President Barack Obama has won a second term. And in doing so, financial advisors say there’s a very long laundry list of issues President Obama must -- without fail -- address and solve. Here’s a look at some of those issues. 

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The economy

Clearly, economic recovery needs to be high on the list of things for President Obama to focus on and that has two components, says David Mendels, CFP, director of planning at Creative Financial Concepts.

In the short term, Mendels says it means finding a way to avoid careening over the upcoming fiscal cliff while weaning the economy from economic stimulus. 

Fix Social Security

In the longer term, Mendels says President Obama needs to focus on reducing our unsustainable deficits and there is no way to do that without finding some way to restrain the growth of our entitlements, primarily Medicare and Medicaid. 

“As Mr. Clinton would say (although he might prefer not to say it in this context) it is simple arithmetic,” says Mendels.  “There are any number of ways of doing it, but you can’t just tax your way out of that one or solve it by cutting back on Big Bird.”

Social Security is a much less difficult problem, arithmetically, since the growth in per person costs is more restrained. “But it is also unsustainable in its present form,” says Mendels.  “The solutions to these issues are politically difficult, but the problems are not insoluble.”

Others agree that the government needs to adjust the “entitlement system in America,” but they say it’s an uncomfortable topic.

“I don’t know what the right answer looks like I do feel that we need to encourage workers to work and reward those that have worked by keeping Social Security intact even though it might need some adjustments,” says Ben Keel III BBA CFP, ChFC, CFEd  CLU, of Financial & Insurance Consultants. “I am all for reaching down and helping the people that are down and out and giving them a hand, so don’t read into my comments; however, the whole system needs to be reevaluated and adjusted. “

For the record, Mendels hesitates to suggest that his list of concerns must be resolved ‘without fail’ since the unknown problems will probably end up outweighing any of the known problems.  “Moreover, the country has proved resilient enough to survive some rather incompetent presidents so I am optimistic that the country will survive regardless of who (won the election.)”

Slow government spending

Keel also says President Obama must slow down -- though it’s a very complex and complicated topic -- government spending. “Just like a company or a family cannot over spend and be sustainable, our government needs to reel in the spending and the debt,” says Keel.

However, Keel says we have a bit of a controversy brewing because Fed Chairman Ben Bernanke is trying to make sure the economy keeps moving forward but the tax increase coming on Jan. 1, 2013 could slow the economy. It’s a “conundrum,” says Keel, who speculates Bernanke released QE3 to avoid slowing the economy down. 

“So while I say we need to slow down spending I do want our economy to keep moving forward and with the tax increases I can understand why QE3 was released,” says Keel. 

That said, Keel doesn’t’ see politicians doing what is needed to slow down spending. “What we need is a true statesman that will put the country ahead of his or her own interest and curb some of the spending that the U.S. Government (both parties) have been doing for the past 20+ years,” he says.

Don’t cut military spending

Keel also says President Obama doesn’t need to reduce military spending. “We might need to reposition some of the spending; however, we need to maintain a strong military that is not be used on the people of the United States but to protect the people of the United States,” he says.

To illustrate his point, Keel quotes Sun Tzu, an ancient Chinese military general, strategist and philosopher who is traditionally believed to be the author of The Art of War; “Good fighters of old first put themselves beyond the possibility of defeat.”

So, says Keel, we have to maintain a strong military and do what we can to put ourselves beyond defeat.

Simplify the tax code

The government also needs to simplify the tax code. “When our own U.S. Secretary of the Treasury Tim Geithner has a hard time doing his own taxes (yes I understand he wasn’t Secretary of the Treasury at that time) then we need to simplify the complex system,” says Keel. 

To that end, Keel says President Obama should get rid of AMT and reduce the tax code to a few, easy-to-understand pages. Plus, President Obama needs to reduce the tax rates for corporations/companies and for the citizens across the board. “Need some proof?” Keel asked. “Look up a chart that shows the growth of new companies, both small and large. The numbers have declined over the last 15 years.”

And Keel says the Obama Administration needs to encourage work and savings, not discourage that with high taxes.

Who is John Galt?

And, finally, Keel says we need to move back toward a “Constitutional Government, reduce the size of government, and let the states, and the people, decide what is best for themselves instead of moving more and more toward the National Government running more and more, also known as socialism.”

Says Keel: “We have case studies that can be reviewed about governments getting too big. Rome is one example and, I am afraid, if we keep moving down this direction we will soon be asking “Who is John Galt?’”

Tags: retirement planning

Working with clients in or approaching retirement is no walk in the park.

It is, according to a new research report from Cerulli Associates (CA), fraught with challenges.

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“Building and managing client portfolios through their accumulation years is difficult in its own right, but the results of missteps generally can be overcome in time,” say the authors of the CA report, IMCA’s Research Quarterly. “In contrast, blunders during a client’s distribution period can fundamentally damage the investor’s ability to finance an expected retirement lifestyle and there are generally few opportunities to overcome severe missteps.”

Not surprisingly, CA says advisors across the industry are taking a broad set of approaches to address these challenges with some “embracing the prospect of becoming experts in assisting retiring investors and others “trying to move forward with as little change as possible in the operation of their practices.”

How exactly are advisers dealing with retiring clients? Here’s what CA found in its survey of IMCA-affiliated advisors as well as other advisors across the industry.

Advisor obstacles to providing retirement-income advice

For one, advisors are reluctant to provide retirement advice because there’s no consumer awareness of it. Some 65% of those responding the survey cite lack of consumer awareness as a key element of their reluctance to provide advice on retirement income.

What’s more, advisers say they aren’t focusing on this market because it’s time consuming. About two in three cite the time requirements of comprehensive retirement income plans as a deterrent to focusing on this market, says CA.

What are some implications of this? Many advisers will not look forward to telling clients that they will need to reconsider their lifestyle expectations in retirement, especially if the adviser managed the client’s portfolio during period of poor returns, CA says.  “In addition, the overall complexity of com­prehensive retirement-income planning serves as a major challenge to advisors addressing the retiree market,” CA says. “Unless an advisor makes an active attempt to involve other professionals, such as the client’s CPA, in optimizing a client’s overall retirement income plan, there is significant risk of investors presuming that the advisor is capable—and willing—to weigh all potential factors.”

Elements addressed in retirement-income plans

What factors do advisors need to address when building a retirement-income plan? Social Security (84%) and a client’s budget needs (77%) are the most-frequently considered factors in designing retirement income plans. Only 66% of advisors actively report that they consider the role of taxes in retirement income plans, CA says.

CA says advisors are generally aware that building a retirement-income plan is more difficult than building an accumulation plan. But they are often are “ill-equipped to discuss the cost of nuanced items such as health care.” Some six in 10 advisors say they healthcare planning as part of the overall retirement-planning process with clients, but “advisors often lack information to make accurate judgments to address clients’ concerns about healthcare costs.”

CA says advisors also need to plan to a mortality age, and they often do not have a good sense of what this end-date for a plan should be.

Sources of income

Somewhat surprisingly, survey respondents say Social Security is the leading source of retirement income across wealth tiers. “Even among the wealthiest households, Social Security accounts for nearly one-quarter of the retirement income stream,” Employer-based retirement accounts (21%), individual retirement accounts (14%), and annuities (7%) combine to account for 43% of overall retiree income, says CA.

According to CA, today’s retirees now are likely to draw income from a variety of sources, each with its own tax treatment and interactions with other sources. And that could mean, from my point of view, that advisors will need to become more expert in creating tax-savvy withdrawal plans.

Household goals

Whatever you do, don’t lose my money. As clients age, CA says their priorities change and they face new problems and challenges. “The top goal of older clients who are working with an advisor is protecting their current level of wealth,” CA says. “Forty percent of households 65 or older cite this as their most important financial goal, compared to only 19 percent of their younger counterparts.”

What’s the implication? Advisors should not assume that older clients want a portfolio of jut bonds and cash, CA says. “Even though older clients state that protecting wealth is a leading financial goal, many will be disappointed if their portfolios do not match those of the broad equity markets,” CA says. To address these concerns, CA says “advisors must be sure to discuss the trade-offs necessary to balance risk and make clear the potential downsides of chasing market returns during an investor’s distribution years.”

Client contact

Advisors report their highest contact levels with clients between the ages of 40 and 49, with an average of 18.5 annual contacts, CA says. However, contact levels of investors over age 70 nearly equal pre-age 49 levels as retirees begin to have more questions as retirement plans become reality.

That’s likely for a number of reasons: They have planning needs around health care, retirement income, and estate planning, and once clients retire, they have more time to spare. “While many advisors enjoy these conversations, the more-frequent communi­cation can cut into an advisors’ time for other activities,” CA says. “Advisors need to be cognizant of their clients who take up a disproportionate amount of resources and work to keep client meetings to a regular schedule.”

Advisor use of retirement income products

Overall, CA says advisors are most likely to be using variable annuities (VAs) with living benefits and bond funds as part of their retirement income strategies (43 percent). However, use of these products is particularly concentrated in the independent broker‒dealer (IBD) and insurance channels. Meanwhile, advisors in the wirehouse and registered investment advisor (RIA) channels are far more likely to employ dividend-paying securities as their primary retirement-income tools within client portfolios, CA says.

What’s the implication? Well, there’s interest in guaranteed products, but there’s isn’t likely to be an increase in the uptake. “Though some academic studies have shown beneficial impacts to client portfolios through the use of insured solutions, cost and flexibility issues still weigh heavily in the minds of both advisors and clients,” CA says.

Advisor opinions of retirement-income funds

Advisors cite a variety of reasons for not using dedicated retirement-income funds but most commonly report that the funds simply are replicating what advisors already do themselves (53%), CA says. But to truly compete as wealth managers to retirees, CA says advisors and broker‒dealers must embrace the challenge of designing investment options for retirement income or be willing to risk losing assets to those who will.

Why don’t consumers talk to advisors about retirement?

“Nearly one-half of investors age 40–49 cite simply not getting around to it as a reason for not developing a retirement-income plan, CA reports. “By the time investors reach the 60–69 cohort group, developing a plan themselves becomes the most-common reason for not consulting a profes­sional advisor.”

Given this, it could be difficult for advisors to attract new clients. Younger prospects will think retirement is too far away, while older prospects will think they don’t need advice. One solution, at least for older prospects, might be this: “Advisors must consider offering their recommendations as alterations to the investors’ current plans instead of complete replacements in order to acknowledge the time and effort potential clients have spent on their plans themselves,” CA says.

Total investable assets

When considered as a fraction of total U.S. investable assets, CA expects annual wealth-transfer rates to triple by 2036.

“Beginning around 2026, the first wave of baby boomers will enter their key wealth-transfer years,” CA says. “Households need help determining how to structure their estates and whether to transfer assets at death or during their lifetimes.”

Unfortunately, many advisors do not have the expertise to deliver a full estate plan, CA reports. And they should, though CA says, estate planning should be viewed as a retention tool rather than a client acquisition tool. CA notes that some advisors are trying to develop relationships with the children of their clients as a defensive measure, but this tactic is getting mixed reviews.

CA also reports that “households with between $2 million and $5 million in investable assets average more than $7 million in total assets at death. Of that amount, more than 72% generally makes its way to beneficiaries with just more than 15% allocated to taxes.”

The big takeaway from this finding? Advisors might want to consider offering charitable-giving services. Doing so “deepens the client relationships and also offers opportunities for advisors to take over management of clients’ foundation and endowment assets.”

Tags: reverse mortgages

When used correctly reverse mortgages can be a great way for retirees to pay the bills in retirement without selling their home. However, because fraud claims have been skyrocketing, the new Consumer Financial Protection Bureau is writing more rules for this product. A good article on this appears here.

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If advising clients to use a reverse mortgage it is important to point out some of the drawbacks, namely:

• High upfront costs
• It can eliminate their eligibility for Medicaid
• All equity can be gone by the time they pass away, leaving nothing for heirs
• Clients might now have to pay mortgage insurance
• Complexity of the mortgage- It might not be easy for them to understand 

There is also the option of simply refinancing the mortgage, which in general has lower fees and costs involved. Either way, it is of course vitally important that clients do not run out of money in retirement. If they are cashing out equity in the hopes of spending it all before a certain age, they might be in for serious trouble down the road if either a) they live longer than expected or b) they need more money later on for medical care.

Reverse mortgages can sometimes be a useful option, but they are fraught with risks. Clients need to understand the risks and the costs involved.

John R. Skar, FSA, served as the Chief Actuary with four different life insurance companies, including MassMutual Financial Group, from 1986 to 2007. He was one of the principal authors of the Final Report of the Task Force for Research on Life Insurance Sales Illustrations, published by the Society of Actuaries in 1992.

I asked Mr. Skar for his thoughts about how consumers should buy life insurance and what role sales illustrations should play in the decision process. 

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1. How should people choose between term and cash value life insurance?

Basically, term is more suitable where the need for insurance is high relative to cash available for premiums.  Anyone with substantial income or liquid investments who is trying to save money for longer range financial goals should look at cash value life insurance.  One significant caveat here is inflation.  Many people are predicting that we may be heading toward a period of very high inflation when the value of all dollar-denominated  assets, such as bonds and life insurance, will take a huge hit. You can purchase variable life to partially cover this risk, if you believe that the stock market will keep up with inflation.

2. Do some types of cash value policies have inherent pricing advantages?

No product type is inherently a better deal than another. You should buy the type of insurance that best meets your personal financial needs for protection and estate preservation.

3. How should people use sales illustrations when evaluating life insurance policies?

Essentially, illustrations are used for two purposes in the marketplace: 

(A) to show how the contract performs under a specified set of premium and interest rate combinations. This is a mechanical calculation based on the policy's contractual terms.

(B)  to compare potential future performance between policies from different companies;  i.e., which policy is the “best” deal.

(A) is appropriate, and  (B) is inappropriate. Unfortunately, most agents and consumers  use illustrations inappropriately.

No amount of regulation or disclosure will ever make (B) usage appropriate, for the simple reason that no one can predict the future. The future will undoubtedly impact different companies differently, and there is no way to forecast that.

Think about if your stockbroker came to you with performance projections for Apple and Microsoft stock based on current dividends and price movements.  How well would  you expect those projections to hold up over 5, 10, 20 or 30 years?  Yet a process that is patently ridiculous for common stocks gets used in the insurance marketplace all the time.

I believe that the most important pages to look at in an illustration are the pages that show the rates of return on death and surrender. You should examine how the rates of return change over time to get a good feel for how your investment in the policy may pay off.

Don’t make the mistake of focusing on a particular point in time, such as which contract has the highest cash value in the 20th year.  What you should really look at is the flow of values over the potential lifetime of the contract. And always remember that using illustrations for comparative performance purposes is inappropriate.

You could potentially perform all kinds of studies about which companies have come closest to meeting their illustrations, or exceeding them. But all this tells you is perhaps how conservative they have been in the past — it tells you nothing about the future, because a conservative company could have a change in management which could then take advantage of the conservative past performance in touting their latest and greatest products.

Using illustrations to predict future nonguaranteed performance is the holy grail for policyholders and agents, but it is just that, a holy grail, a concept that doesn't exist.

4. How can people find the best cash value policy?

I believe that the single most important thing for rating agencies and other insurance company analysts to get a grip on is the strength and orientation of the senior management team. What is the culture?  How steady is their performance over time?  Do they have solid company fundamentals at their disposal? 

Life insurance pricing is a function of the company’s investment return, its expense structure and how well they do underwriting;  i.e., risk evaluation. Companies that do a good job on all three will have a good product. Unfortunately, there are ways of cutting corners or making optimistic assumptions in order to gain market share. The consequences of aggressive pricing usually only show up  five to 10 years down the road, which is why it may look advantageous to a management team worried about next year’s sales numbers.  So, again, you should look for a company with a stable pattern of long-term, steady growth.

Pricing assumptions relative to lapse, reserving and profit margins tend to be of secondary importance in most cases.

Most consumers will not be able to evaluate life company financial statements by themselves but may want to restrict their selection to companies with consistently high financial strength ratings, if they want to be conservative in their choice of policy. As a consumer, you should have a trusted life insurance professional who has good historical knowledge of at least a few companies. It is generally a bad idea to buy from the company which has recently come from nowhere to the top of the charts.

5. What can you learn from publicly available information about a company’s pricing fundamentals?

I don't believe you could ever glean much from comparing statutory financial data with illustrations, unless the company was incredibly homogeneous in its product line.

For example, general expense information may not correlate with any particular policy form, especially if the company has many different lines of business and individual policy forms.  A similar comment applies to mortality information, which depends heavily on the amount and type of underwriting performed across different lines of business.

Investment return data is also far too generalized to be of value to anyone, even insiders trying to compare their company’s performance to other companies.  There are just too many extraneous variables.

Statutory statements can be valuable in pointing out any sharp trends up or down. In life insurance, long-term stability is what you should be interested in. You should question any sharp changes in direction.

6. How important are cash surrender values?

For someone with substantial income or net worth, cash value life insurance is a valuable financial tool. There are many ways to use life insurance effectively as an estate and financial planning vehicle. No investment plan is complete without considering what could be done by adding cash value life insurance to the mix.