Giving’s on the Rise—and a Deadline Approaches for Foundations

Now’s the season for helping others who are less fortunate than you by giving your time, talents and resources to a worthy charitable cause. According to “The Nonprofit Fundraising Survey: November 2010,” compiled by the Association of Fundraising Professionals, Blackbaud, the Center on Philanthropy at Indiana University, the Foundation Center, GuideStar USA Inc., and the Urban Institute's National Center for Charitable Statistics, charitable donations in the U.S. are on the upswing, but still have not climbed back to pre-recessionary levels.

Specifically, 36% of the charities surveyed recorded an increase in donations during the first nine months of 2010, compared to just 23% that saw an increase in 2009. Additionally, just 37% of the charities reported lower donation levels this year, versus the 51% that experienced declines last year. Other findings: Organizations focused on international causes such as the Haitian earthquake and Pakistani flood relief efforts reported the greatest increase in donations. Domestic health organizations and religious charities reported the greatest declines in contributions.

Overall, charitable organizations remain “guardedly optimistic” about 2011. In fact, 47% plan to spend more, while only 20% expect to make budget cuts.

If you have a family foundation, you know that to avoid taxes for under-distribution, you must generally distribute at least 5% of the value of investment assets (minus fees and investment taxes) each year. Ideally, of course, this annual amount has been calculated and distributed throughout the year. However, as the year draws to a close, it’s often wise to take a look at the year’s distributions to avoid shortfalls.

Missing the 5 percent distribution can result in penalties from the IRS, but often the agency allows the offending foundations to make up for their miscalculations by contributing more than 5 percent in the following year. However, missing your mark could also result in higher taxes on investment income.

A Question of Ethics

In her recent article “Why do investors trust advisors, but not Wall Street?” Susan Antilla explores the disconnect between investors who proclaim their distrust of the financial securities industry, but exempt their financial advisors from that profound mistrust. In fact, it seems many investors are so trusting of their advisor that they fail to vet them properly. For example, the article includes details of an arbitration won by actor Larry Hagman where Citigroup Inc. was ordered to pay $1.1 million in damages, plus $439,000 in legal fees for the mishandling of his account by a broker who had seven customer disputes registered with the Financial Industry Regulatory Authority.

Investors looking to work with an advisor can avoid such a situation by working with a fiduciary, someone who is sworn to act in their best interests. In addition to being a fiduciary, I am governed by the professional codes of conduct that accompany my CPA, CFP^® and AIF^® designations.

While Citibank was justly punished, our society has become too willing to excuse serious ethics violations. For example, although Congressman Rangel was convicted of 11 ethics charges, amazingly, he is not going to lose his seat. What does this teach our children? Our kids are certainly getting mixed messages – like the one highlighted in a recent Washington Post story about a Fairfax County high school that allows cheaters to retake tests.

Sadly, we have witnessed too many examples of unethical behavior from political leaders over the last two decades. And the same is true in business world with Enron, Worldcom, Madoff, the list goes on. As is the case in my business, there must be consequences to ethical violations. All politics aside, we must strive to set a positive example for our young people and underscore that there are consequences for ethical violations.

Passage Likely for Estate-Tax

Although agreement seemed highly unlikely just weeks ago, Democratic support for a plan put forward by Republicans and accepted by President Obama seems to be gaining steam. The compromise in waiting would reinstate the estate tax at 35% for two years starting next year, with the first $5 million of an individual’s estate exempted. According to data from the nonpartisan Tax Policy Center, this plan would result in about 43,540 taxable estates in 2011, and raise about $34.4 billion.

Arizona Republican Jon Kyl authored the current estate tax provision accepted by the President. Although House Democrats offer tough opposition, it’s likely there are enough moderate Democrats to side with Republicans and President Obama to pass the bill. If Congress doesn’t act before the end of the year, the estate tax, which lapsed in 2010, is set to return at a 55% rate, with a $1 million exemption on January 1, 2011.

The battle over the state tax has long provoked heated philosophical debate. As Lee Farris, senior organizer on estate-tax policy for United for a Fair Economy, has noted, there’s more than simple politics at work as Congress works towards forging an agreement. According to Farris, “an agreement has proven more complicated than splitting the difference on the numbers because this has been cast as a moral issue” being debated between those who believe the estate tax destroys family businesses and those who argue it is necessary to preserve meritocracy in the U.S.

Interestingly, if a plan is passed this year, Congress may allow this year’s heirs to choose whether they factor taxes based on this year’s rules, whereby some inherited assets are subject to higher capital-gains taxes, or next year's rules – whatever they may be. Stay tuned.

Still Dreaming of Early Retirement?

In spite of all your best laid plans, there may be a glitch in your retirement dreams. If you retire early, before you would qualify for Medicare, you may be looking at a costly gap in your health insurance. If you figure you will simply keep the coverage you have from your employer, think again. The nonpartisan Employee Benefit Research Institute (EBRI) recently examined data for private-sector establishments to answer the question: How many employers offer retiree health benefits to early retirees? Here’s what EBRI found:

• Overall, 444,150 private-sector establishments offer health benefits to early retirees, or about 11.2 percent of the total.
• Large employers are much more likely to offer retiree health benefits than small employers; 34.5 percent of employers with 1,000 or more workers offered them, compared with 1.2 percent of employers with fewer than 10 workers.
• Of the 984,697 employers with 1,000 or more workers, the 34.5 percent account for 339,720 employers that offered early retiree health benefits.

While these statistics don’t boost your confidence in your plans to rely on your employer, keep in mind that there is plenty more uncertainty in the mix. As companies cut costs to survive in an increasingly challenging economy, keep in mind that health benefits to retirees could be on the chopping block. Also, it is anyone’s guess what will happen to healthcare reform when the new Congress takes over.

A Trusting Relationship is a Two Way Street

Trust is a curious thing. Having faith in someone – trusting a person or an institution can be a bond that is stronger than steel. Witness a mother bonded to her young child, or a soldier’s unflinching obedience to a commanding officer, or how you feel when you board an airplane for a flight. The weight of the world can hang on the bond of trust. We will literally step into the void holding only a thread of trust.

Naturally, you want to work with a financial advisor who tells the truth and looks out for your best interests. As I’ve said before, you owe it to yourself to work with an advisor who is sworn to act as a fiduciary and therefore bears the legal obligation that requires them to act in your best interest at all times.

However, trust is a two way street. To gain the most from your financial advisory relationship, don’t keep secrets from your financial advisor. That is, you also must trust your advisor enough to fully disclose all your financial assets and liabilities, your dreams and desires, your hopes and your needs, your fears and worries, even if the truth isn’t comfortable to discuss.

Interestingly, many investors apply the concept of diversification as a risk reducer to purveyors of financial advice and work with multiple financial advisors. There’s no question that in today’s complex, challenging market you require the expertise of financial advisors, CPAs, estate planning attorneys, even insurance professionals and bankers to manage your wealth accumulation, preservation, and transfer. However, new research from State Street Global Advisors and the Wharton School at the University of Pennsylvania illustrates how using multiple advisors -- who often do not communicate with each other -- can increase rather than dilute risk and put you in danger of not achieving your short- and long-term goals.

Specifically, because multiple advisors work out portfolio strategies independently you might be left with overlapping exposures or an unintended over concentration in an asset class. Especially in this challenging market, you need a firm like ours that functions as a personal chief financial officer to take a complete, aggregated view of your finances and prioritize sometimes conflicting needs and goals.

What Is It Going to Take for Housing to Rebound?

Changing demographics are the main cause of today's housing surplus, according to new research by University of Virginia urban and environmental planning professor William Lucy. He says the path to a housing market rebound doesn't lie in new construction, but in rethinking housing needs based on changing demographics.

Lucy’s study of U.S. Census Bureau data, U.S. Housing Market Conditions: Historical Data, U.S. Department of Housing and Urban Development reports, Joint Center for Housing Studies and research by the Urban Land Institute and other scholars, resulted in this conclusion publicized in a University of Virginia press release: "Today’s surplus housing is not caused by either excessive new construction or by foreclosure.” In fact, Lucy found only 20 percent of housing units for sale or sold from 2009 to 2010 were new houses and foreclosures.

Lucy says our excess housing supply is not linked with the economic downturn, but caused by the increase in homeowners over age 55 who want to sell and downsize, coupled with the decrease in number of 30- to 45-year-olds who want to buy. He found from 2000 to 2009, the number of homeowners 55 and over who may want to sell increased by 8 million, while the number of potential 30- to 45-year-old homebuyers decreased by 3.6 million. Moreover, the ratio of aging baby boomers to young adults was 5 to 1 in 2010, a dramatic increase from 3.5 to 1 in 2000 and 3 to 1 in 1990.

Because the demographic shift of too many sellers and too few buyers is not likely to change anytime soon, Lucy says economic drivers of the future housing market will be “more decentralized, multidimensional and shared solutions by developers, builders and government and opportunities for fix-up, remodeling, expansion and condominium projects in cities and inner suburbs, fueled by preferences for convenient locations.”

Read the full Report, where Lucy stresses that “location, location, location” is still a real estate mantra, but that homebuyers will continue to favor more urban settings over distant suburbs.

Take Maximum Advantage of Your 401(k)

I always tell my clients not to leave money on the table, but according to a recent 401(k) study, many American employees are doing just that. In fact, of the 2.8 million 401(k) participants Financial Engines surveyed, 39 percent were not saving enough to receive their employer’s full matching contribution (or they weren’t saving at least 5 percent of salary in companies with no match). That figure is up from 33 percent in 2008. Younger workers (presumably with lower salaries) are most likely not to secure the free cash: 53 percent of participants under age 30 did not save enough to receive the full match. That percentage dropped to 47 percent for participants under age 40.

And while my standard advice for retirement saving is to max out your 401(k), only 6% are saving within $500 of their annual pre-tax IRS limits, down one percent from 2008.

According to Financial Engines, the key to participant savings comes from automatic escalation, where a participant’s savings rate is increased automatically on an annual basis to a pre-determined maximum. Sixty-seven percent of participants in plans with automatic escalation save enough to receive the full employer match, compared to just 52% of participants in plans without automatic escalation.

Remember, increasing your 401(k) contribution as your salary increases is especially important given the fact that many companies eliminated 401(k) matches during the recession. So you may have some catching up to do.

Family Businesses: Make Lemonade out of Lemons

According to the Small Business Administration, 90% of the 21 million US businesses are family owned. Amazingly, less than one third of these companies will transfer successfully to the second generation, and only 15 percent will survive by the third. Why the low survival rate? Most of these businesses lack a succession plan, or an exit plan.

Exit planning is the process of ensuring the future success and continuity of your business after you retire. Your exit plan should address business, personal, financial, legal, and tax questions and includes contingencies for illness, burnout, divorce, and even your death. Ideally, your exit plan should maximize the value of your business at the time of exit, minimize the taxes paid, and position you and your family to achieve your future goals.

In one of the most compelling opportunities found in the down market, low valuations makes this an ideal time for family business owners interested in moving assets out of their estate to transfer ownership of their business to their heirs. For example, if your business was worth $8 million five years ago, but revenues are down 50 percent, consider selling 25 percent to a child. You could even provide financing for the transaction via an interfamily loan. Ten years from now when you are that much closer to retirement and the 25 percent you sold could well be back to being worth $2 million, you will be pleased with your foresight. Of course, you could also gift stock that has plummeted in value to your heirs. Advantageously, the tax consequences of your gift will be figured based on the fair market value of your company stock at the time you gift it.

Especially in today’s uncertain market and increasingly crowded marketplace, there is no substitute for getting a head start on your exit plan.

CAUTION: Long-Term Care Insurance through Your Employer!

Long-term care insurance (LTC) pays for the things Medicare does not--assisted living, in-home care, adult daycare and nursing homes. One of the biggest trends in LTC insurance is group coverage sold through your employer, an association you’re a member of, or even through your bank or credit union. We’ve heard from clients who have asked us if they should buy group long-term care insurance.

First things first

The first step in LTC Planning is just that--planning! Bernhardt Wealth Management has retained the services of a nationally recognized expert in LTC, Allen Hamm and his company Superior LTC, to help our clients with planning for long-term care. There’s no additional charge to our clients for this service. Allen is the author of the book “Long-term Care Planning: Assuring Choice, Independence & Financial Security” which is available at Amazon online.

Allen uses a seven step LTC planning process and insurance may or may not be the best option for you. He starts by assisting you with understanding the implications of relying on each available option to pay for long-term care, not just insurance.

But let’s say that you’ve gone through this process and it’s been determined that LTC insurance is the best option for your particular situation. Is Group LTC insurance a good value for you? The answer is: Usually not, but there may be an exception.

Adverse Selection

Unlike most types of group insurance, LTC is usually more expensive than individually issued coverage. This is because group LTC insurance is normally issued on a guaranteed or modified guaranteed issue basis. This means that unhealthy individuals, who would not otherwise pass the underwriting requirements of the insurance company, can obtain coverage through the group. This causes “adverse selection”: a disproportionate number of people buying coverage through the group who are in poor health and likely to have early claims, resulting in higher premiums for everyone.

In future years, adverse selection can also cause premium rates to be raised more frequently and more dramatically than premiums for individually issued coverage. Rates on some older group policies have been raised to the point where people have been forced to cancel the coverage.

The consequences of adverse selection are particularly negative if you’re healthy. By purchasing group coverage, you’ll heavily subsidize higher premiums for those in poor health, and will continue to subsidize increasingly higher premium rates in the future.

“But the Premium Seems so Low!”

Group LTC coverage has the appearance of a lower premium than individually issued coverage, which is why it’s common for people to automatically jump to the conclusion that they should buy it. But when comparing the details and benefits apples to apples, group LTC coverage premiums are higher than individually issued coverage.

The initial appearance of lower premiums for group coverage has to do with the fact that group coverage does NOT include the automatic inflation protection benefit as a component of the base policy. Yes, you may be able to purchase additional coverage later through the policy’s Guaranteed Purchase Option, but the new benefits will charge a premium at your new attained age rate. Based on Mr. Hamm’s experience in auditing older group policies for clients, people normally don’t exercise the option to increase their coverage, due to the increasing higher premium. In fact, people rarely revisit the group LTC insurance decision until several years later, after premiums have gone up dramatically.

Is Group LTC Coverage Ever a Good Value?

If you’re not in good health and you’re unable to qualify for individually issued LTC insurance, group coverage may be a viable alternative for you. But when people are educated about the higher premiums, the likelihood of increasingly higher premiums in future years, and the limited coverage options available through group coverage, they usually choose an option other than insurance as their plan for long-term care. The rare exception is if you have a strong desire to obtain coverage due to health conditions that make the odds of you needing long-term care very high.

Summary

Planning for long-term care can be confusing. If you haven’t yet developed a plan for long-term care or if you’re being offered group LTC insurance, please contact your independent advisor to begin the planning process . LTC insurance may not be the best option for you and your family - so paying for it, even at low cost, is a bad investment.

What the new Congress means for you?

What does the new Congress--with a Republican controlled House and Democratic controlled Senate--mean for your investments?

In my mind it’s too early to answer that question. While we will almost certainly be dealing with some measure of the gridlock we are so accustomed to in D.C., I worry that gridlock will be paramount in the two month lame duck session before our newly elected representatives and Senators take their oaths. If so, we will wait for answers to our most pressing questions: Will the Bush tax cuts be extended? If so, for whom and for how long? Will the estate tax be allowed to be reinstated at pre-2009 levels? Trouble is, if our representatives fail to address these questions by the end of the year, taxes will increase for nearly everyone unless a retroactive provision is passed.

As for the election’s impact on the investment environment, market commentator Todd Schoenberger has noted that we are closer to the optimal formula for investment success of a Republican-controlled House; Republican-controlled Senate; and a Democrat in the White House. Going back to back to 1940, he says the RRD combination has provided investors with an average stock market return of 15.3% per year, whereas the DDD combination we’ve had for most of this year has lifted stocks only 5.0% on average.

Wall Street Journal writer Brett Arands reminds us, however, that the historical basis for this analysis--data since 1949 via the Stock Trader's Almanac--is meager. I agree with Arands’ observation: “You can't extrapolate universal rules from such a small amount of data. The results are too heavily skewed by the Reagan (1981-86) and Clinton (1995-2001) booms under divided governments."

Could it be we are falling into the behavioral trap of identifying pattern where none exists in order to help ourselves feel more in control? I certainly don’t blame anyone for desiring a measure of predictability in the wake of such recent volatile markets, but markets are just that–unpredictable.

Do Expense Ratios Matter?

Russell Kinnel, Morningstar’s director of mutual fund research, wrote an article on August 9, 2010, titled “How Expense Ratios and Star Ratings Predict Success.” It is a must read and can be found online at Morningstar by clicking on this link.

Morningstar examined five broad categories of mutual funds—domestic equity, international equity, balanced, taxable bond, and municipal bond—over multiple periods beginning in 2005, 2006, 2007 and 2008 and ending in March 2010. The funds were sorted into quintiles based on expenses and the performance of the cheapest funds was compared to that of the most expensive.

We have always preached that investors should focus on the things they can control—expense ratios, turnover (i.e., tax efficiency), diversification, and asset allocation. Therefore, it did not surprise me that Morningstar’s research showed that cheap funds outperformed their expensive cousins in every time period tested. Kinnel observed “if there’s anything in the whole world of mutual funds that you can take to the bank, it’s that expense ratios help you make a better decision.”

Among both domestic and international equity funds, total returns in every time period were higher for the cheapest funds compared to the 5-star funds. Kinnel concluded by saying that "investors should make expense ratios a primary test in fund selection. They are still the most dependable predictor of performance.”

All I can say is Amen!

IRA Assets Top $732.9 Billion

According to a new Employee Benefit Research Institute (EBRI) report based on the organization’s own data, total assets in IRAs are up 25% on average. At $732.9 billion, IRAs represent the bulk of the $13 trillion in 14.1 million retirement accounts across the United States.

According to EBRI, traditional IRAs, including rollover IRAs from employer-based retirement plans, account for 67% of all IRAs, whereas Roth IRAs, funded with after-tax dollars and where qualified withdrawals are treated as tax-free income, account for roughly a quarter of the market. The report also disclosed a host of other interesting statistics. For example, more than half of IRAs have a balance of at least $25,000. The average IRA owner has $68,498 invested in one or more accounts, with men (56.6%) being slightly more likely to own an IRA than women (43.4%). Along a similar vein, men ($91,063) tend to have higher average balances than women ($51,314).

Notably, most investors don’t make the maximum annual IRA contribution of $5,000 ($6,000 for those 50 and older). The average annual IRA contribution is $3,798 for traditional IRAs and $3,582 for Roth IRAs. What’s more, the volatile market seems to be taking its toll, with just 7.2% of traditional IRA owners adding to their accounts in 2008.

Remember that when you change jobs, you have the option to rollover your 401(k) or pension plan lump sum into an IRA.  And don't forget that you have until the end of the year to consider whether converting an IRA (fully or partially) to a Roth IRA is right for you.   You should consult your advisor with questions about Traditional IRAs, Roth IRAs, rolling over your 401(k) into your IRA, or converting an IRA to a Roth IRA.

Who Are You Going to Trust?

With trust in banks and the nation’s financial system at historic lows, new market research reveals that 86 percent of investors are thinking twice about their financial advisors.

If you don’t trust your financial advisor, get a financial second opinion. Above all, you want to work with a financial advisor who tells the truth. The best definition of truth is when the word and the deed are one. Find an advisor who truly looks out for your best interest--someone who isn’t just there to tell you what you want to hear, but someone who is there to tell you what you need to hear. An advisor who makes commissions from selling you a financial product has an inherent conflict of interest. Remember, an advisor who swears to act as a fiduciary bears a legal obligation to act in your best interest at all times.

An industry survey recently revealed how confused investors are about which financial professionals operate under a “fiduciary standard” that mandates putting their clients’ interests ahead of their own. Although most investors don’t understand that brokers and registered investment advisors work under different legal obligations, 97 percent of investors agree that “when you receive investment advice from a financial professional, the person providing the advice should put your interests ahead of theirs and should have to tell you upfront about any fees or commissions they earn and any conflicts of interest that potentially could influence that advice.”

The Dodd-Frank Act gives the SEC the chance to craft a pro-investor policy that requires all financial professionals to operate under the fiduciary standard. The investing public deserves nothing less.

You Can be Excellent at Anything

In The Way We're Working Isn't Working, Tony Schwartz lays out a guide, grounded in the science of high performance, promising he can “systematically build your capacity physically, emotionally, mentally, and spiritually.”

Says Schwartz, “It's possible to build any given skill or capacity in the same systematic way we do a muscle: push past your comfort zone, and then rest.” There is something wonderful about his observation. It suggests that hard work, not innate talent, plays the biggest role in determining our successes. Keep that in mind as you set your financial goals and as you pursue your chosen career – or your golf game!

Here are the six keys to achieving excellence that Schwartz has found most effective in helping his clients reach their goals:

1. Pursue what you love.
2. Do the hardest work first.
3. Practice intensely
4. Seek expert feedback, in intermittent doses.
5. Take regular renewal breaks.
6. Ritualize practice.

He also recommends additional books on this subject:

     Talent is Overrated by Geoffrey Colvin
     The Talent Code by Daniel Coyle
     Outliers by Malcolm Gladwell
     The Genius in All of Us by David Schenk.
     Bounce by Mathew Syed

The Recession is Officially Over

On September 20, 2010, the Business Cycle Dating Committee of the National Bureau of Economic Research (NBER), a non-profit group based in Cambridge, Massachusetts and the arbiter of when U.S. recessions begin and end, officially declared that the recession ended in June 2009 when a trough in business activity occurred in the U.S. economy. The trough marks the end of the recession that began in December 2007 and lasted 18 months, making it the longest of any recession since World War II. Previously, the longest postwar recessions were those of 1973-75 and 1981-82. Both of those recessions lasted 16 months.

While economic indicators now make a double-dip recession seem unlikely, NBER states that it will categorize any potential future economic downturn as a new recession, not a continuation of the recession that began in 2007.

Notably, however, the Committee did not conclude that our economy has returned to normal capacity. We are simply on what may be a long and winding road to a recovery that likely will require multiple quarters to achieve.

As an aside, NBER defines a recession as a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” Absent from that definition is the commonly-held public opinion that a recession is marked by two consecutive quarters of decline in real GDP.

The Art of Getting Along

I had a meeting with a gentleman last week.  He shared a personal story about a high school graduation gift that his grandfather gave him.  It was a print of "The Art of Getting Along."  The gift was not appreciated at the time; but today it is one of his prized possessions and is displayed prominently in his office.  I liked his story so much that I wanted to share this and share the words of "The Art of Getting Along."  Thank you for sharing your story with me, Chris!

THE ART OF GETTING ALONG

Sooner or later a man, if he is wise, discovers that life is a mixture of good days and bad, victory and defeat, give and take.

He learns that a man's size is often measured by the size of the thing it takes to get his goat...that the conquest of petty irritations is vital to success.

He learns that he who loses his temper usually loses.

He learns that carrying a chip on his shoulder is the quickest way to get into a fight.

He learns that buck-passing acts as a boomerang.

He learns that carrying tales and gossip about others is the easiest way to become unpopular.

He learns that everyone is human and that he can help to make the day happier for others by smiling and saying, "Good morning!"

He learns that giving others a mental lift by showing appreciation and praise is the best way to lift his own spirits.

He learns that the world will not end when he fails or makes an error; that there is always another day and another chance.

He learns that listening is frequently more important than talking, and that he can make a friend by letting the other fellow tell HIS troubles.

He learns that all men have burnt toast for breakfast now and then and that he shouldn't let their grumbling get him down.

He learns that people are not any more difficult to get along with in one place than another and that "getting along" depends about ninety-eight percent on his own behaviour.

--Wilferd Peterson

Who Do You Trust?

Trust in banks and the financial system in general is at historic lows. The Dow Jones Industrial Average dropped 700 points in just ten minutes on May 10, 2010. Since the Great Recession started in mid 2007, over two trillion dollars of wealth has evaporated. According to the Conference Board, consumer confidence in 2009 plunged to an all-time 41-year low. Market research into the continuing turmoil has discovered that 86 percent of investors are thinking twice about their financial advisors.

If you are looking for advice in today’s uncertain market, look for an advisor who is a fiduciary. What does it mean to be a fiduciary? When you are a fiduciary, you put the needs of your clients ahead of your own--in all cases.

According to Professor Steven Blum, a business ethics professor at the Wharton School, acting as a fiduciary encompasses both a “duty of care and a duty of loyalty.” He insists that our industry embrace a new definition of a professional, noting, “A true professional uses his or her ability and power solely to advance the best interests of the client. When the professional's interests diverge from those of the client, the professional always follows only the client's interests.” That’s a definition, I have embraced since day one in the business and one I hope will soon be more widely practiced. The investing American public deserves nothing less.

If you want to read more on this topic, read my article titled "Defining My Fiduciary Standard" by clicking on the title.

What Can Investors Learn from Meteorologists?

What can economists and investors learn from meteorologists? Economics and finance professors in the Tippie College of Business at the University of Iowa are researching whether using multiple economic and financial models running concurrently can deliver more accurate economic forecasts than one model can. Of course, the concept of relying on a pool of models to predict the future has its roots in weather forecasting.

The researchers recently ran a series of “model pools” to see how they would predict returns on stock portfolios between 1932 and 2008. After comparing the prediction to actual market performance, they found that a two-model pool led to more accurate predictions than any one model. Better yet? The three-model pool.

Thus, the researchers concluded that model pooling can potentially produce more accurate predictions for a wide range of economic forecasts, whether it’s charting real estate values or tracking changes in unemployment.

Here’s my take: Modeling to control risk has its place, but when it comes to your portfolio, the best defense against market volatility is to maintain a diversified portfolio, stay true to your asset allocation, utilize low-cost investments, and periodically review and rebalance your portfolio.

Planning Amid Tax Uncertainty

Ben Franklin famously quipped that the only certainties in life were death and taxes. Of course, with the Bush tax cuts scheduled to sunset at the end of the year and the midterm elections capable of changing the balance of power on Capitol Hill, there is nothing certain about future tax policy. We can only surmise that taxes will, one way or another, likely increase at some point in the future.

If the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA)--the official names for the “Bush tax cuts”--sunset as originally legislated at the end of 2010, tax rates on ordinary income, long-term capital gains, and qualified dividends will revert to the higher, pre-2001 levels.

This table illustrates the differences in marginal tax rates after the sunset:

      Marginal Tax Rates         Marginal Tax Rates
                 for 2010                    as of January 2011
                     10%                                 15% (indexed and expanded)
                     25%                                 28%
                     28%                                 31%
                     33%                                 36%
                     35%                                 39.6%

Investors will also face higher capital gains tax rates. On January 1, 2011, the capital gains rate is scheduled to revert from the current maximum rate of 15% back to the 20% capital gain tax rate that was in effect prior to 2003.

Also, dividends which under the Bush tax cuts were taxed for the first time at the same low 15% rate as capital gains, will be reclassified and grouped with interest to be taxed at the higher rates levied on wages. In fact, unless Congress acts before the end of 2010, next year the top dividend rate will revert to 39.6% from 15%. That’s quite a leap.

What’s an investor to do? In anticipation of higher tax rates, if your portfolio includes appreciated assets, this year might be a good time to realize some gains at the maximum capital gains rate of 15%, rather than the 20% capital gains rate currently slated for 2011.

Investors in the 15% tax bracket or lower have a greater opportunity to save. For these investors, no gains are due on appreciated assets sold in 2010 if their gains are below a specified threshold. They would, however, be taxed at the 10% capital gains rate in 2011.

You should not, however, embark on a selling spree just to avoid what you think may be higher taxes down the road. Generally, you would want to have a purpose for the cash a sale would generate. For example, it may make sense to sell investments at gains this year if you have college tuition due next year for a son or daughter.  It also makes sense to sell individual, concentrated stock positions to adopt a more diversified and properly allocated portfolio.

If you are a business owner nearing your planned exit date, you may want to accelerate the sale of your business to avoid higher tax rates in the future.

And lastly, it is important to realize that the "wash sale rules" do not apply when selling an investment at a gain.  In other words, you can sell an investment today, record your gain, and buy it back immediately without waiting 30 days like you would when you harvest losses in your portfolio.

Economic and Political Pressures Will Influence Tax Policy

It is an interesting time in our nation’s capital. The latest polls show that the Republican Party may gain more than the 39 seats necessary to tip the balance of power their way in the House. Noting in a recent blog post that control of the Senate is also up for grabs, Washington insider and CNBC commentator Greg Valliere, said the Democrats need a “pre-election Hail Mary pass.”

Valliere floats the possibility for the following scenario: What if, now that lawmakers have returned to D.C., President Obama brings together leaders of both parties and negotiates a deal to extend the Bush tax cuts indefinitely for 97% of Americans, and perhaps for two or three years for the wealthiest Americans whom he initially targeted for tax increases?

While Valliere says a tax cut deal should be a “no-brainer” given the struggling economy, he expects politics to get in the way – on both sides of the aisle. He questions whether there are enough moderates who “recognize that this is a terrible time to raise taxes on anybody” and sees little possibility that the Republican leadership that has refused to compromise thus far would do so on an issue that has great potential to help them win seats and gain Congressional control this fall.

Only time will tell. However, in the meantime tax planning is a challenge as we are still unsure how tax policy will change next year.

Yes, You Can Raise Prices in a Downturn

When was the last time you got a raise? Corporate America has been stingy with raises during the downturn, but pain has also been felt among the ranks of small business owners who have been hesitant to raise prices in a tough economy. In fact, the uncertain economy has promoted many companies to cut internal costs, and even lower prices. Over the last few months, your mailbox likely was full of flyers from local companies or restaurants offering you a deal. Late night infomercials take the marketing pitch to an extreme -- Order now, and you get two of whatever they are selling, and something tacked on for “free.” However, new research from Harvard Business School, “Performance Pricing in Tough Times,” suggests that businesses can, and should, charge more for delivering more -- even in a market downturn. Companies should compete “on the basis of initiatives for which their customers willingly pay higher prices,” says study co-author Frank V. Cespedes, a senior lecturer at Harvard Business School who spent 12 years running a professional services firm.

The key in selling your price increase, say the Harvard researchers, is that your customers understand the value represented in your pricing. To further explore the researchers’ assertion that “Pricing builds or destroys value faster than almost any business action,” check out the HBS interview where authors Frank Cespedes, Benson P. Shapiro, and Elliot Ross discuss pricing strategy and how to convince your customers that higher prices are worth the cost.

Would You Pay a Fund Manager to be Lucky?

How many of us would list luck as the key ingredient for a top performing mutual fund? That’s certainly not the message we receive from most mutual fund companies that stress the expertise and trading skill of their top managers. Interestingly, however, a new study by internationally renowned finance professors Eugene Fama and Kenneth French finds that luck plays a bigger role than skill in determining a fund’s success.

Although investors pay well over $10 billion annually in fees to managers of actively managed funds, Fama and French found that active funds’ returns actually trail their passive benchmarks by approximately the level of the funds’ expense ratios (around one percentage point per year). Furthermore, the professors found that even the small number of managers (just 3%) who cover their costs are unlikely to noticeably outperform a large, efficiently managed index fund in the future.

The current Fama and French study is another in a substantial body of academic research that clearly illustrates the folly of chasing past returns. It also underscores the wisdom of taking a passive approach to investing to secure the superior long-term results upon which your retirement depends.

Is a College Degree Worth the Cost?

If you are paying college tuition, watching your bills increase faster than the rate of inflation, you might be asking yourself this question. Over the course of a working life, it’s been estimated that college grads earn from $900,000 to $1.6 million more than workers without a degree. Yet, according to the a study conducted by PayScale for Bloomberg Businessweek, the dollar value of a college degree may be a lot closer to $400,000 over 30 years -- and varies wildly from school to school.

Of course, there’s the unquantifiable and undisputable personal value of a college degree, but if we seek to determine the true economic value, rather than simply factor in the extra earnings, we need to consider the debt many students take on in college. I recently read a compelling article by Randy Proto, the President of the American Institute, in the online publication The Huffington Post. His thoughtful analysis supports those who argue that a college degree is still worth the cost, even in today’s uncertain job market.

• The median debt owed by a Bachelor's degree graduate is about $20,000, according to a College Board study -- less for a public university, more for private schools. Proto compares that to the average debt level people assume when they buy a new car: $25,396, according to Experian Automotive. I agree with his conclusion that a college degree -- with its lasting economic, social, and personal value -- is worth far more indebtedness than a car, which begins to depreciate the day you drive it off the lot.
• While post-secondary education adds significantly to lifetime earnings, the economic argument makes even more sense once you examine who's been losing their jobs in the current downturn. According to data produced by Economic Modeling Specialists, eight out the top 10 occupations that lost the most jobs from 2007 to 2009 were ones that didn't require a degree.
• Finally, as Proto points out, according to UNESCO, post-secondary enrollment worldwide has increased by 53 million people from 2000 to 2007. In an increasingly global job market, that's a lot of competition for jobs.

For those saving for college in tax-advantaged 529 plans, your homework is about to get easier. Starting this fall, Morningstar will offer published reports on the 50 largest 529 plans. The reports will include a Morningstar qualitative rating, analyst commentary, and data on some of the largest options within the plan.

The “Giving Pledge” to Ignite Philanthropy

A few weeks ago, more than three dozen billionaires signed up for The Giving Pledge, an effort by Bill and Melinda Gates and Warren Buffett to encourage wealthy people to give at least half of their fortunes to charity.

According to Patrick Rooney, executive director and professor of Philanthropic Studies at the Center on Philanthropy at Indiana University, the idea has both potential and challenges. He estimates that if everyone on the Forbes 400 fulfilled the pledge, $600 billion would go to charity. That's about double the total amount of Americans' current annual charitable giving, meaning that some careful planning will need to accompany the generosity.

With such a massive increase of dollars into charitable organizations, it’s incumbent on donors to work with their advisors and charities to structure gifts effectively in ways that can make the greatest difference. Some of the smallest nonprofits, for example, simply may not have the administrative capacity to manage large gifts.

However you intend to express your philanthropic interests, I suggest sharing your thinking -- and your charitable volunteer work -- with your children. You will find this can both enhance your family relationships and lay the foundation for a rich legacy of giving.

If you are looking for more inspiration, you may want to read: The Ultimate Gift by Jim Stovall, The Giving Family: Raising Our Children to Help Others by Susan Crites Price or The Financially Intelligent Parent: 8 Steps To Raising Successful, Generous, Responsible Children by Eileen and Jon Gallo.

What’s Different About a Fiduciary Advisor?

I recently read a post by Kate McBride regarding the differences between an advisor held to a fiduciary standard and a broker held to a suitability standard.  It was short, accurate and to the point.  Therefore, I credit her entirely for the comments below:

What’s so different about a fiduciary advisor as compared to an advisor who meets the minimum requirements of the suitability standard?

It’s the legal duties to the client.

The suitability standard is a business standard, similar to the standard of a salesman, where you know you have to look out for yourself.

The fiduciary standard requires an advisor, like your family doctor, to be loyal and always put the client’s best interests first. This best interest requirement has practical consequences for investors. The fiduciary (best interest) standard means advisors must:

• Use the judgment of a professional to only select and recommend products in the investors’ best interest
• Either avoid or disclose and manage conflicts of interest
• Describe, before beginning work, all compensation, incentives, commissions, and expenses
• Ensure expenses are fair and reasonable
• And, of course, do only what’s best for investors.

An advisor only required to meet the suitability standard is not required to do any of these things.

In Fund Selection, Is It Wise to Reach for the Stars?

How often have you seen headlines on personal finance magazines touting Five Star Mutual Funds? You may figure that list generated by Morningstar constitutes great shopping ground. In fact, many professional financial advisors begin their analysis by evaluating those five-star funds.

It is human nature to be comforted by the idea that the investments you are buying are highly rated. The problem is that when we buy a “Five-Star” fund, we blindly extrapolate that the star rating translates into superior future performance. In fact, nothing could be further from truth. The Burns Advisory Group’s recent research paper, Star Gazing: Five Star Funds Revisited, went back to 1999 to study the subsequent 10-year performance of Morningstar’s five-star funds. The results were enlightening.

Burns found that of the 248 funds rated Five-Star by Morningstar on December 31, 1999, only four were still receiving that rating a decade later. Of the original sample, 87 had ceased to exist. And of those still existing, all had been downgraded to an average of just under three stars. And if this was not bad enough, the average performance for the five-star funds over this 10-year period was worse than the average for all funds in all categories except international stocks.

So what should you consider in making an investment decision? Clearly, a Five Star rating is nothing more than a starting point. You need a more broad-based evaluation, focusing on factors within your control. You might ask:

• Are the risks being taken related to return?
• Are those risks targeted in a reliable, consistent way?
• How diversified is the fund?
• What are the costs of the fund, i.e., expense ratio and turnover?
• Does it make promises it can't keep?
• What is more important - individual judgment or clear processes?
• Are the underlying strategies driven by forecasts?
• Does the fund take account of costs and taxes in its decisions?
• Does the fund manager communicate in a clear and consistent way?

While many of these attributes can lead to good outcomes, they cannot guarantee positive returns every year. However, the above characteristics can give you comfort that your money is being invested in a consistent, transparent way that ensures that when the targeted premiums kick in, you are positioned to receive them.

The bottom line is that we believe you should construct portfolios not around short-lived Five Star ratings, but based on the time-tested, enduring principles of asset allocation, broad diversification, passive management, and low costs.

Reaching for the stars today could mean you find yourself clutching at straws in the future.

Controlling Risk Mandates a Long-term Care Insurance Review

A note from a client thanking me for providing a complimentary long-term care (LTC) insurance policy review prompted me to think how a LTC review would be useful for many others.

Although you may have always figured your nest egg could cover your healthcare costs in retirement, the recession and continued volatility may require a re-evaluation of that assumption. With growth prospects low, LTC insurance may be an attractive risk-reduction strategy. Ironically, however, as consumers’ need for LTC insurance has increased, the recessionary environment has prompted insurance companies to re-assess their own risk levels, making the coverage more difficult and expensive to obtain.

Long-term care refers to the help you receive for a chronic illness, disability, or cognitive impairment that leaves you unable to care for yourself for an extended period of time. These services can be provided in a nursing home, assisted-living facility, or in your own home. Typically not covered by your health insurance, LTC can be expensive. In fact, a recent study by Genworth found average costs to be $74,208 a year, or $203 a day. Of course, these rates vary by region of the country.

So, should you buy LTC insurance and, if so, when? Cost has long been the reason for putting off purchasing LTC insurance until a decade or two before retirement. However, in this financial environment, the reasons for acquiring LTC coverage earlier in your adult life are compelling. In the midst of market uncertainty, adding a LTC policy can provide inflation-adjusted, guaranteed income for your healthcare needs later in life.

If you’re interested in determining if it’s still reasonable for you to self-insure or whether your existing LTC policy still meets your needs, please contact me. The LTC market is in constant flux and our consultant, Allen Hamm, is well-versed in everything from the newest riders to the financial stability of the insurance companies. In addition to ensuring you understand the coverage you are buying, Allen is also available to act as your advocate to protect your rights as a policyholder should you ever have a claim.

Looking for a Summer Time Read?

We’ve all asked ourselves questions like “Why do smart people make foolish choices?” In Sway: The Irresistible Pull of Irrational Behavior (Doubleday, June 2010) the authors, Ori Brafman and Rom Brafman, examine the reasons for our irrational behavior and suggest how we can make more rational choices.

According to Brafman, the most surprising element of researching Sway was finding out that most job interviews are terrible predictors of actual performance. They found that interviewers often form a quick opinion of a candidate and then ignore any evidence that contradicts their initial impression. I don’t know about you, but I have been there and done that.

“Because we’re so likely to misdiagnose, a much better alternative to the normal job interview is to prepare pre-scripted questions that focus on a candidate’s actual experience,” says Brafman. “Questions like ‘Where do you see yourself five years from now?’ and ‘What are your greatest strengths and weaknesses?’ aren’t very useful. Instead, focus on specifics. If you are hiring a web designer, does her portfolio match the style you are looking for? Is she up to date with her knowledge of web standards? What are her Dreamweaver skills? It is assessing those on-the-job skills that helps hiring managers stay on focus and not make irrational decisions based on initial gut reactions.”

Try that the next time you are conducting a job interview. If you are interested in learning more, check out this weblink for an interesting Question and Answer interview with Ori Brafman.

Where There's a Will, There's a Way

When the actor Gary Coleman died on May 28th at the age of 42 after suffering a brain hemorrhage, he left three different wills--including one that was handwritten. Legally, the last will written is the binding document. However, battle lines have been drawn, and it is likely his family and friends are in for a long court fight.

Coleman’s situation underscores the fact that without a well-executed and clearly written will, everything you worked for can go up in smoke. I would add that often overlooked in the estate planning process is the fact that proceeds from life insurance, investments in Individual Retirement Accounts (IRAs), annuities, and qualified retirement plans (such as 401(k)s, 403(b)s, and SEPs), as well as trust property pass outside your will directly to your named beneficiaries.

In fact, the beneficiaries you name for your IRAs and 401(k)s take priority over instructions in your will. That is, a beneficiary you forget naming for your retirement account twenty years ago will inherit those assets even if you later specify in your will that someone else will inherit everything you own. Accordingly, it’s crucial that you review your beneficiary forms on a regular basis.

Other documents that help ensure your wishes are carried out include a Durable Power of Attorney, a document that designates a person to act on your behalf during times of incapacitation, and an Advance Medical Directive, a document that lists your health care treatment preferences and designates a person or persons to make those decisions on your behalf.

Once you have developed and signed these documents, instruct your executor and family members where to find them.  And if you are uncertain about your documents, consult your attorney to discuss your need for a will, living trust, durable power of attorney and/or advance medical directive.

How Do You Solve a Problem Like Jobs?

The question posed in the title of this blog has a double meaning--jobs as in employment and Jobs as in Steve Jobs of Apple.

Chronically high unemployment in the U.S. is having a debilitating effect on our economy. We can point to many causes for this, but one that receives lots of press is the outsourcing of jobs overseas--and that’s where Steve Jobs comes in.

Without getting into a political debate about the pros and cons of free trade, it turns out that in a little recognized fact, Apple is one of the biggest beneficiaries of outsourcing jobs overseas. We can’t get enough iPods, iPhones, iPads, and Macs, but relatively few of the jobs created by our insatiable demand are sprouting within our borders.

According to Apple and BusinessWeek, as of September 26, 2009, Apple had about 37,000 full-time equivalent employees of which about 25,000 were based in the U.S. By contrast, Apple has subcontracted with a Chinese company called Foxconn that employs roughly 250,000 people who are devoted to building Apple products. Doing the math, for every one Apple employee working in the U.S., there are 10 Foxconn employees building Apple products in China. Knowing that costs are much lower in China (and that Apple products are in high demand), is it any surprise that Apple earned $3 billion in profit with a 42% gross margin in the first three months of this year?

Again, this is not meant to start a political debate about free trade or protectionism as there are many facets to this issue. It simply points out the intractable nature of high unemployment in the U.S., particularly in the manufacturing sector. Some people argue that free trade and capitalism are the best ways to grow jobs and profits. Others argue for protectionist measures to rebuild our domestic manufacturing base.

Ultimately, America needs to get its people back to work. The Apple example shows just how difficult that may be.

The Grim Reaper at Work without the Tax Man

The recent death of two billionaires has thrust back into the spotlight the fact that Congress let the federal estate tax expire .

You may recall that 2010 began with personal finance pages running headlines like “On Your Mark, Get Set, Die!” Because Congress failed to pass a new estate tax law before the sunset of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), 2010 began without a federal estate tax. (Currently, if there’s no Congressional intervention, the estate tax will be re-instituted in 2011 at levels that applied prior to 2001--a $1 million exemption and a top tax rate of 55%. In 2009, the exemption was $3.5 million and the top rate was just 45%.

But let’s return to the families of the billionaires. In March, Texas billionaire Dan Duncan passed away with a fortune estimated by Forbes magazine to be worth $9 billion. Forbes estimates that had he survived until 2011, his estate would have been subject to approximately $4.95 billion in federal estate taxes. Also, last week when sports-business legend George Steinbrenner died of a heart attack, leaving behind a fortune estimated by Forbes worth $1.15 billion, his estate escaped paying an estimated $632 million in federal estate taxes--unless Congress makes whatever tax they settle on retroactive.

How did this happen in a nation where Ben Franklin famously quipped there are two guarantees--death and taxes? The fact Congress has failed to address the estate tax issue is a major breach of fiduciary duty as far as I am concerned. Their inaction has already cost the US government billions in taxes. Furthermore, it places families in the uncomfortable position of having to decide whether to unplug Mom or Dad to save millions in taxes.

Pay It Now, Or They Pay Later

Legislators in Congress are reportedly considering creating a kind of Roth IRA version of the estate tax. “On The Money,” a blog of the congressional newspaper The Hill, recently reported that lawmakers are debating whether to let taxpayers opt to pay estate taxes in advance so their heirs owe nothing. One version being bandied about would set the pre-paid tax at 35 percent on estates valued at more than $3.5 million.

The pressure is on to address the federal estate tax before the end of the year, when the rate jumps to 55 percent on estates worth more than $1 million. (Last year, estates were taxed at a rate of 45 percent on values greater than $3.5 million, a record exclusion.)

If you die this year, of course, you pay nothing—thanks to the repeal of the estate tax for 2010 that was part of a vast array of sunset provisions in the Economic Growth, Tax Relief and Reconciliation Act of 2001. Of course, Congress could still pass a retroactive estate tax for 2010.

New IRS Rules Ease 401(k) Stock Sales

New rules approved this May by the Internal Revenue Service require 401(k) providers to offer participants at least three investment alternatives to company stock. Most plan providers do this anyway, but the new rules also address the common corporate policy of disallowing employees from selling or diversifying out of company stock except at certain times.

The new rules, which take effect immediately and apply to plan years beginning on or after January 1, 2011, require plans to allow company participants to exit out of company stock as quickly and easily as they can move out of other investments in the plan.

There was a time was when I typically saw an over-concentration in company stock in the portfolios of new clients. After all, the option of investing in company stock, often at much lower prices than other investment options, can seem like a bargain. And we are all prone to look through rose-colored glasses when it comes to evaluating the prospects of the company we work for.

Today, thanks to the lessons of the tech bubble and companies like Enron and Bear Stearns, I see less "company stock tunnel vision." More investors understand that over-concentrating in one stock can be risky. In fact, a recent study by the Employee Benefits Research Institute (EBRI) shows that the share of 401(k) accounts invested in company stock has seen a steady decline since 1999, falling by nearly 1 percentage point to 9.7 percent by the end of 2008.

If you would like to discuss the allocation of your 401(k) plan, please feel free to contact me.

Fourth of July

To commemorate the Fourth of July I thought I would share three of the many photos I took while on the National Mall observing Independence Day with my niece, Elizabeth.  I hope you had a happy and safe Fourth of July holiday and weekend!

Your money is like soap

Of all the investment advice I've ever heard, the economist Gene Fama, Jr.'s is my favorite: "Your money is like soap. The more you handle it, the less you will have."

For me, that conjures up an image of working up a big lather in the shower. Although it may appear as if your scrubbing creates something solid, the rich lather quickly washes away. What's more, your efforts leave the bar of soap diminished. Similarly, most of the time when you give your portfolio a good scrub, at best you create temporary gains (lather) that will be washed away by the stream of water (efficient markets.) What's more, trading costs eat into your nest egg, leaving it like a shrunken bar of soap.

Indulge me while I push the metaphor a little further. When you hold soap in your hands, it becomes slippery as the water pelts down. Turn the bar around to lather up and there's a chance it will slip from your hands. In fact, the bigger the bar (or the higher your net worth), the more difficult it can be to hang onto. Here, I equate the unrelenting water pelting from the showerhead as the bombardment of "can't miss" investment ideas presented by your friends and colleagues that can damage your portfolio.

Am I telling you to leave the soap on the shower shelf, to ignore your portfolio? Certainly not. However, it's important to realize that our emotions -- most often fear or greed -- spark illogical, unnecessary, and even destructive investment moves. Although research continues to prove it's impossible to time the market, investors persist in believing they can do just that. Pouring money into equities when the market is up and selling when it goes down, investors trap themselves in a vicious cycle of buying high and selling low -- and earn substantially less than index returns.

So, what should you do? Because the markets move up and down beyond your control, work with a trusted financial advisor to construct a diversified, risk-appropriate portfolio you can live with in all markets. Diversification among dissimilar asset classes is the only academically-proven risk control measure that delivers consistent, and potentially enhanced, returns. Also, the next time you get the hankering to scrub, remember that a conscious decision to remain invested in your diversified portfolio is, in fact, a form of action. If you really must do something, we'll take a look to see if you need to rebalance to maintain your ideal asset allocation. Remember, your bar of soap has got to last you for decades.

What's an MBA worth?

What’s the value of a newly-minted MBA degree? In their new book, Rethinking the MBA: Business Education at a Crossroads, Harvard Business School professors Srikant M. Datar and David A. Garvin and research associate Patrick G. Cullen employ a wealth of interviews and quantitative data to examine the worth of an MBA in our evolving global marketplace.

“Business schools are at a crossroads and will have to take a hard look at their value propositions,” the authors write in the introduction. “This was true before the economic crisis, but is even truer in its aftermath. The world has changed, and with it the security that used to come almost automatically with an MBA degree. High-paying jobs are no longer guaranteed to graduates, and the opportunity costs of two years of training—especially for those who still hold jobs and are not looking to change fields—loom ever larger. To remain relevant, business schools will have to rethink many of their most cherished assumptions.”

To train knowledgeable, principled, and skilled leaders, the authors stress that business schools must move away from their emphasis on analytics, models, and statistics to embrace leadership development; critical, creative, and integrative thinking; and understanding organizational realities.

If you are in business, it is worth looking at how this shift might impact your business.  If you are a student or looking to get your MBA, you should understand this trend as you undertake your degree.