Wealth Building Strategies

Wealth Management Roundtable

2009-11-10T13:13:00.002-05:00

From the Daily Business Review: "Seven financial advisers from across South Florida discussed the challenges of both the past year and the next at the Daily Business Review’s seventh annual Wealth Management Roundtable, and gave their take on how clients should approach the next several months." Cathy Pareto was among the small group of panelists.

Check out the full article here and highlights from the discussion in the video link below.

http://www.dailybusinessreview.com/Web_Video/Wealth_Management2009/video.html

Retirement Crisis?

2009-11-07T21:35:00.001-05:00

The percentage of Americans at risk of having to cope with lower living standards in retirement has risen to 51%, seven percentage points higher than the 44% last measured in 2007, the Center for Retirement Research at Boston College found. And the figures would be even higher if they accounted for healthcare and long-term care, the center said.

Among low-income households, the percentage at risk is 60%, among middle-income it is 47%, and for high-income it is 42%.

And Nationwide Mutual Insurance, which underwrote the research for the National Retirement Risk Index, has found that many investors are becoming disengaged about planning for retirement. Twenty-five percent fewer people say they would seek advice before making investment decisions, and 60% less agree that retirement income is important.

“We are clearly facing a retirement crisis, one that will continue to grow as younger workers age,” said center Director Alicia H. Munnell. Both the center and Nationwide are calling on investors and their advisers to proactively prepare for retirement, particularly for advisers to empathize with their clients’ frustration and cynicism. Specifically, the organizations recommend that people save and invest more, reduce debt and work longer.

Are you on track?

5 Ways to Save for College

2009-11-07T20:52:00.000-05:00

Here's part two of the Miami Herald series on college planning, featuring quotes from Cathy Pareto.

You might feel like you need a degree to figure out the best way to save for your child's college education.
Never mind an extra income.

But there are different options -- for nearly every budget -- that can help amass at least some of the money it will cost to pay for an education years from now.

In addition to prepaid plans that let you lock in current tuition prices, a variety of investments are designed to make your money grow.

Investments, interest rates and fees vary in these plans, so you will need to do some research before you choose one of them.

COLLEGE SAVINGS PLANS

Aside from prepaid tuition plans, many states offer 529 savings plans, named after a portion of the federal tax code. A 529 plan can refer to a prepaid program in which the tuition is guaranteed to be covered, like the kind Florida has, or college savings plans, in which investors manage their own accounts and there is no guarantee of the plan's value at the time a child is ready to go to school. Florida has one of those, too: the Florida Investment Plan.

Many advisors recommend using one of these plans along with a prepaid tuition plan. The money from the savings plan can be used for college expenses beyond tuition, such as textbooks.

And if there's money left in the plan when the student finishes his or her undergraduate education, it can be used toward a graduate degree, said Cathy Pareto, a certified financial planner in Coral Gables.....

Prepaid plans could solve college funding problems

2009-10-24T10:02:00.000-04:00

Here's a recent blurb regarding college planning from The Miami Herald.

Mention that you need to start saving for your child's college tuition and you will hear the same advice from many financial planners: Pay for it in advance.
``Step one is, if you can lock in your costs at today's prices, do it,'' said Cathy Pareto, a certified financial planner in Coral Gables.

That's because the costs of college are rising at a staggering pace -- and far faster than the rate of inflation, Pareto said.

Just this year, the state raised tuition at all public universities by 8 percent and every university then raised tuition another 7 percent -- a one-year increase of 15 percent.

Read more.

http://www.cathypareto.com

To Roth or Not to Roth, That is the Question

2009-09-29T14:46:00.000-04:00

The majority (83%) of individual investors are clueless about the removal of income limits on Roth IRAs next year, according to research by Fidelity Investments released today.

Fidelity’s findings are much worse than an earlier study by Bank Investment Consultant, Financial Planning and On Wall Street, which found that only 42% of those clients knew about the changes affecting Roth IRAs next year.

Are you informed? There may never be a better time for a Roth conversion. Find out why and if this makes sense for you. Read on....

Are You Financially and Emotionally Prepared for Retirement?

2009-09-23T10:11:00.000-04:00

The third Real Life Retirement quarterly pulse survey by Charles Schwab shows the recent economic downturn has not spurred Americans to change behaviors regarding retirement preparation. Almost four in 10 Americans (39 percent) are not currently saving for retirement and, despite market losses, six in 10 Americans (62 percent) have not adjusted their thinking about what age they will retire – nearly unchanged from the first pulse survey in September 2008, months before the recession was officially declared.

"Americans may be feeling a lack of control over their retirement which has led to inaction, when in fact this is an ideal time to act," said Mark Jamison, vice president at Charles Schwab. "Now is the time to reevaluate your financial circumstances. Whether that means delaying retirement or adjusting how much you save for retirement, making changes now can lead to a significant difference in the future."

Survey respondents estimate they will need just over $1.2 million to comfortably retire, yet those currently saving for retirement have put away an average of $194,000. Despite this awareness, 41 percent of Americans feel positively about their retirement preparedness and another 22 percent feel indifferent.

For More Information

Do you know if you are on track for retirement? Are you aware of how expensive funding your retirement can actually be? To learn more, click on this recent article on our website.

2009-08-26T13:31:00.000-04:00

How to Pick a Mutual Fund -- powered by eHow.com

To pick a mutual fund, consider the cost of investing, the load on the front and back end, the internal expense, how it fits into current investments and the asset class of the mutual fund. Understand the tax implications of purchasing a particular mutual fund with help from a financial planner in this free video on investments.

Expert: Cathy Pareto Contact: www.cathypareto.com
Bio: Cathy Pareto has an MBA, and is the founder and president of Cathy Pareto & Associates, Inc., based in Miami, FL.

Congress aims to change credit card rules for people under 21

2009-08-04T17:42:00.000-04:00

BY NIRVI SHAH
nshah@MiamiHerald.com

Laptops ready? Take notes: Congress wants it to be harder for the under-21 set to accrue a mountain of credit card debt.

A new federal law affects credit card holders -- and those who want cards -- of all ages. But because several provisions don't take effect until February, this could be the last semester of truly easy credit for many college students.

``I don't want to say credit cards are evil,'' said Cathy Pareto, a certified financial planner in Coral Gables. ``But targeting that demographic has long been an abusive practice. [Credit card companies] take advantage of the naïvete of teenagers.''

Read the whole article here.

Inside The Great American Bubble Machine

2009-07-19T10:10:00.000-04:00

Here's a great story published by Rolling Stone (of all magazines), on how Goldman Sachs has engineered every major market manipulation since the Great Depression.

In Rolling Stone Issue 1082-83, Matt Taibbi takes on "the Wall Street Bubble Mafia" — investment bank Goldman Sachs (click here to read the whole story). The piece has generated controversy, with Goldman Sachs firing back that Taibbi's piece is "an hysterical compilation of conspiracy theories" and a spokesman adding, "We reject the assertion that we are inflators of bubbles and profiteers in busts, and we are painfully conscious of the importance in being a force for good." Taibbi shot back: "Goldman has its alumni pushing its views from the pulpit of the U.S. Treasury, the NYSE, the World Bank, and numerous other important posts; it also has former players fronting major TV shows. They have the ear of the president if they want it." Here, now, are excerpts from Matt Taibbi's piece and video of Taibbi exploring the key issues.

Here's the author, Matt Taibi, in his own words, summarizing his piece. Check out the video here.

Unbelievable! AIG strikes again

2009-07-10T11:23:00.000-04:00

Report: AIG asking corporate pay czar Kenneth Feinberg to approve next week's bonus payments

By The Associated Press

After its bonus payments ignited a firestorm of criticism earlier this year, American International Group Inc. is asking the federal government to weigh in on the insurer's plan to resume paying millions in promised retention incentives next week, according to media reports.

AIG, once the world's largest insurer, has asked the Obama administration's compensation czar, Kenneth R. Feinberg, to approve the payments in order to head off any public outrage, The Washington Post reported Thursday evening.

While the company isn't required to get the government's blessing because the payments are actually for 2008 employment contracts, the newspaper said executives are reluctant to move forward with installments coming due next week without official approval.

Feinberg has the power to reject pay plans he deems excessive at companies which benefited from large infusions from the government's $700 billion bank bailout fund. Feinberg also has authority to review compensation for the top 100 salaried employees at those firms. AIG is among the companies whose pay practices the government now oversees.

New York-based AIG remains the focus of intense scrutiny, after becoming one in a string of corporate calamities and a touchstone for public fury. The huge volume of credit default swaps -- a form of insurance against bond defaults -- sold by AIG, coupled with rising levels of defaulted mortgage and other debt, threatened the company's existence and prompted the government to step in.

Government aid to AIG totals about $180 billion.

The $450 million in bonuses that AIG allocated in 2008 for employees, including to traders in the financial products unit that brought it to the brink of collapse, fueled public and congressional outrage. The first installment of those payments earlier this year sparked legislation in Congress to slap punishing taxes on big bonuses at AIG and other companies bailed out by taxpayers, though the Senate didn't act on that plan.

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Now that's just plain wrong. No more bonuses for bailouts or rewards for bad behavior! The American people deserve better than this.

How to Buy Stocks on a Budget

2009-07-09T21:19:00.001-04:00

How to Buy Stocks on a Budget -- powered by eHow.com

What's the Difference: Stockbrokers, Fee-Only Advisors, Fee Based Advisors?

2009-07-01T22:14:00.000-04:00

The financial services industry is a very crowded space. With so many “advisors” to choose from, how do you distinguish what type of financial advisor you are working with? How do you know who you can trust with your money? Many financial advisors are nothing more than glorified salespeople with a clever title. The investments they sell have a direct correlation with the compensation they receive. Given those dynamics, what are the odds that you will receive objective advice? Don’t be fooled. The following guide will help you make more informed decisions on how advisors are compensated.

Stockbrokers

Commission based advice is great---if you’re a broker or brokerage firm. For the investor, however, it’s not always the right solution. This type of advice is plagued with high costs and opaque disclosure—high costs that chip away at your profits. The registered representative (stockbroker) - unlike a registered investment adviser - has no fiduciary duty to place the client’s interests first. Inadequate disclosure coupled with conflicts of interest guarantees that a fair number of people are going to be victimized by bad advice.

Because broker-dealers are not necessarily acting in your best interest, the SEC requires them to add the following disclosure to your client agreement. Read this disclosure, and decide if this is the type of relationship you want to dictate
your financial security:

“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.”

If this disclaimer appears in agreements you are signing, you should ask questions of your advisor. Obtain complete disclosure about how he or she is compensated, and where his or her loyalties lie. Then decide if the relationship is in your best interest, running for the exits might be a good option here.

Fee-Based Advisors

“Fee based” advisors (also referred to as fee-offset) can be just as bad, if not worse. Commission based compensation includes “fee-based” compensation which is a particularly evil label referring to both fees and commissions. Fee based advisors have the ability to charge a percentage “based” on the assets they manage, but they also have the ability to sell you a commission based product (like an annuity, a load fund or life insurance). “Double dipping”, as it’s known in the industry, while not illegal is certainly immoral. The broker makes money from both the client and the commission. What a guy! Don’t be fooled. Stay away from advisors peddling investments that charge you front end or back end loads or surrender charges.

Fee-Only Advisors

Fee-only compensation (not to be confused with fee-based) is non commission driven and eliminates the exploitation of investors, where quality objective financial advice is the only product, and the advisor sits on the same side of the table with the client. The only way the advisor can make more money on your relationship, is to make more money for you. Federal and state law requires that Registered Investment Advisors are held to a Fiduciary Standard. This law requires that an advisor act solely in the best interest of the client, even if that interest is in conflict with the advisor’s financial interest. This includes finding the best investment alternatives with the lowest internal expenses, and one of the best ways of enhancing returns is to control portfolio costs. Investment Advisors must disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement. Investment Advisors must adopt a Code of Ethics and fully disclose how they are compensated.

High net worth, high income households are often easy targets for bad advice. When hiring an advisor, a considerable amount of thought and research should be dedicated to the process. After all, it’s only your money. Here are some things you should ask when engaging a financial professional:

• How are you paid?
• Are your recommendations in any way influenced by compensation?
• What is your investment philosophy?
• Do you provide an Investment Policy Statement?(Don’t know what that is—find out!)
• How much authority will you exert over my accounts?
• Do you have a clean regulatory record?
• What are your credentials?
• What is your educational background?
• How much experience do you have?
• What are your continuing education requirements?

Finally, you should also request and review the advisor’s written disclosure statement, ADV part I and II.

Other Considerations

Unlike other professions like accounting or law, the financial industry does not have one standard designation or brand (think CPA and Esquire or J.D.) Instead we have a wide array to choose from. Most financial professionals would agree that the CFP® designation offers the most robust, well rounded financial education available to financial practitioners and it carries the most clout. It encompasses multiple areas of study which include taxation, retirement planning, insurance planning, estate planning, investment planning and case studies. Yet, this does not imply that every CFP® has the same investment philosophy or standard of care in dealing with clients. In fact, CFP® designation is held by advisors operating in two very distinct worlds: 1) the traditional brokerage firms/Trust companies that may charge commissions or peddle proprietary funds and 2) the more consumer friendly independent fee-only (or fee-based) side of the industry.

In summary, a consumer should demand that their advisor sign on as a fiduciary in writing. Stock brokers and Registered Representatives (RR) cannot do this. Conversely, an independent Registered Investment Advisor (RIA) is always a fiduciary, and should have no problem signing a fiduciary oath for his client. But, remember that where an RIA is also an RR, the investor must clearly understand that most likely that advisor is not operating as a fiduciary. Remember that credentials do not always translate into your success.

Bottom line—do your homework before you hire!

The Changing Landscape of Taxes

2009-06-18T09:59:00.000-04:00

Get ready for higher taxes! The Obama administration is pushing for changes to tax law, along with more regulatory oversight of the financial sector by the end of this year. Here's a quick intro regarding what policy and tax law changes we might expect, and how these new rulings could impact investors.

Prepare for Tax Increases

With President Bush’s tax cuts expiring at the end of 2010,the timing for tax reform is even more critical. As the deadline approaches,and with President Obama calling for tax hikes on the top two tax brackets, lawmakers are expected to take action before the cuts expire. Indeed, many experts see those top two tax brackets moving from 33% and 35%, to potentially 36% and 39.6% for those earning about $250,000 or more a year.

Without a doubt, the economic stimulus package, the bailouts, plus the cost of proposed new social programs such as health care, will contribute to a significantly higher deficit. So, the current administration wants to try and offset some of these new federal expenses with the revenues collected from higher taxes for "the rich".

Look for Estate Tax Reform

With estate taxes set to temporarily disappear in 2010, we should expect changes to estate tax law before changes to income tax law. The disappearance of estate taxes would eliminate revenue that Capitol Hill clearly needs as it looks to decrease its deficit. It is highly unlikely that Congress will let the estate tax drop to zero in 2010, particularly at a time when our fiscal policy is in the red.

Another reason Capitol Hill is likely to address estate tax law quickly, is that rules set to take effect at the start of 2010 will make it exceedingly complicated for heirs to figure out exactly what they owe to the government when they get their inheritance.

Heirs lose the stepped-up basis in determining the beneficiary capital gains tax starting in 2010, which means they would pay taxes based on the original cost of assets held in the estate, not their worth at a parent’s death. So the savings in estate tax is tempered by increased income taxes imposed on the heirs. Of course, that means tracking down cost basis will be more nightmarish then ever before. This change, if it passes, will be interesting from an administrative perspective.

It is widely expected that Capitol Hill will approve new legislation that would grant a $3.5 million exemption per person, with a 45% rate on anything above that.

Watch for Changes to Dividend Taxes

Another area to keep an eye on is dividend taxes. Taxes on qualified dividends have been at a maximum 15% since 2003—previously the average dividend tax rates were at roughly 28%. But the current rate is scheduled to sunset at the end of 2010 if lawmakers do not authorize changes.

President Obama’s administration has supported increasing these rates for individuals in the top two tax brackets to 20%, beginning in 2011.

According to the current proposal, taxpayers in the lower tax brackets would see their rate stay at 15%, and the lowest tax bracket would see the rate remain at zero. Of course, the outcome may be entirely different in the end.

But unlike the rush to address estate taxes, modifying dividend taxes is not likely to happen until 2010 and is not expected to be effective until 2011. Still, investors and their advisers should be aware of possible changes as they build and adjust their clients’ portfolios.

Consider Municipal Bonds

With income tax rates expected to rise for those in higher-income brackets, certain investors would do well to look to municipal bonds. Municipal bonds, now thought to be undervalued, is expected to increase in value as the public starts to feel more confidence about the financial stability of states.

Some investors have been worried that states will not be able to pay their bonds, devaluing the bonds’ worth. However, the stimulus package is now trickling much needed cash flow down to the states which need it most, alleviating that concern to some extent, which should help the bonds to increase in value.

Expect More Regulation

Investors may also find the increased oversight projected for the financial sector attractive, as regulation is expected to make the way investments are run clearer. In the wake of the meltdown that has affected financial markets, especially the derivatives area, hedge funds and big banks, investors now want more lucidity in their investments. It's about time!

This trend is already apparent in recent legal changes imposed on the credit card industry with the government cracking down on credit card terms that have grown increasingly confusing to consumers.

We'll see how all of this unfolds. Stay tuned for more details as they become available.

Call for Action to Investors!!

2009-06-03T15:51:00.000-04:00

The market news from Wall Street has been positive for a change. But like me, are you wondering if Congress is ever going to change the way Wall Street takes risks with your money?

Right now Congress is looking at the big problems associated with the AIG and credit default problems, but sometime in the near future they will be looking at how to reform the way Wall Street brokers give you financial advice.

To those listeners out there who are still upset with Wall Street misconduct, in a minute I’m going to explain how you can do something about it.

By way of background, the whole advisor area needs serious reform. Years ago your parents clearly knew who was a stockbroker and insurance agent, because that’s what they called themselves. Pretty simple.

The problem is they no longer call themselves brokers or insurance agents. Today the preferred titles are financial advisor, financial consultant, wealth adviser, retirement specialist – the list goes on and on. In reality, brokers and insurance agents are still regulated as sales people and the bottom line is they still need to meet sales quotas to stay in business. This is hugely different from licensed professionals like doctors and lawyers, who are required to act in your best interest. Many in the listening audience may be aware that I am a registered investment adviser, which is different from the brokerage side of the business. Investment advisers, like doctors and attorneys, are required to legally act in your best interest, not meet production numbers.

I believe that if someone talks the talk, they should walk the walk. In other words, if someone markets themselves as a trusted advisor, they should be required to act in your best interest and to disclose conflicts of interest. Some of the conflicts that need to be pro-actively disclosed but are either posted somewhere on a regulatory website or not at all are sales bonuses or payment incentives that might lead a salesperson to recommend a product that benefits them or their firm more than you. Even worse, if they’ve been in trouble with the law before or sued for bad investment advice, current law doesn’t require them to disclose it to you upfront. Investment advisers are required to disclose all of these things.

So here’s what you can do. Grab a pen and write this down. If you know of the name of your members of Congress – including your two senators, there are two easy way to contact them. Call the Capitol Hill Switchboard in Washington, D.C. at 202-224-3121, that’s 202-224-3121, and they will be happy to connect you to either your house or senate member. Just be prepared to leave a short message, since odds are your senator or representative is busy.

If you don’t know your congressperson’s name, or you want to contact them by email, just go to www.congress.org, enter your home address and zip code in the appropriate box and you will find a list and links to your congressperson and senators where you can contact them directly with your own message.

The message is pretty simple. Tell them that a) you are an investor and voter, b) that you are upset with Wall Street greed, and c) the public needs congress to come up with common-sense regulation of all financial advisors. Tell them that no matter if the adviser is regulated under insurance, banking, or brokerage laws, if they are giving investment and retirement advice to the public, they should be subject to a fiduciary standard that requires them to put your interest first. You deserve no less than that.

For more info on the differences between advisors, click on my article here.

Proudly Announcing The 40 Under 40 Class of 2009! (Okay, a little self promotion)

2009-05-20T07:40:00.000-04:00

South Florida Business Journal is proud to announce its 40 Under 40 honorees! This program recognizes 40 individuals, all under the age of 40, who are proven performers in their respective industries and communities.

Proudly Announcing The 2009 Class of 40 Under 40!

Cindy Baldwin, ACAI Associates
Ashley Bosch, Blok Urban Development
Christopher Burgio, Seitlin
David Chaney, Avisena
Jaret Davis, Greenberg Traurig, P.A.
Diana & Michael Dobin, Valley Forge Fabrics
Jon Erickson, Sheraton Suites Plantation
Mike FitzGibbon, 3Cinteractive
Carlos Garcia, Goldstein Schechter Koch
Jennifer Geckler, Bank of Florida
Matthew Greer, Carlisle Development
Group Valerie Holstein, CableOrganizer.com
Rita Johnson, Button Worldwide
Carlos Junco, Bilzin Sumberg Baena Price & Axelrod LLP
Joe Laratro, Tandem Interactive
Tiffani Lee, Holland & Knight
Eric Levin, Gold Coast Beverage Distributors
Kevin Levy, Gunster Attorneys at Law
Nick Loeb, Carbon Solutions America
Jeffrey Lynne, Akerman Senterfitt
Sonny Maken, The Maken Group
Ted Martin, KPMG LLP
Fred Menachem, Johnson & Wales University
Peter Moore, Chen & Associates
Chad Oppenheim, Oppenheim Architecture + Design
Cathy Pareto, Cathy Pareto & Associates
Eliot Pedrosa, Greenberg Traurig, P.A.
Shana Peterson Sheptak, RBC Bank
Jorge Plasencia, Republica
Kevin Ross, Lynn University
Jose Segrera, Terremark Worldwide
Marc Shuster, Berger Singerman
Jared Shusterman, SproutLoud Media Networks
Kricket Snow, Zyscovich Architects
Christina Staalstrom, BAWLS Guarana
Jamie Telchin, LXR Luxury Resorts
Vince Virga, SGIS
Stefan Weiss, Weiss Skin Institute
John Zamora, Deloitte
Alex Zylberglait, Marcus & Millichap

Young professionals are among our community's most vital assets, and it is important to recognize and acknowledge those who are making South Florida a better place to live and do business.

We will honor our dynamic group of 40 Under 40 honorees with a cocktail reception:

Thursday, June 18

Design Center of the Americas

1855 Griffin Road, Dania Beach, FL 33004

Social Security and Medicare Face Insolvency Sooner--One More Thing to Worry About?

2009-05-14T07:52:00.000-04:00

Just in case you needed another incentive to save for retirement, here it is. The government has just revised the estimates for the long-term solvency of the Social Security and Medicare Systems. 2008 marked the first year that Medicare actually ran a deficit, paying out more than was paid in. Government actuaries estimate that the Medicare fund for hospital care will be depleted by 2017, 2 years earlier than previously predicted. Meanwhile, Social Security will start burning cash in 2017 and will have wiped out its funds by 2037, four years earlier than prior projections.

So, what's on the table as far as possible solutions are concerned? We can be pretty certain that taxes will increase. There is one proposal gaining traction on the Hill to tax employee health care benefits in order to raise more capital for the soon-to-be involvement programs. Right now, employers and their employees do not pay taxes on such benefits. Another high probability outcome will be to raise the retirement age and/ or reduce benefits.

My advice for Americans, particularly those under 50--don't plan on these government programs to subsidize any part of your lifestyle in retirement. Unfortunately, the onus will be on us, and only us, to save for our future. Stand in line if you'd like to reclaim your hard earned money back from a system than, in effect, has stolen it from you!

Financial Planning for Women

2009-05-12T14:42:00.000-04:00

When it boils down to fundamentals, planning for women is not much different than planning for men. After all we share common goals: wealth maximization, risk minimization and cost containment. Both ought to strive for an optimal investment mix and both should start investing for retirement at an early age to take advantage of compounding. So, with regard to investing, there is no difference between genders and there is no special need that women have. Yet, unlike men, women face many unique issues that most men don’t. Here are the challenges (and solutions) that we need to consider:

Longevity

One of the challenges that women face in terms of retirement planning is our extended lifespan. On average, women outlive men by 7 years (mortality for women is 79 years vs. 72 for men). Many women are faced with caring for their husbands later in life, but after his death they may be left with no one to care for them. Because of this, women’s health care needs will likely be substantially higher than men, making it much more expensive for us to live longer. What does this mean? It means we may not only need to consider products like Long Term Care insurance, but we also need to have much more money in the retirement pot than men in order to not outlive our funds. Unfortunately, the challenges that follow are even greater…

Earnings Disparity

As little as I’d like to admit it, it’s no secret that men out earn women. Of course, this is true in general terms, and may not be true in all cases. But most statistics will tell us that the "gender income gap" is persistent and well-documented. In fact, he Labor Department claims that women earn only 76 cents for every dollar earned by a male counterpart in the same occupation. And although the gap is shrinking, women are forced to play catch up with their retirement nest egg, as compared to men.

So assume that each gender saves the recommended 10%-15% of earnings over their working years. Dollar for dollar the male will accumulate a larger nest egg and at a quicker pace than the female. The differences in earnings rates between men and women are difficult to explain, but I suspect that as long as women are responsible for child birth and primarily responsible child-care, this differential will likely continue.

Women have to make a conscious effort to take charge of their own retirement planning early on in their careers. And while we can’t change the facts (men earn more than women), women can try to (partially) overcome their retirement challenge by saving a higher percentage (aim for 15% to 25%) of their gross income as compared to men. My advice to all women is to max out their contributions to qualified retirement plans and IRA’s in addition to using some portion of disposable income toward after-tax investments.

Maternity and Benefits

Being a woman is a blessing, no doubt. As women, we get to experience biological miracles that men will never be able to imagine. But our biological blessing can be a double edged sword when it comes to money. Here’s why:

Most women leave paid employment for at least a short time after having children, and many leave for a substantial period of years. Some women may never return to the work force and others that re-enter the workforce may be forced to start their careers all over again. These gaps in a woman’s earnings history may result in lower Social Security and/or pension benefits. Unlike men who receive higher pension benefits because they’ve worked steadily throughout their career.

In fact, the vast majority of men have 35(+) years of substantial earnings by the time they reach 62. Conversely, only a minority of women today has such consistent earnings. Here is how the benefit calculations work. If a worker has fewer than 35 years of cumulated earnings, Social Security requires that zero years be included for those years that the individual did not work. So, let’s say a woman has only 25 years of lifetime earnings, her retirement benefit is computed using those 25 years plus 10 zero years. This number is then divided by 420 to determine the AIME (averaged indexed monthly earnings), which reduces the average benefit. This problem affects very few men.

Here are some frightening statistics to consider:

•For every year a woman stays home caring for a child, she must work five extra years to replace lost income, pension coverage and career promotion.(The National Center for Women and Retirement Research, 1997)

•A woman who takes seven years off over a 40-year career can expect to receive one-half the pension benefits of someone with 40 years of uninterrupted service.(Money Magazine , July 1997)

Investment Responsibility

Unfortunately, most women still defer the investment responsibilities to their husbands. Dreyfus and the National Center for Women and Retirement Research conducted a study in 1997 which found that 33 percent of female investors avoided making decisions out of “fear of making a mistake’” versus 22 percent of male
investors. As a consequence of this fear, women often defer financial decisions and money management to the men in their lives. (Journal for Financial Planning, 2000)

I can attest to that. In my financial planning practice, I’ve encountered far too many women that have never taken the time to learn about investing because they’ve:

1) been too intimated by the process
2) lacked the interest or
3) suffered from the “Prince Charming” effect—expecting to be “taken care of” by their current (or future)husband.

Yet, in the face of a crisis (death/incapacitation of a husband or divorce), too many women are forced to abruptly take the financial reins, leaving them ill prepared to handle their own economic affairs.

The National Center for Women and Retirement Research claims that the average age for a woman to be widowed is 56. And the U.S. Census Bureau claims that at some point their lives, 9 out of 10 women will be solely responsible for their financial affairs. With statistics like that, I can’t understand why any woman would relinquish participation in her financial future. There are no excuses, women need to become informed and get involved. I don’t care if you are single, engaged, married, widowed or already working with an advisor—it’s your future—shouldn’t you be an active participant in the financial decisions?

The Good News

Despite all of these negative statistics I’ve just discussed, there is one positive regarding women and finances. Once women begin to invest, they actually tend to fair better than men!

A behavioral finance study conducted by Terrance Odean (professor at University of California) concludes that men’s overconfidence and hyper active trading actually results in lower investment returns as compared to women. Women tend to be more conservative (investing for preservation AND growth) while men invest for
growth.

As a result, women turn over their portfolios an average of 53% a year; while men’s portfolios turnover at a rate of 77% a year. This excessive trading leads to lower performance. Here’s what Odean found: married women actually get better returns than men -- 1.4 percentage points better, and single women did even better -- 2.3 percentage points a year over single men.

Conclusion

So, what can we learn from this and how should women plan any differently for retirement? From an investment design perspective, we’ve established that women are no different than men. Every one of us ought to own a globally diversified portfolio designed to capture global market returns and minimize portfolio risk. But when building a nest egg, ladies need to make some slight adjustments.

First, we have to get informed and get involved. It’s nice to believe that our prince charming will forever take care of us, but the fact is, at some point in our lives, we’re on our own. So, it’s better to be actively aware of your finances and investments long before you might be forced into crisis mode. Second, we’re not going to stop having babies--why should we?! Yet this means we spend a lot less time in the workforce as a result of our biological gifts and to add insult to injury we’re paid a lot less. How do you counter that? You save more…lots more! Finally, believe in yourself. Investing does not have to be a mystery and we’ve already established that women make better investors than men. So, as the Nike ad proclaims…”just do it”. Your future depends on it.

What Are the Basics of Investing?

2009-05-05T01:04:00.000-04:00

Please ignore the pop-up ads, this was filmed by eHow.com and their sponsors ads show up on the videos.

What Are the Basics of Investing? -- powered by eHow.com

What it Means to Work With a Fiduciary Advisor

2009-05-04T18:41:00.000-04:00

Here I am, in my own words about why working with a fiduciary advisor is so important. Listen here! Make no mistake, there is a difference.

What Should Investors Do Now?

2009-04-29T14:47:00.000-04:00

One of our favorite mutual fund providers, Dimensional Fund Advisors (DFA), has developed a great presentation on the markets and investing. Check out their multi-part series on what investors should consider as they move forward. The videos include an examination of capital markets, the effects of recession and government policy on stock prices, how the current market stacks up to previous downturns.

Roubini: Same Crisis, Different Advice

2009-04-28T04:34:00.000-04:00

Stop Bailing Out Wall St.

2009-04-28T03:49:00.000-04:00

From The Business Insider, April 27, 2009:

Paul Krugman highlights yet another problem with bailing out Wall Street: As soon as the bad news ends, Wall Street goes right back to minting money--for shareholders and executives.

But that's good, right? We taxpayers are shareholders of Wall Street firms. So we should be happy about that?

Well, no, we're not really shareholders, because we just own preferred stock, which doesn't participate much in the upside. And now, of course, we get to watch while Wall Street firms and folks who survived on our dime go right back to paying themselves fortunes again.

But get used to it...because there's no way it would happen any other way.

The only thing that will stop Wall Street from paying itself astronomically relative to every other industry on the planet is a major reduction in the profitability of Wall Street firms. And when you lend Wall Street firms money for nothing, guarantee their debt, and demand that they start lending again for the good of the economy, of course they're going to be wildly profitable. (When they aren't writing down terrible gambling bets, that is).

We can't have it both ways. We can't save Wall Street and then micromanage how much Wall Street firms pay themselves, and we shouldn't want to--because that really is screwing up the basis of the economy. So the answer is...

STOP BAILING OUT WALL STREET.

Got that, Tim?

For more coverage, see The Business Insider.

A Broken Financial System

2009-04-17T08:39:00.000-04:00

Here's a compelling Barron's interview with William Black, "The Lessons of the Savings & Loan Crisis," that leads us to wonder if the symbiotic relationship between Washington and Wall Street has not only failed us, but opened the door to our cataclysmic demise.

---------- (from Barron's)---------

AN INTERVIEW WITH WILLIAM BLACK: The current bank scandal dwarfs the 1980s savings-and-loan crisis -- and could destroy the Obama presidency.

WILLIAM BLACK CALLS THEM AS HE SEES THEM, which is why we enjoy talking with him. Black, 57 years old, was a deputy director at the former Federal Savings and Loan Insurance Corp. during the thrift crisis of the 1980s, and now serves as an associate professor, teaching economics and law at the University of Missouri, Kansas City. At FSLIC, a government agency that insured S&L deposits, Black prevailed in showdowns with the powerful Democratic Speaker of the House, Jim Wright, and helped identify the infamous Keating Five, a group of U.S. senators (including Sen. John McCain, the Arizona Republican who lost his bid for the presidency in 2008) who tried to quash his attempt to close Charles Keating's Lincoln Savings & Loan. Wright eventually resigned amid unrelated ethics charges, and the senators were reprimanded for poor judgment. Keating went to jail for securities fraud.

For Black's provocative thoughts on the current financial crisis, read on.

Barron's: Just how serious is this credit crisis? What is at stake here for the American taxpayer?

Black: Mopping up the savings-and-loan crisis cost $150 billion; this current crisis will probably cost a multiple of that. The scale of fraud is immense. This whole bank scandal makes Teapot Dome [of the 1920s] look like some kid's doll set. Unless the current administration changes course pretty drastically, the scandal will destroy Barack Obama's presidency. The Bush administration was even worse. But they are out of town. This will destroy Obama's administration, both economically and in terms of integrity.

So you are saying Democrats as well as Republicans share the blame? No one can claim the high ground?

We have failed bankers giving advice to failed regulators on how to deal with failed assets. How can it result in anything but failure? If they are going to get any truthful investigation, the Democrats picked the wrong financial team. Tim Geithner, the current Secretary of the Treasury, and Larry Summers, chairman of the National Economic Council, were important architects of the problems. Geithner especially represents a failed regulator, having presided over the bailouts of major New York banks.

So you aren't a fan of the recently announced plan for the government to back private purchases of the toxic assets?

It is worse than a lie. Geithner has appropriated the language of his critics and of the forthright to support dishonesty. That is what's so appalling -- numbering himself among those who convey tough medicine when he is really pandering to the interests of a select group of banks who are on a first-name basis with Washington politicians.

The current law mandates prompt corrective action, which means speedy resolution of insolvencies. He is flouting the law, in naked violation, in order to pursue the kind of favoritism that the law was designed to prevent. He has introduced the concept of capital insurance, essentially turning the U.S. taxpayer into the sucker who is going to pay for everything. He chose this path because he knew Congress would never authorize a bailout based on crony capitalism.

Geithner is mistaken when he talks about making deeply unpopular moves. Such stiff resolve to put the major banks in receivership would be appreciated in every state but Connecticut and New York. His use of language like "legacy assets" -- and channeling the worst aspects of Milton Friedman -- is positively Orwellian. Extreme conservatives wrongly assume that the government can't do anything right. And they wrongly assume that the market will ultimately lead to correct actions. If cheaters prosper, cheaters will dominate. It is like Gresham's law: Bad money drives out the good. Well, bad behavior drives out good behavior, without good enforcement.

His plan essentially perpetuates zombie banks by mispricing toxic assets that were mispriced to the borrower and mispriced by the lender, and which only served the unfaithful lending agent.

We already know from the real costs -- through the cleanups of IndyMac, Bear Stearns, and Lehman -- that the losses will be roughly 50 to 80 cents on the dollar. The last thing we need is a further drain on our resources and subsidies by promoting this toxic-asset market. By promoting this notion of too-big-to-fail, we are allowing a pernicious influence to remain in Washington. The truth has a resonance to it. The folks know they are being lied to.

I keep asking myself, what would we do in other avenues of life? What if every time we had a plane crash we said: 'It might be divisive to investigate. We want to be forward-looking.' Nobody would fly. It would be a disaster.

We know that with planes, every time there is an accident, we look intensively, without the interference of politics. That is why we have such a safe industry.

Summarize the problem as best you can for Barron's readers.

With most of America's biggest banks insolvent, you have, in essence, a multitrillion dollar cover-up by publicly traded entities, which amounts to felony securities fraud on a massive scale.

These firms will ultimately have to be forced into receivership, the management and boards stripped of office, title, and compensation. First there needs to be a clearing of the air -- a Pecora-style fact-finding mission conducted without fear or favor. [Ferdinand Pecora was an assistant district attorney from New York who investigated Wall Street practices in the 1930s.] Then, we need to gear up to pursue criminal cases. Two years after the market collapsed, the Federal Bureau of Investigation has one-fourth of the resources that the agency used during the savings-and-loan crisis. And the current crisis is 10 times as large.

There need to be major task forces set up, like there were in the thrift crisis. Right now, things don't look good. We are using taxpayer money via AIG to secretly bail out European banks like Société Générale, Deutsche Bank, and UBS -- and even our own Goldman Sachs. To me, the single most obscene act of this scandal has been providing billions in taxpayer money via AIG to secretly bail out UBS in Switzerland, while we were simultaneously prosecuting the bank for tax fraud. The second most obscene: Goldman receiving almost $13 billion in AIG counterparty payments after advising Geithner, president of the New York Fed, and then-Treasury Secretary Henry Paulson, former Goldman Sachs honcho, on the AIG government takeover -- and also receiving government bailout loans.

What, then, is staying the federal government's hand? Have the banks become too difficult or complex to regulate?

The government is reluctant to admit the depth of the problem, because to do so would force it to put some of America's biggest financial institutions into receivership. The people running these banks are some of the most well-connected in Washington, with easy access to legislators. Prompt corrective action is what is needed, and mandated in the law. And that is precisely what isn't happening.
The savings-and-loan crisis showed that, too often, the regulators became too close to the industry, and run interference for friends by hiding the problems.

Can you explain your idea of control fraud, and how it applies to the current banking and the earlier thrift crisis?

Control fraud is when a seemingly legitimate corporation uses its power as a weapon to defraud or take something of value through deceit.
In the savings-and-loan crisis, thrifts engaged in control frauds in order to survive. Accounting trickery proved to be the weapon of choice. It is at work today with the banks, and it is their Achilles heel. You report that you are highly profitable when you engage in accounting-control fraud, not only meeting but exceeding capital requirements. These accounting frauds create huge bubbles, which in turn create large bonuses, which in turn lead to huge losses.

Why then is there so much smoke and so little action?

First, they are inundated by the problem. They are trying to investigate the major problems with severely depleted staffs. Honestly. We have lost the ability to be blunt. Now we have a situation where Treasury Secretary Geithner can speak of a $2 trillion hole in the banking system, at the same time all the major banks report they are well-capitalized. And you have seen no regulatory action against what amounts to a $2 trillion accounting fraud. The reason we don't see it -- aren't told about it -- is that if they were honest, prompt corrective action would kick in, and they would have to deal with the problem banks.

Are there any parallels between the current crisis and the savings-and-loan crisis that give you hope?

Of course. Objectively, our case was even more hopeless in the S&L debacle than in the current crisis. If we were able to do it in such an impossible circumstance back then, we have reason for hope in the current crisis. I know how easily things can get off course and how quickly things can turn back again. The thrift crisis went through several lengthy courses and distortions before it finally was resolved under the leadership of Edwin Gray, the chairman of the Federal Home Loan Bank Board, which oversaw FSLIC.

We went through almost a decade of cover-ups by a Washington establishment intent on helping thrift owners. Back then, we had the Justice Department threatening to indict Gray, the head of a federal agency, for closing too many thrifts. Next, there were those so-called resolutions, where the regulators worked day and night -- to create even bigger problems for the FSLIC. Years later, these so-called resolution deals had to be unwound at great expense by closing down even larger failures. Or how about the bill to replenish the depleted thrift-insurance fund that was blocked and delayed by then-Speaker of the House, Texas congressman Jim Wright?

You say the evidence of a breakdown in the regulatory structure comes from the fact that America avoided an earlier subprime crisis in the 1990s.

Exactly. Why had no one heard of the subprime crisis back in 1991? Because America's regulators also faced down the crisis early. The same thing happened with bad credits being securitized in the secondary market. Remember the low-doc or no-doc mortgages done by Citibank? Well, the problem didn't spread -- because regulators intervened.

Obama, who is doing so well in so many other arenas, appears to be slipping because he trusts Democrats high in the party structure too much.

These Democrats want to maintain America's pre-eminence in global financial capitalism at any cost. They remain wedded to the bad idea of bigness, the so-called financial supermarket -- one-stop shopping for all customers -- that has allowed the American financial system to paper the world with subprime debt. Even the managers of these worldwide financial conglomerates testify that they have become so sprawling as to be unmanageable.

What needs to be done?

Well, these international behemoths need to be broken down into smaller units that can be managed effectively. Maybe they can be broken up the way that the Standard Oil split up back in the early 1900s, through a simple share spinoff.

The big problem for the last decade is that we have had too much capacity in the finance sector -- too many banks have represented a drain on our talent and resources. All these mergers haven't taken capacity out of the system. They have created even bigger banks that concentrate risk to the taxpayer, and put off dealing with problems.

And a new seriousness must be put into regulation. We don't necessarily need new rules. We just need folks who can enforce the ones already on the books.

The bank-compensation system also creates an environment that leads to mismanagement and fraud. No one has to tell someone they have to stretch the numbers. It is all around them. It is in the rank-or-yank performance and retention systems advocated by top business executives. Here, the top 20% get the bulk of the benefits and the bottom 10% get fired. You don't directly tell your employees you want them to lie and cheat. You set up an atmosphere of results at any cost. Rank or yank. Sooner rather than later, someone comes up with the bright idea of fudging the numbers. That's big bonuses for the folks who make the best numbers. It sends the message -- making the numbers is what is most important. There is a reason that the average tenure of a chief financial officer is three years.

Compensation systems like I have just described discourage whistleblowing -- the most common way that frauds are found in America -- because the system draws upon the cooperation of everyone.

The basis for all regulation and white-collar crime is to take the competitive advantage away from the cheats, so the good guys can prevail. We need to get back to that.

Thanks, Bill.

Obama: Feeling Our Financial Pain?

2009-03-24T22:14:00.000-04:00

Check out Cathy Pareto's quotes in the latest Ben Steverman article in BusinessWeek.

Should You Fire Your Financial Adviser?

2009-03-20T11:59:00.000-04:00

I take no credit for the following, but it's worth sharing. This is an article by Brett Arends from last week's Wall Street Journal.

Just about everyone has lost money, no matter who manages their investments. But there's a right way – and a very wrong way – to lose.

When it comes to rogue money managers, crooks like Bernie Madoff get all the publicity. But cowboys, charlatans and clowns are far more common, and do most of the real damage.

There are about 270,000 portfolio managers and investment advisers working in America these days. Tens of millions of Americans have a "finance guy" (or "finance gal") of various types to handle their money. Many are wondering these days if they made a bad mistake. I presume most financial advisers are ethical and competent. But I hear from a lot of readers and I must say I am shocked at the way so many have been advised.

It's not simply that they've lost money. Everbody lost money last year, even Warren Buffett.

How can you tell if you should fire your finance guy? Based on emails I've received from reader, here are 10 things that should tip you off.

He didn't just lose money, he lost money stupidly. Everyone had a bad year. But only a fool was still treating Fannie Mae preferred stock as a "conservative investment" when it was 40 cents on the dollar.

He won't return your calls. No, he can't sit on the phone with each client for an hour a day. But this is your money. If he's totally inaccessible during a crisis, he does not take you seriously.

He's rude. Granted, email has given rise to a global rudeness epidemic. But if your money manager isn't polite to you, it suggests he has poor character and can't handle stress. Both are disqualifications for the job.

He hides behind jargon. Don't be fooled. The best money managers speak, and write, in plain English. Like Warren Buffett, Jeremy Grantham, and John Hussman. Jargon is just an attempt to snow you. What's he hiding? Insecurity.

He has blind faith in an automatic "system" for investing. Bah. No such "system" can ever work. If it did, everyone would adopt it, and who would be left to underperform? Successful investing is an art as well as a science. It's pragmatic. It involves judgment.

He wouldn't change course last year. Prices have rarely changed so much in a year. How can the right things to own now be the same as the right things twelve months ago? They can't.

He passes the buck. It's true the government, and those running the big financial institutions, have made a lot of mistakes that have really damaged the markets. But they didn't invest your money. So how can your losses be all their fault? They can't.

He had your money in an inappropriate portfolio for your age and position. There's a reason a 70-year-old shouldn't have all her money in stocks. Any competent money manager knew those reasons a year ago - not just now. Wisdom after the fact doesn't count.

He whines that "this has never happened before." But that's always true of the future. Tomorrow is always unknown. A wise investment strategy takes that into account.

He tries to bully you. I am constantly amazed at the number of people who give in to bullies, thinking they are confident or strong. They are stupid, nasty, insecure and weak. Your money deserves better.

Write to Brett Arends at brett.arends@wsj.com