Too Big for a Single Regulator?

Think back to America History class. Do you remember learning about the Glass-Steagall Act? The law dates back to the Great Depression and enforced a strict separation between banks that take deposits and those that invest in capital markets – that is until it was repealed in 1999.

Ironically, former Citigroup chairman Sanford "Sandy" Weill, who was the architect behind the 1998 merger of Citigroup and Travelers Group (which also owned the investment firm Salomon Smith Barney at the time) that resulted in the repeal of Glass-Steagall recently suggested adopting a new two-tiered banking model. Weill would split banks into the traditional deposit takers who could make loans and more “creative” institutions that could take more risk. In a recent interview, he urged, “Let's have a creative banking system, like we always had, where the financial industry can again attract the best and the brightest young people like they do in Silicon Valley, so that we can lead innovation that is necessary and [encourage] the entrepreneurship that's necessary. We can't have a world where it is impossible to make a mistake."

Allowing bankers to makes mistakes will be a tough sell in the wake of the recent financial crisis, and with the recent London Whale trades and Libor scandal now playing out. While Weill’s unlikely to garner much support to allow bankers to operate in a more risky fashion, the question of just how commercial banking and investment banking should be regulated will persist.

In an article in Knowledge@Wharton, Wharton management professor Mauro Guillén expressed his preference for central regulation for the big banks, noting, "When a bank is in 10 kinds of financial services, it does not need more regulation; it needs one regulator." He says the Dodd-Frank Wall Street Reform and Consumer Protection Act “hands more powers to the Fed, the Treasury and other agencies with authority over systemically important financial institutions. But owing to political pushback, none have full powers.”

Let’s hope that financial regulation and reform stay at the forefront of Washington’s agenda because, as Guillén wisely notes, “Untrustworthy banks are the last thing that’s needed if we are to overcome this crisis.”

Consider These Three Tax Planning Opportunities

With all the talk of higher taxes when the Bush tax cuts expire at the end of the year, it’s important not to become so focused on future tax policy that we overlook some short-lived opportunities.

• Prior to the implementation of the Jobs Growth and Tax Relief Reconciliation Act of 2003 (JGTRRA or the second Bush tax cut), dividends were taxed as ordinary income. With the passage of JGTRRA, qualified dividends became eligible for the more favorable capital gains rate of 15%. At the end of this year, however, the qualified dividend rules will sunset, and dividends will once again be taxed at ordinary income rates. At the same time, the highest tax bracket will increase from 35% to 39.6%, and high wage earners will be subject to a new 3.8% Medicare tax on investment income. Therefore, the dividend tax could shoot up to a high of 43.4%, not including state tax. This means owners of closely-held businesses have a unique tax planning opportunity to pay dividends this year and take advantage of the 15% tax rates.
• Until the end of 2012, couples with taxable income up to $70,700 (or $35,350 for individuals) do not have to pay capital gains tax. That presents a great opportunity for parents to gift appreciated stock to their adult children. (Remember, children over age 18 are not subject to the kiddie tax.) However, it’s important to watch that parents’ gifts of highly appreciated mutual funds or stocks don’t push the child into the next higher tax bracket.
• If you have been thinking about converting your traditional IRA (where distributions are taxed at ordinary income rates) to a Roth IRA (where, after five years, distributions are tax-free), 2012 may be the year to convert. Why? If you convert this year, you will be taxed according to this year’s tax rates, which are scheduled to increase across the board when the Bush tax cuts sunset at the end of the year.

As always, you should consult your accountant on these and other tax planning opportunities.

Short-term Thinking Magnifies Risk

We always talk about the harm short-term thinking can inflict on your investment portfolio. Now, a new study from Professors Francois Brochet, Maria Loumioti, and George Serafeim at Harvard Business School further explores the risks for companies and investors who are attracted to short-term results.

Not surprisingly, their research shows that companies with short-term mindsets attract short-term investors looking for quick payouts. This naturally puts pressure on the company’s executives to generate positive returns, and short-term oriented corporate managers are therefore more likely to take risks to deliver the performance their investors demand. In fact, the short-term companies studied had more volatile stock returns and higher estimated cost of equity capital, two characteristics that make them riskier than companies with longer-term investment views.

It follows, then, that investors looking to temper the volatility of their portfolio should consider the short- and long-term goals of the company before they invest. But just how does one determine whether a company thinks long- or short-term? The Harvard professors studied transcripts of 70,042 earnings calls held by 3,613 firms from 2002 to 2008. They searched for 14 terms used by management such as "latter half" and "weeks" that would suggest a short-term view, versus 15 words or phrases such as "long term" and "years" that likely would dictate a longer time horizon.

Harvard Business School Assistant Professor George Serafeim said one important takeaway from his research is that many companies are, in fact, being managed for the long term. he noted. According to the researchers, industries focused on long term include beverages, retail, pharmacy, and medical goods. In particular, they singled out Coca-Cola, Ford, and Nordstrom as long-term thinkers. Short-term-oriented industries included banking, electronic equipment, business services, and wholesale, with Cisco, Goldman Sachs, and Chevron on the short list.

Of course, investors should still focus on building a diversified portfolio with the proper allocation based upon their goals and risk tolerance.

Turner Gill, A Class Act

As many of you know, I am an avid Nebraska football fan. One of my favorite players is Turner Gill. Turner led the Cornhuskers to a 28-2 record as a starter and is one of the most beloved Husker players of all time. He was an incredible leader and athlete in college. Today, he represents everything that is good—he is an incredible role model, leader and coach; his integrity, character and values are beyond reproach; he is simply a very classy individual.

Turner is now in his first season as the Head Coach of the Liberty Flames in Lynchburg, Virginia. Since Lynchburg is only a few hours from Northern Virginia several Nebraska fans in the area decided to attend a Liberty football game to show our support for Turner Gill. After comparing the Liberty and Nebraska football schedules we decided to attend the Liberty-Lehigh football game on September 22nd.

We bought 20 tickets so that we would be able to have an assigned tailgate spot. Unfortunately, only 11 Husker fans committed to attend. Not wanting to waste any tickets we reached out to the Opportunity House and invited them to bring some of their young men to tailgate and attend the football game with us.  We enjoyed sharing our experience with those young men and bought Nebraska T-shirts to give them.

Liberty University learned what we were doing and on game day came to our tailgate to take video and photos of us. Even Coach Turner’s wife, Gayle, came to our tailgate to thank us for our support. And Turner Gill met us after the game, talked with us, and signed autographs.

As a huge fan of Turner Gill, this is one of my fondest memories. However, the real reward was the reaction of the young men. Many of them told me after the game that it was the best day of their life. In fact, Martin Cox, the Casework Supervisor at the Opportunity House, sent me the following note:

Mr. Bernhardt,

Just wanted to thank you and your group of Nebraskans for showing our young men a great time. During the game, I received a few messages from Mr. Allen expressing how well they were being treated and about how well the guys were enjoying themselves. Also, I was present at the facility when they returned and their faces expressed what a great time they had even before they opened their mouths. When they did begin to tell me about their experience there was no doubt each of them was truly grateful.

You and your group have truly given these young men an experience they will not soon forget, and shown them that nice things can happen when you make good decisions.

Thank You Again,

I didn’t think many things could top meeting someone like Turner Gill but making an impact on these young men while meeting a class act like Turner Gill will make September 22nd stand out as one of the best days of my life.

John Bowen Interviews Gordon Bernhardt

On August 24, 2012, I was interviewed via Skype by John Bowen, the CEO of CEG Worldwide.

In Celebration of Hard Work

When I came across the article People Who Worked Incredibly Hard to Succeed which celebrates the quintessential American trait of hard work, I was reminded of a quote from F. Scott Fitzgerald: “I never blame failure. There are too many complicated situations in life, but I am absolutely merciless toward lack of effort.” As the article points out, although successful people are often said to be “blessed with talent,” or just plain “lucky,” if you dig a little deeper into the stories of successful athletes, business people, and even government officials, you’ll find hard work and dedication at the core of their success.

I hope everyone, from our nation’s entrepreneurs who put it all on the line and work hard to build something to students just beginning the school year and looking to bright futures, can draw inspiration from these hard workers cited in the article:

• NBA legend Michael Jordan spent his off seasons taking hundreds of jump shots a day
• Starbucks CEO Howard Schultz continues to work from home even after putting in 13 hour days
• Dallas Mavericks owner Mark Cuban didn't take a vacation for seven years while starting his first business
• Phillies pitcher Roy Halladay's workouts are so intense, others can't make it halfway through them
• GE CEO Jeffrey Immelt spent 24 years putting in hundred hour weeks
• Apple CEO Tim Cook routinely begins emailing employees at 4:30 in the morning
• American Idol host Ryan Seacrest hosts a radio show from 5 to 10 AM and runs a production company while appearing seven days a week on E!
• Nissan and Renault CEO Carlos Ghosn flies more than 150,000 miles a year
• Venus and Serena Williams were up hitting tennis balls at 6 AM from the time they were 7 and 8 years old
• Lakers superstar Kobe Bryant completely changed his shooting technique rather than stop playing after breaking a finger

And, yes, I did notice that the list is light on women, so I’ll add a few of my own:

• German Chancellor Angela Merkel, the "Iron Lady" of Europe and the lead player in the eurozone economic drama, has vowed to do everything in her power to preserve the 17-country EU.
• Our own Secretary of State Hillary Rodman Clinton, a hardworking diplomat, has this year alone traveled to 42 countries.
• Virginia M. Rometty, IBM's president and chief executive officer, was recently elected as chairman of the board and has held senior leadership positions in IBM's services, sales, strategy and marketing units.
• Oprah Winfrey, who launched the Oprah Winfrey Network (OWN), now can be seen in 83 million homes.

After all, as the old adage goes, “Man may work from sun to sun. But woman's work is never done.”

And for inspiration from local CEOs, business owners and executives, you may want to read their stories at Profiles in Success.

Can You Talk to Your Advisor?

Maybe you’ve seen those speed dating commercials where it’s clear in 30 seconds that the couple doesn’t click and it’s time for them to move on and keep searching for love. Chemistry is important with your financial advisor, too. Let’s face it, you have to be comfortable enough with your advisor to share your hopes and dreams -- as well as your fears.

That essential chemistry begins when you find an advisor with good listening skills. And that doesn’t mean sitting across the desk from someone who consistently nods like a bobble head doll when you talk. Really listening to clients involves inviting them to open up, taking to heart what they say, asking some follow-up questions, and helping place their goals or worries in context of their bigger financial picture.

In my book, that intangible, know-it-when-you-feel-it good chemistry serves as the foundation for problem solving. That’s because feeling comfortable with each other enables us to ask each other questions and work together to find answers.

Finally, because the planning process requires some work and it’s a relationship we hope to enjoy for the long-term, it’s worth it to put the time and energy in upfront to ensure that the financial advisor you select is someone you like. Of course, you want an advisor with the expertise and skills to manage your wealth, but it sure helps if that person is also someone you honestly enjoy meeting with.

Just as satisfaction with your co-workers affects your overall job satisfaction – and your overall happiness, so, too, can an enjoyable relationship with your advisor positively impact both the planning process and your general sense of well being.

(Note:  For a discussion of the six core characteristics--Six Cs--an advisor should have read What Makes a Great Financial Advisor? and the Six Cs blogs on this topic.)

You Can Do Better with an Advisor

In Our Ridiculous Approach to Retirement, Teresa Ghilarducci, a professor of economics at the New School for Social Research, writes that the 401(k)/individual retirement account model, a “do-it-yourself pension system,” has failed because it expects individuals without investment expertise to reap the same results as professional investors and money managers. She asks, “What results would you expect if you were asked to pull your own teeth or do your own electrical wiring?”

The statistics Ghilarducci cites in her article certainly illustrate American workers’ inability to save for retirement: Seventy-five percent of workers nearing retirement age in 2010 had less than $30,000 in their retirement accounts. Almost half of middle-class workers will be living on a retirement food budget of about $5 a day. And, according to the Employee Benefit Research Institute, only 52 percent of Americans expressed confidence that they will enjoy a comfortable retirement. (Twenty years ago, that number was close to 75 percent!)

Ghilarducci writes, “To maintain living standards into old age we need roughly 20 times our annual income in financial wealth. If you earn $100,000 at retirement, you need about $2 million beyond what you will receive from Social Security. If you have an income-producing partner and a paid-off house, you need less.”

If you work with an advisor, you know your retirement “number,” but Ghilarducci’s blunt talk will come as a surprise to the many individuals not working with a financial advisor. Equally distressing will be her insistence that simply working longer is not a solution for folks who have not saved enough. She stresses that the Boomer generation’s plans to “never retire” are particularly unrealistic and risky given current high unemployment rates for older workers.

The bottom line is that today’s self-help, “I can find the answers I need on the Internet” applies to personal finance just about as much as it does to dentistry or electrical wiring. Certainly, you can read and educate yourself about the issues, but when it comes to constructing and executing a retirement plan, you are in better hands with an advisor – someone who operates as a fiduciary. In fact, a 2010 report from the ING Retirement Research Institute, Working with an Advisor: Improved Retirement Savings, Financial Knowledge and Retirement Confidence, found that investors who seek advice from an advisor tend have higher retirement balances, more discretionary income, and feel better about retirement. And in this uncertain economic environment, it is undoubtedly more beneficial than ever to have a professional in your corner.

Slim Thug's Advice

It’s tough trying to reach the next generation with money advice. If all else fails, you might encourage them to check out the advice from Slim Thug in his new book, How to Survive in a Recession. Marketing himself as “the black Suze Orman,” you’ll find Slim’s book listed in the “Humor” section on Amazon. However, some of Slim’s advice could land the book in the “Personal Finance” section as well.

Here’s some of what the rapper shares about money management:

1. When u get a check put at least 50% up.
2. Never buy a house with unnecessary space.
3. Never have Bentley bills with a Benz salary.
4. Never spend a lot of money on things you can't get money back from.
5. Never buy a car that will have you working overtime to afford.

Slim is a rapper and the youngest of seven children. Born Stayve Jerome Thomas in Texas, Slim says he learned many of these the lessons as part of his modest upbringing. Today, it’s estimated he’s worth $2 million. Asked in an interview about the biggest money mistake people tend to make, Slim responded, “They forget that they have to pay taxes and what the check says isn’t really what they have.”

According to Slim, one of his most important and easy-to-apply rules is: “If you can’t buy it 3 times over, you can’t afford it.” However, infusing humor into finances, he also admits in the interview, “I myself am even guilty of rapping about spending money in careless ways.”

Just What is the Fiscal Cliff?

The ominous term “fiscal cliff” has crept into our lexicon, but just what does it mean? The fiscal cliff is a perfect storm of disastrous events that could push our recovering economy back into recession. First, there’s the scheduled expiration of the Bush tax cuts at the end of this year. Additionally, our economy will need to absorb automatic cuts to the federal budget, including significant reductions in defense spending mandated by last summer’s agreement to raise the U.S.’s debt ceiling. Finally, our national debt continues to spiral out of control and Congress finds itself stymied by partisan gridlock.

Focusing on doom and gloom, magazine covers feature pictures of the Capital Building slipping off the cliff. But this is not just media hype. Last week, the nonpartisan Congressional Budget Office (CBO) issued a report warning that the economy will indeed enter a recession next year if the country goes over the so-called fiscal cliff. According to the CBO, the economy would contract by 0.5 percent in calendar year 2013 if the Bush-era tax rates expire and automatic spending cuts to the federal budget are implemented. Further, the CBO estimates that unemployment also would rise from 8.2% in 2012 to 9.1% next year.

Federal Reserve Chairman Ben Bernanke has underscored the dangerous impact of the fiscal cliff, warning that “there is absolutely no chance that the Federal Reserve would be able to have the ability whatsoever to offset that effect on the economy.” Notably, over the course of the last few months, Chairman Bernanke’s warnings have become more dire. In April, he noted that “a sharp fiscal tightening could occur at the start of 2013” that could lead businesses to defer hiring and investment. Yet, minutes from the Fed’s July 31-August 1 meeting describe “a sharper-than-anticipated U.S. fiscal consolidation” as a “significant downside” risk to our economic outlook.

In the CBO report, Director Doug Elmendorf urges Congress to act in September to avoid the fiscal cliff, reasoning that the sooner uncertainty was resolved, the better for our economy. However, Congressional action is highly unlikely given the magnitude of the task and the distraction of a polarizing Presidential campaign. I hope that one day soon the importance of our nation’s fiscal health can transcend politics and that Congress and the President can reach an agreement. And for the sake of our fragile economy, let’s hope that day comes sooner rather than later.

However, despite this news an investor should not abandon their long-term investment strategy.  The pundits have been wrong before and it is more rational to stick to one's long-term plan than to abandon it on what "might" happen.  Furthermore, once an investor abandons his or her plan he or she must decide when to reactivate the plan.  And by the time that decision is made most investors would have been better off if they had stuck to the plan.