March 15, 2012

In professional circles, we often talk about a "client-first" attitude, which is shorthand for giving your clients the same quality of financial advice as you would give your mother. It's a useful shorthand way to navigate through a financial world that is still beset by incentive payments, expensive rewards for sales production, under-the-table or soft dollar incentives and a host of other ways that product vendors try to buy their way into your portfolios. 
 

"Client-first" simply means that the client's financial success and well-being comes before all other considerations. It's what you would expect from a doctor or other professional, and many of us believe that you have a right to expect the same level of care from your financial advisor.
 

Unfortunately, there are some professional advisors out there who think this is all a bunch of baloney. Some Wall Street firms and sales organizations are very good at hiding the real agenda behind their advice, and do a masterful job of hiding the profits they skim off the top when you take their recommendations. This is why it was so startling when, in a New York Times opinion piece, Goldman Sachs executive director Greg Smith essentially pulled the curtains back and showed how he thinks Wall Street really works. 
 

Smith declared that he was resigning from the venerable brokerage firm--perhaps Wall Street's most highly-respected organization--because, in his view, its culture is all about putting the client's interests last. "To put the problem in the simplest terms," he writes, "the interests of the client continue to be sidelined in the way the firm operates and thinks about making money."
 

Pulling the curtain aside a bit further, he said that the criteria for promotion and success was not "leadership" or "doing the right thing." Instead, he said, "if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence."
 

How do you make money for the firm? Smith outlined three ways. A Goldman broker or executive can rise in the ranks by "persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit." (Just what you want to buy for your retirement portfolio, right? Or, alternatively, "get your clients--some of whom are sophisticated, and some of whom aren't--to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned," said Smith, "but I don't like selling my clients a product that is wrong for them."
 

Pulling the curtain back still farther, Smith said that "It makes me ill how callously people talk about ripping their clients off. Over the last 12 months, I have seen five different managing directors refer to their own clients as 'muppets,' sometimes over internal e-mail... Will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client's goals? Absolutely. Every day, in fact."
 

He said that the most common question he gets from junior analysts about derivative investments is: "How much money did we make off the client?" He wonders what the effect will be on that junior analyst who sits in the meeting rooms hearing senior executives talk about "muppets," "ripping eyeballs out," and "getting paid."
 

You can read Mr. Smith's comments in their entirety here: http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?_r=2&hp, where you will also see a nice illustration of vultures at feast. He predicts that companies--and people--who care only about making money will not be able to keep the trust of their customers. 
 

But is this true? Chances are, most people reading this eye-opening article will be hearing about these things for the first time, and may not believe it's true about THEIR broker. Millions of people routinely trust their brokers and the big firms that buy Super Bowl advertisements, never seeing this messy view on the other side of the curtain, unknowingly chipping in their retirement.
 

You find yourself wondering: who's going to tell those "muppets"--your hard-working friends and neighbors--that their broker is quietly, invisibly, cleverly putting their interests last?
 

What does this mean for you?Our firm as a Registered Investment Advisor, and we as CFP^®practitioners are bound as fiduciaries. In other words, our recommendations have to be made with only one concern: is this the best thing I (the professional) can do for you (the client), given what I know about who you are and what you want and need? This means “clientfirst” at all times. Hopefully, this information will shed some additional light on how we differ from the large, institutional brokerage firms. 
 

Please call at any time if you have any questions on this or other newsletters.

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Sources:

www.bobveres.com

 President Obama’s envisioned tax reforms could hurt wealthy retirees.

March 6, 2012

On Capitol Hill, a rough consensus is starting to emerge: a feeling that the corporate tax rate should be reduced to help U.S. firms stay globally competitive. At the same time, President Obama’s 2013 federal budget proposes a massive tax hike on corporate dividends, a change that could harshly impact the individual investor. 

 

What if the corporate tax rate fell by 7%? President Obama wants to reduce the current 35% corporate tax rate to 28%. (Three of his possible Republican rivals in the fall 2012 election would like to take it even lower: Mitt Romney proposes capping corporate tax at 25%, Rick Santorum at 17.5% and Newt Gingrich at 12.5%.)¹ 

 

That’s not the only change the President would like to see. In addition, he has proposed: 

·        A minimum tax rate on foreign earnings (the specifics of which would be left up to Congress)

·        An expanded Research & Development tax break to cap the effective tax rate for U.S. manufacturers at 25% compared to the present 32%

• A hiring incentive tax credit for businesses whose payrolls expand in 2012
   
• An extension of the current bonus depreciation extension on capital equipment through 2012^1,2
   

How would the government make up for lost revenue? It would nix certain loopholes, such as deductions on interest on corporate debt and longstanding tax breaks for oil and gas companies. Treasury Secretary Timothy Geithner claims that this corporate tax reform would actually generate $250 billion more for the federal government than under present tax laws. Detractors claim that the reforms would overtly favor manufacturers and discourage oil and gas production. They also point out that at a time when the federal government is crying for revenue, lowering the corporate tax rate by 7% is a weird move; after all, some savvy corporations may pay no taxes at all.^1,3 

 

However, the 2013 federal budget proposal does detail some other methods for boosting tax revenue. One idea in particular is raising eyebrows among investors – particularly retired investors.
 

Should dividends be taxed as ordinary income? Would you like to see your stock dividends taxed at 39.6% instead of the current 15%? If you are an individual making more than $200,000 or a couple making more than $250,000 a year, that would be the reality you face in 2013 if the currently proposed federal budget passes.^4,5
 

Actually, your dividends would be hit even harder if you find yourself in the top tax bracket. Factor in the 2013 budget's envisioned phase-outs of deductions and exemptions, and the rate climbs to 41%; add the 3.8% “millionaire tax” levied to pay for health care reforms and you get to 44.8%. Toss in any state and local taxes, and the picture looks even gloomier.^4,5
 

It is no secret that older Americans own proportionately greater amounts of dividend-paying stocks than younger Americans. This population includes the most economically successful retirees, who do not want to see dividends taxed as they were in the 1990s. If this condition of the 2013 federal budget makes it through Congress unscathed, these households may be looking at major shifts in their tax and investment strategies.
 

What does this mean for you? We will be watching the proposed tax changes to see which, if any, become law.  If and when then do, we will advise you regarding any changes needed in your portfolio.
 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA
 

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.
 

Citations.

www.marketinglibrarby.net

1 - articles.latimes.com/2012/feb/22/business/la-fi-obama-corporate-tax-20120223 [2/22/12]

2 - www.kansascity.com/2012/02/13/3426281/obamas-proposed-tax-hikes-at-odds.html [2/13/12]

3 - www.chicagotribune.com/business/ct-biz-0226-outside-opinion-corporate-tax-rate-20120226,0,990984.story [2/26/12]

4 - news.yahoo.com/seniors-surreptitious-victims-obamas-corporate-dividends-tax-hike-231300879.html [2/24/12]

5 - money.msn.com/tax-tips/post.aspx?post=4bb02697-fe82-4c9a-ad0f-a164f50ce7c8 [2/17/12]

January 13, 2012

Everybody knows that the Greek government has issued more debt than it can possibly repay, which explains why you can buy its government bonds at pennies on the dollar. Today's secondary markets are pricing Greek 10-year issues at prices that give buyers a jaw-dropping 35% yearly yield. By comparison, comparable Treasury securities issued by the U.S. government (which are NOT expected to default) are yielding less than 2%. Germany recently issued bonds at rates even lower than 2%.
 

The discounts on the Greek bonds have the certainty of default priced into them, and, indeed, the Bloomberg news organization reports that the Greek government has been quietly asking its creditors to accept a 60% reduction in interest payments--which would still keep rates around the 14% level. Meanwhile, the German and French governments have persuaded European banks to exchange their Greek bonds for new securities with longer maturities and lower coupon rates.
 

The effort to put the Greek debt crisis safely behind us has recently hit a snag, under circumstances that might interest the “Occupy Wall Street” crowd. According to the New York Times, a small group of hedge funds have been aggressively buying up Greek debt at pennies on the dollar, and now are refusing to negotiate any kind of a haircut. They're betting that the European governments will eventually have to pay them the full face value of the bonds they bought at huge discounts--giving them big windfall profits at a time when everybody else is accepting losses for the sake of long-term Euro stability.
 

It may work. If Greece is forced to break off negotiations, formally default and unilaterally impose the 60% haircut, that default legally becomes a so-called "credit event." A credit event would trigger the payment provisions of untold numbers of derivative contracts, which are basically private insurance policies called “credit default swaps”. The issuers of those contracts--chiefly those same European banks--would suddenly have to pay face value for the Greek bonds that everybody else is buying at a discount. But only if there is a credit event. 
 

Nobody outside the European Central Bank knows exactly how many of these derivatives are held by European lending institutions, but it is clear from the nature of the negotiations that all parties are carefully avoiding this trigger event. The hedge funds, by demanding either full payment or a credit event, seem to have figured out a way to hold the entire European banking system hostage to their demands for outsized profits.
 

The story offers a rare view inside the negotiating rooms where the European sovereign debt crisis is being managed, and suggests that responsible parties are, behind the scenes, working to resolve the European Sovereign debt crisis without a lot of the fanfare you see in breathless headlines. As the bank negotiations move forward, the "crisis" might not be as dire as the headlines make it out to be. There is even a chance that the hedge funds' greedy stand could backfire. The ECB is now inserting what are called "collective actions clauses" in their agreements with banks.  This would let the lenders impose the concessions they had to make on all bondholders, if a majority of holders agree to it. The hedge funds would either have to acquire a majority of Greek debt or lose their leverage--and most of their hoped-for windfall.
 

Sincerely,

Edward J. Kohlhepp, CFP^®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA


Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Sources:

www.bobveres.com

Greek bond rates: http://www.bloomberg.com/quote/GGGB10YR:IND/chart

Proposed haircut on Greek debt: http://blogs.wsj.com/eurocrisis/2012/01/09/2012-kicks-off-in-a-bad-way-for-euro/

Hedge fund blackmail: http://www.businessweek.com/news/2012-01-11/hedge-funds-trying-to-profit-from-greece-as-banks-face-losses.html

The headlines are screaming again, this time about the Capitol Hill controversy over payroll tax cuts. And, as usual, there is more to the story than what you're reading.

First the good news. Earlier reports said that a stalemate on the tax cut would shut down the government, but before the Senate went home for the holidays, it passed a separate bill that finances the government through next September.

Better news: by all reports, Republicans and Democrats were--and are--in general agreement that there should be some kind of stimulus to the still-recovering economy, and the biggest, least-stimulated sector is consumer spending. The Republicans argued for more tax relief for the wealthiest Americans, and want to reduce pollution controls and force the President to approve the proposed Keystone XL pipeline, which would deliver oil from tar sands in Alberta, Canada to refineries in Texas. Meanwhile, the Democrats wanted a broad-based stimulus measure that would put spending money in the hands of more mainstream American consumers. And they supported environmentalist opposition to the pipeline and the pollution proposals. 

Naturally, the two sides couldn't agree on a compromise, so the Senate, by an overwhelming majority, kicked the can down the road for two months by agreeing to continue the reduction in Social Security taxes from 6.2% to 4.2% until Congress could get back in session early next year.

It seems clear that the Senators expected their colleagues in the House of Representatives to follow this simple solution. But nothing is simple in this partisan political atmosphere, and the House (for now, at least) has rejected the measure.

There are several interesting complexities here that should have gotten more attention. One of them is the problems that this wrangling has created for employers, who will have to scramble at the last minute to change their payroll systems to reflect either the 6.2% rate or the 4.2% rate. Which will it be? Who knows? All anybody knows for sure is that the withholding amount will need to be correct starting January 1, and the National Payroll Reporting Consortium has already said that, as a result of the brinkmanship, there is now not enough notice to accommodate any changes that quickly.

Of course, if and when the whole issue is taken up at the end of the proposed two-month extension, companies would face exactly the same dilemma. Chalk this up to a Congress that is oblivious to the consequences of its actions on the business community--especially small businesses.

Behind the scenes, there are other dramas. One involves the very complicated way that the Social Security tax reduction is structured. Reducing the payroll tax would obviously reduce the flow of money into the Social Security trust fund, which is famously experiencing solvency troubles of its own. Neither side wanted to be seen as making the entitlement mess any worse, so the stopgap bill would have had the U.S. Treasury pick up the payments--a sideways accounting move that has no real substance. The bill also prevents doctors who accept Medicare payments from receiving a 27% reduction in reimbursement payments, which would weaken the financial stability of another entitlement program, so the Treasury will pay that out of its pocket as well.

But the surprising thing here is that this is actually a revenue-neutral piece of legislation. The Treasury coffers would be replenished through a side door that nobody seems to have noticed. Title IV, entitled "Mortgage Fees and Premiums," would have raised the amount that Fannie Mae and Freddie Mac--the organizations that back a majority of home loans in the U.S.--would collect in mortgage fees after January 2012. In all, the raised mortgage fees--which would increase the cost of homeownership at a time when the housing market is staggering--would pay for the two month extension of the payroll tax cut (estimated at $20 billion) plus two months of additional jobless benefits for 2.5 million out-of-work Americans (an estimated $8.4 billion) and two months of added Medicare reimbursements to doctors (an estimated $6.6 billion).

Can we call this a stimulus, when money comes out of the pockets of home buyers and put in the pockets of payroll workers, the unemployed and doctors? Since the bill seems to be stuck in partisan wrangling, maybe the question is moot anyway.

How does this affect you?  Anytime that Congress reduces the funds going into the Social Security trust fund, it affects the long term health of the Social Security system. Another major question is how will Congress see fit to reinstate the tax in either 2011, or 2012? They keep calling it a tax increase when it would just be a revocation of the “payroll tax holiday”. 

This is a major problem either way.

Let’s try to enjoy our blessings and ignore Washington for a few days.

Merry Christmas & Happy Holidays!

Sincerely,

Edward J. Kohlhepp, CFP^®,ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP^®, MBA

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Sources: 

www.bobveres.com

Payroll tax issues, and Treasury funding of Social Security:

http://www.nytimes.com/2011/12/20/us/politics/house-set-to-vote-down-payroll-tax-cut-extension.html?pagewanted=all

Fannie and Freddie: http://blogs.ajc.com/jamie-dupree-washington-insider/2011/12/18/paying-for-the-payroll-tax-cut-extension/

Pipeline and pollution aspects of the legislation: http://www.msnbc.msn.com/id/45707185/ns/politics/t/senate-oks-payroll-tax-cut-extension-house-gop-irked/

Could it? Should it? The Capitol Hill debate continues.

December 16, 2011

There is hope yet that this big tax break will return in 2012. While a pair of bills designed to extend the payroll tax holiday stalled in the Senate on December 1, a bipartisan effort could take place to save the tax cut that amounts to roughly $900 a year for the average U.S. household. It may not be taken for granted as much as the annual AMT patch, but it seems unlikely any Congress would want to be remembered for ending such a big tax break for Main Street in such a tepid economy.¹

The big question: how to pay for it. Democratic leaders see a simple way to keep the payroll tax holiday going: they want a new tax on Americans who earn more than $1 million. Republicans didn’t exactly get behind that bill. They countered with their own version, which in the words of Senate Minority Leader Mitch McConnell (R-KY) would “institute a three-year pay freeze on federal civilian employees including members of Congress [and] reduce the federal workforce gradually by 10%.” That bill also went down to defeat.¹

A follow-up question: should we keep paying for it? In 2011, the federal government reduced Social Security taxes by 2% on employee incomes of up to $108,600. The current payroll tax break is being subsidized by the Treasury. Is it wise to lower Social Security taxes when involuntary federal budget cuts loom in 2013 and credit rating agencies are monitoring our level of fiscal responsibility?²

Some Democrats want to reduce the payroll tax down to 3.1% for workers and businesses in 2012 (companies would pay only 3.1% in Social Security taxes on their first $5 million in payrolls). Sen. Sherrod Brown (D-OH) has a bill that would take that $5 million limit to $12.5 million for businesses that expanded their workforces. ²

The payroll tax holiday might turn out to be about as “temporary” as the Bush-era tax cuts, still alive 11½ years after passage (and not dead yet). The key to making the present 4.2% Social Security tax rate permanent? Finding a new and “permanent” method to pay for it that doesn’t risk siphoning dollars away from the Social Security Trust Fund.

What does this mean for you? If you are still working – a payroll tax cut that may continue. However, if this Social Security tax cut continues it will jeopardize the long term efficacy of the Social Security system.

If you are retired, there will be no immediate impact. However, every time the Social Security tax is cut for current wage earners, it jeopardizes the long term health of the Social Security system – a concern for all of us.

Once again, the payroll tax cut seems to be a short term fix for a shaky economy which “kicks the can” further down the road in terms of fixing the system. 

This is not a pleasant note during this Christmas season, but we want to keep you abreast of the important financial news. So in the meantime, let’s focus on the joys of the holiday season…

Merry Christmas and Happy Holidays!

Edward J. Kohlhepp, Jr., CFP^®, MBA

P.S. As we prepared to send this out, there was word that Congress may pass a “2 month” extension to the payroll tax cut. Since approval on the full bill is doubtful, this would allow them to leave on Christmas recess. We can see where their priorities are.

Please contact us whenever there are any changes to your financial situation, personal situation or investment objectives.

Citations.

www.marketinglibrary.net

1 - www.npr.org/2011/12/02/143052779/gop-leaders-lawmakers-at-odds-on-payroll-tax-cut [12/2/11]  

2 - www.cleveland.com/open/index.ssf/2011/12/will_your_payroll_tax_holiday.html [12/1/11]