When Bank of America management decided to relieve Sallie Krawcheck of her duties as head of Bank of America’s wealth management division, they put more than 16,000 Merrill Lynch brokers in the hands of a new boss who presumably has a different corporate agenda. It’s expected that David Darnell, who hails from the banking side of B of America, will likely spearhead a renewed effort on the part of the nation's largest bank to further integrate Merrill Lynch and encourage its brokers to cross-sell more bank products.
This initiative for brokers at Bank of America Merrill Lynch clearly illustrates the conflicts of interest that brokers operate under. However, remember that anyone who is a registered representative of a broker/dealer also has a conflict of interest. Also, an advisor who is dually registered with a broker/dealer and RIA still is not a full-time fiduciary.
Bernhardt Wealth Management is a registered investment advisor and a fiduciary. That means we always put our clients’ interests ahead of our own -- in all cases. To fully appreciate the role and responsibilities of a fiduciary, we return to its Latin roots: fides, meaning faith, and fiducia, meaning trust or confidence. Traced back to English Common Law, fiduciary describes a person who holds a position of great trust. Most often, a fiduciary would administer trusts or handle the conveyance of property. Particularly in today’s complex and challenging market, you deserve nothing less than a fiduciary.
To determine if the advisor you work with is a fiduciary, consult the National Assocation of Personal Financial Advisor's “Fiduciary Questionnaire.”
Monday, October 31, 2011
Monday, October 24, 2011
Is Social Security a Ponzi Scheme?
Governor Perry generated quite a stir during a recent Republican debate when he referred to Social Security as a Ponzi scheme. According to Governor Perry, Social Security is a “monstrous lie…a Ponzi scheme to tell our kids that are 25 or 30 years old today you're paying into a program that's going to be there."
We can debate how long Social Security can remain solvent, but it is not a Ponzi scheme. In fact, this article in the New York Times offers details on just how Social Security differs from a Ponzi scheme.
That said, we all know there’s plenty about Social Security that needs fixing. Simply, last year Social Security began paying out more in benefits than it received in taxes. And as more Boomers retire, that shortfall is expected to grow, especially given high unemployment rates. The New York Times article points to the nonpartisan Congressional Budget Office’s estimate that the combined Social Security trust funds would be exhausted in 2038. However, a number of steps could keep the program afloat. Washington could choose to increase taxes, reduce benefits by raising the retirement age, or reduce cost-of-living increases. Of course, none of these options will be popular with voters, so it remains to see what our elected officials who often are more concerned with keeping their jobs than with attacking our nation’s most serious problems will do. If the debt ceiling debates are any indication, we could be in for a rough ride on the way to Social Security reform.
We can debate how long Social Security can remain solvent, but it is not a Ponzi scheme. In fact, this article in the New York Times offers details on just how Social Security differs from a Ponzi scheme.
That said, we all know there’s plenty about Social Security that needs fixing. Simply, last year Social Security began paying out more in benefits than it received in taxes. And as more Boomers retire, that shortfall is expected to grow, especially given high unemployment rates. The New York Times article points to the nonpartisan Congressional Budget Office’s estimate that the combined Social Security trust funds would be exhausted in 2038. However, a number of steps could keep the program afloat. Washington could choose to increase taxes, reduce benefits by raising the retirement age, or reduce cost-of-living increases. Of course, none of these options will be popular with voters, so it remains to see what our elected officials who often are more concerned with keeping their jobs than with attacking our nation’s most serious problems will do. If the debt ceiling debates are any indication, we could be in for a rough ride on the way to Social Security reform.
Monday, October 17, 2011
Celebrating the Spirit of Volunteerism
After my niece, Dorothy, graduated from high school this year, she spent the summer with me. She did some work in my office, and we spent very enjoyable weekends sightseeing in the D.C. area. After a tour of Mount Vernon one Saturday, we had the pleasure of having a conversation over lunch with a couple--Don and Virginia--who had recently retired. They sold their home in Texas and travel the country in their trailer.
However, the most unique element to their new lives is that they spend three months at a time in different parts of the country volunteering at various U.S. Fish & Wildlife Service locations. When they take a break from these rewarding volunteer commitments, they may take a cruise; schedule a visit with their kids and grandkids, or see another part of the country. They love their new lifestyle. They use Volunteer.gov to apply to various locations from Alaska to Florida and from California to Maine.
We’ve all heard the expression, “Put your money where your mouth is,” and American’s certainly do that. According to the recently released Giving USA 2011: The Annual Report, Americans donated 2 percent of their disposable personal income to charitable causes in 2010, amounting to $290.89 billion. This was an increase over 2009 and two years of declines during the Great Recession. However, it must be especially gratifying in retirement to so actively contribute to the causes you have long supported financially like Don and Virginia--our new friends from Mount Vernon. You can see a photo of Don, Virginia and Dorothy below.
However, the most unique element to their new lives is that they spend three months at a time in different parts of the country volunteering at various U.S. Fish & Wildlife Service locations. When they take a break from these rewarding volunteer commitments, they may take a cruise; schedule a visit with their kids and grandkids, or see another part of the country. They love their new lifestyle. They use Volunteer.gov to apply to various locations from Alaska to Florida and from California to Maine.
We’ve all heard the expression, “Put your money where your mouth is,” and American’s certainly do that. According to the recently released Giving USA 2011: The Annual Report, Americans donated 2 percent of their disposable personal income to charitable causes in 2010, amounting to $290.89 billion. This was an increase over 2009 and two years of declines during the Great Recession. However, it must be especially gratifying in retirement to so actively contribute to the causes you have long supported financially like Don and Virginia--our new friends from Mount Vernon. You can see a photo of Don, Virginia and Dorothy below.
Monday, October 10, 2011
Debating Tax Reform
“Warren Buffett’s secretary shouldn’t pay a higher tax rate than Warren Buffett. There is no justification for it,” declared President Obama when he announced his deficit-reduction plan. “It is wrong that in the United States of America, a teacher or a nurse or a construction worker who earns $50,000 should pay higher tax rates than somebody pulling in $50 million.”
The President’s reference to the Oracle of Omaha was a response to Buffett’s recent editorial in the New York Times where he noted that the tax rate he paid last year was lower than that paid by any of the other 20 people in his office – and suggested that the rich should pay more in taxes.
In an interview with ABC’s Christiane Amanpour, Buffett clarified his views further when responding to her question on whether the wealthy need tax cuts to increase business activity and further economic growth. Said Buffett, “The rich are always going to say that, you know, 'Just give us more money, and we'll go out and spend more, and then it will all trickle down to the rest of you. But that has not worked the last 10 years, and I hope the American public is catching on.”
Is the middle class paying more in taxes than millionaires? Remember, election season is heating up, so it’s worth doing some fact checking. According to data from the IRS quoted by the New York Times, in 2009, 1,470 households filed tax returns with incomes above $1 million yet paid no federal income tax. However, that's less than 1 percent of the nearly 237,000 returns with incomes above $1 million. This year, those millionaires are expected to pay an average of 29.1 percent of their income in federal taxes, according to the Tax Policy Center. Households making between $50,000 and $75,000 will pay an average of 15 percent of their income in federal taxes.
Yet, projections are just that. Taxes are determined based on where income comes from. Wages are taxed higher than capital gains, for example. Additionally, the tax code is riddled with deductions, exemptions and credits.
As the quest for the White House continues, I’m sure we’ll see tax figures spun a dozen different ways. Certainly, the debate over the “Buffett rule”--that suggests that people making more than $1 million a year should pay a larger percentage of their income in taxes than middle-class families pay--will continue. But it seems to me true tax reform will be a little more complicated than that.
The President’s reference to the Oracle of Omaha was a response to Buffett’s recent editorial in the New York Times where he noted that the tax rate he paid last year was lower than that paid by any of the other 20 people in his office – and suggested that the rich should pay more in taxes.
In an interview with ABC’s Christiane Amanpour, Buffett clarified his views further when responding to her question on whether the wealthy need tax cuts to increase business activity and further economic growth. Said Buffett, “The rich are always going to say that, you know, 'Just give us more money, and we'll go out and spend more, and then it will all trickle down to the rest of you. But that has not worked the last 10 years, and I hope the American public is catching on.”
Is the middle class paying more in taxes than millionaires? Remember, election season is heating up, so it’s worth doing some fact checking. According to data from the IRS quoted by the New York Times, in 2009, 1,470 households filed tax returns with incomes above $1 million yet paid no federal income tax. However, that's less than 1 percent of the nearly 237,000 returns with incomes above $1 million. This year, those millionaires are expected to pay an average of 29.1 percent of their income in federal taxes, according to the Tax Policy Center. Households making between $50,000 and $75,000 will pay an average of 15 percent of their income in federal taxes.
Yet, projections are just that. Taxes are determined based on where income comes from. Wages are taxed higher than capital gains, for example. Additionally, the tax code is riddled with deductions, exemptions and credits.
As the quest for the White House continues, I’m sure we’ll see tax figures spun a dozen different ways. Certainly, the debate over the “Buffett rule”--that suggests that people making more than $1 million a year should pay a larger percentage of their income in taxes than middle-class families pay--will continue. But it seems to me true tax reform will be a little more complicated than that.
Monday, October 3, 2011
Diversification, Diversification, Diversification
In their well-known and oft-quoted 1986 study of 91 large pension plans, “Determinants of Portfolio Performance,” published in the Financial Analysts Journal, Gary P. Brinson, L. Randolph Hood and Gilbert L. Beebower found 94% of portfolio returns were determined by the asset allocation plan and just 6% attributable to market timing and security selection. Interestingly, however, most individual investors spend little time constructing an appropriate asset allocation plan. Rather than determining the ideal percentage to invest in stocks, bonds, and cash and spreading assets among various sub asset classes, most investors look for the hot stock. This return chasing results in portfolios that are overly concentrated in specific stocks or funds, which increases overall risk.
In Are stocks a loser's bet? another industry influential, William J. Bernstein, quotes research from Dimensional Fund Advisors that found that from 1980 to 2008, the top-performing 25% of stocks were responsible for all the gains in the broad market, as represented by the University of Chicago's Center for Research in Security Prices (CRSP) database of the U.S. total stock market. So why not invest in only those carefully chosen "superstocks?" Bernstein’s answer, “Simple: Because a portfolio of 'carefully chosen' equities could easily wind up with none of the best-performing stocks in the market - and thus produce flat or negative returns over many years. Missing out on even a handful of superstocks can leave you short of your target.”
Bernstein notes further that if you missed out entirely on the top 10% performers from 1980 to 2008, you would have cut your annual returns to 6.6% from 10.4%. How does translate into dollars? Bernstein says, “A $100,000 investment in 1980 would have grown to $1.8 million by 2008 at 10.4%. That same amount, at 6.6%, would have grown to only $640,000.” That’s quite a difference.
Here’s the bottom line: It is not worth risking your family’s financial security by speculating on a few stocks, no matter how carefully chose or how much inside insight you think you have. Think of your mother’s advice. “Don’t put all your eggs in one basket.” Spreading your money between stocks, bonds, and cash--asset classes that historically have responded differently to market conditions--is your best defense against being hurt by poor performance in any one asset class. As you see from the Callan Periodic Table of Investment Returns, one asset class never stays at the top or bottom forever. History teaches us that, like a seesaw, as some investments decline, others rise to offset those losses.
Our clients don’t expect us to help them outperform the stock market. Rather, they want our help to develop a plan pay for college, or maintain their lifestyle in retirement, or achieve other important goals. The best way to do this is to invest each client's money in a globally diversified portfolio based upon their goals and risk tolerance. This does not mean they will never have losses but it is the best way to ensure they get the market return rather than hoping someone can identify the year’s top stocks for their portfolios.
In Are stocks a loser's bet? another industry influential, William J. Bernstein, quotes research from Dimensional Fund Advisors that found that from 1980 to 2008, the top-performing 25% of stocks were responsible for all the gains in the broad market, as represented by the University of Chicago's Center for Research in Security Prices (CRSP) database of the U.S. total stock market. So why not invest in only those carefully chosen "superstocks?" Bernstein’s answer, “Simple: Because a portfolio of 'carefully chosen' equities could easily wind up with none of the best-performing stocks in the market - and thus produce flat or negative returns over many years. Missing out on even a handful of superstocks can leave you short of your target.”
Bernstein notes further that if you missed out entirely on the top 10% performers from 1980 to 2008, you would have cut your annual returns to 6.6% from 10.4%. How does translate into dollars? Bernstein says, “A $100,000 investment in 1980 would have grown to $1.8 million by 2008 at 10.4%. That same amount, at 6.6%, would have grown to only $640,000.” That’s quite a difference.
Here’s the bottom line: It is not worth risking your family’s financial security by speculating on a few stocks, no matter how carefully chose or how much inside insight you think you have. Think of your mother’s advice. “Don’t put all your eggs in one basket.” Spreading your money between stocks, bonds, and cash--asset classes that historically have responded differently to market conditions--is your best defense against being hurt by poor performance in any one asset class. As you see from the Callan Periodic Table of Investment Returns, one asset class never stays at the top or bottom forever. History teaches us that, like a seesaw, as some investments decline, others rise to offset those losses.
Our clients don’t expect us to help them outperform the stock market. Rather, they want our help to develop a plan pay for college, or maintain their lifestyle in retirement, or achieve other important goals. The best way to do this is to invest each client's money in a globally diversified portfolio based upon their goals and risk tolerance. This does not mean they will never have losses but it is the best way to ensure they get the market return rather than hoping someone can identify the year’s top stocks for their portfolios.
Monday, September 26, 2011
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?
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?
Monday, September 19, 2011
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.
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.
Monday, September 12, 2011
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.
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.
Sunday, September 11, 2011
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!
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!
Monday, September 5, 2011
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.
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.
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