Why Your Financial Planner May be Replaced?

Posted on March 15, 2023 by Dr. Marcinko

 By a Computer [FIN-TECH]

[By Rick Kahkler CFP®]

If Ken Fisher is right, in the future you will be talking to a computer about your asset allocation and loving every minute of it.

Fisher has built Fisher Asset Management into the largest fee-only investment advisory firm in the US, with over $100 billion under management. Speaking at the Investment News Innovation Summit in New York City on April 17, 2019, he said, “We need to get machines talking to people in a way that is more human than human.”

If you view “talking to machines” mostly in terms of using four-letter words when your computer locks up, you might be skeptical.

Fisher explained there are six personality profiles that fit almost every investor. “When you (or a machine) knows what they are, then you deal with them according to their profile.” In Ken’s thinking, machines will be able to spot the profile and then, using an algorithm free of human error, interact with the customer in a manner superior to a human advisor. He sees this happening within the next ten years.

I asked him, “What happens to the human advisors when machines talk to your customers better than a human?” Ken replied, “I don’t know the answer to that question,” suggesting that people will need to gain new skills and move on to the next thing. “You can’t keep doing the same thing you were before or you will be out of luck.”

As shocking as this idea is to investment advisors, it’s not at all far-fetched. In an “Axios AM Deep Dive” article on April 6, 2019, Mike Allen quoted Axios Future Editor Steve LeVine as saying that Millennials (those born between 1981 and 1996) will be the first generation to fully face the new age of automation, which could wipe out jobs faster than the economy creates new ones.

Like most before them, many Millennials have taken entry level, minimum wage jobs. Allen suggests that, unlike prior generations, they may not find much of a ladder up from there. Part of that is because of the aftermath of the great recession and part is because technology and globalization have reduced middle-wage jobs.

The median income of younger Millennials is $21,000, according to the AXIOS article. Contrast that to the median wage of $84,000 for statisticians and financial analysts, both of which have high concentrations of older Millennials.

It’s those $84,000 a year jobs that Fisher thinks will be done better by machines. If this happens, it will disrupt the financial services industry in spectacular fashion.

Danielle Fava of TD Ameritrade didn’t agree that human investment advisors will become obsolete in ten years. She does see voice digital assistants making email obsolete. She also believes that artificial intelligence will “enhance the conversations advisors are having with their clients,” rather than replace the human advisor.

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robo

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While staring my professional demise in the face in ten years, I drew solace from knowing I am nearing the end of my career. Another fact that should comfort some financial professionals is the difference between investment advisors and analysts (like those who work for Ken Fisher) and financial planners. Investment advising is relatively easy; that’s why a machine may be able to do it all in ten years. Also, investment advice comprises only a small fraction of what financial planners do. It will take a really, really smart machine to integrate all the complex aspects of someone’s financial picture into a sensible plan.

Assessment

So maybe ten years from now a machine will flawlessly figure out your asset allocation. But it may be another ten years before your financial planner is a machine, and maybe another 50 before a machine can do financial therapy.

Conclusion

Your thoughts are appreciated.

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Dig Deeper Than CFP® To Find a Financial Planner

Posted on March 12, 2023 by Dr. Marcinko

CFP® is a Designation  – Not a Guarantee!

By Rick Kahler CFP®

I have long recommended that consumers look for a Certified Financial Planning (CFP) certificant when shopping for a financial planner.

But don’t stop there. A CFP is no guarantee that someone is a competent, ethical, fiduciary professional. It only ensures that you are choosing from a pool of 85,000 financial services providers who are educated in the technical aspects of financial planning. It doesn’t mean the person is engaged in financial planning, is a fiduciary, or has a spotless ethical history.

In a troubling Wall Street Journal article on August 9, 2019, columnist Jason Zwieg writes that the “CFP Board’s online search directory neglected to inform the public that thousands of planners listed” have known “customer complaints, criminal histories, financial problems or regulatory proceedings.”

“Among these CFPs were 499 who have faced criminal charges, 324 who left a previous firm amid allegations of misconduct, 323 who had been disciplined or investigated by regulators and 68 who filed bankruptcy within the past 10 years,” Zweig notes. Yet none were ever disciplined by the CFP Board.

Let’s not lose perspective—these “bad apples” amount to less than 2% of CFP certificants. Every profession has those few who use its licensing and credentialing as a cover to manipulate, deceive, and abuse consumers. No amount of regulation or oversight will ever eliminate all the crooks.

In addition, you cannot simply assume because a professional has a certain license, designation, or formal degree that they are competent. In the graduate class I teach at Golden Gate University, not all students earn As and Bs. Many earn Cs. A few earn Ds and Fs. While I am not sure the D and F group ever graduate, I am sure I would not want them doing my financial planning without convincing evidence that their poor performance in my class was a one-off due to extenuating circumstances.

As the consumer, you cannot know if a prospective financial planner was that student. Nor can you know if they have a tainted criminal background, unless you dig deeper.

That digging includes looking for any past criminal or disciplinary charges brought by licensing agencies. It also includes determining whether the advisor is legally bound to a fiduciary standard—required to put your interests ahead of theirs—but has any conflicts of interest, especially by making a significant amount of their income from commissions on the sale of financial products.

Here are a few tips for digging deeper:

  1. Go to brokercheck.finra.org to see if FINRA has brought disciplinary actions against the advisor.
  2. Go to the SEC’s website to look for disciplinary actions.
  3. Have the prospective advisor sign a written disclosure that you are a client and they have a fiduciary duty to put your interests above their own, rather than a customer where they have no such obligation and will usually put the interests of their company first. Many advisors, especially those not legally bound to be fiduciaries, don’t understand the difference, so insist on getting this assurance in writing.
  4. Have the prospective advisor sign a statement disclosing what percentage of their company’s gross revenues comes from fees charged to clients.  These might be paid as hourly fees, annual retainers, or separate charges for advice. The lower the percentage of income from fees, the greater the chance of a significant conflict of interest. I recommend finding firms receiving over 90% of gross revenue from fees; I prefer 100% because such firms advertise themselves as “fee-only” or will offset any commissions against a flat fee.

Assessment

To find a trustworthy financial planner, I still recommend the CFP designation. Just remember that it’s a starting point, not a guarantee.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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More on Medical Practice Business Costs for Entrepreneurial Physicians

Posted on October 12, 2022 by Dr. Marcinko

Unknown and Under-Appreciated by Many

By Rick Kahler CFP®

I recently talked with an administrator of a private medical practice about some of the financial challenges she faces in dealing with the medical system, insurers, and patients.

Some of the insights she gave me into the realities that private physicians face in providing medical care were rather disturbing.

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Here are a few of them.

Let’s start with the insurers who account for the bulk of their revenue. Many payments for procedures from insurance companies (including Medicare) are below the cost of providing the service. This forces physicians to make up the difference on other procedures or find other sources of income to sustain the profitability of the practice.

Conversely, in markets that have just one hospital, the insurance companies have no leverage. If the insurers won’t pay what the hospitals demand, the hospitals can threaten to drop out of the network, leaving the insurers with nowhere to send their insureds in those markets. The insurers end up agreeing to pay the hospitals more.

Charges for services provided in-house at the hospital can end up being substantially higher than those same services done by outside providers.

Example:

She gave me an example of a lab test that cost $1,500 to $2,000 at the hospital lab but $35 to $80 at an independent lab. Patients do have the option to direct the hospital to use an independent lab. But, how many people know that and will have the presence of mind to make the request? While it makes financial sense to price-shop if you have a high deductible HSA plan, there isn’t much incentive if your plan has low deductibles.

Collections

Another challenge is collecting from patients. She says a surprising percentage of Americans maintain checking accounts with no money or keep checks from accounts which have long been closed. While writing bad checks is a crime, those who game the system know they can probably get by with writing a low-dollar check because the cost of pursuing justice is much more than the check is worth.

Most companies would never do business with such a person again. Healthcare professionals tend to have a bias toward giving everyone services, so these same people do return requesting care. She said she and her physician employer have had huge internal arguments about this. Her position is that these people take advantage of the physician in a premeditated fashion and don’t deserve to be extended services. The physician argues that everyone, even deadbeats, deserves healthcare. Since the practice doesn’t provide life-and-death services, she was able to get the physician to agree that if someone has an outstanding bill they need to settle it upfront, in cash, before any new services are provided.

Then there are those who use credit cards and then fraudulently dispute the charges. Some providers let this go because of the difficulty of proving that the charge is legitimate. It requires photographs of customers during the transaction, copies of driver’s licenses, customers’ signatures on the paperwork, and notarized statements from the provider verifying that this was the person who received services and presented the credit card.

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http://www.CertifiedMedicalPlanner.org

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SSNs

A final interesting point concerned patients’ Social Security numbers. She said the only time these are ever needed is when an outstanding bill is sent for collection. Otherwise, they are never accessed or used.

Assessment

Finally, she was quick to add that only a small fraction of their patients premeditate stealing from them. She also stressed that not all insurance companies or hospitals behave unethically, and some do wonderful, humane acts of kindness. Nevertheless, the lack of integrity that does occur on both sides is infuriating and adds to the cost of health services.

Conclusion

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements.

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On Donor Advised Funds

Posted on December 28, 2019 by Dr. Marcinko

 

More on DAFs

By Rick Kahler CFP®

In A Christmas Carol, Charles Dickens has a scene where two charity workers raising funds for the poor approach Ebenezer Scrooge on Christmas Eve.

” What shall I put you down for?”
   “Nothing!” Scrooge replied.
   “You wish to be anonymous?”
   “I wish to be left alone,” said Scrooge.”

Scrooge may not be alone in his desire to be left alone. With 60% of Americans supporting presidential candidates’ proposals for wealth taxes, financial transaction taxes, higher capital gains tax rates, and increases in income taxes, many of our affluent neighbors are just not feeling the love this Christmas.

Nevertheless, there are still millions more who want to give. Charitable giving, though, can be more complicated than it was in Scrooge’s time. For example:

  • Are you bunching your itemized deductions into every other year and would like to give a substantial amount to charities this year, but you haven’t had time to research which charity you want to support or you want to spread the giving out over time as opposed to giving it all this month?
  • Do you support a number of charities and would like to support even more, but find the IRS requirements for documenting your gifts to be burdensome?
  • Would you like to set aside a sum of money for your favorite charities that could generate an annual income forever, but forming a foundation or charitable trust is beyond your reach?

All the above are possible with a donor-advised fund.

Let’s say you wanted to give small amounts to fifty different charities. Rather than write fifty checks and obtain fifty receipts, you can make one gift to the fund, which distributes the money to the fifty charities. You only have to provide one receipt to the IRS.

You can also make a charitable gift to the donor-advised fund that qualifies as a deduction on your 2019 tax return, but you can delay the distribution of the funds until sometime in the future. This gives you time to explore the various causes you may want to support.

What really sets a donor-advised fund apart from other types of charitable giving is that you can decide how your donations are used, much as you would if you set up your own foundation. You can even create either an endowed or a nonpermanent fund for a particular purpose, such as a specifically-designated scholarship fund in memory of a loved one.

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Case Example:

One example of a donor-advised fund is the Black Hills Area Community Foundation. The BHACF supports scores of local charities and special projects. However, almost all financial institutions like Fidelity, TD Ameritrade, and Schwab have relationships with donor-advised funds.

While DAFs create an easy-to-establish, low-cost, flexible vehicle for charitable giving as an alternative to an expensive and complex private foundation, they are not hassle-free or without costs. Many charge a combination of fixed quarterly fees and an annual percentage of the undistributed funds. There is also a reasonable amount of administrative work involved. One DAF that I use assesses a penalty of $500 if the account is closed in under a year. They work best when a person anticipates significant contributions and a long-term giving plan.

Every donor-advised fund has different charities, minimums, processes, and costs, so it’s important to do your homework. Research whether the fund approves of the charities you want to support, as well as the costs involved.

Assessment

A donor advised fund may be a good way to take a large deduction this year, reduce the administrative hassles and costs of setting up a foundation, and still give to causes you choose to support.

Your thoughts are appreciated.

BUSINESS, FINANCE, INVESTING AND INSURANCE TEXTS FOR DOCTORS:

1 – https://lnkd.in/ezkQMfR

2 – https://lnkd.in/ebWtzGg

3 – https://lnkd.in/ewJPTJs

THANK YOU

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Who Owns Your Credit Card Reward Points?

Posted on December 20, 2019 by Dr. Marcinko

Do your credit card reward points belong to you?

By Rick Kahler CFP®

For frequent travelers, who often choose credit cards based on reward programs, accumulated points can be worth thousands of dollars. Whether points are an asset that can be transferred to an heir is another matter.

I recently received this question: “Our friend whose husband recently passed away lost over a million points with Capital One because her husband was the primary on the account and she was just an authorized user, not a joint owner. Capital One closed the credit card since he passed and all the points were forfeited. Do you have any ideas on how to get the points back?”

Unfortunately, not much can be done after the fact. Most credit cards offering points that can be redeemed for travel expense say that points have no cash value and are not actually the property of the account owner but rather belong to the reward’s program. Most card programs’ terms and conditions say that points outstanding upon the card holder’s death are permanently forfeited.

An appeal to the issuing bank would be worth trying. Surprisingly, some will show compassion and allow the points to transfer to another account or credit their value against any outstanding balances on the card, usually at one cent per point.

Considering this issue ahead of time, however, might allow surviving spouses to avoid losing all of a loved one’s hard-earned points.

First, try to find a rewards card that will allow you to own the account jointly with your spouse rather than being an authorized user. If one spouse passes away, the points will remain in the account and the other joint owner will have full access to them. An authorized user has no risk or obligation to pay any debt, and therefore has no claim on any points that remain in the account after the death of the primary cardholder.

The downside of a joint account is that each cardholder is equally liable for any amounts the other charges to the account. If your marriage is transparent and without any financial infidelity going on, this shouldn’t be a problem. If the card is a business card, joint ownership could be more problematic.

Banks that I found that will allow joint accounts are US Bank and PNC Bank. Specific rewards cards that allow joint ownership are Bank of America Cash Rewards, Wells Fargo Cash Wise Visa, and Discover it Cash Back. Obviously, with only three rewards cards allowing joint ownership, that option isn’t widely available.

The next best choice is to be sure both partners have the login information for the account. This would allow a survivor to log on and redeem or transfer points. Many cards will allow transferring points to an airline or hotel rewards programs for 1.5 to 2.3 cents per point. Of course, both partners need to have access to those accounts as well, which generally isn’t a problem with most programs.


This is also the recommended method of accessing points with a specific airline. According to a September 19, 2019, article by Richard Kerr at thepointsguy.com, giving your next of kin access to all your airline and hotel awards accounts gives them “all the information needed to continue using the points and miles without alerting the airline.”

Including airline reward points in a will may be worthwhile. It might not make a difference with every airline or bank, but some programs will transfer such designated points without a fee.

Assessment:

Travel reward points may be a relatively minor asset. Still, a little planning can make them readily available without adding stress for a surviving spouse during a difficult time.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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When Will You Retire?

Posted on December 8, 2019 by Dr. Marcinko

Where Will Your Money Come From?

By Rick Kahler CFP®

The list is fairly short: Social Security, a pension, working, your assets, children, or public assistance.

According to an April 22, 2019 Bloomberg article by Suzanne Woolley, entitled “America’s Elderly Are Twice as Likely to Work Now Than in 1985“, only twenty percent of those age 65 or older are working. The rest either can’t work physically, can’t find work, or don’t want to work. According to the ADA National Network, over 30 percent of people over 65 are disabled in some manner.

According to the Center on Budget and Policy Priorities, Social Security provides the majority of income for most elderly Americans. It provides at least 50% of income for about half of seniors and at least 90% of income for about one-fourth of seniors. The average Social Security retirement benefit isn’t as high as many people think. In June 2019 it was about $1,470 a month, or about $17,640 a year.

And, as per the Pension Rights Center, around 35% of Americans receive a pension or VA benefits. The greatest percentage of pensions are government. This would include retired state and federal workers like teachers, police, firefighters, military, and civil service workers. In 2017 the median state or local government pension benefit was $17,894 a year, the median federal pension was $28,868, and the median military pension was $21,441.

Working provides the highest source of retirement income for the 20 percent of those who are over 65 and are still working. According to SmartAsset.com, Americans aged 65 and older earn an average of $48,685 per year. However, in a NewRetirement.com article dated February 26, 2019, “Average Retirement Income 2019, How Do You Compare“, Kathleen Coxwell cites a figure from AARP that the median retirement income earned from employment is $25,000 a year.

About 3% of retirees receive public assistance.

This leaves around 20% of those over 65 who depend partially or fully for their retirement income on money they set aside during their working years. According to TheStreet.com, “What Is the Average Retirement Savings in 2019“, by Eric Reed, updated on Mar 3, 2019, the average retirement account for those age 65 to 74 totals $358,000. That amount will safely provide around $15,000 a year for most retirees’ lifetime. The median savings is $120,000, which will produce only about $5,000 a year. In order to retire at age 65 with an annual investment income of $30,000 to $40,000, someone would need a retirement nest egg of over $1 million.

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My conclusion from this data is that most Americans are woefully underprepared to live a comfortable lifestyle when they can no longer work. Between Social Security, pensions, and retirement savings, a retiree can expect a median income of $18,000 to a maximum of $52,000 a year. According to data I compiled from NewRetirement.com, the average median retirement income of those over age 65 is around $40,000.

What are some things you can do to increase your chances of enjoying a comfortable retirement income?

If you are under age 50, begin setting aside 15% to 25% of your income for retirement.

If you are over 60, keep working as long as you can. If you retire early, your monthly Social Security benefit is lower for the rest of your life.

Consider ways to stretch your retirement income by downsizing, sharing housing, or relocating to an area of the US or even outside the country with a lower cost of living.

Research what you can reasonably expect from Social Security and other sources of retirement income. Base your retirement expectations on informed planning, not on vaguely optimistic expectations.

Assessment: Your thoughts are appreciated.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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The Middle Class Cost of M-4-A

Posted on December 4, 2019 by Dr. Marcinko

Medicare for All

By Rick Kahler MSFS CFP

The concept of “Medicare for All” is getting a lot of attention in the 2020 Presidential race. Senator Elizabeth Warren’s promise that it will not cost the middle-class “one penny” has much appeal.

While most Americans support providing free medical care to those who need it most, making it with no additional cost to the middle class would be something never before accomplished by any country that has universal health care. The middle class in those countries pay income taxes of up to 40% and a national sales tax equivalent of 15% to 25%.

Recently, Senator Warren revealed how she will finance her plan. She estimates the cost over a decade at $20 trillion in new federal spending. Estimates by six independent financial organizations are higher, ranging from $28 trillion to $36 trillion.

Here are some of the general provisions of her plan.

1.                            She would tax both employers and employees an amount equivalent to what they currently pay in health insurance premiums. This will bring in $11 trillion.

2.                            She would increase taxes on the top 1% of individuals and large corporations to generate $7 trillion.

3.                            The balance of the money needed, $2 to $18 trillion (depending on whether you believe Ms. Warren’s numbers or the other six independent estimates) would come from new-found efficiencies, tax enforcement, and reductions in wasteful spending. There is widespread doubt that this is even remotely possible.

A Forbes article describing the tax increases aimed at wealthy individuals caught my attention. These increases include:

·                                 Adding a wealth tax of 2% to 6% on household net worth above $50 million

·                                 Eliminating the favorable tax rate on capital gains

·                                 Increasing the “Obamacare” tax from 3.8% to 14.8% on net investment income above $250,000

·                                 Eliminating the step-up in basis for inheritors

·                                 Increasing the salary subject to Social Security from $132,900 to $250,000

·                                 Lowering the estate tax exemption from $12 million to $7 million

·                                 Establishing a financial transaction tax of 0.10%.

The capital gains tax increase, the step-up in basis, and the financial transaction tax will all affect middle class investors, potentially including anyone with a 401(k) or an IRA. The American Retirement Association estimates that the financial transaction tax alone will cost the average 401k and IRA investor over $1,500 a year.

Diann Howland, vice president of legislative affairs at the American Benefits Council, cited in an article in InvestmentNews, called the proposal “not a great thing to do to the middle class.”

The 0.1% financial transaction tax is more damaging than it might seem at first glance. It applies to all the securities sold and purchased within a mutual fund or ETF, as well as the purchase and sale of the funds by investors. By my calculations it can easily add a cost of 0.20% to 0.30% a year to every fund investment. Given that some index mutual funds only charge 0.10% in total expenses, that’s a cost increase of 200% to 300%.

Eliminating the step-up in basis on inheritances and the favorable capital gains tax rate will also affect the middle class. According to a 2013 survey by HSBC Bank, retirees expected to leave their heirs an average of $177,000. If the average basis is one-half of what’s inherited, the elimination of step-up in basis and capital gains tax will cost middle class inheritors $10,000 to $20,000 more in taxes.

Senator Warren’s proposed tax increases will affect the middle class as well as the wealthy. They also fall short of covering the estimated cost of her plan. Assuming, then, that Medicare for All could be implemented with no increase in federal income or sales taxes for the middle class may well be a pipe dream.

Conclusion

Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

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Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com

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Are Bonds Worth Some Excitement?

Posted on September 17, 2019 by Dr. Marcinko

Bonds an Investment Class Worth Some Excitement, Today?

By Rick Kahler CFP®

“One thing I definitely don’t want in my portfolio is bonds,” a prospective client told me a few weeks ago. “Bonds are boring and don’t give good returns.”

Her confidence in her money script that bonds had no place in her portfolio was palpable. However, her understanding of the role bonds play in a portfolio was incomplete. I restrained myself from launching into a lecture on the importance of bonds and simply replied, “While it is true bonds can be boring, sometimes they can be phenomenally exciting.”

Certainly stocks, commodities, and real estate investments are generally much more exciting. They are many times more volatile than bonds; in just a year it’s possible they might even gain or decline 50% in value. Meanwhile, individually held bonds and their mutual funds can crank out predictable coupon yields quarter after quarter after quarter, with one-third of the volatility of stocks. The cost of the lower volatility is that the long-term returns on bonds tend to be half to a third that of stocks.

However, the bond market right now is anything but boring. So far this year, while stocks are back to prices roughly where they were in early 2018, a sharp fall in interest rates has caused bond investors to reap some significant capital gains. Bonds have an inverse relationship with interest rates. The value of most bonds increases when interest rates decline and go down when interest rates rise.

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Bonds

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How significant are the gains in bonds?

Since the beginning of 2019, investors in the 30-year Treasury bond have seen gains (interest plus price appreciation) of 26.4%. That would be an outstanding full year’s return for stocks. According to the Bloomberg Barclay’s U.S. Aggregate Bond Index, long-term bonds overall have generated a 23.5% return. Investment grade corporate bonds have returned 14.1%, while the 10-year Treasury note has gained 12.6%.

Market observers have predicted for the last decade or so that bond rates have nowhere to go but up. What we’re seeing currently is a yield on the ten-year Treasury note of just under 1.47%. At the end of 2018 it was more than 3%.

Will we see more of the same? It’s very hard to imagine that same 10-year Treasury falling another 1.5%—to zero yield. So the smart money says that most of the gains have already been taken, and anybody looking for 20-plus percent returns in long bonds going forward is just chasing them after the fact when returns are dropping.

But how smart is smart?

Just in case you agree and think interest rates have nowhere to go but up, consider that many countries in Europe actually have negative interest rates, where the investor or depositor pays to loan their money to organizations or banks. Another 1.5% fall to 0% interest rates could deliver similar 20% bond returns.

Lessons Learned

The lesson here is that even if you think of bonds as the boring part of your portfolio, there are times when they can add a little more kick to your returns than you might have expected. And in times of falling equity markets, they are an invaluable buffer against big losses. Still, with the long term probability that bonds produce a return half that of equities, there is a significant chance that they won’t sustain the 20-plus percent returns as rates stabilize and increase at some point in the future.

Unlike the misinformed prospect I visited with, most investors over the age of 40 can benefit by having a substantial slice of their investment portfolio in bonds. Whether their returns are typically boring or occasionally exciting, bonds are an important asset class for diversified investors.

Assessment: Your thoughts are appreciated.

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Annuities Do Not Belong In 401(k) Plans

Posted on August 14, 2019 by Dr. Marcinko

Here is Why?

By Rick Kahler CFP

Several weeks ago I wrote about the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which will reform various aspects of US retirement laws. The Act was passed by the House in May and is currently stalled in the Senate.

One of the most troubling of the SECURE Act’s 29 provisions is that it will ease regulations to make it easier for financial salespeople to sell annuities to 401(k) plan participants.

This is alarming, as the act creates a safe harbor for annuities inside 401(k) plans. That means companies choosing to offer annuities would be shielded from liability—no matter how terrible an investment the annuity products may be. This provision has great potential for harm.

Annuities seem always to be a hot financial product in the market place. It’s rare when I interview a new client that they don’t have at least one in their portfolio. Often, it’s the only investment they own. Annuities are not hot because consumers are clamoring to buy them, but rather because annuity sales people love to sell them.

While I rarely recommend them, there are some good things about annuities, especially that earnings grow tax deferred until distributed. They can be useful in this regard in special situations—when stripped of their high fees and commissions. Therein lies the problem.

Sales

Most annuities sold by salespeople inherently contain high fees, big commissions, and high penalties to consumers for taking money out early. What that means for the investor is low returns. For those reasons, the negative aspects of annuities far outweigh any good.

Even worse, annuities have no place being owned by an IRA or, as the SECURE Act would allow, a 401(k) plan. Regardless of fees or commissions, no annuity belongs in a retirement plan. One of my top pet peeves as a financial planner is so-called “financial advisors” who sell people fixed and variable annuities for a retirement account. This makes no sense.

An annuity is a tax-deferred container to put investments in, not an investment itself. It’s what investments are inside it that matters. The same is true of  IRAs and 401(k) retirement plans. Since a retirement plan is already a tax-deferred investment container, it makes no sense to put an annuity—another tax-deferred investment container—inside of it. The silliness of this is obvious to even the most casual observer, unless your livelihood comes from selling these products.

Agents and their companies spare no expense in developing convincing storylines, half-truths, and slight-of-hand explanations of why it makes perfect sense for a retirement plan to own an annuity.

The bottom line is that annuities are sold, they are not bought. The only reason annuities are purchased in someone’s retirement account is because the salesperson receives a much higher commission from the transaction than selling a mutual fund, individual stocks, or CDs.

Why?

So why did our Representatives vote 417-3 to open up investors’ 401(k) plans to these high-cost, high-commissioned, financially disastrous products? I can only surmise that most of them didn’t fully understand what they were voting on and that the insurance lobby did their normal amazing job of selling the alleged benefits of annuities. Oh, and maybe there was a campaign contribution or two.

Assessment

Most annuities are expensive investment vehicles that benefit the salesperson and the company far more than they benefit you. If you are thinking of buying one, or in the future your 401(k) offers the option of buying an annuity, do some digging before you sign on the dotted line. Make sure you get advice first from someone other than the annuity salesperson—someone with no vested interest in selling you this product.

Your thoughts are appreciated.

Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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On Prioriting Money Beliefs

Posted on July 23, 2019 by Dr. Marcinko

“Money is supposed to be spent!” “Money is supposed to be saved!”

By Rick Kahler CFP®

We may not hear talk-show participants shouting these opposing views at each other with the same level of anger that characterizes some of our political rhetoric. Yet the core polarization that pervades so much of today’s society also shows up in people’s beliefs about money.

I saw this polarization recently in a conversation with a group of friends in Europe. The topic of money came up, as it usually does when people find out one of my specialties as a financial advisor is financial therapy. The thinking of my friends was that money is meant to be spent, not saved. They felt that people who saved money were faithless and greedy hoarders who by their saving threatened the economic system.

At the other extreme, I know other people who strongly believe a person’s first duty is to save and invest. According to them, those who don’t save as much as possible for emergencies and retirement are foolish, deluded, irresponsible, and destined to live out their last days in poverty.

My friends who embrace the money script that “money is to be spent, not saved” are likely to also hold a money script that “the universe will provide.” They tend to fall into a category we label Money Avoiders. Those who embrace the money scripts that “money is to be saved and not spent,” who also believe “one can never really have enough money,” are in the category of Money Worshipers.

Like most other forms of polarized thinking, neither of these extremes is right. Nor is either belief wrong.

Money does need to be spent. The health of our economic system depends on transactions. It’s important that money flows through the selling and buying of goods and services. When a significant number of consumers stop spending, economic activity grinds to a halt. We saw the effect of this in the financial crises of 2008. It’s also important to spend money to take care of ourselves and our families. Saving or investing money to a point that we go without adequate food, shelter, health care, or similar necessities is not healthy.

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Money also needs to be saved to provide a cushion against emergencies and to provide for our needs in retirement. My European friends enjoy a higher certainty of adequate income in retirement. For them, this is the universe providing, a strong government security net. However, those that live in many Asian countries are assured very little, if anything, in the way of retirement income. For them, the universe comes up short and depends upon the generosity of family to provide. Saving in an Asian culture is therefore much more important than if you live in a Scandinavian country.

Saving and investing for retirement is important for those of us in the US, as well. Without it, we face two dubious prospects: we can depend on family to provide or we can eke out a meager living on a Social Security payment of around $2,000 a month in retirement.

Those who are not polarized around money understand that both spending and saving are important for financial health. They can balance their spending and saving, applying both when necessary in their own lives.

Assessment

Ideally, from this balanced middle ground, someone can also see past the limitations of others who are polarized. Those who believe “Money is meant to be spent” or “Money is meant to be saved” have a world view that results in such an extreme position. Labeling them as “wrong” is not a useful way to try to shift anyone’s polarized beliefs.

Conclusion: Your thoughts are appreciated.

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Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Financial Stress in Times of Transition

Posted on July 18, 2019 by Dr. Marcinko

Financial Stress Adaptation

By Rick Kahler CFP®

Stress is what happens when something you care about is at stake. This definition comes from Susan Bradley, CFP, author of Sudden Money and a specialist in the financial aspect of life transitions.

The stress around these transitions is a common reason that people seek out financial advice. We tend to be driven to consult advisors as a result of stressful changes in our lives, such as a divorce, a sudden money event like an inheritance or insurance settlement, an investment or job loss, retirement, or the death of a loved one.

While all these life events certainly have financial components, it’s almost always the emotional components of the change—how we respond to them—that are the cause of the stress.

Any change includes three stages: an ending, a period of passage while we relate and adapt to the change, and a new beginning. This period of transition can be fraught with emotion and behaviors that can trip us up in many ways, including financially.

Susan identifies nine such emotions and behaviors that she sees commonly in people in transition.

1. Lack of identity. If the transition results in the loss of a familiar role—spouse or employee, for example—you may struggle with “Who am I now? “There is often confusion and ambivalence about the future, and an inability to make decisions.

2. Confusion/Overwhelm/Fog. There is a sense of defeat by everything. You may physically slump, have a glazed-over look, and ask others to repeat a lot. It’s hard to understand, be present, respond, focus, or move forward.

3. Hopelessness. You may have a sense of having given up, not being in control of your fate, or being a victim. It may seem that there is nothing you can do to change yourself or the outcome. Financial decision-making is very difficult.

4. Invincibility. This can happen with a big positive change in your finances. You may think everything is going to turn out fine. You may feel euphoric, confident, and smarter than your advisors. You may spend more and take greater investment risks.

5. Mental and Physical Fatigue. Change can be exhausting, and the exhaustion can go undetected by others and even yourself. You may have difficulty following an agenda and tasks.

6. Numb/Withdrawn. You may feel ambivalent about and indifferent to exploring the changes in your life, what you want, and what the future may hold. You don’t give much feedback and are withdrawn and non-expressive. You may miss or not return phone calls or emails. The planning process often comes to a standstill.

7. Narrow or Fractured Focus. You may either be preoccupied with one area that excludes everything else or have an inability to focus on anything. In either case, focusing on what’s important becomes difficult or impossible.

8. Inconsistent Behavior. This is the inability to hold to one position. Instead, you may change your mind repeatedly or switch between opposite positions. You are uncertain and often embrace opposites in your wants and desires in the same breath. Making decisions become impossible.

9. Combative. You may hold on to feelings of anger, resentment, victimization, and rage regardless of the facts. You are outwardly emotionally expressive and challenging. You don’t respond well to logic and practicality. A combative person doesn’t have problems making decisions, but does have difficulty making good decisions that are in their best interests.

Assessment

Emotions and behaviors like these are generally temporary. Financial decisions made in the midst of transition-based stress, though, can have lasting negative consequences. The support of trustworthy advisors can be invaluable in navigating through both painful and joyful life changes.

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Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Medicare for All?

Posted on July 12, 2019 by Dr. Marcinko

Taxes for All?

[By Rick Kakler CFP®]

As the recent debates among the Democratic presidential candidates emphasized, the idea of government-managed health care is gaining popularity. “Medicare for all” or some form of “free” universal health care is certainly an appealing idea. Who among us wouldn’t appreciate someone else paying our medical bills?

I certainly would. My family’s personal health care costs, including premiums and out-of-pocket expenses, run just over $3,000 a month. If my health care were free, I could find a lot of uses for the savings.

But my skeptical side, and probably yours as well, knows that there is no such thing as a free medical procedure. Someone, by some means, has to pay for insurance coverage, doctor visits, hospitalizations, and other medical costs.

The tax tab for providing “Medicare for all,” as envisioned by Sen. Bernie Sanders, is $3 trillion a year, according to several analysts. Currently, the cost for Medicare is about one-sixth that amount, or $583 billion a year.

Sanders and other presidential candidates tell us the wealthy will pay this tab. The reality is that when we look at other countries that have similar universal health care plans, it isn’t just the wealthy that are paying for it.

Raising the more than $3 trillion needed annually to fund “Medicare for all” would require doubling all personal and corporate income taxes or tripling payroll taxes. This analysis comes from Marc Goldwein, a senior vice president at the non-partisan Committee for a Responsible Federal Budget. He was cited in a May 9, 2019, Bloomberg article by Laura Davison, “Tax hikes on wealthy alone can’t pay for Medicare for all plan.” “There is a lot of money out there, but there isn’t $30 trillion [over 10 years] sitting around from high earners,” Goldwein said. “It just doesn’t exist.”

I did a little investigating of the tax rates of European countries that have universal health care and found Goldwein’s statement to be true. For example, Denmark taxes income over $7,000, with rates starting at 40%. The US rate starts at 10%. This would indicate a doubling or tripling of income taxes or payroll taxes on the lowest earners is not a politically-skewed scare tactic, but an economic reality.

The top rate in Denmark is 56%, while the top rate in the US is 50% (37% federal and 13% state). This is just one of many examples I found in my searching that strongly indicate other countries that have universal health care haven’t found much room left to tax the wealthy. Based on their experience, the majority of the cost will need to come from lower income earners.

Sadly, this message is not being disseminated to voters by proponents of universal health care. While I am not advocating for or against universal health care here, I am advocating for full disclosure and transparency.

A topic as significant as this deserves a great deal of discussion based on clear, complete disclosure of facts and educated analysis. It requires the best available answers to questions like who will be covered, what will be covered, how much the program will cost, and who will pay for it.

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Assessment

Raising six times what we are currently spending for Medicare would be a huge task. Transferring one-eighth of the US economy from the private sector pocket to the public sector one would not be easy or painless. Making the transition to some form of tax-funded universal health care would be a major shift in direction for this country that would have a significant impact on all Americans. It is not a decision to make based on inadequate information, political rhetoric, or unreasonably optimistic assumptions.

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Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

[Foreword Dr. Krieger MD MBA]

 Foreword by Jason Dyken MD MBA

Book of Month

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The “Good Deal Exemption” for Financial Advisors is No Joke

Posted on May 30, 2019 by Dr. Marcinko

The “Rules”

[By Rick Kahler CFP®]

In the business of selling financial products, the “good deal exemption” may be one of the most widely used “rules” most people have never heard of. You can’t find it in any rule book or statute. Even Google has never heard of it. Yet it is used on a daily basis.

The rules and laws surrounding the sale of financial products are complex and voluminous. Even with the best of intentions, it isn’t hard to run afoul of a rule.

Under the good deal exemption, however, a licensee can violate any rule or statute as long as the investment sold to the customer turns out to be a “good deal.” This is a tongue-in-cheek way of saying you can violate any rule you want as long as the customer doesn’t file a complaint or sue you. Which they will rarely do if the deal turns out to make them loads of money.

It’s when investments go bad that customers often complain or sue, not because they were aware of any securities violations, but because they lost money. It’s the ensuing investigation by the regulating body and the customer’s attorney that uncovers any violations.

Example:

Recently, I came across a perfect example of the good deal exemption. A married couple I knew, Arnie and Audrey, invested with Bernie (not his real name) 30 years ago as they neared retirement. He put their entire savings of about $310,000 into mutual funds that invested in common stocks. Because of a pension and Social Security, they didn’t need any income from their investments.

At the same time, Arnie put his investments into a revocable living trust, naming Audrey as the trustee and beneficiary. Eleven years later, when Audrey was 80, Arnie died.

Losing her husband’s pension income and one Social Security check, Audrey needed to start drawing $2,000 a month from the portfolio. While most advisors would have recommended reducing the risk and volatility of the portfolio by investing less in stocks and more in bonds, Bernie kept Audrey invested 100% in stocks. This is aggressive for any 80-year-old needing income from a portfolio. He made no changes as the years went by.

At 85, Audrey started showing signs of dementia. Bernie rightly suggested appointing someone other than herself as trustee. But rather than naming one of her three children (who didn’t trust Bernie and may have transferred the accounts), he convinced her to appoint his wife, who also worked in his office, as trustee. In any broker’s books, this was a serious ethics violation.

In the great recession of 2008-2009, when Audrey was 89, her portfolio lost just under half of its value, falling from $832,507 to $478,820. Had Bernie reallocated the portfolio before the crash to a mix of 50% stocks and 50% bonds, the loss would have been cut in half. To his credit, Bernie told her to stay the course and not sell out.

Recently, at age 99, Audrey died. Her account had done phenomenally well, being 100% invested in US stocks, which for the last 10 years was the best investment class on the planet. Her $478,820 had grown to $1,300,000, providing her a $2000 monthly income and a substantial estate that she left to her children.

Assessment

Despite the inappropriately risky investments and the ethics violations, Bernie and his wife are probably protected by the good deal exemption. Given their substantial inheritance, Audrey’s children are unlikely to sue.

This happy ending was due primarily to luck. Audrey lived long enough and at the right time so her portfolio recovered. However, if luck were a sound investment strategy, Las Vegas would be full of millionaires happily retired on their winnings.

Conclusion

Your thoughts are appreciated.

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Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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On the Unintended Consequences of High Taxes on the Rich

Posted on May 28, 2019 by Dr. Marcinko

On the two types of tax increases

[By Rick Kahler CFP®]

Two types of tax increases are being promoted by several presidential candidates and members of Congress. The less common idea, which I wrote about recently, is a wealth tax on net worth. The more common proposal is a significant increase in income taxes.

Presidential candidate Bernie Sanders favors a progressive income tax that tops out at 54.2% on incomes over $10 million. Not to be outdone, Congresswoman Alexandria Ocasio-Cortez supports increasing the income tax on the same group to 70%.

If you think these proposals are so radical that only the most liberal of voters would support them, a poll conducted by Hill-HarrisX in January 2019 found that 59% of all voters favored a 70% tax bracket. The survey asked 1001 registered voters if they favored a 70% top rate for “the 10 millionth dollar and beyond for individuals making $10 million a year or more in reportable income.” While predictably most Democrats polled—71%—favored the steep increase, 60% of Independents and 45% of Republicans also supported it.

When you consider how popular the notion of a 70% top income bracket is, it isn’t a stretch by any means to imagine these same voters in the 2020 election giving control of Congress and the Presidency to politicians favorable to hiking taxes. The chance of seeing such massive increases on the wealthy goes from a remote possibility to a real probability.

Promoters of the anticipated windfall revenues from such a tax want to redistribute the proceeds to fund things like free college education, affordable health care for all, high speed rail trains, and converting existing buildings to comply with “green” regulations.

While all these outcomes are well intended, perhaps even desirous, before we forge ahead it may be a good idea to consider unforeseen consequences. Let’s look at how past attempts to fund massive government benefits by raising taxes on the rich have worked.

France

In 2012 France raised the top tax bracket to 75% on individuals earning over $1 million. French economist Thomas Piketty, who really wanted to see the tax at 80%, was so exuberant about the move that he predicted many other countries would follow suit.

Government officials estimated that tax revenues would soar to 30 billion euros in 2013. They were roughly half right: revenues came in at 16 billion euros. One of the reasons the tax revenue windfall didn’t develop was a consequence that politicians had not considered. The wealthy packed their bags and moved, taking their investments and income with them.

By 2015, around 2.5 million French citizens lived in the U.K., Belgium, Singapore, and other countries that had much more competitive tax rates. The French economy ground to a halt, growth stagnated, and unemployment soared to 10%. In 2015 France repealed the ill-fated tax.

England

According to The Times of London in March 2019, one-third of British billionaires have left the country because of high taxes, most in the last ten years.

Maryland

The state of Maryland has had a similar experience due to high state and municipal taxes. In October 2013, the Maryland Public Policy Institute reported on throngs of wealthy retirees  “moving out of Maryland to save money on taxes and leave more to their children. This is costing the state millions in tax revenue.”

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Assessment

If the U.S. enacts a similar tax, it is foolish to assume the outcome will be any different. A plethora of other countries with great amenities and competitive tax rates will appeal to those affected by the tax. Tax policies that regard the wealthy primarily as sources of revenue rather than investors in their communities do little to keep those citizens anchored at home.

And so, your thoughts are appreciated.

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Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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Consumer Confidence and Savings Rates

Posted on March 4, 2012 by Dr. Marcinko

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Are Doctors Just Like the Rest of Us?

By Rick Kahler CFP® MS ChFC CCIM

www.kahlerfinancial.com

After a short period of saving more of their disposable income at the depths of the recent recession, Americans are returning to recent historical patterns of spending more and saving less.

Usually this trend indicates “happy days are here again” as the decline in savings means consumers’ confidence is rising. That is not the case today. Consumer confidence is just half of what it was at the peak of the “good old days” of 2007. That year our national savings rate was 2.1%, just above its post-WWII low in 2005 of 1.5%.

A Jobless Recovery?

As millions of jobs disappeared and consumers hunkered down during the 2008-09 recession, our savings rate almost tripled. In 2008 it was 6.2%. This thriftiness didn’t last long; by the fall of 2011 our savings rate was back to a paltry 3.6%.

American Not Always Big Spenders

We were not always such spenders. During the four years of WWII we saved over 20% of disposable income annually. Between 1974 and 1992 the savings rate often bounced between 7% and 11%. Since 1992, the beginning of the unprecedented 18-year bull market in stocks, our personal savings rate reflected the good times in the economy and averaged just 4%.

Savings Rate Decline

One possible reason for the decline in the savings rate in the past three years may be that we’re paying off all the consumer debt that got us into trouble in the first place. In 2000 our individual debt load (including student loans and mortgages) was $19,750 per person. In the fall of 2011 it was $36,420, 8.6% less than the 2008 high but 85% higher than the 2000 amount.

Running out of Money?

While Americans are not substantially reducing their debt, their equity in home ownership plunged from $12.9 trillion in 2006 to $6.2 trillion in 2011. No wonder consumer confidence is so low.

It appears our return to low savings rates isn’t the result of renewed optimism, paying down personal debt, or a surging economy, but rather that Americans are running out of money in the face of staggering personal debt and declining net worth. This leaves them incredibly vulnerable to another downturn in the economy.

Ironically, Americans’ personal finances are a reflection of our government’s fiscal woes. Washington also finds itself compromised to respond to a national emergency because of a debt that exceeds our national income.

Personal Three-Pronged Approach

There isn’t much you and I can do about our government’s over-indebtedness and overspending except to vote for politicians that promise to end the insanity and hold them accountable. But, we can take better care of our own affairs with a three-pronged approach.

1. Get out of debt. We may not be able to earn more or work harder, but I’ll guarantee you that we can spend less.

2. Start saving for emergencies. You need one savings account for periodic expenses like medical deductibles and car repairs. A second is for bona fide emergencies like losing your job or the death of a spouse. It should represent six to 12 times your monthly expenses.

3. Start investing for financial independence. Ideally, you need to put aside 15% to 35% of your income for the time you no longer can or want to work.

Assessment

The hardest part of this approach is becoming willing to downsize your lifestyle. Too many of us say we are willing to cut spending and economize until it actually comes time to do it. In the two decades before the recession, Americans got out of the habit of making hard decisions in our own best interests. However, as our historical patterns show, we’ve treated ourselves with “tough love” in the past. When we have to, we can do it again.

Conclusion    

And so, your thoughts and comments on this ME-P are appreciated. When it comes to consumer confidence and savings rates, are doctors and medical professionals just like the rest of us?

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