Guarding Your Wealth - Recent Articles

Do You Need A Trust Or Foundation?

2008-05-07T11:35:00.001-05:00

Trusts and private foundations aren't just for the rich and famous like Warren Buffet or Bill Gates. Nowadays, even people of modest means are realizing the great benefits trust and foundations can provide. Read on to see what they can do for you.

There are many different kinds of trusts and foundations, but they all share a common element; control. Using them, you can control what happens to your assets while you are alive, in the event of incapacity, and for generations to come.

For instance, a trust is highly recommended if you and your spouse each have children from a previous marriage and you want to avoid any conflict when one of you passes away or becomes incapacitated. A trust can be just the thing if you are concerned about a child losing their inheritance in a divorce. And, in today's litigious society, trusts can be used to shield assets from lawsuits. A trust can be as simple or as complicated as you need it to be.

Foundations have many similarities to a trust. The main difference, though, is that foundations are designed specifically for charitable, religious, educational, scientific or literary purposes. Like a trust, a foundation allows you to control how the assets are invested, who they are distributed to, and when. Plus, there are tax benefits for transferring assets into a foundation, that aren't available with most trusts.

If you expect to leave several hundred thousand dollars in assets to charity, a foundation may be right for you. That's especially true if you want the assets to be invested and each year's earnings distributed to a special cause.

There's more involved in setting up a foundation as compared to a trust. They also require more work. Accurate records must be kept and informational tax returns must be filed. For those with much smaller contributions, it may be easier to donate the money or assets to an existing organization, as opposed to forming your own.

Still, it may be easier to donate a significant amount than you think. You might have had a life insurance policy for years and you no longer need it. Instead of canceling it, you can name your foundation as the beneficiary. In fact, life insurance is a great way to not only provide the initial funding for a foundation, but also to help it increase in size over time.

I mentioned tax incentives. Appreciated assets like real estate or stocks can be transferred into a foundation (and certain charitable trusts). That way, capital gains taxes don't have to be paid, and you still get a tax deduction for the contribution. The result is that your charity receives more money than if you sold the asset, paid the taxes and donated the remainder.

There are different versions of charitable trusts. Some allow you to donate an appreciated asset, get a tax deduction, and receive an income stream for life. When you die, the remainder can be used by your favorite charity. Another version is similar, but the charity receives the income stream during your life, and your heirs receive the remainder at your death. This can be beneficial if you have investment property that has greatly appreciated, you need income and you don't want to pay all the taxes.

In can cost thousands of dollars to set up a trust that allows you to avoid probate and protect your child's inheritance from a lawsuit. Foundations can be even more expensive. But they don't have to be.

If you are comfortable doing research on your own and are willing to take the time, you can set up a trust and/or foundation on your own very inexpensively. Legally, you can serve as your own attorney and draft your own estate documents. There are many sources that provide templates. If your situation is straightforward, all you have to do is fill in the blanks.

For those with more involved situations an experienced attorney is recommended. Even if you do it yourself, it's not a bad idea to have an attorney review it. Lastly, a trust does nothing for you unless you transfer assets into it. Don't forget that step, or all your work will have been for naught.

Why Investors Lose Money on Wall Street

2008-04-30T12:06:00.003-05:00

Investors fear losing money, but they are almost as afraid of losing out, of not making money when they could have. This is referred to as the fear and greed cycle and is one reason the Wall Street pros make money while the individual investor often loses it.

Here's what typically happens. Let’s use a hypothetical investor named Sam. Sam hears about how much money his buddies are making in the stock market. So, Sam decides to invest his retirement money in the market. He goes to his local advisor who promptly throws his money into the market, while Sam imagines all the money he's going to make.

Well before long, the market starts to go down, maybe it loses 3%. (By the way, there will always be times when the markets go down.) Sam figures the market will turn around in a few days, and often it does.

But this is one of those times when the market continues to go down. Now Sam thinks, "What if this keeps dropping? I'm losing money, not making it!" So Sam calls his advisor, and inevitably the advisor tells him to just hang in there, it will come back.

But this isn't a normal correction and the market continues to decline. It's up one day and down the next, but it's down more than it's up. This goes on for days and then for weeks. Before Sam knows it, his account is down 7-8%.

Sam is really getting nervous at this point. Everything he hears tells him that the market and the economy are in terrible shape. And now, the thought of losing even more money is keeping him up at night. (By the way, Sam hasn't heard from his advisor all during this time.)

The next morning he can't take it any more. He calls his advisor and tells the advisor to sell everything! The problem, though, is that there are millions of “Sams” out there and they are all calling their advisors and saying the same thing. You can imagine what the markets do that week! When there are more sellers than buyers the prices drop, and drop quickly.

In the end, Sam loses around 10% and vows to never invest in the stock market again, or at least to wait until things turn around. Soon, sometimes within days, the markets start going back up. Sam hears about it on the news, but the pundits are still saying that the economy is in terrible shape. So he decides it isn’t time to get back in.

After a while, the markets are up so much that everyone on the news is talking about how great the markets are. Those same experts that were saying the economy was so bad are now saying the crisis is over and that the markets will continue to go up and up.

At last, Sam thinks the danger is past. He calls his advisor and moves his money back into the market. Remember, there are millions of “Sams” out there and they are all calling their advisors and saying the same thing. The markets may continue to go up for a while, but before long they will start to correct.

I think you get the picture. It seems like all that Sam does is lose money. Why? Because, he's acting just like everyone else. And that's the problem. To make money in the markets you need to buy before everyone else buys and you need to sell before everyone else sells. Professionals call this the fear and greed cycle. Professionals are well aware of what the Sams of the investing world are thinking and the actions they will take.

Investing in the stock market is a zero sum game. What that means is that every time one person is making a dollar, someone else is losing one. Whenever you buy a stock there is someone selling it to you and vice versa. Who do you think was buying Sam's stock when the markets were down 10%? It's the professionals. Who do you think was selling that same stock back to Sam later when the market was up 10-15%? That's right, the professionals.

That's why it's the professionals that make money on Wall Street and not the individual investors that are following the advice of their traditional just hang in there, advisors.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide. Read more of Jeff's financial and investing articles or ask Jeff a financial question.

The Wolf Among the Lambs

2008-04-23T17:04:00.003-05:00

For years, I've been warning seniors about the dangers of equity indexed annuities. And I've taken quite a bit of heat over it from those in the insurance industry. While many agents, and some readers, have discounted my views, the uproar against equity-indexed annuities, and the tactics used to sell them, is growing louder and louder. And now the national media has entered the fray.

On Sunday, April 13th, 2008, Dateline NBC aired a hidden-camera investigative report titled "Tricks of the Trade" with reporter Chris Hanson. They recorded actual insurance agents selling equity-indexed annuities to seniors, went to their seminars, and even attended training sessions for agents.

Agents might dismiss my claims when I say that equity-indexed annuities are a horrible investment, but it's hard to disqualify the comments of Joseph Borg, the Alabama Securities Commissioner. When asked by Mr. Hanson if he would recommend an equity indexed annuity to his own mother, Mr. Borg responds, "I wouldn't. I wouldn't recommend them to anybody."

Mr. Hanson also talks to the Minnesota Attorney General Lori Swanson about the sales tactics agents use to convince seniors to buy these investments. She says, "What is tragic about it is when those agents go into the seniors' homes, it is literally the wolf among the lambs. It's happening all around the country and it's happening on large scales and these insurance companies need to knock it off."

These comments come, not from other financial advisors like myself, but from public servants entrusted to protect the citizens of their states. And these aren't the only public officials who feel this way. Many states are taking action against the insurance industry and the tactics used by agents selling these products.

One of the biggest bones of contention is the common sales tactic of gaining credibility with the investor through the use of deceptive credentials. Often, those selling these products are life insurance salesmen who have little if any training, background and experience in investing. In fact, for most it is against the law for them to render financial advice. But isn't that exactly what they are doing?

Dateline showed this scheme in great detail when they secretly attended Annuity University, a training seminar for agents selling equity indexed annuities. They discovered, that for the right price, an agent can make it appear they've written books, magazine articles, and have been interviewed by a national radio show. You can even have your name and face on a magazine cover that contains a large picture of Federal Reserve Chairman Ben Bernanke.

All of this is designed to make the insurance agent sound more qualified than they might otherwise be. And it works. Many seniors follow the agent's advice because of these credentials. Minnesota Attorney General Lori Swanson is not amused with these tactics and doesn't pull any punches in her response. She says it's like "handing them [the agents] loaded guns so they can walk into the senior's home and rip them off."

Ms. Swanson goes on to say that "this is part of the marketing ploy, build trust, show you're reputable." Dateline reporter Chris Hanson, who is not an agent, was able to get his own picture and name on a magazine for $1,500. "That's terrible, and you've captured it right on tape," responds Ms. Swanson, "what we're hearing in all of these cases and investigations that we're bringing [is] that these agents are not telling the truth."

Speaking of not telling the truth, Dateline captured instructors at Annuity University training agents to frighten seniors by telling them that their money isn't safe at the local bank, because the FDIC is insolvent. This simply is not true and there has never been a single instance when the FDIC has failed to pay out on a valid claim.

Ms. Swanson also believes agents aren't being truthful when discussing surrender penalties with potential investors. After viewing the typical sales pitch caught on hidden camera, she replies, "It's absolutely misleading. I mean really, they need to deal with these seniors straight."

So don't just take my word for it. Be very careful when considering any investment. Do your own research. Read the contracts and the fine print. If you can't understand it then don't invest.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide. Find more articles about annuities or investing or ask Jeff's advice about your personal financial situation.

Harmed Investor Gets Justice

2008-04-16T11:56:00.001-05:00

Countless investors have lost large portions of their investments. Some have been in investments where they lost everything. But investors looking for help in recouping losses often find there are few places to turn for assistance. Read on to learn about one investor that finally got justice.

Many an investor has been harmed by their advisor's inaction or being put in unsuitable investments. It's natural that those feeling wronged seek retribution. So, where do investors turn if they need justice?

For securities investments such as stocks, bonds, mutual funds and variable annuities, it's to the National Association of Securities Dealers (NASD). The NASD is a self-regulatory organization created by the securities industry, not a government agency.

In 1987, the Supreme Court ruled that investors can be required to waive their right to sue in court in order to open a brokerage account. Now all grievances with a brokerage firm must first go through arbitration.

Fifty-five percent of arbitration cases rule in the investor's favor. But the average settlement is about 12 cents on the dollar. It so happens that the judges (even those deemed to be independent) are from the securities industry! No wonder brokerage firms prefer arbitration!

It is a long, expensive process to pursue arbitration on an individual basis. When you look at the average settlement, you will be lucky to cover your legal expenses. Your chances can be greatly improved, though, if you are one of many members in a group that had similar experiences with the same broker or firm. Think of it as class-action arbitration.

That's how Bob finally got justice. He invested $750,000 in a variable annuity recommended by an advisor in 2000. Three years later Bob's investment was only worth $350,000. When Bob became my client in November of 2002, there was little recourse he could take.

About a year later, though, he saw an advertisement in the local newspaper about a seminar just for those retirees of his company. It was put on by an out-of-state attorney that specialized in handling arbitration cases.

It turns out Bob, wasn't the only victim. Many of his fellow retirees used the same advisor that he did. Almost all had virtually the same experience. Collectively, they were able to get more of the attention they deserved during arbitration.

After 3 long years, Bob has received a settlement check for $166,000. It doesn't make Bob whole, but it sure helps ease the pain. Bob was one of the lucky ones.

Guess what happened to the broker? Not much. There won't even be any hint of the problems he caused on his permanent record. That means other investors will never know what this advisor did to Bob, and his fellow retirees. That means it can happen to them, too.

You see, the advisor you use could have lost investors hundreds of thousands of dollars and you will never know about it. There's no way to know if your advisor has had cases go to arbitration in the past. There's no way to know if he/she has any current cases in arbitration.

So what can you do to protect yourself?

First, ask your advisor if they have ever had any written complaints and/or cases that went to arbitration. You should also do a broker check at www.nasd.com.

Second, find out how the advisor will monitor and manage your investments on a day-to-day basis. Beware of the advisor that does nothing. Look for an advisor that has specific procedures in place to monitor and manage your account. Few do.

Third, make sure you have the ability to make changes should something go wrong. That's why I am so adamantly opposed to investments that have long-time commitments or big surrender penalties. They limit your options, making it expensive to switch investments down the road.

Fourth, if you've been wronged, try to see if there are others in the same boat. Search the internet for existing class-action lawsuits and see if you can join.

Typically, the problem is the advisor, not the type of investment. Use an advisor that will prevent a significant loss from happening in the first place. Bob was able to recover a portion of his loss. Justice was served, at least partially. Of course, the best strategy is to do your research before you invest your hard-earned money.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide. Find more articles or ask Jeff a financial question at www.guardingyourwealth.com.

Special Announcement: Dateline on Equity-Indexed Annuities

2008-04-12T16:17:00.002-05:00

Dateline will be airing a hidden-camera investigation segment this Sunday that focuses on how Seniors across the nation are being taken advantage of by unscrupulous insurance agents selling a product called an Equity-Indexed or Fixed Index annuity.

I have been writing a weekly financial advice column for over 4 years and have consistently warned investors about the hidden dangers of these products. I have been contacted by so many investors across the nation that I wrote two, in-depth Special Reports that focus solely on helping the investor understand how these products actually work so they can make an informed decision before buying one. I've been contacted by attorneys nationwide as a result of those reports and asked to serve as an expert witness.

You can find my in-depth Special Reports (provided to investors free of charge) at these URLs:

www.guardingyourwealth.com/SpecialReports/Allianz.htm

www.guardingyourwealth.com/SpecialReports/GeneralEIA.htm

Always At Your Service,

Jeffrey D. Voudrie, CFP President

The Three Risks You Must Avoid

2008-04-09T11:42:00.001-05:00

There are many financial risks that investors want to protect themselves from (inflation risk, interest rate risk, market risk, etc). But there are three risks that most investors don't take into account and I believe not doing so can quickly get them into trouble. I call them control risk, access risk and flexibility risk. Let me explain.

When I refer to control risk, I'm talking about your ability to exert control over your money. Since you are the one that will have to reduce your standard of living if something happens to your nest egg, it's vital that you retain control over it. The problem with annuities, life insurance and other packaged products is that you immediately lose control over your money. You are ceding control to someone else. They are the ones in the position of power because they get to decide what is done with your money. They use contracts that specifically limit your control and give it to them. Why would you ever want to surrender control over the most important financial asset you will ever have? It doesn't make sense!

The second risk that people fail to think about is access risk. Whose money is it? It's YOUR money. If you own something, shouldn't you be able to access it any time you want? You own your home and you can use it whenever you want. Imagine giving your home to someone else where they control what happens to it and you can only access it when THEY allow you to. That doesn't make any sense, yet that is exactly what happens when you buy many of these packaged products.

There's no way to know what life is going to be like tomorrow. Few could have imagined the terrorist attack of 9/11. Few expect to be in a car accident. No one thinks that they will have a heart attack today, but there's no way to know.

Let me tell you a true story that just happened. My neighbor had some friends stop by yesterday. These snowbirds, were driving their motor home from Arizona back to the Northeast. As they were driving across the barren roads of west Texas, they didn't realize that there had been an auto accident up ahead. The accident had happened on the other side of the Interstate, but a highway patrolman had stopped traffic in their lane and a single car had come to a complete stop. For some reason, the patrolman's car had no flashing lights to get their attention.

You probably know what happened. The speed limit was 75 mph there and although the motor home wasn't going that fast, it takes a long time to get one stopped. He didn't see the stopped car until it was too late. He swerved around it, barely missing it, but the truck he was towing clipped the back end of the stopped car, totaling their truck. But it gets worse. As he swerved around the stopped car, the patrolman stepped out right in front of their path. The impact threw him onto their windshield then dumped him onto the grassy median. The officer ended up being air-lifted to the hospital.

This retired couple is still waiting to see if charges are going to be brought against them. And they most likely will. Their lives changed dramatically that instant, something they couldn't have foreseen. Imagine how you'd feel if that happened to you!

They could easily end up spending tens of thousands of dollars in legal fees. This is just one of many true examples that illustrate why free and complete access to your money is critical.

The third risk is Flexibility Risk. This is closely related to control and access risk. Basically, since it's your money you should have the flexibility to do whatever you want with it. You should be able to make changes to the way that it's invested. You should be able to move it from one place to another without having to pay a penalty. You should be able to pull it out and use it to help a loved one or just to take that dream vacation. But flexibility is just one more thing you lose when you buy a packaged product.

These three risks are difficult to place a dollar value on until you are affected by them. Then they are priceless.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide. Find all his articles at www.guardingyourwealth.com.

House of Cards Part 2

2008-04-02T12:24:00.005-05:00

Last week, I talked about how the current credit crises evolved. This crisis is the result of mistakes made by the homeowner, the mortgage company, the investment banks and the rating agencies. This week, you'll see what caused the House of Cards to fall and will learn how this example can keep you from making a financial mistake.

Leverage was used at each stage of the mortgage-chain. Leverage is when money is borrowed so that additional investments can be made. The idea is that more can be earned on the investment than has to be paid in interest on the loan. So the homeowner borrows the full value of the home, the investment banks borrow money so they can buy more loans, etc. While leverage can increase returns, it also exacerbates a decline.

For example, a popular concept these days is to borrow the equity from your home and invest it in life insurance (one that I don't agree with). Perhaps both spouses work and their income easily covers the additional mortgage payment. The couple only sees the potential profit and doesn't realize if things don't work out, this transaction can be very costly to unwind.

Suppose one spouse loses their job and their income falls short of covering the mortgage payment. Or maybe their mortgage payment increases because of interest rates. Unless the spouse can find another job, the couple will be faced with having to sell their home quickly to pay back the mortgage company. If there are lots of other people in the situation, all trying to sell their homes at the same time, the value of a home is going to drop quickly.

Taking this example a step further, if home prices in general have declined 20%, then those who had 20% equity in their home suddenly have none. Now their home is only worth what they owe. Or, they may have a home equity line of credit. The bank is going to reduce the line of credit based on the decreased amount of equity.

That's basically what has occurred on a national scale at every point in the mortgage-chain. If a portfolio of mortgages is used as collateral and it's suddenly worth 50% less, the lender is going to want their money.

What should we learn from this? First, examine why so many homes are in foreclosure. Is it because the borrower wasn't informed about the details of the loan? No, the bank or mortgage company provided lots of fine print for homeowners to sign, explaining every aspect of their loans, including how interest rates would increase payments in the future.

Did banks or mortgage companies illegally provide mortgages to consumers who weren't qualified? No, not really. Obviously, the mortgage lenders wanted to sell as many mortgages as possible because that's how they made money. It wasn't their job to protect the borrower.

It's the same in the world of investing. You can't expect the one selling you a product like a mutual fund or annuity to be the one to watch out for your best interests. As a consumer, it is your responsibility to do the research, read the fine print and thoroughly understand any financial contract you sign. A financial advisor isn't going to say to you, "Hey, this might not be the best investment for you. Your money is going to be locked up for 15 years and the only way you can tap it is by paying a big penalty. Besides, you can earn even more using a balanced portfolio of quality investments."

Believe it or not, a commission-based broker or agent is NOT legally obligated to do what is in your best interest. They only have to offer investments that are suitable. They don't have to make sure you understand the fine print you sign. They don't have to go over all the future consequences of your financial decisions. They don't have to sort through all your investment options and find the one that fits you perfectly. That's not their job!

Don't let fear or greed cause you to defy common sense when it comes to investing. Do independent research, read and carefully parse the fine print and if you can't understand it then you shouldn't buy the investment. Don't let a smooth-talking advisor cause you to skip any of these important steps.

Nationally-syndicated financial columnist and Certified Financial Planner(R) Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA.

Read more or ask Jeff a financial question at www.guardingyourwealth.com.

A House of Cards: Part 1

2008-03-26T14:03:00.007-05:00

The current credit crisis has impacted multiple sectors of our financial economy. Home foreclosures are on the rise. Credit-worthy consumers struggle to secure mortgages. Investment banks are brought to their knees. Foreign and domestic stock markets experience gut-wrenching volatility. The Federal Reserve is forced to take historical steps to maintain liquidity. And the list goes on....

In an effort to help the ordinary investor make sense of it all, here's the first part of a simplified explanation of the credit crisis that has overtaken our economy. Hopefully you'll come away with a better understanding of the situation, along with some lessons you can apply to your own personal finances.

As with all true disasters, a series of mistakes are made that culminate into a full-fledged crisis. History provides us with many examples, including the sinking of the Titanic, the stock market crash of the 1920s, and more recently, 9/11 and Hurricane Katrina. In each case, a series of circumstances, along with multiple human errors, combined to bring about a true disaster.

Such is the case here. We can't just blame the banks, or the mortgage companies or the housing market or the Federal Government. This was a real group effort and there's plenty of blame to go around in this chain of events.

Let's start the story at the beginning of the chain, with the American home-buyer. We all know how to buy a home. If your income and credit score are high enough, and your outstanding debts are low enough, you can get home loan from a bank or mortgage company. And many people do. But as home prices continue to rise and the supply of credit-worthy consumers dwindles, a way has to be found to keep the mortgage profits flowing.

So loan requirements are relaxed. Adjustable rate mortgages, with low initial teaser rates, are introduced. Down payments are lowered or eliminated altogether. Documents proving credit worthiness, like income tax returns, are no longer required. Loans for more than the price of the house are given. Suddenly almost anyone can get a loan for more house than they can really afford. But that's no problem, certainly not in the middle of one of the hottest housing markets in recent memory. House prices are going up like a rocket and everyone wants to go along for the ride.

Once a bank or mortgage company gets a loan, they turn around and sell it to investment banks, freeing up capital so they can loan even more money. The investment banks, believing that these mortgages have been given to credit-worthy consumers, in turn sell groups of mortgages to shell companies they create. This way these mortgage loan assets are off their books, freeing up capital they can reinvest to earn even more profits.

The shell-companies don't have the capital requirements that banks do, so they can leverage these loans even more by issuing short-term commercial loans to institutional buyers and hedge funds. They are earning more off the mortgages than they are paying on the commercial loans, so they make a profit. The rates offered on the commercial loans aren't high because the mortgage bonds collateralizing them are AAA rated.

The institutional buyers like the AAA ratings of the underlying bonds, and buy large amounts of the short-term loans they're based on as a secure source of income. Everyone believes that these groups of mortgages are well diversified and are from credit-worthy consumers, hence the AAA rating. As long as house prices keep climbing, everyone is happy and keeps making money.

So far, our chain of events is all about leverage. The home-buyer leverages a small (or no) down payment and monthly house payments to fund a substantial mortgage. The bank or mortgage company leverages the profits from these loans to loan even more money. The investment banks that purchase these mortgages from the original lenders are able to move them off their balance sheets and into shell companies they create, leveraging them even further. The shell companies leverage them yet again, allowing them to make even more loans and helping institutional investors increase profits.

In our next article, we'll see the tragic consequences when all this leverage is turned on its head and the house of cards based on a booming housing markets collapses.

Sticker Shock

2008-03-19T12:16:00.000-05:00

It can be difficult for someone in the financial services industry to know how the investor feels, especially when first choosing which advisor to work with. I recently had an experience that put me in your shoes for a change.

A couple of mornings ago, my teeth began hurting for a short time after I brushed them. It had been awhile (too long) since they were cleaned so I decided to go to the dentist for a cleaning and check-up...

I only have one set of teeth and I know that they need to take care of me for the rest of my life. Unless I want to exist on soft food, it's vital that I take care of them. Likewise, someone retiring only has one nest egg and their lifestyle and ability to remain retired will depend on what happens to it. Make a mistake and you can lose a good portion of it.

How do you choose an advisor? How do you choose a dentist? I could look in the phone book and I can ask people that I know whether they are pleased with their dentist. Still, how do I know if their experience with a dentist is going to be the same as mine? It's not like you can interview a dentist, get a price list and an extensive list of references!

Worse, the reason I was looking for a new dentist was because I wasn't pleased with the dentists I'd used in the past. Surely this time I would find one that I would like! So I called a dentist that seemed to do a good job for another family member and I set an appointment.

A red flag went up during the first call. I asked for an appointment after the stock market was closed for the day and amazingly, they just happened to have had a cancellation and I could get in that very day! Having a sales background, I know that's a common tactic to use because you don't want to give the impression that you aren't busy.

Another red flag was raised as soon as I walked into the office. There was leather furniture, a cafe and a plasma screen television. The coffee table featured literature on various cosmetic improvements. The plasma TV, it turned out, was just playing a loop designed to sell those improvements. I never realized that having whiter teeth would have such a positive impact on my entire life!

The phone sales tactic I picked up on was confirmed when I heard the receptionist say the same thing to others that were calling in. In the financial services industry, these are seen as harmless statements. "It's no big deal, they'll never know," the advisor might explain to the assistant. Maybe I'm old fashioned, but I don't want to be treated that way and neither do my clients.

Soon, I was ushered into the chair where I thought I was going to have my teeth cleaned. After a few pleasantries, the dental assistant said that she needed to take some x-rays and that they recommended the 360 degree one. "It is $199 for both sets, is that OK?"

While examining my gums she mentioned that oral cancer was very hard to detect and affected many people. They had a test that would screen for it and it only cost $49 would I be interested? No.

My appointment was for a cleaning. But all I received was the x-rays and the initial consultation‚. It's possible‚ I have a cavity under one of my existing fillings and the dentist recommended it be fixed, not with a traditional filling but with a new crown that would be much better.

I left feeling like I paid $200 for some x-rays and a sales pitch. The full cleaning, it turns out, will cost over $500! That partial crown would only be $850! For comparison I called another dentist. This one seemed to be more old school. His cost for a cleaning? $110.

Have you ever felt like I did after going to an investment advisor? Undoubtedly, some of you have and I am ashamed to say that it is becoming more common. There are advisors out there, though, that are more focused on your needs than their own. Trust your red flag indicator, don't move quickly, and do extensive research on any recommended products.

Read more or ask Jeff a question at www.guardingyourwealth.com.

An Ounce of Prevention

2008-03-13T12:32:00.000-05:00

We've all heard the old adage that an ounce of prevention is worth a pound of cure. This applies to many areas of life, but perhaps none better than in the area of long term care. Nobody likes to think about the possibility of needing this kind of care and, as a result, many people put off preparing for it until it is too late. Here's a real life story that will hopefully motivate any procrastinators out there into action.

A dear friend of ours, whom we'll call April, has been helping her 88 year old mother recover from some fractures in her spine caused by osteoporosis. After living independently and refusing any kind of assistance for years, she has now decided she does not want to go back home from the rehab hospital, but would rather go straight to a nursing home facility.

As often happens with the elderly, declines in health and mental attitude can come on quickly and such is the case here. April's mother has been a widow for several years and did not even want her own children dropping by to help her with housekeeping. But when her severe back pain turned out to be three fractured vertebrae requiring surgery, she had a sudden change of heart. Now, she would rather have others care for her and not have to deal with keeping up a home.

Fortunately, 18 years ago when April's mother was 70 years old, she purchased a long-term care insurance policy. While it only covered nursing home care and not assisted living, it promised that premiums would not increase over the life of the policy. Her premiums were $1,800 a year, which seemed like quite a sum to her and her husband back in 1990. But given the longevity on her side of the family, they felt it was a wise decision.

They didn't buy a similar policy for April's father, because he was a World War II veteran. In those days veterans knew that they could live out their days in a V. A. nursing home should the need arise. As the years went by, the couple remained in relatively good health. When a letter from the V. A. arrived years later, he didn't understand exactly what it said and didn't realize that the once-promised nursing home benefits for veterans had drastically changed.

His family didn't realize this either, until the father developed severe Alzheimer's a few years ago. That's when they discovered that the V. A. would only cover nursing home care for the first 90 days. After that, you were on your own. Unfortunately for him, his ability to swallow went away quickly and he died soon after. Had his illness progressed more slowly, his condition would have financially devastated his wife's financial security.

But because of the policy bought 18 years ago, April's mom will be well cared for. While $1,800 a year seemed so expensive back in 1990, today it's an absolute bargain. With nursing home care in our area costing about $175 a day, the $32,400 she's paid in premiums will be recovered in less than 6 months. Think about that. She's paid premiums for 18 YEARS and will get it all back with only 6 months care.

It's true that if she recovers well enough to handle most activities of daily living and goes into an assisted living facility instead, she will have to pay for it. But given her age and current condition, even if that is the case, most likely the need for nursing home would simply be a matter of time. But her policy gives her options she would not have otherwise and will allow her to choose a quality facility without having to consume her nest egg.

There are several lessons we can all learn from this story. While we can't predict our future, the increasing of life spans and medical advances means most of us can expect a longer life than our parents, increasing the likelihood of needing some kind of long term care. Medical costs continue to outpace inflation. If you wait too long to apply for long term care, you may have developed conditions that will medically disqualify you for it.

So don't put off this very important aspect of your financial plan. An ounce of prevention is certainly worth a pound of cure.

Read more or ask Jeff a question at www.guardingyourwealth.com.

A House Divided

2008-03-05T14:18:00.002-05:00

One of the biggest issues seniors face as they get older is how to preserve an inheritance for their children. Their biggest fear is spending all of that money on assisted living and/or nursing home care. As each family situation is different, so is each solution. Perhaps you can learn something from the experience of one of my clients.

Here's their situation in their own words, with their names changed, of course:

"Tom's mom has decided that she wants to move to a retirement home while she can make her own decisions about where and when to go. She's on the waiting list at one that's so nice I may go too!"

"Anyway, we are looking at options of what to do with her house. She's always wanted the house to go to Tom and his brother Les even if she has to use up every other asset she has."

"Les is disabled and on Social Security Disability Income. Mom sends Les about $150.00 a month to help out. Her first thought was to sell the house and divide the proceeds now. Tom thought it might be better for her to lease it and then she could still send Les money each month."

"Also, if she were to sell, we think she should keep the money in case she ends up needing it to live on. I know there are tax limits on gifts of money, (and not sure what all that would do to Les's assistance eligibility). Maybe she could sell, give each $10,000 and keep the rest for her future living expenses. Anyway, I think she could well be heading toward some mental issues (lots of forgetfulness, etc.) so we need to make the right decision."

"What say you, Mr. Financial Guy?"

These are difficult situations. First, you need to make sure that you have the appropriate legal documents in place to handle any incapacity that may/may not occur. There should be Powers of Attorney for Assets and Healthcare and/or a Living Trust. There should be a Living Will. If she doesn't have a Living Trust you will want to make sure that her Will is up to date.

There are issues relating to Les receiving an inheritance in that it might disqualify him from SSDI. It's important that any inheritance he receives go to a Special Needs Trust. Otherwise, the government might take the money as pay back for what they've spent. Be sure and consult a qualified attorney for this kind of trust.

Depending on her income, she may need the money to cover her assisted living and/or future nursing home care. Some want to leave an inheritance and try to get the government to pay for their care. That is done through Medicaid. To qualify, one has to be indigent--having less than $2k in assets.

So if she sells the home and uses the money for her care, she will need to spend it down to $2k before qualifying for Medicaid. There is a 5-year look back period when someone applies for Medicaid. If they have gifted money within that period, they will be denied benefits for the amount of time that money would have otherwise covered.

There are really two unknowns here. First, whether mom will need all her money for her care and, second, whether that will occur within 5 years. If she sells the house, she can gift all the money to her sons now without having to worry about Federal Gift Taxes (other than filing a form). She should check to see if there will be any state gift taxes.

As long as her other money lasts for 5 years the gift wouldn't impact future Medicaid eligibility. Another option is for her to consider long term care insurance. She has to medically qualify and her memory issues may keep that from happening.

In short, Mom should make sure she has enough money to cover her expenses for the next five years. She might need some of the house proceeds to cover this. Then she could go ahead and gift the remaining house proceeds to her sons. If she qualifies, long term care insurance could help cover future health care expenses. And you're right to not put off these kinds of difficult decisions. Deal with it now, before it's too late.

Read more or ask him a question at www.guardingyourwealth.com.

Pulling Back The Curtain On Reverse Mortgages

2008-02-27T21:56:00.004-05:00

Last week's article on reverse mortgages generated a very interesting response from one reader. Unfortunately, due to his choice of vocabulary, I can't print his response here. Suffice it to say that this advisor doesn't want me saying anything negative about his chief source of revenue. This week I'd like to pull back the curtain on the real reason reverse mortgages have become so heavily marketed and what you need to do as a consumer to protect yourself.

In my previous article, I mentioned an elderly couple from Florida who were considering a reverse mortgage as the answer to their financial crisis. Over the course of a year, they attended two different seminars presented by their bank. This couple was living beyond their means and saw tapping their home equity as a way to keep making credit card payments. A reverse mortgage would have given them access to a $38,000 line of credit, but would have cost them almost half that much in fees.

Fortunately, they shared their plans with their son. They were scheduled to sign the papers in a week. That's when he called me. He gave them my advice and took the time to help them look at all the options available. More on their decision later; the issue I really want to explore is why are conservative banking institutions and mortgage brokers pushing these mortgages so heavily?

The answer is simple and obvious: the collapse of the housing bubble. Home values are declining, credit is drying up, and fewer homes are being bought or sold. Mortgage departments are a huge source of revenue for a bank. Over the last 5 years, the mortgage department has been generating huge profits. Suddenly, that has all changed.

Enter the reverse mortgage. These have been available for some time, but when a loan officer was so busy writing traditional mortgages, there wasn't a reason to focus on them. With some spare time on their hands, mortgage brokers need to find a way to feed their families. And from their point of view, the reverse mortgage is the perfect product for a variety of reasons.

For one thing, reverse mortgages are government guaranteed so the bank doesn't have to worry about losing money in a foreclosure. This is especially important when home values have plummeted 10% or more. In other words, there is very little risk for the bank.

It also helps that the fees on reverse mortgages are amazingly high. That means that the mortgage brokers, if they are successful pushing reverse mortgages, can continue to make money. The bank likes it because the mortgage department continues to add to the bottom line.

A third reason why reverse mortgages are so popular is because the market for them is far larger than the traditional mortgage market. Most people only buy/sell a home every 5-10 years. Think of how many seniors are sitting in homes with huge amounts of equity! Instead of chasing a limited market of home buyers who can afford large down payments, mortgage brokers can tap a larger, ever expanding senior market.

It isn't that banks and brokers shouldn't make money. They should. My primary concern isn't the bank, though. It is you. I want you to understand the motivations of those involved. You should research any large financial decision you make. Get all the facts so you can make an informed decision. It's the same when considering a reverse mortgage.

There are certain situations when a reverse mortgage can make sense, but I expect that there are many, many reverse mortgages done in situations where there were better alternatives. It was never intended as an easy way to pay for dream vacations.

What about my friend's elderly parents? Given all the facts, they chose credit counseling instead. They consolidated their credit card debt while reducing their interest rates. They also decided to sell their home and use their equity to relocate closer to family. Besides leaving a hurricane zone, they'll be moving to a more temperate climate with a much lower cost of living.

Don't blindly fall for the reverse mortgage sales pitch. Explore all the options and make sure youâre making the choice that is best for you. I also suggest you get your children involved as well. You could just sell the house and move in with them (just kidding)!

Should Seniors Use Reverse Mortgages?

2008-02-20T13:28:00.001-05:00

Some of the most popular products being pitched to seniors today are reverse mortgages. Everywhere you turn there are free seminars, free reports and free DVDs, all touting the amazing benefits these loans offer. Are reverse mortgages the answer to seniors‚ prayers, or are they too good to be true?

It all sounds so wonderful: easy access to your home's equity, no monthly payments, and all without having to sell your house or move. You can have a guaranteed income for the rest of your life! I feel that the sales pitches for these products do a disservice to seniors and, in some cases, can do irreparable damage.

All of us are familiar with a traditional mortgage. You borrow money from the bank using the home for collateral. You are then charged interest on that loan and have to make monthly payments. The larger your mortgage is compared to the value of your home, the less equity (or wealth) has been accumulated.

A reverse mortgage is just like it sounds. You are still borrowing money from the bank and using your home as collateral. The only difference is that you don't have to make monthly payments on what you borrowed. Instead, the interest just builds up. So every month you go further and further into debt and have less wealth.

You don't have to pay off the loan unless you sell the home or no longer live there. Another advantage of a reverse mortgage is that you don't have to have any income to qualify and there are no restrictions on how you use your proceeds.

While these mortgages can be helpful to seniors truly struggling to cover the basics, many seniors see reverse mortgages as free money‚ that can allow them boost their standard of living. Some providers are promoting reverse mortgages as an easy way to pay for that dream vacation or expensive new car. For those with considerable home equity, such possibilities are indeed tempting.

A reverse mortgage is probably the most expensive loan available today. The up-front fees can be astronomical. Here's a real life example. A friend of mine asked me to check out a reverse mortgage being pitched to his elderly parents. The proposal given to them by the bank showed that in order to access $33,000 in equity, they would be charged almost $18,000 in fees! That's over 50%.

His parents had a home worth $230,000 and a $100,000 mortgage. They needed $33,000 and didn't qualify for any other loan. A reverse mortgage has to be the primary loan on the home so enough had to be borrowed to pay off the existing mortgage. So they were paying fees on a loan of $133,000 instead of just the $33,000 they needed.

The lender has to know that they will be able to sell the house for more than you owe on it. That's why they will only lend around 65% of the home's value depending on your age. In some situations, if the home value doesn't appreciate significantly over the years, you could see your equity dwindle away to nothing. You have the miracle of compounded interest working against you month after month.

His parents weren't concerned about the fees because they didn't see it as costing them anything. But it does. That money took decades of making monthly payments to accumulate. It looks just like some numbers on paper, but it can have a very real impact on their future.

The money spent in fees is money that they won't be able to spend on food, medicine or personal care. It's money they won‚t be able to use to fix the roof or get a new water heater. And if they don't maintain the home, the lender can step in and take it away.

For those who receive a set monthly payment from their reverse mortgage, it's true that they won't run out‚ of money. That doesn‚t mean there isn't any risk. The monthly payment doesn't increase from year to year, but the price of everything else does. What will you do if that set payment is no longer enough to meet your expenses, and you've lost much of your home's equity to high fees and interest costs?

A reverse mortgage may be right in special situations, but it's anything but free money.

Read more at www.guardingyourwealth.com or visit the website and ask Jeff a question.

Charting a Course for Emerging Markets

2008-02-14T01:02:00.003-05:00

Investors dissatisfied with domestic returns have been seeking greater growth in foreign markets. As noted in last week’s article, the growth of emerging markets is not a short-term fad, but a long-term trend that will affect global markets for years to come. The question then, is how you can take advantage of this opportunity without losing your shirt. Read on to find out.

The returns of foreign emerging markets are truly impressive—-20%-100% a year or more isn’t uncommon. Who wouldn’t want to earn 83% in one year like the China index FXI did? Or the 58% it did in 2007! These dramatic returns have caused some investors to throw caution to the wind. They’ve moved significant portions of their portfolios to these markets only to suffer devastating losses.

That’s not what I want for my clients, nor do I want it to happen to you. While the returns are much higher, the risk is also much greater. Unless you have carefully planned how to control that risk then you should leave these markets to the professionals.

Here’s the real question. Are you willing to endure losses of 20-50% that can last for months in order to achieve those stellar returns? Most are not. They jump into these markets only to get discouraged and sell after a big decline. The China index (FXI) is down over 30% since its peak in October of 2007. Would you still be hanging on to it?

Daily swings of 5% to 8% are not uncommon for large-cap Chinese stocks. Newer markets, like those in Vietnam, can take huge dives very quickly. Governments, along with their financial regulations, can change overnight. Growing pains are common for developing markets and those with the stomach to handle the wild ride can be richly rewarded. Clearly, investors have to match their foreign exposure to their appetite for risk.

Investing in emerging markets is not for the faint of heart. That doesn’t mean that you shouldn’t do it. Start small by only investing a couple of percent of your overall portfolio. Then you need to decide the method of investing that is best for you.

There are several ways you can invest in foreign and emerging markets. You can buy individual stocks on the foreign exchange. You can buy foreign companies that are listed on U.S. exchanges. There are exchange-traded funds (ETFs) for just about every country and/or region. There are mutual funds. You can buy bonds as well as stocks.

I only recommend buying stocks on a foreign exchange for advanced, sophisticated investors. This isn’t as hard as it used to be thanks to online brokerage firms, but is still pretty involved. First, the markets like the Hong Kong exchange are located half-way around the world. That means their market is open while it’s nighttime here. Second, you have to convert your money to the local currency prior to making a purchase.

It’s much easier to buy large foreign companies that trade on U.S. exchanges. Doing so isn’t any different than buying any other U.S. stock. Some of these companies trade on the pink sheets. If you go this route, beware of the daily trading volume and the spread (the difference between the bid and ask price).

Good quality mutual funds are perhaps the most popular way to invest outside the United States. There are too many choices to list here and doing your research before you invest is crucial. Some have active management, while others are more passive. Some focus on specific markets while others are more general in nature. Fees can vary widely as well.

No matter how you invest, one major risk to consider is currency risk. When the U.S. dollar is falling, foreign returns benefit. When the dollar is rising, however, foreign returns suffer. This means your return can either be wiped out or greatly boosted, depending on what the currency markets are doing.

While the superlative performance of emerging markets is long term trend, many tactical decisions will need to be made along the way. There are simply too many changes in the governments, rules and regulations and the economies themselves to just set it and forget it. Professional management can add significant value and help you take full advantage of the opportunities that are available.

Nationally-syndicated financial columnist and Certified Financial Planner® Jeffrey Voudrie provides personal, in-depth money management services and advice to select private clients throughout the USA.

Read more at www.guardingyourwealth.com or stop by the website to ask Jeff a financial question.

Can Emerging Market Growth Continue?

2008-02-06T12:37:00.001-05:00

We've all heard about the amazing growth taking place in developing countries and how the global economy will never be the same again. But countries like China, India and Vietnam seem so far away. It can be hard to understand how those marketplaces can affect the individual investor here in the U.S.A. After my recent trip to Cambodia, I'm here to tell you that emerging markets aren't some short-lived fad. We've only begun to see the impact they will have in the financial markets.

My wife and I had visited Cambodia last March, but this time was different. Besides having our four children along for the experience, the signs of a growing economy were everywhere. Construction was taking place all around Phnom Penh, the nation's capital. A new 42 story office building had broken ground, the country's first skyscraper. It's being financed by a South Korean company. A huge new complex of shops and office buildings were coming up on old rice fields north of town in a special economic zone.

Masses of new apartment buildings were being constructed. The prices of these condo/apartments continue to increase. Those that were $40,000 when construction started are now $100,000. Land values continue to soar exponentially. More people can afford cars. Everyone has a cell phone. Universities and schools teaching everything from nursing to English classes to management and computer skills are popping up on every corner. And the schools are packed.

The city continues to improve its infrastructure with the paving of roads and improvement of their drainage system, which is important during the monsoon season. Internet access is growing as is the availability of cable television. But there's much work to be done. Power outages occur almost daily. The municipal water isn't potable. The sewer system has a very limited reach. There is no mass public transportation service in a city of well over 1 million. There's little garbage collection.

Just outside of town, the picture is even starker. When you travel out to the provinces, it's like stepping back in time. Once you get off the main highway, there are no paved roads. Many homes are simple wooden shacks with thatch roofs. Naked children play with sticks in the road next to ditches that are little more than open sewers. Electricity comes from generators that operate a few hours a day. Health care is almost non-existent. The rice grown in the fields hardly supplies enough grain for each family's yearly needs.

Not all provincial families live in dire poverty. But the majority do. The young people don't want the same life their parents have. They want more. And they're willing to work for it. Many of them turn to the garment factories, where by working six to seven days a week, ten to twelve hours a day, they can make $100 a month. In country where unemployment can reach 50%, that's a nice sum of money. But it's not much of a life.

Others realize that education is their ticket to a better future. The church we visited and were working with offers free English and computer classes. Over 200 students jam every available room of the building four nights a week. In addition, all of these kids attend either high school or university during the day. Many of them came from the provinces and plan to send money they earn back home to help support their families.

So if you think the emerging markets‚ is just the latest financial talk point, think again. The story in Cambodia is the same story all over Asia. These people want a better life. They want a higher standard of living. They are becoming educated. Their countries are only beginning to improve their infrastructure. Astute companies from around the world are investing big bucks into these economies. And the growth is only going to increase.

This isn't a five year fad. It will take decades for these countries to grow into modern nations. But there's no going back. The young people we met are determined and focused. This generation will do what it takes to succeed.

Your generation worked very hard to achieve financial security. In today's changing global marketplace, you'll have to invest smarter in order to maintain it. In next week's article, I'll give you practical steps to take advantage of the opportunities these emerging markets provide.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

Do You Owe Taxes On That Gift?

2008-01-30T12:50:00.001-05:00

As a Certified Financial Planner, I'm often asked about issues regarding inheritance, gifting and the resulting taxes. Here's a classic example of just how complicated these situations can be, using a question from a reader in Michigan we'll call Bob.

Bob writes: I have a question about my mom's home that I inherited. Before my mom died she put her real estate into joint ownership between her and my sister. It was supposed to help make settling her estate easier. Before mom passed away, my sister died. After my sister died, mom placed the real estate jointly between herself and me. Mom passed away over a year ago and I am now contemplating the sale of her house. After mom's death I had the home transferred to my and my wife's names.

What are my capital gains liabilities on the sale of the house? Do I pay capital gains on the whole sale, half the sale, or none of the sale?

Bob's lack of knowledge is nothing out of the ordinary. Few people are aware of the tax implications and needlessly end up creating a tax headache for themselves and their loved ones.

Let's explain what an inheritance is and how it differs from a gift. An inheritance is money, property, or another asset of value that is transferred after death. A gift occurs when money, property or other assets are transferred before death. An inheritance and a gift are handled very differently from a tax standpoint.

Each of us can give gifts up to $12,000 per year to any person we want without any Federal tax implications. (There may be some state gift tax implications so check with an accountant.)

Inheritances aren't subject to Federal Estate Tax unless the estate's value is over a certain amount, which is currently two million dollars. Because all assets owned by the deceased are included in the estate's valuation (i.e. retirement accounts, annuities, life insurance, etc.), reaching that two million dollar limit is easier than you think.

Even if there is no gift or estate tax when the assets are transferred, there can be capital gain taxes when the assets are sold. The trick is determining the asset's original value, or cost basis, and that depends on whether the asset was a gift or an inheritance.

When you receive a gift, you also receive the cost basis the person giving the gift had. So, if a parent paid $10,000 for a home and it was worth $100,000 when it was gifted to the child, the child now has a cost basis of $10,000. If the house is sold 5 years later for $125,000, the child will owe taxes on a gain of $115,000.

If the house was instead inherited by the child, the cost basis is the value of the house at the time of inheritance, which in our example would be $100,000. So when the house is sold 5 years later for $125,000, the child only owes taxes on the gain of $25,000. In tax parlance, the house received a step-up in basis when transferred after death. It doesn't receive a step-up if transferred prior to death.

Let's apply this to Bob's situation. When Mom added Sister's name to the deed, it was a gift to the sister of 50% of the value of the home and Sister's cost basis was 50% of Mom's cost basis.

When Sister died and the house transferred back to Mom, it was considered an inheritance. So Mom's cost basis on the 50% she inherited was the market value at the time she inherited it back. So 50% of Mom's ownership is based on her original cost basis and the cost basis of the other 50% is the value at Sister's death.

When Mom then adds Bob's name to the property, it's another gift. So Bob will inherit 50% of Mom's new, adjusted cost basis. When Mom dies and the other 50% is transferred to Mr. K, his cost basis in that 50% is the value at the time of Mom's death. Now you know why accountants make all that money!

If Mom had used a Living Trust instead, there would have been no need to add names to her house and her heirs would have 100% of stepped up cost basis, saving thousands of dollars in taxes.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

Tune Up Your Finances

2008-01-17T11:53:00.000-05:00

With the beginning of a new year, it seems everywhere you turn you hear something about self-improvement. There are plans for weight loss, exercise regimens, quitting smoking, going green and more. What about your finances? Even if you think your finances are in ‘good shape’, everyone could use a little ‘tune up’ to make sure everything is running smoothly. And it’s not as hard to do as you think. There are some very simple steps you can take that can make a world of difference.

Step 1: Check your beneficiaries…all of them. A beneficiary is simply who will receive a given asset when you die. Assets with beneficiaries include life insurance policies, retirement accounts and annuities. Even bank and brokerage accounts have a feature called P.O.D. or T.O.D., which stands for payable (or transfer) on death. Many people forget who they listed as beneficiaries, and when they check, are often shocked to find ex-spouses, deceased relatives or estranged family members listed. Do yourself and your loved ones a favor and make sure your beneficiaries reflect your current wishes.

Step 2: Check your Living Trust and/or Will. If you don’t have any plan in place for distributing your assets at your death, by all means put one in place now. If you have a plan, make sure it’s up to date. One of the biggest mistakes those with Living Trusts make is forgetting to keep all their assets in their trust. For instance, have you purchased a vehicle recently, or maybe a vacation home or time share? Made any new investments? If so, be sure they are registered under the name of your trust. Whether you have a Living Trust or a will, be sure there aren’t changes you need to make. Perhaps you have new grandchildren or there has been a divorce in the family. Your designated executor might no longer be the one you desire. Powers of Attorney might not be up to date.

Step 3: Check your insurance needs. Our needs change through life and our insurance needs change along with it. If you’ve recently been blessed with children and/or your once income-earning spouse is now home with the kids, you might need increased income replacement. On the other hand, if you’re newly retired, you might not need as much life insurance as before. You might need more homeowner’s insurance if you’ve built an addition or have valuable belongings. Liability coverage might need to increase. Your auto insurance might have little uninsured motorist coverage.

Step 4: Check your insurance deductibles. By raising your deductibles on your home, car and health insurance, you might be able to save some serious dollars. And don’t be afraid to shop around for better rates. With the internet, getting insurance quotes is easier than ever.

Step 5: Tune up your company retirement plans. Are you putting all you can into your 401(k), 403(b), etc.? Are there any company-matching funds you aren’t benefiting from? You should also review and update your portfolio allocation. Is it all in company stock? (Not a good idea!) Are your funds allocated too conservatively or too aggressively? And don’t forget to check out those beneficiaries while you’re at it.

Step 6: Tune up investment portfolio. The economic climate this year will probably be considerably different than last year. That means that you may need to adjust how your portfolio is allocated. Depending on your needs and your tolerance level you may need to move more money to international or more money out of the markets and into fixed. Asset allocation isn’t something that you want to set and forget.

You may also want to consider who you need to share your financial and estate plans with. For instance, if you are recently widowed and your spouse handled the finances, maybe you want to enlist the help of one of your adult children. If you’ve named someone as your successor trustee or your medical power of attorney, you might want to discuss your desires.

These are by no means the only ways to tune up your finances, but doing even just one of them can make a positive impact. And while our new weight-loss diets might be hard to maintain over time, these financial tune-up steps usually only need to be done once a year.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

Arbitration Won't Fix It

2008-01-09T10:14:00.000-05:00

Some of my best article ideas come from my readers, and this week is no exception. This is a story of misplaced trust, dishonesty, inaction and great financial loss. The lessons learned through their experience will hopefully save you from a similar fate. Read on to find out more.

Bill and his wife, Jane, (not their real names), were a well-educated couple looking to boost their returns. After attending one broker's seminar, Bill was impressed by, his... expertise in company analysis and stop-loss protection.

They decided to put Jane's retirement money into this broker's hands. But after signing the paperwork to open the account, the broker never contacted Jane to find out how she wanted her money managed. Both sides made assumptions about what the other wanted and/or would do.

Jane and Bill were busy, and so was Jane's IRA. We don't know how long it took or how the account did early on, but eventually, over 90% of Jane's retirement money went down the tubes.

The broker promised stop-loss protection but never actually put that strategy in place. The broker determined Jane's risk tolerance without any input from her. When that section of the application was left blank, the broker filled it in it himself so that it, according to Bill, would justify his stock picking and mutual fund selection.

Bill and Jane had to go through arbitration in an attempt to recover their losses, as are almost all brokerage firm clients. After a process that typically takes several years, the panel agreed that the broker had violated 26 NASD regulations. These included lying, the use of erroneous information, total mismanagement of client's accounts and the use of unsuitable investments.

When it was all over, guess who the panel found at fault for Jane's losses?

Jane, of course! They reasoned that since she was a well-educated woman, with a Master's degree no less, that she should have known better than to let it happen. Her husband Bill was even chastised for finding the broker in the first place, and for putting her in a position to lose her money. "We were supposed to know better, not the broker, or his broker-dealer. I am not making this up. My wife got a check for less than 1% of the account value before the losses occurred."

Bill's experience with arbitration is fairly typical. Roughly 50% of arbitration cases are won by the investor, but the award is often a fraction of the damages. Moreover, many times the complaint doesn't even show on the broker's record.

This story has many lessons. Perhaps the most important one is that you bear the primary responsibility for managing your investments. The financial system isn't out to protect the individual investor. Even if you suffer great financial loss, don't expect the system to bail you out.

Bill's story also illustrates the need for investors to have transparent communication with their advisor. If you don't like the investments being used or if you aren't comfortable with the portfolio allocation then let the advisor know.

Don't just assume that your account is doing fine. Watch your monthly statements. Track your portfolio's value. If the value starts to decline significantly and you aren't assured the advisor is taking action to protect it, then find out why. If you don't like the advisor's response, then take your account elsewhere.

Also keep in mind that you won't know if any advisor is right for you until after you've worked with him/her for about a year. If you find yourself laying awake at night worried about your money, though, it's a sure sign that something is wrong.

The bottom line: it's better to prevent significant losses from occurring in the first place instead of trying to recover them through arbitration later. Determine the risk you are willing to assume. If your account value drops to that level then demand that action be taken. You are the boss.

The buck stops with you. You can delegate the day-to-day management and investment selection to a trusted advisor, but it is your responsibility to manage that relationship. Think of yourself as a business owner. If you didn't like the job an employee was doing you'd fire him/her. Take the same approach with your advisor. Remember, it's YOUR money.

I'll personally respond to your questions, free of charge. Go to www.guardingyourwealth.com and click on "Ask Jeff."

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

Building and Maintaining Wealth in 2008

2008-01-02T17:22:00.000-05:00

Last year (2007) was a tumultuous year for the stock market. Now that the LED ball in Times-Square has dropped and the confetti has been cleaned up, it's time to briefly recap 2007 and, more importantly, look at how your portfolio should be positioned for 2008.

2007 could easily be referred to as... the Year of the Tums. Our volatile markets experienced three major drops during the year. The first, at the end of February, caused the S&P 500 to fall 4.7% and the emerging markets over 10%. The after celebrating a great first half of the year, the sub-prime fiasco hit in early July and resulted in the S&P 500 losing 7.7% and the emerging markets 17.7%. The year-end rally came early followed by another decline of 7.75% for the S&P 500 and 15.3% for the emerging markets.

In the end, the S&P 500 was up 3.5% and the emerging markets (EEM) were up 33%. Investors, even seasoned investors, have been tempted to throw in the towel and get out of the market. Many have (even institutions have increased their cash holdings). That's why interest rates have fallen so dramatically, with the 10-year Treasury now yielding around 4%.

Let's put this in perspective before you get too depressed! The last time the S&P 500 had a losing year was in 2003. The average annual return on it over the last 5 years has been over 12%. That's well above its long-term average.

The emerging markets (EEM) have done even better. EEM wasn't available for all of 2003, but has been up over 25% each of the last 4 years. To put that in dollar terms, a $100,000 investment in EEM when it came out in 2003 would now be worth around $600,000.

While there is risk associated with investing in the markets, we need to be compensated for taking that risk. Over the last 5 years I would have to say we have. The amount we've earned has far out-weighed the amount we spent on Tums!

Enough about the past. How should you invest in 2008? I can't speak to your situation specifically, but I will tell you about the general themes that I see playing out in 2008 and how you can profit from them. I expect it will be another volatile year so you will have to determine if the potential reward is worth the risk. I believe it is, if you invest correctly.

The U.S. economy is slowing and the housing market/sub-prime crises may continue into 2009. I doubt that we will see returns higher than 10% in the S&P 500. It's more likely that the return could be half of that, but it depends on the Federal Reserve. I expect the Fed to continue to cut interest rates because it must keep our economy from going into a recession, even a mild one.

If you are serious about growing your wealth, you need to invest a portion of your money outside the U.S. markets. The growth in Russia, China, India, and other Asian nations will once again far surpass the growth of our nation, while our inflation is likely to increase. If you don't earn enough, you will actually see your purchasing power decline.

Asian economic growth, combined with even higher mandates for ethanol production in the U.S., will continue to put pressure on commodities like corn, wheat and soybeans. Demand for energy will continue to increase far faster than supply. Oil and coal prices should continue to increase.

This is why I plan to continue focusing on investments outside of the U.S, along with an emphasis on energy, commodities and raw materials. I expect high-dividend paying stocks (such as regional telephone companies) to recover their recent loses. Declining interest rates should drive income-oriented investors back, creating locked-in yields of 8-10% or more.

Investing in foreign companies, energy and raw materials can increase the volatility of a portfolio. You will have to be the judge whether you have the stomach for it. But think about it this way, what are you are trying to accomplish over the next 5 years? The best way to protect your wealth is for it to grow. A drop of 5% or 10% in the short-term pales in comparison to the growth that should be achieved as these major themes play out.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide

Is Your Portfolio Properly Seasoned?

2007-12-28T12:41:00.001-05:00

The effect interest rates have on the performance of our economy cannot be overstated. Understanding how interest rates affect the business cycle will help you know how to structure your portfolio to achieve growth while minimizing risk. Read on to learn more.

Would you wear a winter parka on a Florida beach in the middle of summer? Of course not. I doubt any of us would... wear a bikini to go ice fishing in the middle of a Minnesota winter. I know I wouldn’t!

Clothes are a tool that is used to help regulate our body temperature. They protect us from the cold or keep us from over-heating. Their proper use determines our comfort from one season to the next. We don’t want our body temperature to wildly fluctuate up and down.

It’s the same when it comes to investing. Unfortunately, many don’t understand the changing of economic seasons and therefore fail to adjust the clothing used in their portfolio. As many saw in 1997-2000 and 2000-2002, the investment clothes that work in one season are close to useless in another.

There are economic business cycles. There are seasons when the economy is expanding, other’s when it is contracting. There are also times (called peaks and troughs) that are like spring and fall, times of transition from one major cycle to the other.

Interest rates are one key in determining where we are in that cycle. The Federal Reserve uses the rate it charges on over night loans to banks (the Fed Funds rate) as an accelerator or brake on the economy.

It may seem strange that small changes in the over night rate banks pay could have an impact on the overall economy. Banks lend more money then they receive in deposits. That ‘extra’ money comes from inter-bank loans and is referred to as the Fed Funds Market. It stands to reason that if a bank pays more on what it borrows, it will have to earn more on what it lends.

The Federal Reserve controls the Fed Funds rate by putting money into the inter-bank loan market or by taking it out. Just as supply and demand causes the price of a stock to go up or down, so is with the interest rate charged in the Fed Funds market. By putting money in or taking money out the Federal Reserve is able to artificially control the supply demand balance.

Interest rates affect every area of our economy. If you have to pay a higher interest rate on a mortgage your monthly payment is going to be higher. Since you can only afford to spend so much a month on that payment, the interest rate affects the how much home you can afford.

Likewise, most businesses borrow money to fund expansion, cover inventory and to smooth out cash-flow. Just like the homeowner, they have a limited amount they can afford in payments each month. The amount they borrow affects whether they can build bigger plants, buy more computers or hire additional employees.

Different industries do well in different parts of the economic cycle. The construction industry will perform best during periods of low interest rates because low interest rates are designed to spur growth. When people and businesses can borrow at low rates they will build new homes, skyscrapers and factories.

Similarly, we each tend to buy the same amount of toothpaste and toilet paper regardless of where interest rates are. The companies that make those essentials aren’t going to see the big change in demand for their product that a construction company might.

Equity investments can be categorized as cyclical or non-cyclical based on how they are affected by changes in the economic cycle. The proportion of each in a portfolio will greatly affect the overall volatility. I recommend having a portfolio of high-quality non-cyclical companies. You can then introduce cyclical companies as the seasons change to add additional growth. Make sure you adjust the cyclicals as the seasons change.

Economic cycles don’t just affect stocks. They determine whether it is a good time to own bonds, and what type of bonds to own, as well. The last several years, interest rates have been at historic lows. You don’t want to lock in low rates for 30 years. When interest rates are above the historic norms, that’s when you want to stretch out your maturities.

Think of your investment portfolio as a living, breathing entity. Recognize that the investments used in it will determine your comfort level as the economic seasons change. Doing so properly will allow you to increase your return while reducing your risk. Take advantage of economic cycles. Don’t let them take advantage of you.

Have a financial question? Send me an email and I’ll personally respond, free of charge. Go to www.guardingyourwealth.com and click on ‘Ask Jeff’.

In addition to being a nationally syndicated columnist and Certified Financial Planning Practitioner, Mr. Voudrie provides personal, private money management services to clients nationwide.

The Tax Gifts Keep On Coming

2007-12-20T01:18:00.000-05:00

Did you know that you can sell a stock at a profit and pay next to nothing in capital gains tax? Or that you may not owe any tax on dividends you receive? It's true. The Tax Increase Prevention and Reconciliation Act (TIPRA), which was signed into law in early 2006, reduces capital gains and dividend tax rates even further down to 0% in some cases. Read on to find out more and how you can save money through proper planning.

Capital gains tax must be paid when you sell an asset for a profit. For instance, if you buy a stock at $10 per share and sell it two years later for $15 per share, there is a $5 per share gain that is subject to tax. Most of us know that the maximum capital gains tax rate is 15%. But depending on your income, your capital gains rate might be 0%.

Your capital gains tax rate is based on your overall income tax bracket. If your overall tax bracket is greater than 15%, then your capital gains will be taxed at the maximum capital gains rate of 15%. Even if you are in the 35% tax bracket, you still only pay 15% on capital gains. But if you are in the 10% or 15% overall income tax bracket then your capital gains tax rate is only 5%!

There is also a big difference between the way that dividends and interest are taxed. Dividends are paid by preferred and common stocks. Interest is paid on bonds and Certificates of Deposit. Interest is taxed at your overall income tax rate, as are any gains from annuities. But dividends aren't. Just like capital gains, qualified dividends are taxed at a maximum rate of 15%. If you are in the 10% or 15% overall income tax bracket then your dividend tax rate is also only 5%!

TIPRA, passed in early 2006, changed this. Between 2008 and 2010, the maximum dividend and capital gains tax rate stays at 15%. But it drops to 0% for those in the 10% or 15% overall tax brackets. You can have capital gains and receive dividends and NOT pay any tax on them!

Assuming 2006 tax rates, you can have $61,300 in income (married filing jointly) and still be in the 15% overall tax bracket. You can have $60,000 in income and you will only pay 5% in tax on dividends and capital gains! Between 2008 and 2010 you wouldn't have to pay ANY tax on dividends and capital gains. It's the same for those who are single if they have $30,650 or less in income.

How should this affect your investments?

Regardless of your overall tax bracket, dividends and capital gains are more valuable than interest because of the tax savings. Let's say that you have the option of putting $10,000 into a Certificate of Deposit at 5% or a preferred stock that pays a 5% dividend. At the highest overall tax bracket, you will owe about $175 in taxes on the CD interest, leaving you $325 to spend.

You will only have to pay about $75 in taxes on the dividend from the preferred stock, giving you $425 to spend. That,s $100 more just off of a $10,000 investment. In percentage terms, you have 30% more to spend with the dividend-paying investment than with the Certificate of Deposit.

For those in the highest tax bracket, to produce the same spendable amount, a Certificate of Deposit would have to earn around 6.25%, or 5.75% for those in the 25% tax bracket.

It's possible to find dividend-paying investments that currently pay far more than Certificates of Deposit. For instance, I use several stocks for my clients that pay dividends of 7-10%. They may fluctuate in value whereas a Certificate of Deposit does not, but properly diversified and managed, they are a great way to receive a larger income stream from your investments. When taxes are taken into account, the amount of spendable income is close to double that provided by the CD.

The bottom line is this. If you pay any income taxes at all, you are better off (tax-wise) receiving dividends and capital gains than interest. That's even more true in 2008 when the minimum capital gains and dividend rate drops to 0%.

Income Investors Should Take Action

2007-12-13T14:21:00.000-05:00

The Federal Reserve cut interest rates again yesterday and will be likely to do so again in six weeks. Yields on 5-year Certificates of Deposit are down to around 4.25% and falling. On top of that, the mortgage meltdown has hindered the performance of the entire stock market. If you are retired and need your investments to generate income you don't have to settle for these paltry rates and dismal returns. Read on to learn how you can get rates that are double that!

I have written several articles on various types of investments that can generate a dependable income stream that is far higher... than that paid by certificates of deposit. I've talked about income deposit securities, closed-end funds, regional telephone companies and Canadian income trusts in previous articles (you can find them at www.guardingyourwealth.com). Keep in mind that these types of investments aren't guaranteed by the government and their share value will fluctuate from day to day.

Closed-end funds make attractive income-oriented investments. Think of a closed-end fund as a pool of underlying investments. Those underlying investments can be U.S. corporate bonds, foreign bonds or even stocks. Something unique to closed-end funds is that they don't always trade at the same price as the underlying value of what they own.

For instance, a closed-end bond fund may own a pool of bonds that, if sold that day, would be worth $10 per share. Those shares don't always trade at $10. They can trade above or below that price at a premium or a discount to the fair market value of what it owns. Currently, high-quality closed-end funds that previously were trading at a premium are now trading at a discount. Some have discounts of 10% or more.

One reason why I particularly find select closed-end funds attractive is because the share price has been declining much faster than the value of the underlying securities. To me, this is an indication that the decline is a result of investor panic, not the underlying fundamentals of the fund. The yields on attractive closed-end funds have increased 2-3% with many yielding in the 9-10% range.

I also like the stocks of select regional telephone companies. Studies have been done that show how stocks paying dividends tend to out-perform those that don't over longer periods of time. That's because companies that pay dividends tend to be older and are in industries where their cash flow is more dependable.

These telephone companies have a steady, stable and growing cash flow. Think about it. Every month you pay your phone and cable bill. Things would have to get pretty bad before people allow their phone and cable to be shut off. Recent market fears have even caused the price of these stalwarts to decline. That means you can now get yields close to 10%--or even higher.

Canadian Trusts are popular among those seeking higher dividend yields. These investments are out of favor due to changes in Canadian tax laws. Those laws don't take effect until 2011 though, and even then will only have a limited impact on certain trusts. Yet the share prices of all of the trusts have declined as much as those trusts that are adversely affected. That means that high quality trusts with healthy and growing underlying businesses are paying unbelievable yields.

A company that prints telephone directories is now yielding over 7.5% and has already increased their dividend this year. There are trusts in the oil and gas sector that have shown they can weather the stress of low natural gas prices. Some are paying over 10%--some even 15%---and still they are only paying out 70-80% of the money they have available for dividends.

The key with all investments like these is to own several of them to reduce your risk. The prices will fluctuate. The prospects of individual companies can change. That's why I use groups of these in my clients, portfolios. For instance, my growth stock portfolio may utilize 10-15 different positions like those mentioned here.

So while everyone else is in a panic and rushing for the exits, I am using this opportunity to pick up investments that will give my clients a steady and growing source of income for years to come.

Are Variable Annuity Guaranteed Living Benefits Worth It?

2007-12-06T15:34:00.000-05:00

If you have an IRA, sorting through all the investment options can be very confusing. Unfortunately, there is a lot of hype out there and, in my opinion, the financial services industry is great at selling the sizzle and delivering very little steak!

This is especially true in the area of annuities. Folks purchase variable annuities based on the belief that... the principal is protected and other guarantees. Often there is a wide gulf between what the investor thinks a product does and what it really ends up doing.

These are complex financial instruments that are sold using generalities. As with anything, the devil is in the details, and the more you know the details the less important some of these guarantees become.

Take a look at a principal guarantee on a variable annuity. The ones that I'm familiar with guarantee that you can withdraw so much a year for a certain number of years, thus getting back your principal even if the market goes to zero.

Think about that for a minute. Let's say they allow you to take 7% a year. It would take over 13 years for you to get back your principal. What are the probabilities of the market being worth less over a 13 year period? Very, very small.

Or there are the guaranteed income provisions--referred to as the guaranteed living benefit. Many investors think that these living benefits guarantee that they will earn 5-7% a year regardless of what the market does. They believe that if they leave their money in and 10 years later decide to take it out that they will have earned at least the 5-7% a year.

Nothing could be further from the truth.

These living benefit riders don't apply if you surrender the annuity. They ONLY apply if you take a lifetime income stream from the annuity. Even then, if you ever cash it in, what you get is based on the actual earnings of the annuity less any withdrawals. What you get when you cash it in isn't ever based on the 5-7% guarantee.

Let me explain it this way. Picture two columns on a piece of paper. The first column is the actual value of the annuity from year to year. So if the market goes up, so does that value. If the market goes down, so does that value. The second column is the 5-7% column. This column takes your initial investment and increases it by the 5-7% each year.

So 10 years down the road, you decide to cash in your annuity. You get the value in the first column; the value in the second column meant nothing.

In a different scenario, let's say that 10 years down the road you decide to start taking the income stream of 5%. That income stream is based on the second column. So if the second column was $200,000 your income stream would be $10,000 a year guaranteed for life.

So far so good.

Time has passed and you have been receiving the $10,000 a year. Your situation changes and you need (or want) what's left of the money in the variable annuity. Here's where the surprise happens. What you get isn't based on the value of the second column; what you get is based on the first column less any withdrawals you've made.

Actually, every time you get a payment, they reduce both columns. That payment affects the growth of the first column (as it should).

What if you die? Do your heirs get what's left in the second column? No. Your heirs get what's left in the first column.

That's why I don't place a lot of value on the guaranteed provisions associated with annuities. I expect that few people will ever use them or get the benefits that they expect.

That's why an annuity should first be evaluated based on its investment potential. These benefits are designed to take your eye off of the underlying investment. Investors can have a false sense of security thinking that changes in the market won't hurt them. They will.

When evaluated as an investment, I believe that there are many alternatives that are much more attractive and that allow the investor to retain the control, flexibility and access to their money.