Starting Over

For some people organizing, creating and staying on point is easy-peasy. Not so for me. In order to get and stay organized I became a compulsive list maker. I have long days and multi-tasking is a must and not a choice. In order to stay organized and keep on top of things I make lists. It's something that works for me.

Lists keep me organized. But there are some people who get so overwhelmed just thinking about investments, planning and incorporating it into their personal and professional lives that nothing really helps, not even lists. A lot of times they throw up their hands and quit. So I'm going to give everyone who's interested a few tips to get on track. They're simple things and involve developing some basic organizational skills.

The first thing to do is know where you are. That means inventory all your assets, market value of your home, savings, collectibles, tools, jewelry, who owes you money, and investments. The next thing to do is to list everyone who you owe money to including the mortgage, college loans, credit cards, insurance loans, 401k loans, mom and dad and the like. When you're finished subtract one from the other and what you have is your net worth. Hopefully you are on the plus side of the equation. If it's a negative net worth you should concentrate on eliminating debt before pursuing any plan on investing for your future. In either case you know exactly where you are at this specific moment in time.

The next thing is to think of where you want to be. You may want to retire or start your own business or cruise the oceans in the boat you're building in the basement. Put a price tag on that dream. Since you don't know what the cost will be in the future write what you estimate to be the current cost. My web site has inflation calculators and go to www.primaryplanner.com and plug in the numbers you have and I would suggest a 3% inflation rate for anything over 10-years and 4% if it is less. You can print and save those numbers with your notes.

The second step plus the first is nothing more than your personal MapQuest. You now know where you are and you have a destination. Which, of course, are the basics of MapQuest.

The next thing you need to figure out is how to get from here to there. Since nothing is guaranteed at the very best you can estimate what you need to save and at what rate of return you need to get there from here. Here too my web site can help and do a reverse calculation. Let's say you have 20-years to reach your goal and you've saved $40,000 and the calculation shows you need to save an additional $8,000 a year at a 10% annual rate of return. But assume those numbers for you are a little rich. You can't guarantee(no one can) getting 10% on your investments or savings. So what you do is run alternative numbers of 25 and 30 years and reduce your anticipated returns considerably. What you are doing is creating some alternative routes to help you reach your goal if you run into an unexpected detour, much like 2008.

No matter how step 3 comes out at least you have a solid idea of where you are, where you want to be and what it will take to get there. Feel good about it since a lot of people never get to this point in the planning process.

Steps four and five involve common sense. Here is where you don't do crazy what-if-I-win-the-Lotto dreaming but develop reasonable expectations about what you want and what you need to get there. Don't jot down you want a zillion dollars as a goal and you need to earn 20% a year to get it. Make your objective as sensible as you can. It's your plan.

Step five is what investments you use to make that journey and that choice is strictly all you. Stick with what you know. Don't start investing in emerging markets if you don't know what an emerging market is. Don;t suddenly become a stock trader if your don't know how. Stick to the basics if the basics are what you know and are comfortable with.

The last thing to do is review your plan. You don't have to be compulsive about it but do it as it becomes comfortable. Do quarterly check-ups. Keep your notes and statements in a file or notebook and like magic you'll slowly but surely bring organization into your life. Don't worry about checking the values of your accounts every day. Warren Buffet once said he didn't check his personal accounts but once or twice a year. If it's good enough for one of the world's richest persons it should be okay for the rest of us.

If you have any questions about this blog call Paul Stanley@ 877 783 7080 or write pstanley@westminsterfinancial.com. Send Paul your e mail address if you want to be kept up on news and blogs.

News January 27th

Expect the markets to go lower as the dollar strengthens. Last week's slide of 4% was the worst since March 2009. We may be in for a correction. We should not be testing market lows but perhaps a decline sharp enough to cause fear in some investors.

What the best minds know is that no one knows. Time, as we have learned, is always on the side of the individual investor who stays the course. Corrections have a way of providing buying opportunities.

If you have questions on anything contained in this blog call Paul Stanley @ 877 783 7080 or write to pstanley@westminsterfinancial.com

Know anyone who should be keeping in touch with their investments have them e mail their address to the above address.

Musings On Tuesday

Here are a few reasons for the meltdown week ending January 22nd.

For the most part you can blame it on the big mouths on Capitol Hill.

On the still not getting it...after losing big time in Boston the President, according to some reports, is trying to back his populist reputation by getting strict with banks and threatening them with stern measures vastly diluting their future earnings. Even though TARP has been paid back by these same banks with huge profits for taxpayers the administration is bent on separating speculative trading from banks traditional activities. This is Glass-Steagal redux even though the biggest players and blow-ups for the 08 mess were not commercial banks but Lehman, AIG and Bear Sterns. The reality is it will take several years to get this done but for the time being it makes for a horrible story for investors.

The President forgets that Mommy and Daddy middle-class own these very banks in their mutual funds and retirement accounts.When their shares lose money like they did last week the Dems will continue to lose support. Bill Clinton got it. This President doesn't...yet.

Letting go of Ben Bernanke is another live story that lead investors to confusion. Bernanke is slowly losing support and this is also taking a toll. Every time someone came out against him the markets lost a few points, said one observer.

Another voice to drop a pill into the Kool-Aid was Barney Frank who called for the elimination of Fannie Mae and Freddie Mac and rebuilding the U.S. home finance system from scratch. Investors thinking Frank meant the government should get out of the housing biz altogether had their own moments of panic selling. Reshuffling $5 trillion in agency mortgages doesn't happen overnight. But, when investors are nervous they're nervous.

There is always a reason to sell and takes many compelling reasons to buy.And, even though the numbers reported by the financials and tech were good but not great experts contend the sell off only confirmed that the good numbers were already baked into the share price.

Peter Boockvar of Miller Tabak summed it up by saying that earnings relative to expectations were mediocre.

If you have questions on anything in this blog call Paul Stanley@ 877 783 7080 or write pstanley@westminsterfinancial.com. Register your email to be alerted to new news and information.

Long Term Care

I am at the age when various body parts either start falling off or seizing up and I'm penciling doctor appointments into my day-planner with greater regularity. Already I'm on a first name basis with my local pharmacist. The valet at Henry Ford Hospital downtown knows my truck on sight and Marie at the main floor hospital cafeteria waves hello whenever I pass by on the way to my eye appointment. Slowly but surely I'm on a one way highway to old age where eventually I'll need skilled and not so skilled care to patch and spackle me until I head out to that big brokerage firm in the sky.

Back in the day when an elderly family member got sick everyone got together and made the decision on who was going to take care of granny or gramps and who was going to be snookered out of their bedroom while care was being given. At worst a hospital bed was wheeled into the living room and the oldster became almost part of the furniture as life revolved around him or her. Today no one has the time for that and the family member either goes into an extended care, nursing home or has home health care come to them. The cost is monstrous and an easily it can amount to two to three hundred dollars a day which quickly adds up when caring for someone. Most of that is not paid by Medicare, group health or private supplemental insurance.

It's not cheap living a long time while being old and sick. It is as expensive as anything anyone will ever spend money on; just ask someone who has had a relative in an extended care residence or needed home health care. Small fortunes disappear and a lifetime savings legacy is quickly wiped out. A cost of $50,000 a year is not unusual to take care of someone. In answer to that today's insurance companies created long-term care insurance but you can only buy it when you don't need it. When you need it you can't get it. Lots of people just don't like that at all. They want to be able to get it when they can't get it.

Long-term care insurance is also expensive, not as expensive as paying dollar for dollar the cost of care but not a cheap premium. It is insurance for living too long and giving people a certain dignity in their last years. But, what happens, people ask themselves, if a person doesn't slowly fade away like a good soldier but is hit by a bus and they've been paying into a long-term care policy? The argument shifts to not buying long-term care and convince ourselves that we'll die suddenly and not over a long period of time. Unfortunately the actual numbers differ. The average person lives now well into their 70s. Most people do not die violent or sudden deaths but slowly. The cost for caring for the elderly is extremely expensive.

Insurance companies are not stupid and realize the reluctance of people buying long term care insurance for their own good tomorrow is based on spending premium dollars today, and for many years, on something they may never use. 'What would you like, dear, a long term care policy or a new kitchen?' One of the really good thing to come out of this parsimonious attitude are new policies.

There are three basic ways insurance companies today provide benefits and do it economically. First is the long-term care contract with a return of premium rider. If the beneficiary does not use the benefits the premiums are returned. All money spent on the long term care policy are returned to the family.

Life insurance companies are adding moderate long-term care living riders onto life insurance policies to provide living benefits and dollars used for that care would be subtracted from future death benefits.

Savers are also able to get long term care riders. Fixed annuities from a few companies now offer a long term care rider that offers living care benefits after a waiting period is satisfied. This is attractive to seniors as they can save, earn a guaranteed rate, have access to their fixed savings and still have a moderate long-term care policy without additional out of pocket costs.

A few tips when shopping for that long-term policy. It is important that you understand that the policy you choose is the one you'll own forever, Make sure that the one benefit you add onto the long-term care policy is an inflation rider, especially if you are less than 60 years of age. The rider increases daily benefits as inflationary trends increases costs of in home and resident care.

Rates on premiums are never guaranteed and while the cheapest policy is often the most attractive understand that the premium will go up from the so-called teaser rate. Finally, when buying a policy check out the claims paying ability of the insurance company. You do not want to find out down the road that the company can't or won't pay the stated and agreed benefits because of their poor economic health.

If you need additional information on anything contained in this blog call Paul Stanley @ 877 783 7080 or write him at pstanley@westminsterfinancial.com

Asset Allocation Part 1

Asset allocation simply means creating an investment portfolio in such a way to reduce overall risk while maximizing total return. The concept revolves around the fact that at any given time not every investment asset class will perform in the same way.

I first learned about asset allocation back in the late 70s. The person that introduced asset allocation to me was a wholesaler for a large asset management firm and he spent more time telling me that he played football at the University of Michigan than explaining the finer points of asset allocation. I had to endure ninety minutes of such unlikely-Oscar Wilde bon mots as, 'In sixty-eight I had two sacks against Ohio State.' Eventually the big guy lumbered away leaving me with a stack of papers to study, and I remembered thinking as I was self-educating myself that this was how investment planning should be. By using asset allocation I did not have to guess if fund manager A was going to blow up or if fund manager B was going to stick with his investment philosophy. I need not worry that in case the domestic economy imploded I'd have foreign holdings propping me up on the other side. I was giddy with excitement. I could build safe guards into client's portfolios that if something bad happened I ad another asset class to partially support the portfolios from doom.

Doom is what brokers fear most of all. Since 'most' brokers get paid the same if they buy a great investment or a piece of junk it behooves the broker to find what they believe is the best investment for their clients. What brokers don't want at any time in their career is a catastrophic meltdown of any investment for any client. Asset allocation wasn't meant to get investors rich but to reduce risk and increase total return over simply buying one asset, one stock or one fund.

Pension plan managers were probably the first to latch onto asset allocation because they had to provide income for retirees for a significant length of time and could not foresee what particular investment would so well and which would do poorly. Pension plan managers knew that they would need x dollars to provide x income for x years for each of their retirees. In defined benefit plans if the pool of money did poorly the company would have to contribute more money and if the investments did extremely well the company did not have to contribute as much, or in certain cases anything at all for a particular year.

Just to give you an idea how sectors differ in performance in 1998 an investment in Large Cap Growth sector was up 38.7% while small value lost 6.5%. But knowing this ahead of time was impossible. Managers would hedge their bets and create portfolio models like recipes and put a percentage into each investment class.

Then came the moment no one thought could ever happen in modern investment history. In 2008 Small Cap Value lost the least of the equity classes or a -29.8% while Mid-Cap Growth was the biggest loser with a negative 44.3%. Did I write that the best performing sector in 2008 lost almost 30%? Yes, I did. In fact 2008 showed that in a global meltdown asset allocation did not work at all.

Very smart money managers in 2008 were caught losing significant amounts of money for their clients including the venerated fund manager Bill Miller. Miller was so far off base that he kept on looking for a market and sector reversal and buying investments that, in retrospect, had as much of a chance of turning into winners as the Kingston Trio had of another hit record.

Other money managers while not seeing the crisis coming either, just happened to be making some very wrong investment bets that turned out brilliant. When the dust cleared those fortunate's who made, in ordinary times, extraordinary stupid bets, were billionaires. Particularly well rewarded was Nassim Nicololas and his hedge fund partner. Part teacher, manager and philosopher when asked how they did it Nassim simply shrugged and said they were lucky. No one, he insisted, knows anything about how markets work.

Economists, slipping in their comfy smartest- people in the room suits, explained to the rest of us dimwitted ones that the markets were deleveraging. They pointed out that debt and leverage were what got us into the mess and the entire kit and caboodle had to unwind. Not only business, they pontificated, but also consumers who had used debt to fuel their lifestyle. I had to wonder why my 90 year old mother who didn't owe a drachma to anyone had to have her portfolio unwind 50%? But the wise people in the Ivory Towers were adamant that they knew what of they spoke.

The simple fact is that panic and wholesale selling by investors, hedge funds, investment banks and brokerage firms caused stocks and, yes, dear reader, even bonds of good companies to plummet in value. There were more sellers than buyers. We saw a bit of it in 1987 but nothing like 2008-2009. When the panic hit people they needed to get liquid and get liquid quick. Big Mouth Jim Cramer showed up on the morning Today Show with a can of gasoline (he didn't but you get my point) in one hand and a BIC lighter in the other stating that if any investor needed money over the next five years they better sell their stocks, funds and bonds. And an hour later sell they did as the panic turned into a stampede for the exits. (Less than a year later he shows up on the same program spouting Mea Culpa's and that it was now a great time to buy.) Why, I keep asking myself, isn't this person locked up where there is a lot of padding on the walls and he can't hurt himself or others?

Bottom line- traditional asset allocation failed us.

It just didn't work when it was supposed to. Actually, when panic sets in and people are selling everything they own asset allocation cannot work. This has resulted in some of today's investors seeking the magic of Absolute Return Management.

Mathematicians and investment gurus have been fiddling with portfolio mixes that replicate a positive return but using investments that have no correlation with equities. It's something like betting on meatball futures or shorting the VIX or some esoteric concept that needs a football stadium filled with super computers trying to eliminate risk from an investment while getting significant returns over a specific index. Today there are funds and managed accounts that state their mission is to provide a return of X with zero beta. Beta is a measurement of volatility and every investment has some volatility. The trick has always been to reduce beta while getting better than market or sector returns.

What these 'mad' managers of today have done is redesigned asset allocation to create something called 'market neutral'. And as giddy as I was about asset allocation some 30 years ago today's twice bit investors are all gaga over Absolute-Return Funds. There are lots of these engineered products coming out, designed to provide positive returns over a set period of time no matter what the overall market does. These funds utilize shorts, hedges, options and commodities to give their clients a positive return, or so it is said.

The problem, that investors, and sideline critics have observed, is that these funds have failed to deliver. In the first eights months of last year a few of the touted Absolute Return Funds provided shareholders with a measly 2% while the overall market returned 14%, In addition these funds are expensive to manage. One fund charges an upfront fee in excess of 3% plus an annual expense load of 1.25%. All that for a 2% return. It's like the Gene Wilder Frankenstein firm where he installs an Abby Normal brain into the monster and mulls that the concept initially looked good on paper.

The other problem with Absolute Return Funds is that the investors want equity returns with none of the equity risk. That won't happen now or ever. Absolute Return Funds at best will provide one or two points above Treasury.

The best thing that investors can do is forget ARFs and be proactive with their investments, buy a diversified commodity ETF and add short-term domestic and foreign bonds along with their equity holdings.

Sometimes the cure is worse than the disease. Investors buying ARFs may well find themselves earning very little indeed to get zero risk while the broader markets may well shrug off the malaise of the prior decade and possibly motor along in double digits for the next 10-years.

If you want additional information on anything in this blog or more information on designing your asset allocation write to Paul Stanley at pstanley@westminsterfinancial.com or call 877 783 7080.

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Perfect Numbers

The markets retreated the week ending January 15th as earning season so far has failed to impress. Investors beat-down certain sectors expecting sterling results and getting good but not spectacular numbers from reporting companies.

Looking ahead I like the beat-down. It's far too early in the recovery to be getting this picky.

If you have questions about anything contained in this blog write to me at pstanleywestminsterfinancial.com or call me at 877 783 7080.

Musings On Tuesday

Conan gets $40 million for failing. Actually that isn't true. He's getting paid because his boss messed up and in order to cover it up the boss is using shareholder money to hush Conan from badmouthing him and the network. In the real world we call that blackmail.

Lady Kraft gets her candy. Spending shareholder money on Cadbury, a business that may not increase shareholder equity but will certainly cost them time to intergrate and lots of money. Historically acquisitions have failed to impress. Expect Warren Buffet to unload shares to express his ire.

Money experts post their 2010 predictions and point to their 2009 forecasts as proof of their genius.

I wonder what Ronald Reagan would have done if bankers and Wall Street acted like spoiled children and demanded their bonuses? Can you say, 'air traffic controller?;

Beating On The Banks

Who out there loves their bank and banker? Let's see a show of hands. Not many, I see. Which shouldn't surprise anyone. It's a different world from when I was a kid and the neighborhood banker was someone who was active in the community, knew everyone in town, sponsored the Little League team and loaned money because of someones character as much as how much collateral they had. If he wasn't Jimmy Stewart at least Jimmy would have played him in the movies.

Today's bankers are vilified because they were one of the greedy cogs in the economic mess and because they still have not stepped up and said their Mea Culpa. We don't like people who don't fess up to their faults and ask for forgiveness. Just ask Tiger Woods.

The public and government sentiment on the extreme lack of gratitude by today's bankers is understandable. We saved their miserable skins by loaning them tens of billions of dollars and expected them to be appreciative of that magnanimous generosity. Many of the CEOs and executives would today be wandering the streets, unemployable, begging for scraps and enduring horrible economic times if it were not for our largess,

We expected them to change when we loaned them the money. I think we wanted them to drop to their knees and hug us and proclaim their undying gratitude. We thought that if we saved them from extinction they would loan money to those that needed it, re-worked the awful mortgages they saddled people with and cleaned out those that were individually responsible for creating the mess in the first place. Instead what the banks did was tighten their monetary policy at a time that people needed it the most, increased credit card rates, foreclosed on the home mortgages rather than reworking them, paid back the government loans without sending a bread and butter note and gave themselves huge bonuses as a way of congratulating themselves that they were fine fellows all.

To say that the public wouldn't mind taking the TARP repayment and building a new prison to hold these people in perpetuity is probably an understatement.

The government, who loaned our money with little restriction except for repayment, is so angry at the lack of contrition and business as usual that they have threatened bankers with a soggy noodle slap against the wrist as punishment by meting out a bank tax. This tax, which would be passed onto the consumer, is expected to be about $90 billion, or what these banks earn per quarter. It is obvious that the banks will only turn around and pass whatever penalty onto their customers. Bankers will not miss a bonus, paycheck or perk because the government hands out a retribution tax. Our government doesn't get it.

If our government, which isn't very bright when it tries to do something good, wanted to put restrictions on the loans to the banks they should have written them into the contracts in the beginning just as the banks do when someone borrows from them. And what banks do when someone defaults on one of their loans? They take the customer to court, add interest penalties and other egregious charges, and finally send the sheriff or hired goons to take whatever someone owns to satisfy the debt. Plus they make a mark in their credit file so everyone can see making it more difficult to get credit. That's how big banks treat their bad customers. They don't bail them out they punish them.

Still we do business with these people instead of going to our neighborhood credit unions, shopping for best rate credit cards and treating big banks in the same manner as they have become accustomed to treating us. But, because I understand people will continue to go to big banks and do business no matter how badly they are treated I still like certain big bank stocks at certain levels.

It is the old fable of the frog and the scorpion and when the frog does the scorpion a favor the scorpion rewards the frog by stinging it to death. When asked why the scorpion simply says it is what it does. And so it is with big banks.

If you want more information on what banks I am buying or anything contained in this blog e mail me at pstanley@westminsterfinancial.com or call 877 783 7080.

Transaction Tax Around the Corner

Inflation is creeping around the house but sooner or later our proud baby will be on its two hind legs, stumbling along, knocking us for a loop as food and crude take more of our earnings. Right now we're in a small comfort zone where we look in the crib and see baby inflation and think 'how cute', but it won't be long before the little darling will be keeping us up at night demanding to be fed more and more. Yes, we have that to look forward to but on the good side we're starting to get a little economic traction with a more confident stock market. Just as that's happening a few politicians are contemplating greasing the recovery flagpole. Certain Capitol Hill bandits have proposed plans to tax all mutual fund transactions.

Just to bring you up to speed, active managed mutual funds, as their name implies, buy and sell stocks and bonds along with other more complicated financial trades. Unless the fund is an index fund, where there is little trading, most active funds have a turnover of assets of around 30% per year (as a rough estimate). Every time there would be a sale and or a purchase of a stock or bond by the mutual fund managers it would create a tax according to the proposal being floated around by certain Democratic politicians.

If at any time in economic history people need help to get back on their feet the last thing they need is to have their mutual funds burdened with a tax that will do nothing but reduce total returns. It is estimated that if the government gets away with this scheme the average annual rate of return to investors will decrease by approximately 25%.

Treasury Secretary Geithner, who should know of what he speaks, criticized this Democratic initiative while Speaker Pelosi said the plan 'has a great deal of merit'. Not content to potentially destroy retirement plans of the average United States citizen the Speaker suggested that the U.S. coordinate with other developed countries to impose a similar tax. (Nothing like exporting American misery)

To illustrate how much an investor would lose assume an investment of $50,000 in a mythical mutual fund that earns a consistent 10% per year for 15 years (this does not exist, by the way), and you would have a total gross of $208,862 versus $158,608 at an 8% return over the same period. In addition, deduct the normal tax on cap gains and dividends and bingo, your savings are virtually destroyed by taxation. Many developed countries provide incentives for their citizens to save. The United States is not bashful in doing everything it can to make it as difficult as possible for the average person to accumulate wealth.

And, don't think you can run to an insurance annuity variable account because it would be taxed the same way on their managed sub accounts.

Damon Silver, policy director at the AFL-CIO, was quoted in the January 4-8 2010 Investment News as saying, 'the tax would encourage long-term investment while discouraging what he calls churning of stock trades.'

Damon, sounding like a recent graduate of the Jethro Bodine School of Finance, should know that churning is an illegal activity and not something any mutual fund uses as a money management technique. Perhaps Silvers was referring to rapid fire computer trades employed by some hedge funds. Churning is a criminal activity whereby a broker buys and sells securities simply to create commissions

Slashing total returns with an additional tax would cause retirees to face recalculating and reducing their income.

The total cost of this proposed tax to the mutual funds is estimated to be $70 billion per year. After reading what certain elected officials in this administration plan I thought why not just have them petition to have the United States merge with Canada and be done with it.

If you want to calculate how much the proposed tax would cost you go to my calculators at www.primaryplanner.com and run numbers based on the decrease in returns, print it and call your elected official.

If you need additional information on anything in this blog e mail me at pstanley@westminsterfinancial.com or call 877 783 7080.

His Daddy's A Lion

Lesson one for the new year is to know your investments and if you're working with an investment planner to know who he or she is. The reason I'm bringing this up is a WSJ article reported on how there are approximately 20 billion dollars of auction rate securities, or ARS, of investor's money that cannot be liquidated because brokers sold them as being 'just like money markets' except with a higher yield, and then the market collapsed leaving this extraordinary amount of money hanging in limbo. It begs the questions if they were just like money markets why are they called auction rate securities and not money markets and why did they suddenly become illiquid?

In order to take a complicated subject and make it understood some brokers define one product being just like another even though there is little or no correlation between the two. Those serving up rattlesnake often say it tastes just like chicken.

You have to ask a lot of the right questions if you want to get a straight answer. Unfortunately, even if you ask the right questions there are people that lie to get at your money.

Which brings me to the story of the new year and what happened to one of my clients just last week. It was about him and his wife doing business with someone they thought they could trust.

It started off by them deciding to take the money they had invested with me and moving it somewhere else. These were people who had been with me for years and yes they got caught in the 08-09 meltdown. They bailed into cash at the mid-point of the crisis because they were losing sleep and every day they awoke to more and more bad news. Yes, from their point of view the sky was falling and nothing I could say could convince them to stick it through. Thew threw in the towel and decided to never invest in equities again, even though they had made significant amounts of money they made a decision that only fixed and guaranteed were words they wanted associated with their savings.

These are retired people who live about two hours north of me in a suburb of Flint but in a town where traditional investment firms are as rare as Starbucks franchises. That alone should tell you that they live in unspoiled country. Us city folk call it the sticks. There are trees, deer and loads of open land. The financial advisers in their neck of the woods are mainly tax preparers and insurance agents; and there is a growing group of newly minted adviser's who only a few years ago were installing seats in Buick's at those factories in Flint before the auto industry collapse.

I got a call from my back office that informed me that these folks were leaving and transferring their assets somewhere else.

Normally when a client decides to leave I say to myself, 'Vaya con dios.' I figured these clients were moving to a local bank or credit union but later that day I wondered exactly where they were moving their money to. I was told by my back office the money was going to an insurance company, and when I checked the company out I found they had a history of being sued by clients and state regulators because of their product line. I knew at the very least I had to call and tell the client.

Let's call the company ArmPit Life of ArmPit, Texas and their primary product an equity-indexed bonus annuity that they specifically market to seniors.

EIA are fixed annuities and the only thing they have to do with equities is that the word 'equities' is in their name. They have been sold as they best thing since low-fat cottage cheese with no risk and huge equity returns. To understand an EIA you need a doctorate in mathematics as the creators use hedges and a variety of esoteric formulas for matching investment returns to a specific index. The insurance annuity does not really invest in the index but buys certain products to mimic an index.

To further hedge their bets the insurance company does not credit what an index actually returns to the client but uses another formula to provide a percentage of that index to the client. If, for example, the index was up 20% a client may only be credited with 30% of that 20% or 6% return in their annuity. In addition, if it wasn't mind-boggling enough, there is a cap on earnings and this number changes every year on the anniversary of the account. The company may also offer sweeteners which include a guaranteed one year fixed return and/or a onetime bonus. In order to get that bonus a client may have to hold the contract forever or annuitize the entire amount. The only fixed long term rate is a minimal guarantee of 1-2% per year that the client receives no matter what happens to the marketplace or interest rates.

If you're confused don't feel bad. Almost all agents selling this product don't understand how it works except for the fact that it pays a huge commission. Usually agents will receive 10-15% of the deposit made by the client. If someone hands over $100,000 to invest in an EIA the agent earns $15,000 for doing little more than filing out paperwork. In addition there are overrides and other commissions paid to people above the humble agent. Putting it simply the $100,000 gets carved up in fees and expenses rather quickly. Pity the poor but uniformed client who truly believes that they are getting a wonderful opportunity but in reality something more akin to a high colonic. They could be sitting, excuse me, facing a redemption period of 15-20 years.

I could have turned my back on these folks and let them do it to themselves and get a satisfaction that they got what they deserved for leaving me, but I didn't feel that way and they very least I wanted to know if my soon to be ex-clients knew what they were getting into. This, I know, is a little like calling your soon to be ex-wife who is running off with the pool boy, and asking her if she knows if Juan has a green card. Usually the answer is, What business is it of yours?, followed by an expletive and the sound of a phone being slammed.

When I called Mr. Jones wasn't home so I spoke with his wife, also a client, and explained why I was calling and asked if they knew how the product they were buying worked. There was silence at the other end of the line that told me the agent had been less than forthwith. I shared a few of the highlights with Mrs. Jones, who finally asked when Mr. Jones could get back to me and I told her. Sure enough the next morning before the sun crawled over the transom, Mr. Jones was saying to me, 'Guess I screwed up, huh?'

I will summarize our conversation because it was rather long. Basically my client was told by the insurance agent that when he invested all his savings he would get market returns, no downside risk, a 10% bonus on his money (no strings attached), a 5% fixed guaranteed rate if the markets were down and no cost to him. When I asked how the agent got paid the insurance agent said he was paid by the insurance company and not by the client. There was no mention of redemption fees, expenses, how returns were credited, what happened if the client needed money the next day, and how much he would have in his account the day after he gave his money to the agent. In fact, the information was so sketchy my client did not even know the name of the company he was moving all his money into. Anyone with any common sense would have screamed at this agent, 'Liar, liar, pants on fire.'

When we finally sorted out what to do next my client said to me, I know this guy's family, why would he do something like this?' I answered, with tongue firmly in cheek, that I didn't really know but it was a huge commission and maybe that had something to do with it.

As we were hanging up I asked Mr. Jones where he met the insurance agent. He answered, with a note of sadness, 'He gave a talk a few weeks ago at the local Lions Club. His daddy's a Lion, for crying out loud. If you can't trust a brother Lion who can you trust?'

If something sounds too good to be true, dear reader, let that be your first warning and investigate only at your peril. Remember the old adage, if you sit down at a poker game with strangers and can't figure out who's the sucker, it's probably you.

If you want additional information on anything mentioned in this blog call Paul Stanley @ 877 783 7080 or e mail at pstanley@westminsterfinancial.com