Is a College Degree Worth What It Costs?

PIMCO bond fund legend Bill Gross grabbed the spotlight a few weeks ago when he questioned the value of a college education in today’s economy. In “School Daze, School Daze, Good Old Golden Rule Days,” he wrote, “College was great as long as the jobs were there.” Gross also described the liberal arts education as a “four-year vacation interrupted by periodic bouts of cramming or Google plagiarizing.” That’s not something parents wanted to read as they packed up their cars to take this year’s incoming freshmen class to college.

The facts Gross offers to lay the foundation for his thesis include: College tuition has increased at a rate 6% higher than the general rate of inflation for the past 25 years, making it four times as expensive relative to other goods and services as it was in 1985. Also, the average college graduate now leaves school with $24,000 of debt. College graduates, he reasons, “can no longer assume that a four year degree will be the golden ticket to a good job in a global economy that cares little for their social networking skills and more about what their labor is worth on the global marketplace.”

Certainly, we all know college graduates who are struggling to find employment. And we all know students who are in college who, for whatever reason, would be better served elsewhere. However, it seems a bit of an overreaction to let the current job market, influenced by a confluence of unprecedented market events, dictate how we prepare the next generation of thinkers to compete in global marketplace. Surely, the goal at the end of a college education is meaningful employment, but higher education cannot be governed by the economy alone.  The business leaders I have interviewed typically recommend a college education for today's young people.

What do you think?

Is Now a Good Time for Wealth Transfers?

Our ever changing tax laws seem perpetually riddled with sunset clauses. And that makes estate planning opportunities fleeting. For instance, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (TRA), increased the federal gift tax exclusion to $5 million. Accordingly, you can make $5 million in gifts in your lifetime without paying a gift tax. However, the TRA is scheduled to sunset at the end of 2012. Post-sunset, the federal gift tax exclusion will revert to its previous lower level of just $1 million. Therefore, if you have been considering making large gifts to your children or grandchildren, it may be advantageous to move those assets before the end of next year.

Also on the estate planning radar screen is the fact that Standard & Poor’s recent downgrade of long-term credit rating for U.S. Treasury debt from AAA to AA+ may cause an increase in the safe harbor interest rates for intra-family debt transactions. These so-called Applicable Federal Rates (AFRs) are currently near historic lows -- and that obviously works to your advantage when making lifetime transfers of business interests or property to your children or grandchildren. We’ll keep a watchful eye on interest rates so we can effectively guide your estate planning decisions.

If you want to discuss how to take advantage of the increased gift tax exclusion under the TRA or how a potential increase in AFRs might impact your estate planning, you should consult your attorney, accountant, or wealth manager.

The Truth about the Downgrade and the Downturn

After a period of growth and semi-stability where many hoped that the worst of the market volatility was behind us, last month we experienced dramatic downturns not seen since the dark days of 2008. Some will blame the Dow’s freefall on Standard & Poor’s decision to downgrade U.S. Government debt from its AAA to a lesser AA+ credit rating. (See the “S&P Downgrades the U.S.: Five Things” for details.)

While the downgrade is unprecedented, in my view, it is not responsible for the profound market volatility we’re experiencing. More likely, the steep decline reflects the market’s broader frustration with the difficulty our elected officials had striking a debt ceiling compromise and the fact that Washington’s solution is a temporary fix. Congress and the President ultimately agreed to a budget cut of $2.1 trillion, half of the figure initially debated.

Standard & Poor’s has grabbed all the headlines, but it’s important to note that the other two major credit agencies, Moody’s and Fitch, elected not to downgrade U.S Treasuries. Although sticking with their top rating of Aaa, Moody's Investors Service did assign a negative outlook on United States government bonds on August 2. The firm noted that it could take “further action if: (1) there is a weakening in fiscal discipline in the coming year; (2) further fiscal consolidation measures are not adopted in 2013; (3) the economic outlook deteriorates significantly; or (4) there is an appreciable rise in the US government's funding costs over and above what is currently expected.”

Regardless of being on a kind of watch list, U.S. debt still remains among the world's safest investments. In fact, we’ve seen a rally in the Treasury market with the traditional “flight to quality” that occurs when we experience dramatic market downturns. It’s also worth noting that the downgrade to AA+ does not apply to short-term Treasury securities. Accordingly, money market funds, which generally hold a lot of short-term Treasury securities, should be unaffected by the downgrade. There may be long-term negatives, however. China and other foreign countries could demand a higher interest rate to hold U.S. debt. Additionally, consumers could face higher rates for mortgages, car loans, and student loans. Stay tuned.

A Moment to Reflect on 9/11

I am sure the hearts and minds of every American reflected with great sadness on the events that took place ten years ago.  Our thoughts and prayers go out to everyone who lost a loved one on 9/11 or as a result of the terrorist attacks on America.

As I was reflecting on 9/11, I wanted to share two articles and one video that are worth reading and seeing.  The articles are written by Peggy Noonan--one on the five year anniversary of 9/11 and the other on the ten year anniversary.  They are:

     The Sounds that Still Echo from 9/11

     We'll Never Get Over It, Nor Should We

To watch the video click on this link for an eight minute video on the World Trade Center Memorial.

God Bless You and God Bless America!

The Numbers are Staggering

Following Standard & Poor’s downgrade of U.S. debt during the week of August 10th, investors pulled $40.3 billion out of long-term mutual funds of all types, according to the Investment Company Institute (ICI). Put in perspective, the outflow of $40.3 billion was roughly 25 percent more than was pulled out in the previous four weeks combined and more than double the $17.0 billion pulled out the previous week. Since, May 1, according to the ICI, investors have pulled out more than $85 billion.

The extreme volatility of the last few weeks not withstanding, the economic recovery continues to follow an atypical course. Generally, the more significant a market downturn is, the stronger the rebound. Yet, although the economy contracted about 4% during the “Great Recession,” the worst since the Great Depression, this recovery has been lackluster. In fact, growth is running at about half the expected speed due to tight credit conditions, a depressed housing market and a pervasive lack of consumer and corporate confidence. Unsure whether better days are around the corner or further down the road, investors have been focused on capital preservation and the search for decent yield.

If the “Super Congress” makes essential budget cuts and positive signs like strong corporate earnings and robust exports continue, we’ll see a real improvement in investors’ confidence. That optimism will move steadily from Main Street to Wall Street and give our recovery the boost it needs. In the meantime, diversification and investment discipline will continue to be the best policy in this environment.

Get the Raise You Deserve

Articles instructing us how to trim our budgets often target the coffee shop specialty coffees: $3.00 a day, compounds to $15 a week, $60 a month, and so on through your working career. I recently heard a compelling rebuttal to the instruction that we do without our morning caffeine stop. “I’m not expecting any great inheritance,” the twenty-something employee declared. “I figure the money I spend in the morning to fuel my day is a great investment in my own productivity.” That statement got me to thinking that more than ever today’s young workers rely on themselves, not their parents or fabulous market gains to achieve their goals. Accordingly, their salary is more important that ever.

With high unemployment making it a hirer’s market, it’s more important than ever not to sell yourself short when it comes to salary negotiations. A recent article by Greg Robb for Market Watch offered some stellar advice for those about to tackle salary negotiations.

Set your expectations, says Don Hurzeler, author of the book The Way Up: How to Keep Your Career Moving in the Right Direction. If you are unemployed and applying for work, he says to expect to earn approximately what your old salary was or slightly less. However, if you are being hired away from an existing position, look for a 20% salary increase.

Charlotte Weeks, a Chicago-based career coach advises clients to avoid answering questions about expected salary early in the interview process. She says to deflect money questions by turning the tables and talking about what you can offer the company. Later in the interview process, you might offer an acceptable salary range based on your research into what others in the field earn, says Karen Lawson, a management consultant.

Finally, before you accept an offer, be sure to calculate the value if a company’s benefits, including health insurance, 401(k) plan, deferred compensation program, and even vacation and sick leave.

Should Your Small Foundation Convert to a Donor-Advised Fund?

In an investment environment that’s seen endowment assets drop and administrative costs climb, many families nationwide are eschewing the cache of small foundations for donor-advised funds. Why? Lower administrative costs and flexibility mean that more money goes to their charitable causes.

According to a recent article in Investment News, Fidelity Investments' Charitable Gift Fund, the largest donor-advised fund with $5.6 billion in assets, took in about $30 million from foundations in the one-year period ended June 30, 2011, up from $16 million a year before. Similarly, Schwab Charitable, the second-largest donor-advised fund with $3.1 billion in assets, saw roughly $28 million converted from foundations to donor-advised funds, double the amount from last year.

A donor-advised fund is an account established at a sponsoring charity. You make irrevocable contributions of cash, securities, or other assets to the giving account and receive an immediate tax deduction. As the account advisor, you then make distributions from the account to other operating non-profits, such as hospitals, schools, environmental organizations, or the Red Cross. The fund handles all the due diligence, tax filing, compliance, and administration. Approval of your grant recommendations is essentially automatic as long as your designated charity is a 501(c)3 in good standing.

The benefits of donor-advised funds I’ve long stressed for individuals also hold true for foundations. For example, whether an individual directs funds to a foundation or a donor-advised fund, they qualify for the charitable deduction that year, and can disperse the funds later, on their own timetable. (Note: There are some limitations on securities so be sure to check with your tax advisor.) Donor advised funds also facilitate donations of stock and other assets, allow donors to maintain privacy, and deliver the benefits of professional recordkeeping at a lower cost that a foundation can.

Of course, you need to consider your foundation’s goals before making the move to a donor-advised fund. Although you may realize tax and administrative benefits with a donor-advised fund, foundations do offer greater grant-making flexibility, allowing you, for example, to establish an endowed scholarship.

Brokerage Firms Must Report Investment Gains; Plus S&P Downgrade

In an effort to ensure everyone pays their fair share of taxes, on January 1st of this year, the Federal government began requiring brokerage firms and other custodians to calculate and report gains or losses on certain customer trades to the IRS. This requires knowing not only the cost basis (the amount paid for the security), but also establishing the method to calculate gains. Most custodians use the “first-in, first-out” method for equities and the average cost method for mutual funds to determine cost basis.

You should consult your custodian to determine what methods are available to you and to determine how your portfolio is setup. For our clients we utilize a hybrid of the "high cost" method. We first try to determine if there are any trade lots that can be sold at a loss.  Once that has been done we sell the lots with the highest cost basis that are over 12 months old first.  This gives us the maximum tax efficiency on any trading in our client accounts.

Our portfolios’ tax-efficiency has always been a major concern. While many give up on tax loss harvesting in years when investors have not registered significant gains, the exercise is never a waste of time. Remember, harvested losses can offset any gains and up to $3,000 of net capital losses can be deducted from their ordinary income on their tax return for the year. Net losses above that $3,000 can be carried over to future years until they've all been used up by future portfolio gains.

As we expect capital gains tax rates to increase in the future, the tax loss harvesting approach makes even more sense. Simply, losses you book today mean gains that are otherwise likely to be taxed at a higher tax rate in the future could be tax free.

Utilizing “tax swaps” whereby we sell a losing position and simultaneously purchase a similar security (mindful of wash sales rules which prohibit selling and then buying the same security within 30 days) allows us to maintain exposure to the asset class while we harvest losses.

S&P Debt Downgrade:

Unrelated to this blog topic is the subject of Standard & Poor's downgrade of the U.S. credit rating from AAA to AA+.  This will be brief but as I mentioned to many, I felt investors and the media made more of this matter than what it deserved.  The U.S. dollar is still the global reserve currency and Standard & Poor's and others don't exactly have a pristine record when it comes to making accurate credit ratings.

On the lighter side, I wanted to share the formula below that a friend shared with me.  I don't know where he got it, and I am unable to give credit to the person who created it.  If someone knows who created it, I will gladly give them credit.  In the meantime, I hope you can enjoy the humor of it:


No offense is intended to be directed at the POTUS, Senate Democrats, House Republicans, Tea Party or Wall Street.  Just enjoy it!

Protecting Seniors from Financial Scams

We’ve all received emails riddled with misspellings from scam artists notifying us that a vast amount of cash is just waiting for us to claim, or that something’s amiss with our bank account. All we need to do is enter our bank information and money will be wired immediately and we’ll live happily ever after. Many of these scams are targeted at older people.

A recent MetLife study found older Americans are financially abused by family members, strangers and businesses to the tune of $2.9 billion a year. Alarmingly, despite increased efforts to educate seniors about the dangers of sharing their financial information, the sum of swindled funds is 12% higher than in 2008. The real tragedy, of course, is that both numbers may grossly under-estimate the thefts as experts figure that more than 80% of cases are not reported because the victims are too embarrassed to report the thefts to their children or authorities.

Why are our seniors so vulnerable? A recent Investment News article mentions research from behavioral economist David Laibson that found that people tend to make poorer financial decisions as they age. Laibson’s take on this sad reality is that because seniors are often lonely, they may be more willing to talk to strangers.

To protect your older relatives, I suggest sharing two simple investment adages: If it sounds too good to be true, it probably is a scam. And if you don’t understand it, you should not own it.

If you’re charged with reviewing the bank accounts of a loved one, any large withdrawal should prompt questions. Of course, seniors working with an independent financial advisor who is a fiduciary (i.e., a firm like Bernhardt Wealth Management) have the added assurance of a trusted professional reviewing their financial accounts and activities in their accounts.

Credit-Report Firms to Face Scrutiny

On July 21st, the newly formed Consumer Financial Protection Bureau (CFPB) took over a range of consumer-product regulatory functions from bank regulators. In addition to mortgages and other credit products, the CFPB also is now responsible for the oversight of the three major consumer credit-reporting companies, Equifax, Experian PLC, and TransUnion. In spite of this new level of fresh oversight, presumably to do something about the high rate of errors in credit reporting, my advice still holds: It is wise to request a copy of your credit report at least once a year to make sure that a mistake isn’t damaging your credit score and resulting in your having to pay high interest rates.  You can go to AnnualCreditReport.com to request a copy of your credit report.

It will be interesting to see whether this new agency will be able to do anything about the high rate of credit report errors. I would hope that the credit reporting companies would have to open up their own books and processes for thorough examinations.

July 21st was also the year anniversary of the passage of the Dodd-Frank Act. And Securities and Exchange Commission (SEC) Chairman Mary Schapiro, speaking before Congress, used the occasion to warn that the SEC needs “significant additional resources” in order to fully address their new responsibilities under Dodd-Frank. “There’s only so much you can achieve by wringing funds out of the existing budget,” she said. Over time, she says, “full implementation of the Dodd-Frank Act will require a total of approximately 770 new staff,” including experts in derivatives, hedge funds, data analytics, and credit ratings. She also noted that the SEC “also will need to invest in technology to facilitate the registration of additional entities and capture and analyze data on these new markets.”

Let’s hope the SEC gets the resources it needs to fulfill its broader responsibilities under Dodd-Frank.