a good investment. In fact, paying off your mortgage is even more important when the housing market starts to drop, as it helps prevent you from losing the roof over your head.

[Luis Mopeo]

It seems to meet that I have just identified an untapped market for my next seminar series, tax pros. That might sound crazy, but from what I've heard over the last couple of days, it looks like a lot of people in this business are not too up to date on modern portfolio theory. And, if we're passing this along to our clients than there is a serious problem.

I know you can't write in crayon on an internet message board, but please try to help me understand anyway.

You're saying this 60-year-old couple would be better off cashing the equity out of their home to invest in mutual funds?

[JoshinNC]

No, No, No!!!!!

I know you can't write in crayon on an internet message board, but please try to help me understand anyway.

You're saying this 60-year-old couple would be better off cashing the equity out of their home to invest in mutual funds?

The question says they already have money in a taxable interest bearing savings account on which they are paying interest. We are assuming that it is roughly $175,000. My advice is to move that money into a balanced mutual fund, thus creating tax advantaged dividend and capital gain income, and use that income to pay a portion of the current mortgage payment as opposed to cashing out the savings and paying the mortgage off completely, leaving $0 in the bank. Under that scenario they would still have a mortgage payment and no cash cushion.

But, there are advisors who would recommend exactly what you are proposing. As a matter of fact, there's even a group of advisors running ads over the radio locally promoting this strategy. I would not agree with it in their age bracket, knowing what I know.

[JohnH]

Josh: Would you agree with someone doing that in any age bracket, given all the other aspects of the situation being the same?

[JoshinNC]

I've never done it before

Josh: Would you agree with someone doing that in any age bracket, given all the other aspects of the situation being the same?

I can't say that there is absolutely no way that I would do that. Each situation is totally different, so I can't say yes or no. But, I don't think it makes sense in very many situations, and definately not this one.

[Black Bart]

Investment Advice

Hmm...maybe I need to send my clients to y'all for a little more depth. Here's a chronicle of an investment counseling session I conducted just last month with a sheetrock hanger (age 60, zero savings, no pension):

SH: Should I take out a $2,000 (all the spare dough he's got) IRA?
BB: Yes.

[BOB W]

A house is not an investment, and that is what got a lot of people in trouble. You don't only buy at bottoms, because bottoms are impossible to predict, no matter how good you are. Today's bottom could be next week's mid point. Dollar cost averaging, or periodic purchasing of similar assets, is the key to attaining long term wealth.

OK> Tell me if I screwed up on this one. I bought a townhouse in VA (Smith Mountain Lake) in 1999. Vacationed there for 5 years and sold it in 2004. Purchase price= 255,000. Selling price = 564,000. For not being an investment the outcome was better than my mutual fund. By the way I lost 65,000 in my Fidelity Mutual Funds & Simple pensions during the same time period.

[thomtax]

Maybe you have worked with some bad advisors before, but please don't paint us all as money hungry, account churning, grandma robbing opportunists.

I agree with Golden, these folks can't see the forest for the trees. But, without good professional money management they won't ever get ther.

Josh, my comments were partly meant in semi-jest. If you read the post, I did not paint them all together. I said the ones that I know and then went on to say that I am sure there are good ones out there. I live in a small town that only had two people that called themselves financial advisers, and there is one stock broker. Of the two, one has just moved here and have had no feedback yet. The other one that was here for 5-6 years was an attorney. And she was the one that I was actually talking about. But, she is gone now. It seems that she was not doing well for the last couple of years she was here, after she filed bankruptcy. When I was asked about her my comment was always "I always wanted to get my financial advice from someone that had just filed bankruptcy".

Sorry if I offended you - I did not mean to.

[veritas]

Just for fun

I did a ten year hypothetical for an investment of 255,000 on 10/01/97 and the results 10 years later is $873,577.

This is a load fund with a 2.5% initial sales charge.

[BOB W]

I did a ten year hypothetical for an investment of 255,000 on 10/01/97 and the results 10 years later is $873,577.

This is a load fund with a 2.5% initial sales charge.

The key here is hypothetical........ mine was actual...............

Now that I'm 65 my only investments are tax frees, cd's, real estate and Short Terrm day/month stock trading. I only use $50,000 for stock trading and this year I'm up, so far, $12,000 on that $50,000.

I think " Financial Advisors" have a place, especially those NOT connected with Am Ex, brokerage houses and other non-certified CFP. "Fee Based CFP" are my choice. Since I own a business, my best investment is in it. That is where I get my best return on $$ invested year after year.

[Bees Knees]

The question says they already have money in a taxable interest bearing savings account on which they are paying interest. We are assuming that it is roughly $175,000. My advice is to move that money into a balanced mutual fund, thus creating tax advantaged dividend and capital gain income, and use that income to pay a portion of the current mortgage payment as opposed to cashing out the savings and paying the mortgage off completely, leaving $0 in the bank. Under that scenario they would still have a mortgage payment and no cash cushion.

No, they could have a lower mortgage payment and higher cash flow.

In your scenario, their mortgage payment stays the same and hopefully investments will out perform their debt. But if they retire at 62 in 2 years and start collecting Social Security, your higher income will cause 85% of their Social Security Benefits to be taxed. Plus, they still have the same cost of living to support as they had prior to retirement.

If on the other hand, they take that $175,000, pay off half the debt and refinance, they have a lower mortgage payment increasing available monthly cash. Plus, the savings on not having to pay as much interest does not increase their taxable Social Security Benefits. It may also keep them out of AMT.

Which is another scenario I doubt many financial planners are going to be able to handle. Not even tax professionals have a handle on AMT. If you refinanced your home to pull all the equity out so that you can pay off your car, or pay off your credit card debts, or invest the cash in “good quality” mutual funds, the interest on that mortgage is not deductible for AMT purposes.

Maybe I should give seminars to financial planners and educate them on tax law in the 21st century. AMT and taxable Social Security Benefits are two good reasons why using mortgage debt to gamble with supposedly better investments may not produce the results you think they will.