Thinking Financial Planning

Where is Jimmy Stewart's Honeymoon Money When You Need It?

2009-07-03T06:39:20-07:00

Did you know that 7 banks failed just yesterday? On top of the five that failed a week earlier?

Source: FDIC

On top of yesterday's unexpectedly disappointing jobs report (450K+ new unemployment claims in June) it appears talk of recovery is being moved to the back burner, being replaced by more caution and concern for the rest of summer and the second half of the year. Someone has sprayed Roundup on the Green Shoots.

Also, yesterday, we had this disconcerting video from Nassim Taleb, author of the financial bestseller, "Black Swan", on CNBC Squawk Box. Yes, by the nature of the title of his book, he's in the pessimist camp, but he's saying we're in the MIDDLE of a Crash:

Fiduciary Reform: The Crux of the Issue

2009-07-02T14:46:09-07:00

Activities on the fiduciary reform front heated up this week. According to an article in FA magazine, a group of advisors calling themselves the Committee for the Fiduciary Standard formed to lend a voice to refinement of fiduciary standards for financial advisors, which they characterize as an 'authentic' fiduciary standard. They have laid out five core principles which they believe to be the essence of a fiduciary as outlined in their press release:

Putting the client's interests first.
Acting with prudence, defined as acting with "skill, care, diligence and good judgment."
Not misleading clients and providing "conspicuous, full and fair disclosure of all important facts."
Avoiding conflicts of interest.
The full disclosure of unavoidable conflicts.

These are noble goals, but further detail is required to really define an issue like "putting the client's interest first". This new group appears to consist of about a dozen otherwise unaffiliated independent advisory firms.

On a parallel front, the Financial Planning Coalition (FPC) released a statement this week both applauding administration efforts, but raising concerns that the focus of regulatory change was aimed mostly at broker-dealers, and would result in a watered-down "fiduciary-lite" standard, and that the changes continued to leave a broad class of finanical planners still unregulated. The FPC is a coordinated group consisting of the CFP Board of Standards, the Financial Planning Association, and the National Assoc. of Personal Financial Advisors (NAPFA).

The FPC stance appears to be similar to the new group mentioned earlier, in that they are both advocating a clear, strong and/or authentic guideline for fiduciaries, and desire to retain the value-added perception of fiduciaries today over non-fiduciary brokers. I'm not sure how many unregulated financial planners there are out there, and how much business they are actually getting, so I'm somewhat skeptical that needs more attention, but OK.

To understand the crux of the issue, I always want to drill into the details, though. What does it really mean to "put your clients interests first"? To me, the big issue here is compensation. Registered reps (brokers), can sell any product that is "suitable" to their clients, and are generally compensated by commissions, or fees that result from the investment products sold. Not being a fiduciary means that you don't have to make sure that your clients are getting the best products at the lowest fees, and that whatever you can get in commissions is a testament to your sales skill.

On the other hand, the fiduciary concept means you as the advisor have to put your client's need to minimize fees as well as risks for the optimal potential return ahead of your need/desire to maximize your compensation. If anyone disagrees with this seldom discussed interpretation, please let me know, because it's often vague and certainly controversial. If you agree with this supposition, how can you be a fiduciary and charge a commission, or even promote loaded mutual funds over no-load funds, or... and the list goes on. Where is the line to be drawn? If you elect to hold yourself out as a fiduciary, do you have to justify the use of mutual funds over index ETFs, which many point to as having a higher liklihood of outperforming a majority of funds net of fees and expenses?

In an earlier blog article I also raised the issue of increased liability for fiduciaries and how that necessarily affects investment advice, especially if lots of investors are losing money in a broad down market like we have seen. Along with the compensation issue, I still think that's an issue (overall investment planning difference, asset allocation models, and risk aversion methods) that these fiduciary groups need to further define.

Andy Gluck has another excellent post on this topic this week, and raises the compensation issue as well. He writes:

"If brokers are fiduciaries but can continue to be compensated on commissions, then the fiduciary standard of care has no teeth. And if the U.S. government bans commission compensation of independent financial advisors, as was done last week by Great Britain’s Financial Services Authority, an extremely unlikely reform, then telling the difference between fiduciaries will be difficult."

So, it's very interesting that Great Britain has now actually gone the route to ban commission compensation for RIAs. And I agree it's unlikely to happen here, even if that's what ultimately holding the client's needs first effectively translates into. This is where these fiduciary advocacy groups need to fill in the details for us and provide us a stance on their "more authentic" definitions of a fiduciary.

The "teeth" of the fiduciary standard of care definition has more to do with the implied liability for investor losses, or what "acceptable" losses are, given the risk tolerance of the client, than whether the advisor is commission-compensated or not. For example, when I was at Smith Barney, we used to push structured investment products that could track a stock or an index and limit the downside risk of the investor through the use of complex option strategies. You might get 85% of any upside in the index, but losses could be limited to 5%, or even less. Just one example, but these might be great products for fiduciaries to promote, because of the risk protection, even if they carried a reasonable up-front fee or commission. Just as long as the commission was clearly identified, and comparable investment vehicles were promoted, if applicable, and all relevant facts were disclosed.

Health care reform, not to change the subject, is such a complex issue because nobody wants to give up their piece of the pie. And it's going to be no different with advisor regulatory reform. Nobody is going to want to give up their revenue stream, or any perceived differences they hold out over the competition that they have today. Expect a long and convoluted battle here as well. And lets hope the advocates on both sides are sincere in their positions, if they really hold the consumer's interests most dear.

Happy Independence Day Everyone!

The Road to Zimbabwe Revisited

2009-06-23T17:03:51-07:00

“Lenin was right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.” [Keynes, 1919]

Inflation expectations appear to be on the rise, and there is increasing speculation from analysts about hyperinflation if the U.S. continues to pursue its current monetary policies to revive the economy. One such article appeared today, which I found thought provoking and deserving of a response: “The Road to Zimbabwe” by Robert Huebscher in the June 23 issue of AdvisorPerspectives.

There is no question that we are going down a path of greatly reduced purchasing power of the dollar. John Williams at Shadowstats provides a great service with more meaningful and factual data that can provide better insight into economic and market trends. However, the economics of inflation are far more complex than the relatively simple view he provides. I would also disagree that the facts he points to imply that we will see such rampant inflation in the next 12 months or less. There could be other facts that do, and we might well experience something extreme, but I don’t follow the conclusion from what’s presented here.

The point is, as Keynes says, that inflation is very complex and truly not one man in a million will be able to properly diagnose and/or predict the effect with any degree of certainty. Points that need to be considered:

The government’s unfunded liabilities are astronomical, but that’s amortized over the next 75 years or so. How does that factor in to the next 12 months specifically? If we print only the money we need next year, what causes inflation to accelerate faster than it has in, say, the last year or so?
I would argue all historical currency collapses that necessarily result in hyperinflation have been accompanied by speculative shorting of the currency in a targeted coordinated attack by well financed investors with access to large pools of capital relative to the targeted currency. The printing of currency by a sovereign government generally cannot result in what we would call hyperinflation in and of itself. Where is this speculative attack against a currency with the global volume of the US dollar going to come from? I don’t think it’s possible to leverage enough pools of capital to short the dollar with enough vigor to drive it down into hyperinflation the way Zimbabwe did, or the smaller Asian currencies were in the late 90’s, or Latin America currencies were in a number of examples, or Soros famously did with the British pound. There is no doubt that as reality sets in on the dollar, foreign dollar holders will divest themselves of bonds and dollars, reducing their long positions, but is this enough to hyperinflate the dollar in a way that US consumers experience the result? I don’t think it’s possible, even if we can divine the intentions of notoriously secretive sovereign wealth funds.
As the dollar weakens, all other nations will inflate as well. They cannot afford to see their exports to the US collapse any more than we can tolerate a collapse of the dollar. So the question has to be asked, what does the dollar collapse relative to? Hyperinflation implies it collapses against the price of bread, gasoline, everything, if not other currencies as well. If it doesn’t collapse relative to other currencies, what does that look like? Will it collapse against all commodities and precious metals? Probably. Will it collapse relative to real estate? Maybe. Who knows? Inflation shows up in various asset classes at wildly different rates. What if gold skyrocketed in value to $5000/oz.? Could the US govt. exchange gold to sop up enough of the money supply to mitigate inflation. It might be able to if it wanted. The velocity of gold is much lower than currency. Devaluing the dollar against gold has been theorized as a mitigating mechanism to shore up the economy, as FDR did in the thirties. Again this is a complex scenario that is not out of the realm of possibility and which impact would be hard to predict.
Inflation calculations necessarily must include the velocity of money. The higher the velocity, the faster and the greater the inflation. What if the money supply increases dramatically, but the velocity of money continues to decline? What if the vast majority of consumers continue to see their wealth decline and either hoard cash, or the increased money supply can’t find its way into the right hands to create demand in prices across the board? If the vast majority of consumers don’t see increasing dollars in their hands, either through increased unemployment, or declining real wages, it’s hard to say what the results will be. All it takes will be a single asset class to sop up the extra dollars (like gold above), the way foreigners have been sopping them up for the last decade or more in the form of US bonds for the apparent affects of inflation to be mitigated even with accelerated govt. spending. Could we have another asset bubble like Internet stocks that sops up excess cash so it does not flow into consumer prices or prices of imported goods? This is more likely if the increased money supply stays in the hands of only a relatively small number of parties with a low velocity of money. Will Ben drop it from a helicopter or will banks sit on it to bolster balance sheets? Who can predict?
Which brings me to another point. The vast majority of the money supply comes not from govt. printing excess cash but from bank loans and free flowing credit. This is probably still in the process of contracting, although eventually inflation may overwhelm this effect. Since a dollar on deposit can eventually (maybe years later?) contribute to a 10x increase in the money supply, how are we going to increase the rate of bank loans from what we’ve already seen? Loans are getting tighter, Americans are trying to save more, businesses are taking on less risk. All factors that will continue to mitigate inflation in the near to mid-term.

I would be inclined to agree more with Marc Faber’s view of hyperinflation here on CNBC (below and at: http://www.cnbc.com/id/31450173). It’s probably coming, but it won’t come as fast as the dollar bears predict. It’s a much more complex situation with enormous contrary forces in place than any one person can accurately predict.

Fiduciary Standards of Financial Advisors Part of Proposed Regulatory Reforms

2009-06-19T11:28:10-07:00

This week, the U.S. Treasury unveiled their vision and recommendations for regulatory reform in the securities industry in a detailed whitepaper entitled, “Financial Regulatory Reform, a New Foundation: Rebuilding Financial Supervision and Regulation”. (Background: "Fiduciary Standard Part of Sweeping Regulatory Reforms", FA Magazine, June 18, 2009) The most pertinent changes for brokers and financial advisors is the sweeping reforms that make all investment advisors fiduciaries, including registered reps at broker-dealers and all CFP®s. The stated goal is to bring all classes of investment advisors under a common fiduciary standard (the strictest) to avoid confusion among consumers and to ensure the highest degree of integrity when dealing with clients for all professionals throughout the industry. While many brokers and advisors are still taking a wait and see attitude, and take an arms-length view of the whole regulatory alphabet soup, I think these changes will have profound impact on the industry and the way nearly all advisors run their practice, how they market themselves, and the services they offer. Understanding the big picture and preparing for what appears to be inevitable regulatory reform at this juncture is critical.

First, a bit of background: Today, the various certifications and designations of investment advisors are held to different sets of regulatory requirements and guidelines, particularly in the determination of whether the advisor is or is not held to a fiduciary standard. Registered Investment Advisors are held to a fiduciary standard, meaning that they are liable to provide appropriate investment advice for the needs and risks of the clients, but registered reps, insurance agents, and broker-dealer agents are not. CFP®s and financial planners are fiduciaries only if they are RIAs. Most descriptions of fiduciary responsibility focus on the requirement to further divulge how the advisor is compensated and any potential conflicts of interest that arise from the advisors compensation and the client’s needs. In general, a fiduciary needs to put a client’s needs first and foremost, and are held to strong ethical standards, much like a doctor or lawyer. OK, well, doctors anyway, “do no harm”, and all.

Divulging conflicts of interest and compensation schemes is all well and good, but where the fiduciary standard really matters is when the advisor gets sued. And, unfortunately, after down markets and investor losses, clients sue a lot. If the client has suffered losses that will affect their lifestyle or children’s college plans, there is a much greater liability on the part of fiduciary to prove that he considered all downside risks, and to show that the investment plan was clearly in line with the client’s risk tolerance and comprehensive investment needs. The onus falls on the fiduciary when material harm is done.

By comparison, nearly all broker-dealers require clients to agree to binding arbitration in the event of a dispute. They also make no warranties about keeping the client’s needs first and foremost, merely that a particular investment is “suitable”. The onus is on the client to show lack of suitability to the arbitrator, a much more challenging prospect for the uninitiated.

The National Association of Professional Financial Advisors (NAPFA) compares the approach of a fiduciary (which their members are), with that of broker-dealers who provide the following disclaimer in their client agreements:

“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. [My emphasis. – GK] Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest.”

Andy Gluck, CEO of Advisor Products, Inc. wrote an impressive blog about the regulatory changes and the impact of all registered reps becoming fiduciaries. He concludes that, “making all advisors say they will act as a fiduciary will water down the meaning of the term… I suspect that advisors who today are fiduciaries are going to have a tough time differentiating the way they give retail advice from the way brokers who are fiduciaries do it.”

Taking another perspective, I’m hopeful that the fiduciary standard will continue to maintain its inherent liability implications, as this is clearly the intent of the regulatory reform: to close loopholes that keep consumers from getting the best, most appropriate advice and standardizing ethical guidelines that alleviate confusion and clarify issues to the public. What I take all this to mean is less that RIAs will now face a marketing challenge, but that brokers won’t be pushing high flying Internet IPOs, and emerging market ETFs on quite so many unsuspecting investors. While they may never give up their binding arbitration clauses, broker-dealers are going to find themselves in court having to defend their investment advice with a whole new level of fervor where there will be much more of a presumption of guilt than innocence. Since there are many more registered reps at broker-dealers than RIAs, I think this reform will have much broader impact than many expect, particularly those that think that the fiduciary and ethical standards are going to be watered down to the least common denominator.

What is a broker-dealer, financial planner, registered rep, or variable annuity agent supposed to do? Well, I’m no lawyer, and I don’t even play one on T.V., but your goal should be that if you ever end up in court that you’ve got all the facts on your side. Have you taken a holistic view of your client’s financial situation in order to ensure that their risk tolerance was in line with your proposed investments? Have you taken into account all their lifestyle needs, goals and factored in an appropriate measure of downside risk commensurate with “doing no harm” according to historical precedents? Have you built an investment strategy that minimizes risk for the anticipated returns according to asset class correlations determined by historical data going back long enough to cover all reasonable market conditions? My guess is that if you are not doing financial planning, or at least are collecting enough data about your client to be in a position to do it, that the answer to most of these questions is “no”. Further, unless you are using asset allocation and portfolio management software to design efficient portfolios, the answer is probably “no”.

We know that the vast majority of RIAs, who have long been held to fiduciary standards, do make comprehensive financial planning an integral part of their practice. The reason is that they need to be in a position to answer “yes” to all the above questions when pressed. We also know that the vast majority of financial advisors at the large broker-dealers don’t do financial planning, or do it only as a marketing gimmick to show a need to sell products and services. Clearly, as these regulatory reforms move forward from the good intention/whitepaper stage to new legislation, this is going to change. Would you want to end up in court needing to prove that you have operated at the highest fiduciary standard possible without the documentation and planning details that justifies your decisions and the design of your portfolios according to the best historical asset correlation and risk management data available? Again, I think the answer is, “no”.

The last question is: will financial planning technology vendors be regulated through technical certifications of their products (sort of an FDA or UL approval for planning apps), with appropriate liabilities for their role in the delivery of advice? Well, AdviceAmerica welcomes being held to an equally high standard, but I wouldn’t expect any real legislation in this area until after they sort out the next great crash around 2050.

Yield Curve Update with Wolfram Alpha

2009-06-11T13:57:51-07:00

Here's an interesting update to my earlier post on Wolfram|Alpha about two weeks ago. Since that time, long term treasury yields have increased considerably, so I thought I would rerun my query to display the yield curve and compare results.

First is the yield curve from today (June 11, about noon Pacific time):

Followed by the yield curve pulled from the earlier post on May 27:

Hard to see with the naked eye, but sure enough, we see a much steeper yield curve today with slightly lower yields at a year and under, while the yield on the 10-year is up from 3.17% to 3.71% (an increase of about 17%). I actually saw the 10-year yield today on CNBC at 3.96%, so I'm not sure how current even the Wolfram|Alpha data is. Bloomberg is showing 3.86% right now after trading hours as I type this.

The 30-year T-Bond yield has increased by about 10% according to the above charts (Bloomberg is showing the 30 year at 4.69 compared to Wolfram|Alpha's 4.59%, or an increase of 12.2%). Investors tend to panic when their stock portfolios drop 12-17% in just a couple of weeks, but we don't hear the same kind of high anxiety from bond investors now. I wonder why?

I retweeted an article last week that was titled "Fed Puzzled by Steepening Yield Curve". It's really not that puzzling. And it's not that the FED is easily puzzled, but part of their job is to feign indignation at the hints of inflation, when they are trying to push the deflation story in order to jawbone interest rates down. The fact is that investors are expecting greater inflation down the road, and a weaker dollar. Amidst the talk of Russia and China diversifying out of the dollar as their primary reserve currency (i.e., selling their treasury bonds), investors are looking for more yield to both offset inflation expectations and the fear of a glut of treasuries hitting the market sending prices down and yields up.

This is not good news for the housing market or the prospects of a recovery if the cost of borrowing is going up. If the recovery is going to continue, it's going to depend on an environment of low interest rates. Although the massive govt. spending and bailouts has increased the money supply to unheard of proportions, with the prospects of more and more of that to affect consumer prices over the coming years. These two forces (the need for both dollar creation and low interest rates) are definately at odds with each other, and will require investors to navigate difficult waters in the months and years ahead.

Financial Advice from Jim Rogers

2009-06-10T16:30:29-07:00

I always enjoy the insights and perspective of legendary investor Jim Rogers, co-founder of the Quantum Fund along with George Soros. I found this short video recorded in the last day or so to be very compelling. Financial advisors should really take his prognosis to heart when thinking about current assett allocation strategies. His summary:

Govt. economic figures, particularly employment numbers, are unbelievable
He's not really "short" anything right now
He's not long on equities, though, either, since business fundamentals continue to deteriorate
The worst is not yet over and looks for a serious leg down later this year or next
There is no other way to bail out the current financial mess than inflation. Bernanke is finally being honest about this, or more candidly realistic that this will cause future problems. Please invest accordingly.
He's very bullish on commodities whether the market goes up or down

I have to admit I'm generally invested along these lines as well, in the interest of full disclosure. I have tentatively reintroduced some equity short positions lately, and I'm definately short longer term treasuries, which has been a nice trade recently, and I find hard to believe Jim Rogers isn't playing as well given his inflation bias.

Almost equally important, Jim Rogers has a new book out on fatherhood, offering wisdom to his young children since he became a father relatively late in life. He describes the new emotions you experience and great joy of fatherhood. Being a father is the greatest thing that's ever happened to me, so Amen to that Jim! Enjoy the full video:

Wolfram|Alpha: Cool Toy or Something Useful for Financial Analysis?

2009-05-27T15:17:24-07:00

Wolfram|Alpha is a very interesting new search and analysis technology that was officially launched in the last week or so. Calling itself a "computational knowledge engine", it could revolutionize what you think about search engines like Google, and how you access information on the Internet.... someday. To say it's very ambitious (and it does), is something of an understatement, but it's already an amazingly cool tool, and shows some great promise for any area that deals with data collection and analysis, or scientific research.

Alpha is the brainchild of Stephen Wolfram who developed one of the most advanced applications ever based on Artificial Intelligence programming techniques, Mathematica. Mathematica allows users to input extremely complex math equations including calculus, differential equations, infinite series, etc., and then uses symbolic analysis and rules to solve the equations and/or plot the analysis. Many equations like this require tricks/intelligence to solve, rather than algorithmic approaches, and Mathematica has been a boon to those in the fields of physics, chemistry, and engineering for nearly three decades.

In my college days I actually studied Artificial Intelligence, and have long been an admirer of Mathematica. So, I was very interested last year when I heard about Wolfram|Alpha, and even more so when it was finally launched to much fanfare recently. Wolfram|Alpha allows you to enter a search phrase, and instead of returning a bunch of existing pages, it seeks out data and assembles a new page or analysis for you on the fly. Depending on what it decides you're looking for, it may create a chart, a map, a variation of a graphic, or tabular data. In their own words:

"Wolfram|Alpha's long-term goal is to make all systematic knowledge immediately computable and accessible to everyone. We aim to collect and curate all objective data; implement every known model, method, and algorithm; and make it possible to compute whatever can be computed about anything. Our goal is to build on the achievements of science and other systematizations of knowledge to provide a single source that can be relied on by everyone for definitive answers to factual queries."

How's that for an ambitious goal? If anyone else other than Stephen Wolfram was behind it, it would be laughable. But based on what he's accomplished with Mathematica over a few decades, and applying the same sort of approach, I think anything is possible. Just don't expect the world today. It may be several years before Wolfram|Alpha is truly ready to amaze. [When it's a little more mature, will it be called Beta? Just asking...]

One of the most interesting application areas for it already is financial data analysis. While there are some interesting sample queries on the site to show what it can do, I decided to try a few of my own. An easy data collection and analysis report that can be generated is comparing the current market caps of two stocks (in this case Toyota and Ford, a sample from their site). As you can see, we've got a simple math equation in the search form, and a historical chart is created on the fly (it just assumes that we need a historical chart along with the current value, so some decisions are being made for you about what you need most, and if you need data prior to 1989, well, you're on your own):

Another simple query I asked for is to see the current yield curve on the US Treasury. There had to be some interesting data it came up with, and good charts that would be assembled on the fly. Based on the simple query, here's what I got (simple, straightforward, and informative):

But just to show that there's a lot of evolution and development ahead of them, Wolfram|Alpha didn't have such good luck with a Corporate bond yield curve. I tried several ways of asking the question, but it couldn't figure out what I was asking for, and the suggestions were only partially helpful, if not completely irrelevant:

I guess when you're new and trying to make a good impression, but you get thrown a curve you can't handle, it's a natural response to go with your strength. Nevertheless, I don't need the encouragement to explore curves and surfaces, or weather and meteorology when I'm trying to get a graph of a yield curve.

I also found other immediate limitations in that there was no knowledge of ETF symbols, just individual stocks. I asked for GLD as a proxy for the price of gold, and got Gladstone (traded on the London exchange). I then asked for information about gold specifically and got the atomic number and its place in the periodic table.

As an exercise for the reader, check out the comparison charts of multiple stocks, like GOOG, MSFT and AAPL. Not as detailed as you'd get on Yahoo! Finance, but stylish and informative none the less. Clearly Wolfram|Alpha is not a one trick pony, but it's a small finite number of trick ponies when it endevours to handle a seemingly infinite number of ponies. It's pretty slick now, will probably be incredibly impressive in about 3-5 years, and fully baked in about 2050. I'll let you know when it's ready for Beta.

Financial Planning and CRM Tools

2009-05-20T14:00:30-07:00

An article I wrote a couple of months back on CRM systems for financial advisors was finally published on three cooperative sites, Financial Planning magazine, On Wall Street, and Bank Investment Consultant. Sometimes it can be frustrating waiting until editorial calendars align themselves and the right space appears for your content to run, but I've long since taken a zen-like approach to forces you cannot control.

The crux of the article is that financial-specific CRM systems are becoming the hottest technology trend in the advisor community. Unlike a lot of other technologies, where you make an investment, plug them in, and they work for you, CRM is a bit of the opposite. You, the advisor, have to make a commitment to work in accordance with the CRM to derive any real benefit. Too many CRM tools require you to work within the framework they define, as well as requiring strict process definitions that are hard to stick to and 100% buy-in from all participants. Choosing the right CRM tool requires choosing a good fit for the processes you are looking to make more efficient, the level of commitment you are willing to make to conform to defined processes in your practice, and the size of the team you are looking to coordinate.

While not explicity stated in the article, and this is actually a good time for an addendum, one of the clear advantages of the AdviceAmerica system, ClientVision, is that it is so flexible to the way advisors currently work because it is tightly integrated with Microsoft Outlook, and the way a majority of small office advisors already work with client contact data and communicate with them. You don't end up working in another application, and you don't have to learn another entire system on top of your deskop calendar, mail and task management system. The fact that ClientVision is also integrated with an industry-leading financial planning and portfolio management platform, AdvisorVision, makes it that much more efficient to handle all your client-facing processes within one seamless platform, without re-entering data, dealing with different U/Is and multiple vendors. This can make your compliance processes go smoother as well by keeping all the client records, communication archives, plans, documents and task lists in one consolidated application.

FPA Tip of the Week: The American Recovery and Reinvestment Act

2009-05-13T15:55:37-07:00

This week the Financial Planning Association approached me to help provide advice on how individuals could better understand the changes in their withholding that they are now seeing in their paychecks due to the America Recover and Reinvestment Act (ARRA). This turned out to be their FPA "Tip of the Week" for May 11, 2009, which I'm reprinting below (the FPA's web site actual page can be found here):

How to Benefit from the American Recovery and Reinvestment Act

You wouldn't be alone if you didn't understand all the provisions of the American Recovery and Reinvestment Act, especially the one that affects your pay check, the one that makes it seem like your taking home more money each pay period.

In 2009 and 2010, the Making Work Pay provision of the American Recovery and Reinvestment Act will provide a refundable tax credit of up to $400 for working individuals and up to $800 for married taxpayers filing joint returns.

This tax credit will be calculated at a rate of 6.2 percent of earned income and will phase out for taxpayers with modified adjusted gross income in excess of $75,000, or $150,000 for married couples filing jointly.

If you receive a paycheck and are subject to withholding, the credit will typically be handled by your employer through automated withholding changes in early spring. According to the IRS, these changes may result in an increase in take-home pay and the amount of credit will be computed on the employee's 2009 income tax return filed in 2010. Taxpayers who do not have taxes withheld by an employer during the year can also claim the credit on their 2009 tax return.

So what does this mean to you?

Perhaps, nothing. But as with many things financial, tax law changes represent the perfect time to check in with a financial planner to have your situation reviewed. Find a Financial Planner. "I believe this warrants all taxpayers taking a closer look at their federal withholding," said FPA member, John Kilroy, CPA, CFP®. "No one should assume their withholding is in line with what ultimately may be due at tax filing time. I believe this to be true in any year, but even more so now as this "credit" influences amounts withheld. My advice: Anyone who receives a paycheck should work with a tax professional (now - if not sooner) to project whether he or she may be over or under withheld. The worst thing that may happen is for a taxpayer to learn they are not eligible for the Making Work Pay Credit after it has been given to them in their paycheck."

According to the IRS, "it is not necessary to submit a Form W-4 to get the automatic withholding change. However, an employee with multiple jobs or a married couple whose combined income places it in a higher tax bracket should consult the IRS Withholding Calculator and, if necessary, submit a revised Form W-4, Employee's Withholding Allowance Certificate, to ensure enough tax is withheld. Publication 919, How Do I Adjust My Tax Withholding?, provides additional guidance for tax withholding including a special Making Work Pay worksheet. Learn more about the Making Work Pay tax credit

Financial planners and financial planning firms also offered these tips:

"The result of the change is that many employees will have their withholding reduced automatically in anticipation of the ARRA tax credit," said FPA member, Gary Kinghorn, director of product management at AdviceAmerica. "The best case scenario is that employees should be seeing larger take-home pay, and the same tax obligation next year."

Kinghorn also said, "employers, who are responsible for determining the changes in withholding, have general guidelines as to the new withholding schedules, but if the employee is not eligible for the ARRA tax credit (because they are be working two jobs or their spouse makes too much), the result could be an under withholding. Employees don't need to file a new W-4 form to get the reduced reduction, but they should consider reviewing the specifics of the tax credit (or consult their local financial planner and CPA) if there's a chance they aren't eligible. If that's the case, they should file a new W-4, increasing withholding, if they wish to more closely manage their withholding to their actual tax obligation."

Others agree. "Yes, consumers should review and possibly change their withholding," according to First Command Financial Planning. You should review your previous and currrent pay stubs and determine the difference in withholding. You can either use the IRS withholding tables found in IRS Circular 15-T or request an additional amount be withheld on their Form W4.

Cramer's Disingenuous Tirade on Naked Short Selling

2009-05-05T17:37:38-07:00

One of the most interesting issues/debates going on in the financial markets the last couple of years that has really caught my attention is the issue of naked short selling. One of the most interesting aspects of it is how misunderstood it really is by a vast majority of savvy investors, including brokers and financial advisors. It's also a prime example of how market regulations and oversight have gotten way off track in recent years, much to the detriment of the average investor (you and your clients).

First of all, naked short selling is NOT defined by selling shares you don't own, which is perfectly legal. It's about selling shares that you don't own, and haven't arranged to borrow from a "long" investor, with no intention of delivering shares to your counterparty, at least until you cover your short position (which in many cases can be months). This is a violation of SEC Regulation SHO, and is, in essence, counterfeiting shares which don't exist. In an environment of coordinated hedge fund naked short selling, supply of counterfeit shares increases dramatically, without a corresponding increase in demand, thereby driving share price down (basic Econ 101 stuff), much to the benefit of the shorts.

Jim Cramer has passionately joined the debate, albeit in a misleading way, as exhibited by his recent interview with Senator Ted Kaufman of Delaware, which you can see right here (8 minute video clip):

Although Cramer is showing some passion about what is an extremely important and underappreciated issue, he is being very misleading in addressing the issue and confusing the real solution with the reinstatement of the uptick rule. The uptick rule really has NOTHING TO DO with the crux of the naked short selling issue, i.e., counterfeiting shares. The uptick rule applies to legal short selling (inclusive of selling borrowed shares). Requiring naked short sellers to wait for an uptick to sell counterfeited shares is still allowing counterfeit shares to hit the market. When Cramer sounds like he's passionately on board with fixing naked short selling now that it has gotten to be a hot issue, but advocates the wrong solution (even though he's stepping gingerly around it), it's hard to tell whether he's being disingenuous, deliberately misleading, or he doesn't really understand the issue.

Just to be clear, there is no doubt in my mind that the uptick rule should be reinstated, but to imply that that is the solution to the naked short selling problem is to be either uninformed or deliberately misleading. Again, check out the text caption in the video: "Anatomy of a Naked Short: Shorts Used To Have To Wait Until There Were Buyers Willing To Pay More On The Uptick". This is NOT the issue of naked short selling. Senator Kaufman at least tries to separate the issues of the uptick rule and what he refers to as "abusive short selling". No such distinction from Cramer (it's all about the uptick, not enforcement of Reg. SHO).

Patrick Byrne, Overstock.com's CEO, has taken the lead in researching and exposing the naked short selling issue and is undoubtedly the most in-depth source of information on the topic. If you want to understand the issues and why opponents believe it could be a foundational threat to the markets, I highly recommend the following two presentations by Patrick and team:

http://www.businessjive.com

http://www.deepcapturethemovie.com

There is also a wealth of information on the www.deepcapture.com web site, and, of course, you can follow deepcapture on twitter at www.twitter.com/deepcapture. Perhaps the most important aspect of Patrick Byrne's collective analysis is how badly the regulatory authorities have let the average investor down by, at best, looking the other way, and at worst, conspiring against them. I'll let you be the judge. As for Cramer, since you can't say he's uninformed, it all comes back to how lame the financial media has become, who they are an advocate for, and a question of integrity.