These dramatic gestures are supposed to help revive the American economy, but what are they costing our nation’s reserve bank? The Reuters news service looked at last year’s audited results and reports a surprise: the Fed’s increasingly complex balance sheet generated $88.9 billion in profits last year. That’s far more than the most profitable U.S. companies, like number one Exxon Mobil ($41 billion); number two Chevron ($27 billion), #3 Apple ($26 billion) or Microsoft ($23 billion).

Under Chairman Ben Bernanke, the Fed has gotten in the habit of earning a profit on its operations. In 2011, 2010 and 2009, it took in $77.4 billion, $81.74 billion and $53.42 billion in profits, respectively.

Where does this money go? Does the Fed pay out this largesse to its executives in the form of bonuses, like Goldman Sachs? Fortunately not. The Fed sent $88.4 billion to the U.S. Treasury last year, and gave taxpayers back a comparable percentage of its profits in previous years. The interesting truth is that the most profitable entity in the American economy is run like a nonprofit on behalf of our government.

Sources:

http://www.huffingtonpost.com/2012/03/21/federal-reserve-profit-2011_n_1369354.html

http://www.huffingtonpost.com/2013/03/15/federal-reserve-record-profit_n_2884366.html?utm_hp_ref=business

This article was written by Bob Veres and re-printed with his permission.

And that makes me nervous. Investment styles that are currently in vogue tend to attract people that fail to consider the risks. From what I’ve seen, I have the feeling people have a false sense of security. Here are some things that the investor seeking income should consider:

-Dividend paying stocks usually go down in value on the date the stockholder is entitled to their dividend. In reality the thought of not touching the principal is an illusion.

-Focusing on dividend paying stocks pays no attention to dividend paying stocks of the future. Great companies usually do not initially pay dividends. Only when their business matures and growth slows do they begin these payouts.

-There is no documented research that proves dividend-paying stocks weather downturns in the stock market better than non-dividend paying stocks.

-Only 40% of the domestic stock universe pays dividends and a majority of these stocks fall in only a handful of business sectors. You are giving up a lot of diversification.

-If a bond or bond fund is carrying a higher yield, there is a reason for that – it’s called risk. Bonds that have longer maturities are more likely to fall in value when interest rates go up. Some bonds have higher risk of default. Other investment vehicles such as closed end funds borrow money at lower rates to buy higher yielding bonds. Some bonds go overseas and are subject to currency or sovereign debt risk. Municipalities can fail as well – all you have to do is look at the credit default swap rates of municipal bond insurers to see the risk is real. There is no free lunch here.

-How bad can it get if interest rates were to rise? If we have a sudden 2% jump in interest rates within a 12 month period, I estimate an owner of a 20 Year U.S. Treasury Bond will see the value of the bond go down by about 18%.

-If and when interest rates should rise, I fear the same herd of people flooding in will turn the other way and may cause a mass capitulation. If these yields begin to look lousy as compared to prevailing interest rates, people may hit the exits all at once and we could have an acute decline in these types of securities.

-Capital gains are more tax efficient. When one sells a security, some of the gains come back as cost basis and is not taxable. All of a dividend or interest payment is taxable. Also you control when to take a capital gain while you have no control on when to receive a dividend or interest payment.

In the end, dividends and interest shouldn’t be shunned. I only fear that investors have placed too much myopia on the subject than is warranted. Rather than income, seeking a total return approach which include capital gains will not only provide better after tax returns over the long haul, but it will do this with a lot less risk. We’ve gone through a secular bull market for income investors for over thirty years. If and when the secular cycle ends, I fear that many people will be in for a rude awakening.

Why is this so important? It’s because huge unintended consequences could happen if you fail to review this on a periodic basis. For example:

• Many people have trust arrangements set up within their estate planning but many people fail to change the beneficiary designations on accounts when the trust is established, potentially ruining the whole estate planning strategy they wanted to employ.

• It is not uncommon for former spouses to still be listed as beneficiaries on an individual’s life insurance or retirement plans.

• If you have an ERISA based retirement plan like a 401(k) or 403(b) and remarry, did you know your new spouse is automatically your 100% primary beneficiary? This may be the intent of the person, but it may not necessarily be that way if children from a former marriage are involved. And by the way, prenuptial agreements don’t work here.

• I’ve seen parents still listed as beneficiaries even though their child has long been married and has a family of their own that they need to financially support.

• Listing an estate as a beneficiary of a retirement account can have the unintended consequence of having the funds disbursed (and taxed) even if the beneficiaries didn’t need the funds and would opt to defer the receipt of these funds (and the tax consequences) to a later date.

• Having a child who has special needs lose their government assistance because they were improperly named as a direct beneficiary rather than a special needs trust.

• Not only beneficiaries, but the designation of guardians for your children, executors and trustees are good to review as well within your estate planning documents.

On an annual basis, it’s a good exercise to go through this to make sure that all of this is still aligned with your goals. And I would confirm any beneficiary designations directly with the financial service firm that you are working with rather than assuming they have the latest paperwork that you filed on hand. In the end, this is a very simple exercise that can save your family a lot of grief later down the line.

• The two percentage point reduction in Social Security payroll tax was discontinued. This will probably have the widest impact as this will apply to everyone that is working.

• The exemption level for the alternative minimum tax has been made permanent and will be adjusted upward with inflation over time. Congress over the past few years would “patch” these exemptions at the last moment prior to year end.

• For those who earn over $200K if they are single and $250K if they are married will be subject to the 3.8% Medicare surtax on unearned income.

• Individuals with adjusted gross income of more than $250K and married couples with over $300K will be subject to phase outs of itemized deductions and personal exemptions. This is entirely phased out at $372,501 for individuals and $422,501 for married couples.

• Individuals with taxable income of over $400K and married couples with over $450K will be subject to the highest new tax rate established of 39.6%. Long term capital gains and qualified dividends will be taxed at 20% instead of 15% (add Medicare surcharge taxes and this increases to 23.8%).

• The $5M estate and gift tax exemption has been made permanent ($10M in total per couple), but the tax rate increases for amounts above the exemption from 35% to 40%.

There are some other smaller items that can be discussed at a later time, but these are the core changes. The biggest takeaways from this are individuals close to either the $200K or $400K threshold and couples close to the $250K or $450K level will want to intensify their tax planning to see if they can avoid these tax increases. Of course any strategies should be aligned with one’s goals, not for the sake of letting the tax tail wag the dog. The good news is that these tax codes are permanent in nature, which will help people plan for the long term without worrying about sunset clauses. The permanence of the alternative minimum tax exemption and estate tax code also takes away a great deal of uncertainty.

In the end, our tax code is still too complex and should be reformed. Although there is a sense of permanency here, just keep in mind that this can easily change when the next Presidential administration takes over in 2017.

Why shop around? Like any other insurance policy that renews annually, it’s important to see if your current options still best fit your needs. For example, what may have been the most efficiently priced policy last year could be significantly higher this year. Pricing for most Medicare Advantage Plans are expected to increase moderately this coming this year. However many Medicare Part D Plans are expecting double digit increases in premiums. Second, your current plans provisions and benefits may have changed and may not best fit your needs anymore. Finally, you may have had a change in your personal circumstances where another option may be more efficient. When shopping around for Medicare Advantage, just make sure that any new plan that you are considering has your primary care physician, specialists and care facilities that you are likely to use are on the plans network of providers.

The best place to start shopping is the Medicare Plan Finder on the Medicare website. Before shopping, it is recommended that you have your list of prescription drugs you take and the dosage. Plug in Medicare number and drugs and it will produce a list of available options and detail so you can determine what plan is the best fit for you. One on one advice, the State Health Insurance Assistance Program offers Medicare counseling services.

In the end, it pays to be proactive as it could prevent disappointment in the quality of coverage you receive and it may save you hundreds of dollars each year.

This serves as a good opportunity to remind people that protection against earthquakes is not a covered peril under common homeowner’s and business insurance policies. Flood insurance is commonly known as something that needs to be bought separately, but most people who don’t live in an area with high seismic activity often forget that earthquake damage is not covered either.

An earthquake in New England is a rare event, but they do occur. In the 1700’s, an earthquake struck the North Shore of Massachusetts with an estimated reading of 6.1 on the Richter Scale while the largest earthquake in Maine was in Eastport with an estimated reading of 5.8. Many people remember the earthquake centered in Plattsburg New York in 2002 that had a magnitude of 5.1. Compounding the risk is the fact that the geology of Northern New England typically doesn’t respond to seismic activity very well and most of our buildings are not built to the same standards as Japan or California.

Now this blog isn’t meant to alarm anyone. But I do think it is healthy to periodically review the risks that confront us, determine if the risk is insurable and if so, determining if it economically makes sense to insure against the risk. It also never hurts to review your homeowner or business insurance periodically to become fully aware of what risks aren’t covered under your policy.

Here are the steps necessary:

1. go to https://www.annualcreditreport.com/cra/index.jsp
2. select your state and click “request report”
3. fill in your personal information, security characters from picture, and click “continue”
4. select Experian and click “next”
5. click “next” again
6. enter last four digits of your social security number and click “submit”
7. choose extras if you want to pay, I never do, click “annual credit report” at the bottom in gray.
8. check “I have read and agree to Experian’s Terms & Conditions, etc” if you accept them, click “Submit”
9. answer the “identity verification” questions and click continue.
10. click “print report” in upper right section of page.
11. print report

If you find there is something amiss, contact that agency immediately. You can contact Experian at 866-397-3742. In 4 months I will remind you to get another report from TransUnion.

All of this has made it even more difficult for people to protect the financial risk of needing long term care. What can you do to protect yourself? Here are some tips:

• For financial planning projections, you should make the assumption that LTCI premiums will go up with inflation over time if you currently hold or are purchasing a LTCI policy. Given the flux of the long term care insurance market and the fact that premiums will be variable over time, I suspect it will be a while before the insurance companies become effective of adequately pricing out the risk and underlying premiums needed to support this type of insurance.

• If you are one of those individuals who have insurance and received a significant price hike, I would caution you against dropping the policy altogether without thorough consideration. If you can’t afford the increase in premiums, the insurance company may allow you to reduce your benefits to keep premiums at affordable levels. It may not be ideal, but you still have some level of protection. Even with the premium hikes, many currently held policies still look attractive compared to what you can purchase new on the open market today.

• There are many riders and options available in the insurance marketplace to address long term care needs. There are a new slew of hybrid life insurance products which provide long term care benefits if needed. Traditional LTCI can have riders that protect against inflation and pays back the premium if no claims are ever made. There are options where the LTCI buyer can fully pay off their premiums in several payments in the early stages of owning the policy. These provisions all protect against the current flux of the LTCI market and are very attractive to someone shopping for LTCI. However I would be careful as everything that reduces risk comes with a cost. Insurance companies do a very good job of profiting on areas where the consumer has a heighted level of fear so I would weigh out if the benefit is worth the cost.

• Many people are resistant to buying long term care insurance because they may never use it. For those who fall in this camp, just keep in mind that most of us go for years without ever having a claim on their homeowners insurance. Somehow we continue to pay premiums on this type of insurance.

• In the end, I still continue to think shopping for this insurance in your early 50’s is the ideal time to consider this, buying a policy that covers the average daily cost in a nursing home care in the area you intend to live with a 5% compound inflation rider with a three to five year period is the best baseline place to start as far as shopping for a LTCI policy. From there you can adjust this accordingly to meet your personal circumstances.

• Finally, determine if LTCI is right for you. This type of insurance tends to be a perfect fit for those who have the financial means to pay the premiums over the long haul, but not enough in financial resources to absorb a long term care need. In some cases, people who can both afford the premiums and a long term care need buy it to increase their chances of leaving a legacy to their heirs. But LTCI is not universally the best fit for everyone.

When addressing my client’s retirement planning needs, the financial risk of needing long term care is always a built in assumption within my planning work. The state of the LTCI marketplace certainly isn’t making things any easier. But I urge that everyone should consider this risk and if LTCI fits you’re your needs regardless if you do this yourself or have professional guidance with your financial affairs.

The solution: expand the regulatory authority of the organization that currently regulates Wall Street brokers. Make all who give investment advice answer to the organization that allowed Wall Street to sell trillions of dollars of toxic mortgage pools and derivatives, and which once had Bernie Madoff sit on its board of governors.

In other words, create a world where all advisors become brokers, and eliminate consumer access to independent, objective advice.

The Bachus-McCarthy bill, also known as the Investment Oversight Act of 2012, talks about enhancing the protection of financial consumers by allowing the Securities and Exchange Commission to delegate its oversight of many thousands of independent registered investment advisors to a self-regulatory organization. As many press reports have pointed out (see links below), the self-regulatory organization would be the Financial Industry Regulatory Authority (FINRA), the regulator that oversees Wall Street, and which has Wall Street executives sitting on its board of directors.

FINRA is the same organization that was in charge of policing Wall Street when the 2008 scandals broke. Bernie Madoff was under FINRA jurisdiction for his entire career (including its predecessor organization, the National Association of Securities Dealers or NASD), served as a member of the board of governors of the NASD in 1984, and on numerous committees. His brother and business partner, Peter Madoff, was elected vice chairman of the NASD in November 1992. FINRA’s lack of oversight continues. Joel Blumenschein, a member of FINRA’s Board of Governors, resigned. Last week, Blumenschein, president of Freedom Investors, Inc., was fined $30,000 and suspended by FINRA for allegedly failing to supervise one of his company’s brokers, Gary Gossett. The complaint claimed that Gossett made “a series of unsuitable penny stock trades in the retirement account of a customer of limited means,” without the customer’s permission. FINRA described Freedom Investors, Inc.’s oversight system as “so inadequate that Blumenschein was unable to provide a consistent or coherent description of it.” FINRA also claimed in the settlement that “his testimony, under oath, was at times both evasive and contradictory, thus highlighting the system’s inadequacies.”

We do not support handing over expanded regulatory authority to an organization that failed to prevent the flood of toxic mortgage pools, the sale of derivatives and sat by unconcerned while the Madoff Ponzi scheme continued for decades.

The real agenda of the bill is very clear: to give Wall Street (through its regulatory arm) control over its most persistent competition: independent advisors who, in contrast to the Wall Street sales culture, put the interests of their clients first when giving financial advice. At a time when Wall Street’s credibility is at its lowest ebb, when consumers are walking away from the opportunity to send their retirement dollars into the bloated brokerage industry bonus pools, the preferred solution is not more transparency, not changing the culture to put the consumer’s interests first, but to create a new regulatory overlay on the competition and bury it in paperwork.

In fact, when the Boston Consulting Group evaluated the expected cost of FINRA regulation on registered investment advisors, it concluded that the cost would be $51,700 a year in additional expenses for the average independent advisor. This is more than twice as much as it would cost to develop enhanced oversight by the Securities and Exchange Commission. (See the link below for more detail on the numbers.)

There are other ways to estimate the cost differential. FINRA (as mentioned earlier) is not exactly transparent about its salary structure, but public records show that current SEC chairperson Mary Schapiro’s base salary as FINRA CEO came to $3.2 million a year–plus a $9 million bonus payment she received when she left to join the SEC. (We only know this because a number of news outlets filed Freedom of Information Act requests that were vigorously resisted before the data was finally handed over.)

Schapiro’s current salary at the SEC: $163,000 a year. If we simply compare that with her base salary at FINRA, without including the bonus, it would appear that FINRA regulation would be a remarkable 19 times more expensive than the SEC as a regulator of RIA activities.

There is reason to think this is a low estimate. In 2009, FINRA collected over $700 million in regulatory fees, user fees, dispute resolution fees, transparency services fees, and contract services fees. In the same year, FINRA’s leadership used the dues collected from its members to pay its top ten executives $11.6 million, to spend over $1 million lobbying Congress and the SEC (do regulatory organizations engage in lobbying activities?), and to spend undisclosed amounts on advertisements in The Washington Post and on CNN touting its record as a regulatory body. In 2008, eight FINRA executives received more than $1 million in compensation and benefits, and the top 12 most-compensated employees received more than $24.8 million. One might fairly question the organization’s rigorous stewardship of dollars allocated to regulatory efforts.

In addition, consumers and members of the press might be astonished at how little transparency FINRA operates under.

To take a recent example, just last year, Amerivet Securities president Elton Johnson (a former Green Beret) managed to get seven proxy votes onto the agenda at FINRA’s 2010 annual meeting. These initiatives would, among other things, have required FINRA to do things that any guardian of the public interest would normally do as a matter of course: tell us the compensation paid to its ten most highly-paid employees, disclose FINRA’s investment transactions to members and the public, and open up its board meetings or at least provide transcripts of the discussions among Wall Street executives and others who currently (this, to me, is amazing) make the organization’s decisions in secret.

All seven of these initiatives passed overwhelmingly, garnering more than two-thirds of the membership vote, some more than 80%. The FINRA board of directors debated these measures in a closed meeting, and decided to reject them.

There may be significant conflicts of interest in the way this legislation was crafted and produced. It has long been clear that Rep. Bachus speaks as a proxy for FINRA on the subject of “enhanced” regulation, and I don’t think anybody close to the profession can see this as anything but a way to let FINRA take over regulation of the fiduciary RIA profession. The press release accompanying the legislative proposal goes so far as to praise the diligent regulation of broker-dealers and the lax regulation of RIAs. I think this one line offers particular insight into where this legislation is coming from:

“Customers may not understand the different titles that investment professionals use but they do believe that ‘someone’ is looking out for them and their investments. For broker-dealers that is true, but for investment advisers, it is all too often not true and that must change,” concluded Chairman Bachus.

In other words, the RIAs, who are required by law to live up to a fiduciary standard (and put their clients’ interests first in all advice-giving) are the bad guys in the marketplace, who must be watched much more vigilantly, while the brokerage firms (which have resisted registering their brokers as RIAs and thus evading this tougher standard behavior) are the good guys who protect consumers.

This, of course, is taken straight from the mouths of FINRA and SIFMA (the brokerage industry’s lobbying group), and it is not hard to find out why this particular legislator has been so persistent on this subject. When you look up where the lobbying money has gone, you find that Rep. Bachus’s top ten contributors include commercial banks (a total of $213,650 in 2011-12), insurance companies ($191,010), securities and investment firms ($184,277), finance/credit companies ($90,438) and “miscellaneous finance” ($89,250). In the 2011-2012 election cycle, he was the number one fundraiser from commercial banks, from finance/credit companies and from mortgage bankers and brokers. (All of that can be found here: http://www.opensecrets.org/politicians/industries.php?cycle=2012&cid=n00008091&type=I&newmem=N)

Beyond that, Rep. Bachus has been accused of a peculiarly Wall Street crime: insider trading (see link below).

When you connect the dots on this piece of legislation, it becomes frighteningly clear that the actual agenda is something very different from consumer protection. Yet unless the public learns about this power grab by Wall Street just a few years after it brought the economy to its knees, consumers may find themselves living in a world where everybody who gives investment advice is a broker, and regulated like one.

The SRO would be FINRA: http://www.financial-planning.com/blogs/veres-sro-sec-finra-2678577-1.html

http://www.investmentnews.com/article/20120425/FREE/120429948#

The excessive cost of FINRA regulation: http://www.fa-mag.com/fa-news/9412-rias-back-sec-as-regulatory-body.html

http://www.financial-planning.com/news/finra-sro-napfa-2678574-1.html

FINRA’s regulatory effectiveness (or lack thereof): http://registeredrep.com/advisorland/opinion_finra_is_an_ineffective_regulator_1006/

FINRA’s lack of transparency at the board level: http://www.dailymarkets.com/stock/2010/06/22/finra-owes-america-answers-on-these-proposals/

http://newsandinsight.thomsonreuters.com/Legal/news/2011/02_-_february/court_refuses_to_dismiss_lawsuit_demanding_finra_transparency/

Rep. Bachus insider trading scandal: http://www.washingtonpost.com/politics/rep-bachus-faces-insider-trading-investigation/2012/02/09/gIQA21Ui2Q_story.html

Do brokerage industry representatives actually sit on FINRA’s board of governors? Here’s a list of the current board of governors: http://www.finra.org/AboutFINRA/Leadership/P009756 Among others, you find representatives of Morgan Stanley Smith Barney, LPL Financial, Deutsche Bank and Edward Jones.

But look more closely at some of the “public” members of the board of governors. John Schmidlin, who is listed as a member of the consuming public, is the former chief technology officer and managing director at JP Morgan Chase (http://www.harlemacademy.org/about/board-trustees). Richard S. Pechter, another member of the consuming public, is actually former CEO of Donaldson, Lufkin & Jenrette, and chairman of the board of Credit Suisse USA. (http://investing.businessweek.com/research/stocks/private/person.asp?personId=12665753&privcapId=165284&previousCapId=23021&previousTitle=SONY%20CORP-SPONSORED%20ADR) Kurt Stocker was chief Corporate Relations Officer of Continental Bank Corp. (http://investing.businessweek.com/research/stocks/people/person.asp?personId=11713969&ticker=NYX:US&previousCapId=3777896&previousTitle=Rensselaer%20Polytechnic%20Institute ) “Public” governor William Heyman is the former Chairman of Citigroup Investments, and Executive Vice President of the Travelers Companies.

This was taken from a recent press release received.

How can you account for rising health care costs within your retirement planning? Here are several things to consider:

1.) Account for Higher Costs in Your Planning: The first thing that you need to do is account for healthcare costs as a separate distinct expense in your retirement planning. The reason being is that healthcare costs grow at a faster rate than most other expenses encountered during retirement. Over the course of the past ten years, the inflation rate in the Fidelity study has been about 6% a year. If you are bundling your healthcare costs with other retirement expenses in your assumptions and not applying an appropriate inflation rate, you could be seriously underestimating your financial needs.

2.) Reconsider the Key Financial Planning Pillars: There are four key financial pillars which tend to have the most power in financial planning. This is simply the amount you save, the amount you spend, the time that you give to accomplish a goal and the risk you take in your investment strategy. Rising health care costs all suggest that more pressure needs to be applied to these pillars.

The first element is saving and spending. These are pretty straightforward and work in tandem. Usually higher saving correlates with lower spending and you will need to remain disciplined in your discretionary spending once you stop saving and begin the distribution stage of your retirement cash flow strategy. As discussed above, this includes appropriately accounting for anticipated health care costs.

Time is an issue as well. The earlier you can save towards a goal, the more compound investing can influence the dollars you will have at retirement. Working longer helps, although many people retire early due to health issues. If you want to retire early, bear in mind it is becoming harder and harder to achieve. This is because pre-age 60 retirees have to flip for all healthcare costs without Medicare subsidies, they aren’t entitled to Social Security yet and early retirement means more years of drawing down on financial resources rather than building upon them. I find a year or two can be the difference between successful and unsuccessful retirement projections for the younger retiree.

Finally, rising health care costs lend to a need to take higher risk in your investment strategy. When healthcare costs are rising at a 6% annual rate, it suggests that a portfolio with some element of growth will be required to keep up with expenses. Certificates of deposit, money market accounts and many parts of the bond world at current rates simply will not keep up.
I discussed each of the above in a vacuum. However all of these pillars can be combined and worked in tandem that best fits your needs and circumstances. The overriding theme is that more pressure will need to be applied on your planning and the basic options you have to accommodate healthcare costs if you haven’t accounted for these costs already.

3.) Consider Health Savings Accounts: If eligible, health savings accounts are the best of both worlds. Initially you get an initial up front deduction for the contribution from your income taxes. Then if used for qualified healthcare costs, then any earnings from those accounts are tax free. Now this is great by itself, but if you have a long time horizon and can afford to pay medical expenses out of pocket at this time, I suggest not tapping into this account in the short term and invest the funds in higher risk/return assets. Over time the increased growth can better keep up and match with the medical costs later in life. Unfortunately I see a lot of people using the account to pay current medical bills even when they can pay out of pocket. In addition, most investors seem to have these accounts invested in some cash equivalent bank account paying very little in yield. With trending health care inflation at 6%, the purchasing power of these assets erodes over time and offsets the tax benefit if it isn’t invested properly.

4.) Invest in Healthy Personal Habits: Diet, exercise and preventative care are all attributable to better health and lower medical costs. It doesn’t guarantee health, but studies have shown they all increase the chance of living a healthier life. Over the past several years the financial planning world has not only focused on healthy financial habits, but also encouraging people to live healthier lifestyles due to the influence of these on health care costs.

Healthcare costs will continue put pressure on ones retirement plans. But these simple steps will make this more affordable in your later years.