Bonds without Interest?
By Shawn Meade, CFP®, CPA, MS
I was reading Kiplinger’s recently and came across the article “Ring Out the E-Bonds, Ring in the I-Bonds” by Joan Goldwasser. That got me to thinking. I remember when I was growing up that I would get US Savings Bonds from my grandparents or aunts and uncles from time to time for Christmas or my birthday. I’m sure that many of our clients have the same memory. Twenty years later, you find them stuck in a box somewhere and wonder, “How much are these worth?”
US Savings Bonds are issued by the US Treasury and are backed by the full faith and credit of the US Government, they are guaranteed (I don’t get to say that very often in the Investment Advisory world!).
So the bonds are worth whatever their “face value” is, likely written on the bond itself.
However, while the value is guaranteed, the bonds may no longer pay interest so cashing them in and buying bonds that do pay interest probably makes more sense than leaving them in the attic.
The US Treasury has put all the information you need on their website, http://www.treasurydirect.gov.
The site has a list of bonds no longer paying interest including:
- Series E Bonds issued from May 1941 through January 1980
- Series EE Bonds issued in January 1980
- Series H Bonds – All of them
- Series HH Bonds issued from January 1980 through January 1990
- A bunch of other ones are listed on the website as well
If you want to convert your savings bonds to a similar investment, consider I Bonds, currently paying 3.36% for the current six-month period (November 2009 through April 2010). This rate is composed of a fix rate and a semiannual inflation rate which is tied to the Consumer Price Index for All Urban Consumers (CPI-U).
Another cool feature the US Treasury offers is a website called www.treasuryhunt.gov which allows you to find bonds that were purchased either for you or by you by entering your Social Security Number. The database goes back to 1974 as of right now. I will be the first to admit that I entered my Social Security Number to see if my Mom and Dad had amassed a small fortune of Savings Bonds for me. Alas, the search returned a blank screen.
The Treasury is trying to “go green” and now sets up electronic accounts for people who wish to purchase Savings Bonds, again all of the information is on the website if you wish to do so. I think that is great for “going green” but it means that people will now always be able to redeem their bonds instead of having them lost in people’s attics and so forth. For a government short on revenue, they sure messed that up.
In case you are wondering what happened to all my Savings Bonds that I accumulated over the years, I remember cashing them in while in college with the blessing of my parents. I believe that I used the proceeds to go to Vegas with my wife and two other friends who would eventually become clients of mine. Unfortunately, I can’t amend my taxes for that year and write-off the trip as a business expense which is just too bad.
To wrap this up, 1) make sure you are no longer holding any bonds that are not paying interest anymore, you are just wasting your money, 2) if you believe there are bonds out there for you, go to www.treasuryhunt.gov and check it out and 3) if you wish to purchase bonds, go to www.treasurydirect.gov and open an account and buy the I-Bonds. It’s always nice to get some guaranteed (I had to say it again), inflation protected savings vehicles!
Where is Abraham Flexner?
By Lane Steinberger, CFA, CFP©
C FA MA G A Z I N E / N OV – D E C 2 0 1 0
Today’s investors must demand higher standards from their financial advisers
A century ago, most surgeons secured their education from one of 155 small, for-profit trade schools where they were taught by part-time doctors, not professors. Minimal regulations guided the curriculum at these schools.
Encouraged by the American Medical Association (AMA) and backed with funding from the Carnegie Foundation, Abraham Flexner published a report in 1910 about the quality of education in America’s medical schools. The Flexner Report was an indictment of the medical education system and called on schools to enact higher admission and graduation standards.
In the wake of the report, most of the schools shut down, and the number of medical graduates dropped by half. Today, a prospective doctor completes at least six to eight years of postsecondary education at an AMA-approved institution with full-time clinical professors. In addition, prospective doctors must pass a rigorous state board exam before practicing legally.
At the beginning of the last century, Americans rightly demanded that those who provide their health care meet the highest educational standards. But a decade into the 21st century, American investors have yet to demand the same from those who give them advice about their money.
Indeed, standards are hardly high. To sell financial products, a person has only to pass a two-hour exam that covers basic investment products and laws. There are no educational requirements to become a financial adviser— not even a college degree.
Granted, many brilliant and successful people have no formal education. But would any of us accept legal advice from someone without a law degree?Would we want someone other than a CPA to advise us on complex tax issues? Lawyers usually complete at least three years of law school before sitting for their respective state board exams, and CPAs must complete a 150-credit college degree program.
Although most Americans would be uncomfortable accepting legal or tax advice from a person without a high degree of formal training and education, many of us seem to have a more cavalier attitude about the people we go to for financial advice. And this casual attitude has not produced positive results.
According to a 2009 DALBAR study, “Quantitative Analysis of Investor Behavior,” the average individual investor earns about 7 percent less per year than the market. Given an army of financial advisers out there, how is this happening? With more than 1 million people in the United States licensed to dispense advice on investments, shouldn’t these returns be better?
In short, today’s financial industry is similar to the medical industry in the early 20th century, using methods that lack a rigorous basis and focusing on profit rather than skill. The financial services industry needs an Abraham Flexner of its own, someone to lead the charge to recommend critical and immediate changes to the investment industry.
Some may argue that this proposal is another way for government to impose more rules and restrictions on an already heavily regulated industry. Naysayers had a similar response in the 1930s and 1940s with the establishment of the U.S. Securities and Exchange Commission (SEC) under the Securities Act of 1933 and the development of A It’s time to take the next series of steps to improve the intellectual standards of practitioners in our industry and transform the typical financial adviser from one with a sales product in mind to one with a particular investor’s portfolio in mind. standards for investment advisers with the Investment Advisers Act of 1940. These two acts improved credibility for the industry, although not all unscrupulous advisers have moved on.
Consider the low barriers in the mortgage industry— similar to financial services, whereby a simple licensing test is the main requirement to participate as a broker. Again, no one would seriously argue against the need for increased regulation and oversight in that industry. Even Alan Greenspan admitted to the House Committee on Oversight and Government Reform in 2008 that the oversight failures in this area were among his biggest mistakes.
The ease of entry into the mortgage industry was highlighted in Darrin Seppinni’s 2007 book The Millionaire Mortgage Broker: How to Start, Operate, and Manage a Successful Mortgage Company. Seppinni profiled Mark Shippee, who went from a US$48,000 annual salary driving a Pepsi truck to becoming a mortgage broker and earning more than US$480,000 a year. MortgageDaily.com quoted Leif Thomsen, mortgage millionaire and president of Mortgage Master (one of the largest independent mortgage lenders), as saying, “There is no other business you can come into without an education and make good money.” Thomsen obviously never tried to become a financial adviser.
It’s time to take the next series of steps to improve the intellectual standards of practitioners in our industry and transform the typical financial adviser from one with a sales product in mind to one with a particular investor’s portfolio in mind.
Financial advisers should be required to have a CFA designation or hold a graduate degree in finance to sign off on investment recommendations. The CFA designation requires successful completion of three difficult exams that cover everything from building optimal investment portfolios to determining the option-adjusted spread of a mortgage-backed security using probability trees. Unlike the current tests in many states, the CFA exams focus on economics, portfolio management, accounting, derivatives, and statistics.
Having a CFA charterholder build a customized portfolio for all individual investors may not be practical, but every firm should have a charterholder or comparable expert on staff to assure accountability. For some firms, hiring someone with the necessary knowledge and expertise may raise costs in the short run, but the benefits may include reduced client turnover and higher investment returns, thus producing higher revenue for the firm.
I have found that nearly every financial adviser I know has the Morningstar Principia software on his or her desktop. Many advisers’ investment strategies involve screening the entire universe of mutual funds based on the Morningstar rating system. Thus, the fund with the most stars is immediately added to their buy list. This strategy is destined to fail because, in many cases, a highly ranked fund will be at the bottom of the list within five years, according to Dimensional Fund Advisors data.
Although not all CFA charterholders subscribe to modern portfolio theory, research indicates that asset allocation accounts for more than 90 percent of a portfolio’s return.*
Chasing performance isn’t even good business. Failing to build a well-allocated portfolio that minimizes risk and maximizes return will increase the likelihood of disappointing performance, leading to higher client turn – over and lower fee revenue. Of course, investment returns are not the only factor in client turnover, which is why many advisers focus more on personal relationships. But the relationship-based approach is primarily reserved for high-net-worth clients and won’t help the average investor who barely has enough to retire.
What role should investment professionals play in bringing about the necessary changes? Today, as a result of of the AMA’s efforts, patients are confident that doctors and surgeons have been adequately trained. When was the last time you scrutinized your doctor’s academic background? Besides a quick glance at a diploma on the way out, probably never. That’s because we know that requirements are demanding for anyone who wants to be a member of this elite profession.
By following the example of Abraham Flexner, investment professionals might achieve similar results in the financial industry. And we need to earn the respect of investors now more than ever.
Many investors in 2010 have a problem—looming retirements funded by sickly portfolios. Consumers have to do their part by making healthy contributions to their nest eggs, but investors should also expect more from those dispensing investment advice. Of course, nothing can guarantee that people will receive quality advice (even from educated and experienced investment advisers), but the current path to becoming a financial adviser is much too easy.
* Gary Brinson et al., “Determinants of Portfolio Performance II: An Update,” Financial Analysts Journal (May/June 1991).
529 College Savings Update
by Brian Huey
If you work with an advisor at Redwood and have children, you have heard about the benefits of 529 plans. That may be due to the fact that the advisors at Redwood have a collective 10 children under the age of 8 so planning for the needs of children is a constant topic of conversation in our hallways.
Investors in 529 college savings plans received good news recently as several 529 plan sponsors have reduced management fees. In December, Fidelity Investments announced it was cutting program-management fees in half for its index portfolios in all seven of its state-sponsored plans. The applicable program management costs will now range from 0.25% to 0.35% annually, down from 0.50%.
Separately, Vanguard and Upromise investments lowered program management fees in 2009 on several 529 plans. Competition is driving fee reductions as more states put pressure on plan sponsors to cut costs. Additionally, more plan sponsors are adding lower-cost index funds to reduce expenses associated with 529 plans.
Fidelity is also making some changes in how the money you put in their plans is invested. Fidelity will increase the amount of international stocks it holds in its age-based portfolios to 30% of the overall stock holdings from a current range of 0% to 20%. The company also plans to add an emerging markets fund to its age-based portfolios. This added diversification should benefit the long-term performance of the plans.
529 savings plans are designed to help families set aside funds for future college costs and offer unsurpassed income tax benefits. Although contributions are not deductible on federal tax returns, investments grow tax-deferred and distributions and earnings used to pay for college costs are tax-free.
Are you looking for a creative way to contribute to a 529 savings plan? Fidelity Investments offers a 529 College Rewards American Express Card that allows users to earn 2% for purchases that can be deposited into a Fidelity 529 account. This card has no annual fee and no limits on cash rewards. Other reward programs such as Upromise and Futuretrust may provide additional opportunities to contribute to 529 college savings plans.
Please contact your Redwood wealth manager should you have any questions on 529 savings plans or education planning.
Importance of a Will
By Peggy J. Bailey, Esq.
Morris, Manning & Martin, LLP
In order to save money, potential chaos and hurt feelings among your family members, it is important to plan for the disposition of your estate upon your death.
If you die in Georgia without having a valid Will (known as dying “intestate”), Georgia law dictates who will receive your assets. If you are married and have no children, your spouse will receive all of your assets. If you are married and have children, your spouse will share equally with your children, but will receive no less than one-third of your estate. If you are unmarried but have children, your children will divide your estate in equal shares. If you are not married and have no children, your estate will be distributed to your parents. 1
If you die intestate, a friend or member of your family will have to petition the Probate Court to become the Administrator of your estate. The Administrator may have to post a bond with the Probate Court, file an inventory of your assets, and file returns annually with the Probate Court documenting the disposition of your assets.
If you die having a valid Will (“testate”) you can name the individual you wish to serve as your Executor. You can relieve your Executor from posting bond and filing an inventory and annual returns with the Probate Court. The Court filing fees are substantially less in a probate procedure than in an administration procedure.
Another important reason to have a Will is to appoint the person to raise your minor children if you are no longer here. Appointing a guardian for your children should not be left in the discretion of the Probate Court.
There are a myriad of problems that can arise if you die intestate. Suppose a typical scenario where a young couple with two minor children live in Georgia and have no Wills. The husband takes care of most of their business and the wife stays at home and raises the children. For convenience sake, the husband has most of the couple’s assets titled in his name. The husband dies unexpectedly in a car accident. The family is devastated. The wife now learns that their assets do not all pass to her but she must share them with her two small children. She now owns one-third of the house, one-third of the cars and one-third of all the bank and brokerage accounts. If the wife wants to sell the home or dispose of any of the other assets, she must now obtain the approval of the Probate Court. This can be a nightmare for the wife. The Probate Court will appoint a guardian ad litem for the minor children. The guardian ad litem’s job is to protect the children’s interests in the assets. If the wife gains approval from the Probate Court to sell the house, she will most likely have to segregate two-thirds for the proceeds from the sale for the benefit of the children. It is very timely and expensive to petition the Probate Court every time you want to change the nature of your investments.
The above situation could easily have been avoided if the couple had a Will. A Will sets forth who receives your assets, can save estate taxes, appoints an Executor to administer your Estate and appoints a guardian for your minor children. If you have a Will, you save money, time and confusion for your family members.
1 Official Code of Georgia Annotated Section 53-2-1.
Redwood Grows Again
By Larren Odom, CFP®, MBA
It seems like every recent Redwood newsletter features a story about a new addition to our firm and this quarter’s edition is no different. Ross Hughes joined Redwood as a Portfolio Analyst in November 2009. Ross is a University of Georgia graduate with a degree in Personal Financial Planning.
At UGA Ross completed coursework in Retirement Planning, Estate Planning, Investment Planning, and Portfolio Analysis so he is well equipped to help the advisors at Redwood serve our clients.
“I am a person who loves to help other people. I always knew I wanted to do something where I could be in touch with people and help them achieve their goals,” Ross said.
As a Portfolio Analyst, Ross works directly with Lane Steinberger and the other members of the Investment Policy Committee.
“In my first three months at Redwood, I have learned that I work for a great group of advisors, and I believe it is due to the fact that they are good individuals. They truly care about their clients and about the other individuals in the firm.”
Ross loves hunting, fishing, golfing, and “pretty much just loves being outdoors.” He also loves art, art history, and likes to draw in his free time.
“My goal is to become an advisor. I am hoping after a few years in my position I will be comfortable enough to move into an advisor role. Ideally, I would love to continue working at Redwood when I make that transition. I enjoy investments and think it is an area in which I will continue to focus in the future.”