The Different Focuses of Financial Professionals

December 31, 2009

In today’s world, many financial institutions offer a wide range of financial services to clients. Since the regulatory wall between banks and brokers was knocked down, the distinctions have been blurred, with many banks offering brokerage services, and vice versa. Still, I believe it remains true that most professionals tend to focus their efforts more narrowly.

Stockbrokers. Most stockbrokers help primarily with the accumulation phase and tend to have a shorter-term approach to investing, concentrating on the best possible returns at any given time, rather than a longer-term view that helps you get to where you want to be.

CPAs. Certified public accountants are primarily tax specialists, not investment specialists.

Private Bankers. Banks tend to focus on trusts, so they offer legacy/transfer services but usually not broad-based planning.

Insurance Agents. Insurance agents focus on risk or the legacy/transfer phase of planning. They are often also well-versed in certain types of tax-deferral or tax-avoidance products that are insurance related. However, most do not offer well-rounded financial strategies.

Attorneys. Lawyers work primarily on estate planning, a legacy/transfer niche.

Financial Advisors. Financial advisors can take your financial plan beyond accumulation strategies to address distribution and legacy/transfer issues as part of a comprehensive plan. I am proud of what I do, and I believe independent companies like mine, by bringing together experts in all of the planning phases, offer the most comprehensive service.


Good Communication and a Solid Plan

December 29, 2009

Most of us don’t want to think about the time when we won’t be around anymore for our loved ones and our loved ones certainly don’t want to think about when we won’t be around for them either. While difficult to do, it is highly recommended that you share your estate plan and financial plan with those who will be responsible for, and perhaps even the beneficiaries of your estate when you do pass on. If you have not created an estate plan or financial plan yet, it may be helpful, with the guidance of a qualified financial adviser, to help facilitate that discussion so that all options are considered. Some of the most well-executed estate plans have come with complete discussions with the entire family to get all of the issues out now while they can still be addressed, instead of after the fact when no changes can be made.

In having these discussions, it is also important to note where important documents such as wills and insurance policies can be found. It would be helpful to create a list of all bank, investment, retirement, and insurance accounts and their beneficiaries as well. Remember that any account, such as an IRA, generally has a designated beneficiary. Any account with a beneficiary designation does not pass through your will, but rather to who is listed as beneficiary on the account. Your will and beneficiary forms can be entirely different, and perhaps not even listing who you might like to receive a particular asset. There are even significant tax benefits in naming certain individuals or entities beneficiaries as well.

Back to the Future: Will 2010 Look Like 2004?

December 24, 2009

While some forecasters are reaching back to the 1930s to find comparisons to the environment the markets are likely to encounter in 2010, we find a more recent comparison to be compelling. We believe that 2004 could be a useful guide to what may happen in 2010.

The idea that 2010 could be similar to 2004 in many ways may not be as far fetched as it may seem. After all, 2009 looked a lot like 2003. Consider that in both 2003 and 2009:

1. The S&P 500 index started the year at about the 900 level and closed in on 1100 as the year wore on.
2. The stock market made its low in March in the aftermath of a recession brought on by a bursting bubble in the financial markets.
3. Key economic barometers like the Institute for Supply Managements Purchasing Mangers Index (ISM) rose above 50 in the second half of the year signaling the return of expansion in the manufacturing sector.
4. The dollar fell and commodity prices rose.

Not only did the charts look similar, the years even sounded the same: the best selling album in 2009 is actually a compilation from 2003, Michael Jackson’s Number Ones.

Just as 2009 echoed 2003, 2010 is likely to be similar to 2004 in a number of areas, including: earnings growth for S&P 500 companies, the actions by the Federal Reserve, the outcome of the congressional elections, and the performance of the stock and bond markets.

Proposed Reforms (Part 3)

December 22, 2009

Consolidation of bank regulators – Currently, there are four major bank regulators: Office of the Comptroller of the Currency (OCC), Federal Reserve (Fed), Federal Deposit Insurance Corporation (FDIC), and Office of Thrift Supervision (OTS). We think it is most likely that the OCC and OTS are merged into a new National Bank Supervisor (NBS), but more aggressive consolidation is also possible. Senator Christopher Dodd’s has recently proposed combining all four and stripping the Fed and FDIC of their regulatory functions. In addition, there are proposals to merge other agencies involved in the regulation of financial markets, including the Security and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC). Also, non-federally regulated financial institutions (such as AIG and Countrywide) were prime contributors to the financial crisis. Bringing these financial institutions under the scrutiny of the federal regulatory umbrella is likely to be part of the consolidation.

Systemic risk regulator – The gaps in the patchwork of financial industry regulators contributed to the series of failures that led to the financial crisis. The Obama administration’s proposal to grant enhanced authority to the Fed to oversee overall financial system risk appears to be losing favor to the idea of creating a Financial Services Oversight Council to make recommendations on preventing systemic risk. This is very likely to get passed in some form.

Other measures include requiring hedge funds to register with the SEC, restructuring Fannie Mae and Freddie Mac, increasing SEC regulation of the credit rating agencies and even considering changing their business model.

Proposed Reforms (Part 2)

December 17, 2009

Consumer Lending Rules – Last Wednesday, the House passed a bill by a wide margin to move up the start date to limit banks’ rate increases on existing credit-card balances. The Financial sector swooned by a few percentage points as soon as the bill passed. There will be increased scrutiny of many of the lines of lending from credit cards to student loans.

Credit Default Swaps – Right now, many derivative agreements are private one-on-one contracts in what is called the over-the-counter market. These opaque transactions are outside the view of the public or regulators and are dependent upon the parties remaining solvent. If one party becomes insolvent, it may take the other with it. This lack of transparency in volume, size, and counterparties proved disastrous in the financial crisis.

In the bailout of American International Group, tens of billions of dollars went to settle these contracts to avoid a domino effect. The reform proposals require that many derivatives be traded on public exchanges providing transparency on the volume and size of the market and providing each party an exchange whose creditworthiness would be backed by the entire industry. Forcing these contracts to be traded on an exchange may limit the risk they pose to the financial system.

Proposed Reforms (Part 1)

December 15, 2009

With sweeping financial industry reform again on Washington’s agenda what should investors be watching? Last week, the House Financial Services Committee took up debating the major proposals. The big issues to be debated in the coming months include:

Too-big-too-fail institutions – A proposal would create a designation for financial institutions that are systemically important and subject them to special regulation. The outcome of this legislation is likely to have a market impact. At first glance, this designation would give an institution a competitive advantage because it would have what amounts to Government Sponsored Enterprise status with an implied government guarantee. This competitive advantage for Tier 1 institutions to access capital cheaply may result in consolidation of the industry among a few systemically important institutions rather than a larger number of competitors that would pose less individual risk to the financial system – which would be counter to the intention of the legislation. However, the additional cost to these firms in the form of higher capital requirements, contributions to pre-fund a bailout fund, and the threat of a break-up may have negative consequences. Last week, the UK regulators forced Royal Bank of Scotland to sell some business lines to reduce the size of the institution and the stock reacted poorly falling over 10% in a couple of days. Clearly, how this issue is dealt with is very important to the financial services industry. This is the most contentious issue and is unlikely to be resolved before the end of the year resulting in lingering uncertainty for the sector.

Consumer Financial Protection Agency – The Obama administration has proposed the creation of a new agency intended to protect consumers purchasing financial products. The focus has shifted from regulating the types of products that can be sold, (which would eliminate complex financial products and ensure only plain vanilla products are marketed) to making sure the disclosure is appropriate on products that are more complex. The reach of this agency to regulate what products are sold, how they are marketed, and perhaps even how they are priced is critical to the size and profitability of the financial industry. This could be a positive for the sector if it lessens the risk of default or litigation risk for lenders, but presents challenges if it forces consolidation as the products become commoditized.

China’s Choices

December 11, 2009

In normal times, the Chinese government uses the banking sector to send masses of low-interest rate loans to companies and sectors targeted for growth. This maintains growth and employment levels, preserving social and economic stability in a country with a massive population.

In times of stress, this aggressive lending goes into overdrive. The year 2009 has witnessed an unprecedented lending-surge by Chinese banks, who, under government direction, hoped to stave off a recession in China’s domestic economy as exports to the U.S. and rest of the world plunged. This has been a dramatic success. For example, the data reported for the month of October was very strong:

1. Growth of industrial value-added, which accounts for about half of China’s GDP, accelerated to 16% year-over-year.
2. Electricity production, a good growth barometer, grew by 17% year-over-year.
3. Steel production set a record 44% year-over-year gain.
4. Retail sales increased 16.2% year-over-year.
5. Vehicle sales totaled 1.2 million (more than the 838,000 sold in the U.S. in October).

By the end of the year, the net new loans fueling this growth are likely to total more than $1.5 trillion, which would equal over a third of China’s GDP. In October, the money supply was up 29.4% year-over-year and bank loans were up by 34%. This is a massive lending spree, even by China’s standards.

Much of the lending that was targeted to growth industries has leaked into the stock and real estate markets, which have rallied dramatically and are beginning to form bubbles. With subsidized loans still growing and the global economy now in recovery mode, the threat of double-digit inflation (already prevalent in India, another BRIC country) is looming.