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Your Money: Financial Advice for Those With Hummingbird Nest Eggs

January 14, 2012 by Leave a Comment

Brokerage firms have been making these sorts of moves for years, and Merrill is notorious for a leaked memo in the late 1990s that discouraged “charity work” for clients with less than $100,000 in assets — “poor people,” as the memo put it.

That patrician view is probably a minority one: if the people who run Merrill Lynch felt that way, they wouldn’t be doing what they’re doing now, which is trying like mad to figure out a way to service those smaller accounts profitably.

But Merrill’s decision to tell its brokers that they might not get paid if they persisted in working with such people reflects one of the sorriest truths of the financial services industry: Nobody has figured out a way to consistently give large numbers of people reasonably priced financial advice across all areas of their life and to do so in an ethical manner.

The case of Merrill — and its effective opposite, a start-up called LearnVest — is instructive in part because it reflects how the world of managing money has changed since Merrill Lynch first started hanging shingles on Main Streets all over the United States.

Charles E. Merrill Company opened for business nearly 100 years ago, and the company (along with Merrill’s current owner Bank of America, interestingly enough), resolved to serve Main Street, not Wall Street. Charlie Merrill put it this way, according to the 1994 book by my colleague Joe Nocera, “A Piece of the Action.” In it, he quotes Mr. Merrill as writing the following: “A new guild has sprung up in the [investment] banking profession which does not despise the modest sums of the thrifty.”

Many brokerage firms have backed away from that sort of stance in recent years. An old saw in the industry notes that the little old lady with the diminishing balance who hounds you when her dividend checks arrive late takes up five times as much time as a 50-year-old millionaire.

Besides, you make more money serving richer people. So the big firms (and thousands of smaller operations and individuals) fight hard over the 1 percent and then siphon off a small cut of their assets each year through fees and other revenue mechanisms.

Everyone else ends up at Charles Schwab or Fidelity and pays roughly $1,500 to $3,000 if they want a full financial plan with advice on insurance and mortgages and other things beyond investments.

A few years ago, Citi took a bold step with its myFi service that aimed to provide just that sort of holistic guidance from bank branches. But it introduced the service at one of the worst economic moments since World War II, and the bank shuttered myFi when it did not succeed quickly enough for its tastes.

Nowadays, a thrifty Merrill customer with modest sums is told to use a service called Merrill Edge. And Merrill is taking its best shot at attracting and keeping them (and eventually) upgrading them to a real broker), given that it believes that there are 28 million households with $50,000 to $250,000 in assets.

The people who service them are called Financial Solutions Advisors. There are more than 500 of them in bank branches and the company will hire 500 more in 2012. There are currently about 800 F.S.A.’s working in call centers as well.

The company (to my great surprise) could not say how many of them were certified financial planners, the sort of people trained to look at a client’s whole life before making investment recommendations.

If Merrill isn’t tracking this, it’s tempting to conclude that the company doesn’t make the credential (and holistic advice) a priority and that all it wants to do is push investments. Still, Merrill does the right thing and encourages people to earn the certification by covering classes for F.S.A.’s who want to become certified financial planners.

Dean Athanasia, the executive who oversees Merrill Edge, said that any good investment advice had to be holistic by its very nature. “If you have a mortgage and debt, then you need to factor that into the consideration of your planning for the future,” he said. “You can’t just look at assets.”

The Merrill Edge investment account costs a flat $125 each year if you are working with an F.S.A., though the company will also manage a portfolio for you for 1 percent of your assets annually. As for the underlying mutual fund fees, the firm collects “the appropriate fees based on our agreement with the firm and the prospectus.”

Anyone working this way needs to ask their adviser for a plain-English explanation of how much money, if any, Merrill stands to collect in any way, shape or form now or in the future, based on the mutual funds it selects for you. And if any of you have asked an F.S.A. for a collection of low-cost Vanguard or similar funds, I’d be curious to hear what the reaction was.

On compensation, Merrill appears to be doing the right thing, meanwhile; advisers earn a salary plus incentives based on the amount of assets they gather and manage, whether it’s in bank savings accounts or in mutual funds or other investments.

The most curious thing about my conversation with Mr. Athanasia is that he didn’t once mention personal budgeting.

This article has been revised to reflect the following correction:

Correction: January 13, 2012

An earlier version of this column incorrectly referred to the customer service employees of Merrill Edge as Financial Service Advisors. 

Article source: http://feeds.nytimes.com/click.phdo?i=bf5f1ec9f531bb88544816bb48cf3bb6

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Off the Shelf: When Retirees Are Shortchanged for Corporate Profits

September 18, 2011 by Leave a Comment

Now, inevitably, comes the book. In “Retirement Heist: How Companies Plunder and Profit From the Nest Eggs of American Workers” (Portfolio/Penguin, $26.95), Ms. Schultz herds all her journalistic cattle into a single corral, laying out by what any measure is a damning indictment of the broken pension promises too many American corporations have made to their workers. For anyone seriously interested in the retirement industry — and that’s what it amounts to, an industry — this book should be required reading.

For just about everyone else, alas, “Retirement Heist” is hard to recommend. Ms. Schultz is a top-tier newspaper reporter, but as an author, as a shaper of narrative, well, she’s a top-tier newspaper reporter. The book reads like a very, very long Journal article or, worse, a hefty think-tank white paper. This may have been unavoidable, but its sheer density of pension and related jargon will defeat many readers who aren’t accountants or actuaries. I had to stop a number of times in the first 50 pages just to fully understand what Ms. Schultz was trying to tell me.

Which is a shame, because she has quite a story to tell. It’s hard to distill the book’s far-flung elements into a single narrative, but it appears to come down to this: After the huge run-up in stocks during the 1980s, American corporations were sitting on billions of dollars in pension funds that weren’t going to be paid to retirees anytime soon. They began pushing to use the money themselves, an effort that resulted in a series of new accounting guidelines and federal regulations that, in time, allowed them to put pension monies to all sorts of uses never before envisioned. Financing corporate restructurings. Paying for retiree health benefits. Paying for golden parachutes. Some companies simply eliminated the pension plan altogether and took the money themselves. At the same time, Ms. Schultz shows, companies like I.B.M. steadily cut back on pension and health benefits while assuring employees that it was making the plan more “modern.”

The mind-boggling complexity of many pension statements prevented most employees from understanding what was going on; a notable exception came at I.B.M., where a handful of older workers figured it out and began protests. Corporations, of course, rarely if ever acknowledged that they were shortchanging their retirees. Everything they were doing, some pointed out, was not only completely legal but also a boon to shareholders.

In Ms. Schultz’s telling, there was almost nothing that some corporations wouldn’t do to pare their pension obligations, from canceling death benefits to instituting “clawbacks” — that is, informing retirees that they had somehow been overpaid and demanding a lump-sum repayment that very few were able to afford. No promise, it would appear, was too small to be broken. A reader should feel something like outrage at this kind of behavior, but I felt little, in large part because the book, especially in its first half, focuses more attention on tricks played by employers than the plight of victimized retirees. Pension abuse affects millions of Americans, yet not enough of them make it into the pages of “Retirement Heist.”

Where they do, the book jumps to life. Some of these stories are heart-rending. There’s the corporate pilot who was presented with a clawback bill even as he struggled with esophageal cancer, a debt his widow continued scrambling to pay even after his death. And the retiree who lost his death benefit on his deathbed. And the 80-year-olds forced to take jobs at Wal-Mart to pay for health care their companies canceled. And the N.F.L. players who fought for disability benefits after they retired. This book could have used many more of these stories.

Given the complexity of pension and accounting regulations, “Retirement Heist” cries out for history and context, a sense of where the pension world came from, the forces that shaped its rise and how companies historically dealt with pensioners. Yet little of that is here; in the text, it’s as if pensions sprang up fully formed in the mid-1980s to be abused by companies in the 1990s.

A small industry of pension consultants has emerged to show companies how to pare and profit from their retirees, yet the book, despite repeatedly citing the names of these firms, gives us little information about their origins, operations and size. Even if they (smartly) wouldn’t discuss their business, aren’t there former employees willing to talk? How about a Michael Moore-style visit to one of their headquarters?

I don’t mean to be too hard. Ms. Schultz has done heroic work compiling her facts, and is to be applauded. But the best journalism, unfortunately, does not always ensure the best book, an unpleasant fact that always leaves me feeling a little wistful.

Article source: http://feeds.nytimes.com/click.phdo?i=d82606023d28a07c6d57af33bc21db78

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Bucks: Dave Ramsey’s 12% Solution

May 13, 2011 by Leave a Comment

Financial guru Dave Ramsey in his broadcasting studio in Brentwood, Tenn., in 2009.Associated PressThe financial guru Dave Ramsey in his broadcasting studio in Brentwood, Tenn., in 2009.

Thousands of people swear by the philosophy of Dave Ramsey, an up-by-the-bootstraps kind of guy who doles out tough financial advice about getting out of debt and living within your means. His legions of fans call his nationally syndicated radio show to seek his advice, attend his self-help seminars in both big arenas and small church classrooms and buy his best-selling books and DVDs. He’s part entertainer, part financial coach.

Mr. Ramsey has become immensely popular by giving out advice that includes “baby steps” to financial freedom, like saving $1,000 in an emergency fund and getting rid of credit card debt. His Web site says his company, the Lampo Group, provides “ biblically based, common-sense education and empowerment which gives HOPE to everyone from the financially secure to the financially distressed.”

Even his critics give Mr. Ramsey credit for helping thousands of people shed debt and build savings. But when it comes to his investment advice, financial advisers say he is wildly optimistic.

Particularly troubling, they say, are his statements about the potential returns to be had by investing in the stock market, and his recommendations on how much retirees can safely withdraw from their nest eggs each year. A sort of cottage industry has arisen of advisers who refute Mr. Ramsey’s claims.

Mr. Ramsey often says, for example, that mutual fund investors can expect “average annual” returns of 12 percent, based on the long-term performance of the SP 500. From 1926 through 2010, his Web site says, the index’s average annual return is 11.84 percent. “When Dave says you can expect to make 12 percent on your investments,” his site says, “he’s using a real number that’s based on the historical average annual return of the SP 500.”

The problem, financial advisers say, is that not all investments track the SP 500, and using average annual returns is misleading. Thomas De Jong, a financial planner in Sioux Center, Iowa, who is affiliated with Money Concepts International, explains why, in a simplified example in a report he wrote about Mr. Ramsey’s claims. (Mr. De Jong noted in a telephone interview that he was initially inspired to become a financial adviser after reading one of Mr. Ramsey’s books.)

Here’s a synopsis of Mr. De Jong’s case: Say you invest $10,000, and you double your money in the first year. You now have $20,000, or a 100 percent return. But in year two, you lose 50 percent. Your balance is back at $10,000. The “average annual return” on your investment is 25 percent (100 percent minus 50 percent divided by two years = 25 percent), but you have earned nothing.

“What is your true rate of return?” Mr. De Jong wrote in his report. “The answer, of course, is zero.”

That’s why knowledgeable investment advisers use “annualized” returns, also called the compound annual growth rate, to measure investments. That formula smooths out the swings in the market and shows what you’ve actually earned on your investment.

On a compounded basis, the SP 500’s return from 1926 through 2010 is just under 10 percent, about 2 percentage points less than the figure Mr. Ramsey points to. That might not sound like a lot, but over time the impact on your investment is enormous. Mr. De Jong gives a comparison and invites followers to check the numbers on this financial calculator. (We updated Mr. De Jong’s example using 2010 numbers):

  • Say you start with $100,000 in your investment account. After 30 years, at 12 percent annually (per Dave Ramsey’s advice), you’d have $2,995,992.
  • At 9.89 percent annually — the SP 500’s true return from 1926 through 2010 — you’d have $1,693,344.
  • At 6.7 percent annually — the true SP 500 rate, after adjusting for inflation — you’d have $699,733. That’s roughly a fourth of what Mr. Ramsey leads his devotees to expect.

The danger, advisers say, is that unsophisticated investors will be lulled into thinking that they will have much more in retirement savings than they actually will. To make things worse, Mr. Ramsey also says retirees can withdraw as much as 8 percent of their nest egg each year for living expenses. Most advisers recommend no more than 4 to 4.5 percent, to avoid depleting their retirement funds too soon.

So why does Mr. Ramsey use such high figures? He did not make himself available to explain. “Dave is currently working on the completion of his new book and unfortunately is not able to add anything to his schedule, at this time,” a Lampo Group public relations assistant said in an e-mail. “He would like to apologize and thank you for requesting an interview.”

While Mr. Ramsey doesn’t have time to explain his investment philosophy, his staff has made time to talk to advisers who publicly disagree with his statements.

Rick Kahler, a financial planner in Rapid City, S.D., wrote a column in 2007 called “Dave Ramsey, How Could You?” and posted a video version on YouTube, taking issue with Mr. Ramsey’s investment advice. (Mr. Kahler had heard Mr. Ramsey dismissing REIT funds on his radio show, in favor of growth mutual funds.)

Subsequently, a notice from Lampo Group was posted to YouTube, ordering Mr. Kahler to “cease and desist” using Mr. Ramsey’s name in the title of the video and in its “tags,” which are identifiers that allow Internet postings to show up in online searches.

Here’s the text of the message, which Mr. Kahler provided in an e-mail (it also links to the video):

“Dave Ramsey’s name and image, along with other properties of The Lampo Group, Inc. are legally trademarked. Any opportunistic use (including for-fee and nonprofit services/products) of these items without written consent of The Lampo Group, Inc. is strictly prohibited.

In order to protect the Dave Ramsey brand, The Lampo Group, Inc., customers, clients, and other third parties who are in agreement with Dave Ramsey, legal action will be pursued for trademark violations and copyright infringements with anyone who knowingly violates these rules.

We have found violations in your use of “Dave Ramsey” either in the title, keywords, or tags for the YouTube videos below.

Action Required: Cease and Desist using Dave Ramsey or related terms in the title, keywords, or tags of the video above and any other existing and future videos.

We expect compliance with the requested actions by 3/17/2008. Please also notify us when you have been able to comply with the things outlined in this email.”

Mr. Kahler said the issue eventually fizzled after he contacted Mr. Ramsey’s office. His Web site says he is a fan of Mr. Ramsey’s debt-free living advice, although he continues to be publicly critical of his investment opinions.

Have you considered Mr. Ramsey’s investment advice? Are you confident in his understanding of how returns are measured?

Article source: http://feeds.nytimes.com/click.phdo?i=e970125da91953ef264de8c7e9ffae04

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