Add Value to Your Client Experience

Rosemary Smyth MBA, CIM, FCSI, ACC

Rosemary is an author, columnist and an international business coach for financial advisors. She spent her career working at leading investment firms before pursuing her passion for coaching. She lives in Victoria, BC. Visit her website at

It’s still early in 2014 and now is a perfect time to consider what you can do to add value to your client experience. Chances are your competition is currently prospecting your top clients, so you can be sure that a few of them are wondering what value they’re getting from retaining you as their financial advisor. Since value is “perceived”- you need to focus on the client and see what value means to them.
Asking clients for feedback on how you are doing can be set up formally or informally- by just simply checking in or by means of a survey. Be sure to take the feedback as objectively as possible and make changes as you see fit. You may find that a few clients want newsletters in larger print or have quarterly meetings at their home instead of coming to the office. Try to customize your service to each client without having a wide range of additional services that make it difficult to maintain. Focus on the top tier clients first for feedback and make those changes first before moving down to the middle tier.
Below are four steps to jump-start your client experience- enabling you to feel confident about the value you are offering.
1. Review your current client service level
Client service levels for some advisors can be very random, so before you start adding a lot of new structures, examine what is currently happening. It’s important to see the big picture, so involve your team and lay out exactly what clients are experiencing. Look at all aspects of your business; marketing, communications, financial planning, firm events, seminars and lunches. If you haven’t already segmented your clients into top, middle and bottom tiers, take the time to complete that task. Then, look at each segment and examine what each tier is receiving. 
For example, your middle tier clients may receive: financial plans, a monthly newsletter, quarterly reviews and a small gift for making referrals while your top tier receives all of that plus  a client appreciation invite as well as quarterly lunches.
2. Analyze
Once you have completed your review of the current service level, do a simple analysis of how you are doing. Check in and see what’s working, what could work better and what’s not fitting into your budget. Once you have tweaked it and you’re happy, answer the following questions:
• Would clients see a noticeable difference in service if they moved from one tier to the next?
• Is there a sustainable level of service so that if the client base doubled, you would still be able to offer the same level of service?
• Is there a clearly written process for your service levels, so that if admin staff changes you can easily train someone new?
• Do your service level agreements resonate with what your niche market is looking for?
3.  Discover opportunities
Consider what your clients’ goals, wants and needs are and everything they hope to achieve. Match that with your new client service level and everything else you deliver such as products/services. If you find gaps, investigate and see how you can fill them.

For example, if you have a few top tier clients that are planning on selling the family cottage to their children and are not sure what to consider, make that a highlight in your monthly newsletter or offer a seminar that deals with that topic and bring in the experts to answer questions.

4. Get started

The key ingredient in any new plan is implementation. You may have a great idea of what your new service level will look like but getting the ball rolling always seems to elude you. Or worse you start for a few months and then stop. Think about what your resources and budget are for implementing this new service level. How do you plan to maintain it in the future to when your business grows?
If you have a team, decide who is responsible for certain tasks and create a file or binder that explains how each task is implemented and monitored.

During your meetings this week, start researching what clients are really looking for in terms of value and service from you and start to focus on how you can begin to add value to your client experience.

Rosemary Smyth, MBA, CIM, FCSI, ACC, is an author, columnist and an international business coach for financial advisors. She spent her career working at leading investment firms before pursuing her passion for coaching. She lives in Victoria, BC. Visit her website at You can email Rosemary at: and follow her on Twitter @rosemarysmyth.

Take Your Business to the Next Level with Referrals

Aaron Hoos, MBA

Formerly a stockbroker, insurance broker, and award-winning sales manager, Aaron writes for the financial and real estate industry as an educator and marketer. His first book, The Sales Funnel Bible, helps advisors master their sales funnel.

Rosemary Smyth MBA, CIM, FCSI, ACC

Rosemary is an author, columnist and an international business coach for financial advisors. She spent her career working at leading investment firms before pursuing her passion for coaching. She lives in Victoria, BC. Visit her website at

As consumers, we have so much choice in the marketplace and marketing efforts don’t always effectively convince us to buy. The one type of “marketing” that holds the most sway over any decision we make is the enthusiastic referral of someone we know.
The same is true for financial advisors: Prospective clients have a lot of choice but a referral from one of your clients can help to convince the prospect to get in touch with you. Referrals are a great way to reach prospects because the relationship starts with a higher level of trust. Plus, it’s also easier to start conversations with the other person as you have something in common with them. Finding prospects through referrals is a powerful way to grow your business without using up your entire marketing budget.
Integrating a referral system in your practice starts with intention. You need to decide that prospecting by referral will one of your methods of client growth and you need to create a system that you feel confident using.

Create a Referral System

One of the biggest reasons that financial advisors do not get referrals – or the kind of referrals they want – is because they haven’t created a system that enables their referrers to refer effectively. Here are the components that need to be in place:

• Know who you want referred: Know who your perfect prospect is so that you can build an expert status that makes you attractive to prospects. Be able to explain who your perfect prospect is so that if someone is out a dinner party they would know if a person is a good referral for you.

• Communicate the value you offer in a way that your referrers understand: People rarely would know how many investable assets that their friends have but they would know if a friend just inherited money from a relative or if a family member just got a big payout on their retirement package. You are looking for a prospect that has a problem that you are an expert at solving so communicate what that problem is in a way that friends or family would recognize it.

• Have a client experience worthy of sharing with prospects. Clients will be more likely to refer you if they enjoy working with you and feel that you are an invaluable resource.

Implement Your Referral System

By having a system in place to follow, you eliminate the panicky uncomfortable situations where you could come across as needy and pushy instead of confident and processional. Your ideal referral system includes 1) Asking 2) Explaining your process 3) Following up 4) Saying thanks.

1) Asking- Your “ask” has to be proactive. For example, adding the words “Never too busy for referrals” in your email signature or footer is a good reminder but you want a personal conversation with your potential referrers. Your “ask” conversation needs to be timed so that it happens when clients are happy with your level of service and trust in your ability. Be courageous and ask clients for feedback on how you are doing and be willing to adjust your client experience. To be sure that you remember, add “Asking for a referral” as an item on your meeting agenda and then add a note to your CRM about the outcome, if any, from your meeting.

2) Explaining your process. Some clients may think that saying, “call my neighbour Bob, he’s rich”, is a referral. Be able to clearly explain who you want to be connected to and how you would like that connection to happen. For example, you may want your client to contact the person they are referring to get permission from them for you to contact them. Asking for permission to call prospects fits with the Do Not Call rules. Others may want to meet together with a client for coffee and just chat and get to know each other before you talk about their financial situation. Some give their clients a few of their business cards to handout and others prefer email introductions where they are cc’d and ask if is OK to follow up.

3) Following up. This is in two parts. First, you should follow up with the referral name and second, you should let your clients know that you have reached out to the referral. When people give you a name, ask about how they know them, what you could help them with, what kind of introduction would be appropriate and then ask for the contact information. Jumping right into “ Great I’ll give them a call” when they give you a name can put you in a tough spot especially when they tell you that every advisor has fired them and then you end up making an uncomfortable call. The more information you have about the person the easier it is to build rapport and also you have an idea of what products or services they might be looking for. Thank clients regardless of it being a great prospect and if it’s not a great fit you can say, “I’ll follow up with him later when the time is right” or “we talked about finding a better fit for them in the meantime.”

4) Saying thanks. Be appreciative and say thank you to clients with a call or a handwritten card. Some send small thank you gifts that are appropriate and suitable for that client.


Working With Centers of Influence

The system that you set up for clients can be replicated for Centers of Influence (COIs). The COIs, like clients, need to see you as referable, they need to have a referral mindset, they need to understand what your perfect prospect looks like and they need to understand your referral process.
Be clear about reciprocity and how you are going to follow up and thank them. Strive for a win-win business relationship with COIs and be willing to send them your marketing material about what you do and what services you offer.
If you are sending a COI a lot of business and not getting any referrals in return, have a conversation to see if they are willing to send referrals to you and, if not, you may want to choose a different COI that would be more willing to send business your way. It may be time to revisit your process if you are getting lousy referrals from your COIs to make sure you are communicating clearly what you are looking for in a prospect.
Some COIs feel that their client list is confidential and that they can’t give referrals. Have a conversation about how you can be a resource and collaborate on helping their clients in a way that respects their clients’ confidentiality.
Building a business based around referrals is an effective way to multiply your client-generating efforts without multiplying your marketing budget or the time required to prospect. Referrals can flood into your business and completely change your practice if you build an intentional referral system that encourages your clients and COIs to send the right referrals to you.

Advising Clients to Gift to their Children

Joan Sharp, CFP®, ChFC®, CAP®, RLP®, MSFS

Joan Sharp, CFP®, ChFC®, CAP®, RLP®, MSFS, is founder and president of Life Strategies, LLC based in Delaware.

If your client is lucky enough to be in a strong financial position, gifting is one way to approach the subject of their children’s financial well-being. Gifting opens the door for conversations about money between parent and child. You may discover that many of your clients are afraid to talk about money with their kids. This is probably because they don’t want to create a lazy mentality and give their children the feeling that they do not have to work to support themselves. Or perhaps your clients seek to avoid the topic altogether in an effort to create normalcy in their home. In this case, as their advisor you need to remind your client that when their child receives a windfall someday, they will not be equipped to handle their financial matters. Like lottery winners who discover the desire for unearned success, the majority of people who experience this windfall will squander the money.

My experience has shown that the best way to begin this client conversation is by urging clients to be honest with their kids. It is important to start talking about money issues when the kids are young. They never want money to become the driver of their lives.

Clients need to understand that with gifting comes the responsibility of managing money and striving to obtain a balanced life. While clients may have begun to talk about money with their kids, they have to show them that work provides a sense of identity and is not all about the money. Hopefully, your clients are involved in their communities, follow a passion or have explored undeveloped talents. Tell your clients that kids will often follow what their parents do. Urge them to lead by example.

Clients also need to become better communicators. As an advisor, you can help in this process. Suggest your clients give their children room to grow and share their strengths with the world. Encourage them to educate their children about money—talk about it, open accounts to manage and challenge them to think about spending and saving and how to use money to support passions and develop talents. One option is to open a donor advised fund and allow the children to make the grants. This helps prepare them for running family foundations and their own future charitable giving. Perhaps your client might even introduce their children to you, giving you the opportunity to reiterate some of these ideas.

Foremost, your clients need to create a reality for their children. If they open the door to gifting, it should be used as a vehicle to teach financial responsibility and as a way of educating their children about their money stories and family heritage. Your clients should embrace teaching moments so their children learn about the value of money. Perhaps every time your clients deposit money into their children’s account, they should have their children give back in some manner. Help your client feel comfortable developing their kids’ talents, work ethic or an interest in volunteering. And don’t forget to tell your clients that it is okay to let their children take charge.

In advising your clients that it is time to begin a dialogue about money with their children, consider providing these steps for them to follow:

1. Clients need to get over their fear of talking about money. It’s their issue. They shouldn’t make it an issue for their kids.
2. Have your clients show their kids what the bills look like, what things cost, how they choose to spend money.
3. Your clients should build a strategy as a family that is not based on money but rather on what is important to their family. Let kids make choices and decide which items are important and how much to give to different charities/the community.
4. They can gradually give their children more financial responsibility. Maybe participating in a family outing to Montana or Europe where their kids make some of the financial decisions would be a good exercise.
5. Show them how hobbies and interests could potentially become careers. This is a way in which they will learn to enjoy work not purely for money.

To have this conversation, you must understand your client’s money issues as well as their life priorities. Basically, you are teaching your clients to help their kids form a strategic vision, not a tactical vision.


Originally published in the Spring 2013 issue of The Wealth Channel Magazine, How Fast Can YOU Adapt?

“Hello” to “Yes”- Become a Professional Persuader

Aaron Hoos, MBA

Formerly a stockbroker, insurance broker, and award-winning sales manager, Aaron writes for the financial and real estate industry as an educator and marketer. His first book, The Sales Funnel Bible, helps advisors master their sales funnel.

Rosemary Smyth MBA, CIM, FCSI, ACC

Rosemary is an author, columnist and an international business coach for financial advisors. She spent her career working at leading investment firms before pursuing her passion for coaching. She lives in Victoria, BC. Visit her website at

When you sit down with a prospect or a client, you probably open the conversation with a brief comment about the weather, followed by a discussion about families or work or a news headline. At some point, the conversation shifts and you discuss some aspect of the client’s finances or portfolio – perhaps listening to their ideas or giving advice from research you’ve performed.

To an untrained eye, this was just an advisor and a prospect or a client having a conversation. But look closer and you’ll discover powerful selling forces going on below the surface. And understanding these selling forces can help you convert more prospects to clients and can help you do more business with your clients.

The Three Objectives of Every Conversation

Every conversation you have with prospects and clients has three objectives:

• To build rapport
• To communicate information
• To persuade

Depending on the relationship you have with your client, and what you wish to achieve with the person in the long-term and in the time you have available at the moment, each conversation might have more of one objective and less of another.

Rapport-building: Conversations about the weather are mostly rapport building. There tends to be more rapport-building at the beginning of relationships and at the beginning of conversations, although rapport-building does continue throughout each conversation in a relationship.

Rapport-building conversations tend to be very “surface” conversations, seeking mild opinions on topics that are relatively well-known and where some agreement likely already exists. This is why you probably won’t use topics like religion or politics when rapport-building, unless you happen to belong to the same religion or political persuasion of the person you’re speaking to.

The goal here is to find further common ground. Some rapport-building will simply touch on topics that have no long-term significance (such as the weather) while other rapport-building will touch on topics that do have long-term significance (such as families).

Communicating information: Conversations should also communicate information. You communicate financial advice information to your client and they communicate back to you with their feedback of your ideas and with potential new ways that you might be able to serve them.

For example, conversations about family and work build rapport but, if you’re paying attention, they also communicate valuable information by hinting at opportunities that allow you to serve your clients further. Perhaps the birth of a new child or an impending retirement suggest ways that you can provide more helpful advice to your client.

The goal here is to ask great questions and to listen closely to the answer. You can build off of some of your rapport-building conversations but go deeper, asking about the future and the other person’s plans. And then listen actively to the response!

Persuading: Persuasion is part of your job, unfortunately the term “persuade” is often misunderstood to mean aggressive sales or pushiness. However, professional persuasion is how advisors grow their business: You persuade prospects to become clients and you persuade clients to take a sensible course of action by following your advice. (Of course they may choose not to become clients or to follow your advice but professional persuasion should present the best course of action for them so they know what you think they should do).

Persuading presents the best choice to make and outlines the reasons why someone should make that choice. Persuasion grows out of rapport-building and communicating information. If you haven’t built rapport and if you haven’t communicated the right information, your persuading will fall short.

Financial advisors’ practices are built around conversations. Master these conversations by understanding the three key objectives you strive for in every conversation and then prepare before each conversation to help you convert more prospects to clients and to help you work more effectively with your clients.

Action Steps

• List a number of topics that you can use to build rapport. Think of topics that you feel comfortable discussing that you probably share some mutual agreement with your clients.
• Memorize a list of questions that you can draw from to show that you take an interest in your prospect or client.
• Reflect on the ways that you have persuaded prospects and clients in the past. What results have you achieved with the persuasion methods you’ve used?
• We’ve simplified the concept of “selling” down to this one concept: Persuading presents the best choice to make and outlines the reasons why someone should make that choice. Prepare for your upcoming conversations by thinking of 2 or 3 specific prospects or clients you’ll be speaking to soon. Identify the best choice you’re going to recommend (i.e. become a client or invest in a particular investment) and then list as many reasons as you can for that person to follow that course of action.


The views expressed here are those of the author and not necessarily those of The Wealth Channel or The American College

Embracing the Serve First Philosophy

Frank W. Sarr, CLU®

Frank W. Sarr, CLU®, is founder and president of Training Implementation Services, Inc.

Decades ago, legendary agent and manager Stuart Smith conceived a philosophy of serving the client first and letting the financial rewards take care of themselves. Smith’s concept became an integral part of the culture at his company, and many disciples still practice it today. The essence of the “Serve First” credo is that:

• The focus is entirely on serving the client.
• No product or solution is recommended until the advisor understands all of the client’s financial and personal objectives.
• Despite the amount of work involved on the advisor’s part, there might be no sale.

An understandable reaction to this approach might be, “Are you kidding?” However, as those advisors who believe in and practice it could tell you, the Serve First way of life can be richly rewarding, personally, professionally and financially.

A dual foundation
This philosophy rests on a foundation of time and service. The advisor must be willing to invest the time required to thoroughly understand the client’s financial situation and must believe that service is their differentiating factor.

To appreciate the need to invest enough time, let’s look at this episode from the Seinfeld show:

After scalding himself with their hot coffee, Kramer sues a Starbucks-type chain. En route to the settlement meeting, Kramer’s attorney advises him to say nothing until they hear the defendant’s offer (which, viewers learn, includes free lattes for one year and $50,000). As soon as the defendant’s lawyer leads with free lattes, Kramer yells, “I’ll take it!” By not waiting to hear the full story, Kramer gains some lattes but loses out on the more lucrative settlement.

What about an advisor’s dialogue with a prospect? Does the advisor hear and consider the person’s entire financial situation before making recommendations? Or by jumping the gun as Kramer did, do they risk losing out on a much more substantial reward for both the client and themselves?

The Serve First philosophy also relies on the advisor’s confidence that their service is the differentiator. To illustrate this differentiation, here’s a true story:

A business-owner prospect told an advisor that he wasn’t interested in meeting him because he had just purchased a $50,000 policy. The advisor saw this as good news because he had been taught that the purchase marked this prospect as a buyer and, because it was probably a product rather than a Serve First sale, the policy amount was more than likely insufficient. The advisor persisted, got the appointment and gathered pertinent information. The advisor’s sales manager instructed the advisor to obtain some additional data from the prospect. This led to a recommendation of an additional $250,000 of life insurance. Upon hearing this (and confident that it would quash this ridiculous proposal), the prospect directed the advisor to meet with his accountant to discuss it. As a result of that discussion, the accountant was convinced that what the prospect actually needed was a $500,000-policy!

Lessons learned
What do these examples tell us about this sound sales philosophy?

• Time is money (or can be). It may require multiple steps, staff support and possible meetings with the prospect’s advisors, so be prepared to take time and do a lot of work.
• Go long. Go deep. Probing long enough and deep enough without any preconceived ideas as to the proper amount of insurance and/or products to be sold will not only uncover the facts of the situation, but even more importantly, the reasons that will induce the prospect to buy. Instead of worrying about the sale, the advisor should concentrate on gathering all the information needed to recommend a solution that motivates the prospect to act.
• Adjust for inflation. In the example, the sale was 10 times the amount of the original policy. If you start with a number ($50,000, $100,000, etc.) as the base product sale, there’s an excellent chance that the inflation ratio will hold up.

Orchestrating a Serve First culture
It always begins with recruiting. Today’s recruits seem excited about the Serve First concept. They want to be perceived as true professionals, capable of delivering total financial solutions to their clients and experiencing the financial rewards that will be generated for them. In the past, in the back of their minds, new recruits hoped “total financial planning” didn’t mean having to sell life insurance. In contrast, today’s recruits who are attracted by the Serve First concept recognize life insurance as the cornerstone of a sound financial plan, and a significant factor in the recommendations they make.

While a Serve First philosophy may motivate a recruit to join your agency, during their initial training new hires will constantly seek confirmation of whether you really walk the talk. It is imperative that your sales process reflects what’s required to communicate and implement this philosophy. For example:

• Does your initial interview script reinforce the philosophy’s tenets? This script is, in fact, the initial face of your Serve First philosophy to both the advisor and their prospects.
• Will the recruit’s initial training go beyond closing a single-need product sale and encourage and teach them how to gather the kind of in-depth information that builds understanding and trust?
• Is there a process to analyze and design a presentation that goes beyond a single-need sale?
• During joint work, does the mentoring sales manager or advisor model the philosophy?

A client’s financials can be a complicated tangle. In-depth fact-finding can uncover issues in which an advisor lacks experience. In the past, the cost of providing support when needed became prohibitive. Today, more and more Serve First-minded agencies are building alliances with outside professionals and/or teaming advisors with other advisors within their agencies to provide support in situations requiring specialized knowledge. This enables the agency to expand its services to their clients.

When gathering a client’s financial information, advisors might hesitate to ask questions about subjects they themselves don’t thoroughly understand. They can become immobilized by what they don’t know, as opposed to what they need to find out. Uncovering sufficient information to move the prospect to the next step is less about extensive book knowledge about a given subject than asking the right questions and listening to the prospect’s answers.

Think about how doctors and lawyers do their fact-finding. Asking the right questions signifies confidence and professionalism, not lack of knowledge.

New life for life insurance
A Serve First advisor needs to believe in life insurance as the foundation of what they do and embrace it as a viable solution for their clients. Given the unsettled economic climate in recent years, whole life insurance has weathered the storm so well that many advisors see it in a new light. From a secondary nice-to-have, a substantial life insurance policy is emerging as a vital must-have component in anyone’s portfolio.

Activity is key
While this philosophy can be both personally and financially rewarding for an advisor, the ever-present, offbeat elephant in the room is activity. An issue 70 years ago when Albert E. N. Gray penned The Common Denominator of Success, activity continued to be enough of an issue in 2010 to motivate Nick Murray to author The Game of Numbers.

As they’re learning to implement the Serve First philosophy, the need to invest more time to close a substantial case—especially when combined with low activity—can imperil the new advisor’s very survival.

The solution to this dilemma is a two-part approach:

1. Generate high activity by working on cases in which the need is evident and thus can be closed quickly.
2. At the same time, pursue the more sophisticated but time-consuming cases.

The good news is that high activity—regardless of the source—hones skills, grows confidence and generates needed income.

The important thing for the advisor to remember is that large or small, every case must be approached with the same focus, professionalism and Serve First mindset. Only by going long and deep can they reveal someone’s true financial picture. Thus, even when working on a perceived small-case situation, instead of making a $50,000 product sale, they might find themselves forging a $500,000 long-term relationship with the client.


Originally published in the Spring 2013 issue of The Wealth Channel Magazine, "How Fast Can YOU Adapt?"

Federal Wealth Transfer Tax Reform—Certainty for Now

Ted Kurlowicz, JD, LLM, CLU®, ChFC®, CAP®

Ted Kurlowicz, JD, LLM, CLU®, ChFC®, CAP® Ted is the Charles E. Drimal Professor of Estate Planning and a Professor of Taxation at The American College.

It’s been a long and very strange journey tracking the federal estate and gift tax laws since 2001. After many years without significant change, the federal estate and generation-skipping transfer taxes were statutorily phased out and repealed by the first of the Bush-era tax cuts. Although many prognosticators never thought full repeal was likely, estate owners fortunate enough to die in 2010 had the opportunity to pass their bounties without wealth transfer taxation. A two-year reform was passed at the end of 2010 giving us an indexed $5 million exemption for gift, estate and generation-skipping taxes with a 35 percent tax rate. This provision once again was scheduled to sunset at the end of 2012, followed by a return to the wealth transfer tax system that existed prior to June 2001. Some high net worth individuals rushed to make maximum gifts by the end of 2012, certain that Congress would permit the gift tax exemption to return to a mere $1 million. Even those gifts were made with trepidation because of the possibility of a clawback affect in the estate of those who made such gifts if the gift tax exemption was reduced.

Essentially, all of our estate tax planning for the last 11 years was based largely on guesswork due to the uncertain future of the wealth transfer tax system. With the American Taxpayer Relief Act of 2012 (ATRA), we finally have legislation reforming the federal wealth transfer tax system without sunset provisions.

Estate, gifts, and generation-skipping transfer tax provisions of ATRA
After debate and compromise, the rules moving forward are fairly simple. The key components of the legislation provide:

Tax rates. Congress compromised to set the tax rate of 40 percent. There are lower brackets in the table, but the maximum rate of 40 percent applies to transfers over $1 million. Hence, the first tax payable will be at 40 percent for transfers subject to gift, estate or generation-skipping taxes.
Exemption amount (applicable exclusion amount). The exclusion amount for all three wealth transfer tax systems will be $5 million indexed annually for inflation. Because inflation indexing already applied in 2012, the applicable exclusion amount for 2013 is $5,250,000.
Portability of applicable exclusion amount. The portability provision, which permits the surviving spouse to inherit and use the unused exclusion amount (DSUEA) of the deceased spouse is now a permanent provision. However, the portability provision is limited to estate tax and is not available for the unused GST exclusion. This provision appears to be a no-brainer at first glance, but some considerations in specific estates warrant further discussion (refer to next section).
Estate tax deduction for state estate or inheritance taxes. The deduction for state succession taxes paid is now permanent. This means that the federal estate tax credit for state death taxes paid is repealed. This provision is not much of a surprise because the old credit caused federal estate tax revenue to be diverted to the states.

Planning implications of the new wealth transfer tax provisions
That the ATRA provisions were made permanent and we can stop warning taxpayers about sunsets and clawbacks is certainly some relief. The higher exclusion amount seems to eliminate more than 99 percent of estates from the federal estate tax. The danger created by this simplicity is that the need for estate planning is more important than ever irrespective of wealth transfer taxes, and estate-planning issues will vary depending on net worth. Remember, there is no “one size fits all” estate plan, and it remains critical to be able to examine fact patterns carefully and explain the implications for alternative methods of transferring wealth.

Net worth up to $500,000
This marketplace has been largely underserved with respect to any significant estate planning. This is unfortunate because smaller estates need to be transferred efficiently. Many heirs might find their inheritances essential. It is estimated that somewhere between 60 and 70 percent of American adults do not have a will. Even if a will has been drafted and executed, it often has not been reviewed, and its implications are generally not understood. Individuals in this category of net worth are likely to be reluctant to spend significant legal fees to execute and periodically review their wills.

It is incumbent on the various members of the planning team to be able to explain and reinforce the provisions of the will. Individuals creating their wills are often unaware that only probate property is distributed by the provisions of the will. Unless the individual is single or a surviving spouse, it is unlikely that he or she will have significant probate if their net worth falls in this range.

Joint property will also create confusion. Married couples often title their property to pass automatically to the survivor or may reside in a community property state that has implications on the transfer of property. Joint property titling is also used by senior family members in lieu of a general power of attorney. If joint titling of financial accounts with survivorship provisions is used with next-generation family members, this can lead to confusion, disappointment and disputes. Estate planners should carefully explain the implications of jointly titled accounts.

Other transfers are often made by beneficiary designation. Often, the titling of property and beneficiary designations are decisions that are made quickly and without much advice concerning the estate-planning implications. Members of the planning team should be able to help these individuals with a beneficiary designation audit and determine how the individual has selected to answer the important who, how and when questions that should be answered by anyone transferring property. For example, is it possible that outright transfers have been planned to heirs who have not reached the age of majority (or better yet, the age of maturity).

The key to estate-planning momentum is an individual who is not comfortable with what would happen to his or her estate if they were not here tomorrow. Once the deficiencies of the current estate plan have been explained and addressed, it is possible to have discussions concerning appropriate asset allocation and problems that can be addressed with planning or products solutions such as retirement income planning, life insurance, disability income insurance, annuities and long-term care insurance.

Net worth between $500,000 and $5 Million ($10 million for married couples)
I selected this range somewhat arbitrarily to address individuals with significant amounts of wealth to transfer but who are unlikely to face any significant federal estate taxes.

Individuals in this category have the capability of paying for significant estate-planning advice but, in my experience, will often not see the need for this expenditure. They typically have accumulated this wealth in one generation, maybe enhanced by some modest inheritance. All too often, the federal estate tax has been the focus of too many planners in the past. The enhanced exclusion amounts coupled with portability of exclusion amounts would seem, at first glance, to indicate simple wills if the focus is primarily on the federal estate tax. Important estate-planning considerations for individuals in this range of net worth include:

Portability versus exclusion trusts. The surviving spouse can inherit the unused exclusion amount (DSUEA) of the deceased spouse. It is required that a Form 706 Estate Tax Return be filed for the deceased spouse to transfer the unused exclusion. We’ve had two years experience to tell us that this is often a difficult recommendation, particularly for people at the lower end of this net worth category. There is no Form 706–EZ and this would require a significant expenditure. There are numerous good reasons to continue to use what we used to call the “credit shelter trust” to use the exclusion immediately at the first death. First, it creates a freeze of the growth of the transferred assets exempt from tax. Second, an exclusion amount transferred to a surviving spouse is not indexed for inflation after the first death. Third, the GST exclusion cannot be transferred to a surviving spouse. The exclusion trust could perhaps be created during lifetime in the form of a spousal limited access trust  (SLAT). The earlier such a vehicle is created, the greater the freeze of the potential estate appreciation. A careful examination of each fact pattern is necessary to determine whether or not to plan for portability or create the exclusion trust.
Impact of appreciation. The estate of individuals in this category should be examined to determine the potential growth of net worth to determine if the individuals will potentially jump into the next category. Certainly many circumstances such as a family business, private investments, inheritances or even lottery winnings could indicate a change in the level of planning.
State estate or inheritance taxes. The impact of state inheritance or estate taxes should be examined because these could significantly shrink an estate. Some states (Pennsylvania, for example) have an inheritance tax that applies without many exclusions. In the worst-case scenario, the Pennsylvania inheritance tax rate is 15 percent. Many other states fall into the category of decoupled states and apply an estate tax as if the federal estate death tax credit was still in existence. These will have different exclusion amounts depending on the state. For example, New Jersey’s exclusion is only $675,000, while other states have the exclusion as high as the current federal level. It is important to note that the state tax will apply to the decedent in his or her state of domicile, and real estate located in other states is subject to succession taxes in the state where the real estate is located.
Gifting strategies. Individuals at the higher end of this net worth range should have the capability of making some significant lifetime gifts. Perhaps some of the family members have pressing immediate needs for a gift. Gift planning becomes more important as wealth levels near the federal exclusion amounts to prevent or reduce future estate taxes. Gifts will also be very effective if state inheritance or estate taxes are a concern because the vast majority of states do not have a state-level gift tax.
New or existing life insurance. Life insurance may be indicated for many estate-planning purposes irrespective of an estate or inheritance tax. Perhaps there are family members with special needs. Maybe there is a blended family and life insurance can help provide for specific beneficiaries, such as the new spouse or children from a prior marriage. Perhaps a family business must be transferred and the estate must be equalized between active and inactive children. Life insurance has always been a perfect liquidity tool in this situation. What about existing insurance, perhaps in an irrevocable life insurance trust (ILIT)? Even though the estate may no longer be subject to federal estate taxes, we certainly don’t want to terminate or defund an existing trust without careful consideration. First, we should consider how well the policy is performing. Terminating an effective policy would make no sense, particularly with the currently low alternate investment yields. We certainly could change the existing policy to a new policy or another investment. This might be indicated where there is a single life policy and the insured’s spouse is the income beneficiary of the ILIT. The ILIT might be useful for retirement income planning in this scenario.
Asset protection planning. Asset retitling and/or the use of trusts will be indicated if either the estate owner or any of the heirs have significant asset protection concerns.
Planning for nontraditional relationships. Planning for the circumstances would begin with a consideration of whether or not the relationship is a marriage. In many scenarios, couples will choose not to be married and the federal estate tax marital deduction will not be available. In this circumstance, federal estate taxes will be imposed on estates above the federal exclusion amount. A growing number of states have enacted statutes permitting marriage for same-sex couples. Traditionally, states have solely held the power to determine marital status. This presumably could get more confusing if a couple married in an enabling state moved to a state that statutorily refuses to recognize a same-sex marriage. The Federal Defense of Marriage Act (DOMA) provided that same-sex marriages would not be recognized for federal law. This presumably would include the federal estate tax marital deduction. It is expected that the Supreme Court will rule on this issue in the near future.

Net worth over $5 Million (over $10 million for married couples)
Planning for individuals or couples in this category must include the consideration of the potential federal estate and generation-skipping transfer taxes. Estate planning will invoke consideration of the traditional techniques to mitigate the effect of federal wealth transfers taxes. Again, the estate-planning process for these individuals should not be focused solely on taxes and should include much of the planning we have already described for individuals in the lower net-worth ranges with the addition of the following:

ILITs. This time-tested planning technique is particularly useful the higher the net worth exceeds the exclusion amount. I don’t particularly favor ILITs for marginal amounts of federal estate tax. But when the potential tax is significant, individuals or couples can use this technique to replace all the wealth lost to federal estate taxes. The new higher exclusion amounts certainly help us with the funding of the ILIT. High net worth individuals are often already using the annual gift tax exclusions. Even if the gift tax exclusion is available, $14,000 per beneficiary may not sufficiently cover all of the gifts to fund a significant premium. The $5,250,000 exclusion amount could be used to cover any otherwise nonexcluded gifts.
Low interest rate planning. Quantitative easing has provided us with historically low interest rates, and this provides the opportunity for high net worth individuals to transfer wealth with unprecedented leverage. Techniques that should be examined to take advantage of low interest rates and/or enhanced gift tax exclusion amounts include intrafamily loans, grantor retained annuity trusts (GRATs), charitable lead annuity trusts (CLATs), and sales to intentionally defective trusts. Through these techniques, the investment chosen for the invested principal of the gift and/or sale needs to exceed the historically low interest rates applicable to the technique. The greater the actual investment return, the more effective the transaction. The interest rate changes monthly and is different for specific techniques.

The future
Future legislation could, of course, alter the techniques used in estate planning. However, it should never alter the process of examining an individual’s situation and asking the important questions.


Originally published in the Spring 2013 issue of The Wealth Channel Magazine, How Fast Can YOU Adapt?

Don’t Let Health Care Costs Crack Your Nest Egg

Ryan E. Price

Ryan E. Price, CFP®, ChFC®, CLU®, CRPC, AWMA is the President of Price Financial Partners located in Irvine, CA. He has more than a decade of experience dealing with high net worth clients in the areas of investment, retirement, estate, insurance & business succession planning. In addition to managing his practice, Ryan is also Field Training Supervisor for a division of Lincoln Financial Advisors. Ryan currently serves on the board of Lincoln Financial Advisors Advisor Based Sales Division & is a member of LFA’s prestigious Private Wealth Services group. He is currently a member of the National Association of Insurance & Financial Advisors (NAIFA) where he serves on the membership committee and is on the Education Committee for the Financial Planning Association (FPA) of Orange County. He is a frequent lecturer on financial planning topics and has taught multiple courses at The American College, UCLA & UCI extension.

Escalating health care costs can undermine the best-laid retirement plans. One of the biggest risks lies in the cost of long-term care. Unfortunately, health care costs in general have been outpacing inflation, and this trend to may continue.

Even if you’re currently in good health, you can’t guarantee that it’ll continue in your later years. Not being prepared can be very expensive. According to AARP, the average cost is $5,566 a month for a semiprivate room in a nursing home, and $6,266 a month for a private room*. At that rate, it wouldn’t take long to put a sizable dent in the most solid of nest eggs.

Most people think of long-term care as nursing-home care, but, in fact, most of the people who need long-term care need it in their own homes or in assisted living. This means that nursing homes are only one part of the picture. About 60 percent of the population over age 75 will need long-term care for approximately three years2, whether in a nursing home, assisted-living facility or at home. The latter two alternatives – while usually less expensive than nursing-home care – are by no means cheap. Care in an assisted living unit costs $2,968 a month on average, according to AARP.* Round-the-clock care at home can also add up fast.

Insuring Against the Cost
Long-term care insurance policies are designed to defray the cost of nursing-home, assisted-living and at-home care –costs that are not covered by Medicare except in very limited circumstances. Today’s policies typically offer the same daily benefit for each level of care. Eligibility kicks in when an individual is unable to perform two out of six “activities of daily living.” These include toileting, bathing and being ambulatory.

If you have $10 million in assets, you may not need long-term care insurance. But $5 million may not be enough, as comfortable as it seems, especially if half of those assets are locked up in illiquid assets such as real estate or if you want to leave as much of your estate as possible to your heirs. The government adds an incentive in terms of partially tax-deductible premiums. For 2009, the yearly maximum deductible amount of $280 for those under age 41 rises to $3,530 for those over age 70.

But don’t wait to buy long-term care insurance until age 65, because premiums then could be very high. The most cost-effective purchase point is from the early 40s to the early 50s. Whenever you buy, be sure to buy a policy that increases benefits to keep pace with inflation. You can also keep costs manageable by electing a waiting period before benefits begin and by limiting the length of coverage to four or five years instead of a lifetime.


Beyond Long-Term Care
If you retire at age 65 or beyond, Medicare plus a Medicare Supplement policy should cover most of your medical expenses. If you retire earlier, however, you may want to purchase a personal health insurance policy. Either way, it’s crucial to select coverage that matches your lifestyle. For example, if you enjoy foreign travel, you may want to consider a policy that includes coverage outside of the United States.

Long-term care insurance is designed to be flexible where you can control the costs relative to the benefits you wish to receive. Long-term care policies offer various kinds of coverage. Some offer adjustments for inflation, others pay only for a stated number of days, and others offer a life-time benefit. When deciding on a policy, you should compare the benefits of different types of policies, the limitations and exclusions, the types of facilities the policy would cover, and the cost of the premiums.

*”What Does Long-Term Care Cost? Who Pays?” (, accessed April 2009.


Ryan E. Price, CFP®, ChFC®, CLU® is a registered representative and investment advisor representative of Lincoln Financial Advisors Corp., member SIPC, [18400 Von Karman Ave., Ste 450 Irvine, CA 92612 949-623-1788] offering insurance through Lincoln affiliates and other fine companies. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances. The content of this material was provided to you by Lincoln Financial Advisors for its representatives and their clients.

CA Insurance License #0E10210

Top College-Planning Mistakes Parents Make

Ryan E. Price

Ryan E. Price, CFP®, ChFC®, CLU®, CRPC, AWMA is the President of Price Financial Partners located in Irvine, CA. He has more than a decade of experience dealing with high net worth clients in the areas of investment, retirement, estate, insurance & business succession planning. In addition to managing his practice, Ryan is also Field Training Supervisor for a division of Lincoln Financial Advisors. Ryan currently serves on the board of Lincoln Financial Advisors Advisor Based Sales Division & is a member of LFA’s prestigious Private Wealth Services group. He is currently a member of the National Association of Insurance & Financial Advisors (NAIFA) where he serves on the membership committee and is on the Education Committee for the Financial Planning Association (FPA) of Orange County. He is a frequent lecturer on financial planning topics and has taught multiple courses at The American College, UCLA & UCI extension.

Paying for your children’s college educations should actually be placed quite low on the totem pole of financial priorities. Why? There are several reasons for this, such as the availability of tools to pay for college, such as financial aid in the forms of student loans, grants and other programs where loans are forgiven in exchange for public service in low-income communities. But ultimately, it’s also because focusing too much on college savings can jeopardize a family’s overall financial planning strategy.

First Things First
Some family financial needs may be a good thing, like college for other children, or they can be tragic, like long-term care costs for the parents themselves or medical expenses for grandparents. Devoting too many resources to college savings can cut into preparing for inevitabilities such as retirement which—unlike financing college—can’t be funded by loans.

Since college costs these days are skyrocketing, how should parents prioritize their saving and investing plans? Consider adhering to the following priorities, in this order:

• Establish an emergency fund. It’s critical to establish an emergency fund with at least six months worth of living expenses. This is a key building block for meeting a family’s basic financial needs. After all, what if you have a job change or you get laid off? If you don’t have six months worth of expenses to fall back on, you can’t go into that 529 account and take money out without a penalty and taxes.

• Fully fund employer-sponsored retirement plans. A major mistake many people make is reducing contributions to their employer-sponsored retirement plan in favor of investments toward a child’s education. Instead, the priority should be in making as large a contribution as possible into a 401(k) or 403(b) plan. Doing so not only enables you to take advantage of any employer match available, it also provides potentially significant tax advantages.

• Take care of insurance needs. Too many parents make the mistake of ratcheting back on life or disability income insurance in order to save for a child’s education. But if something bad should happen, both college and a family’s most pressing needs may be in jeopardy. If the primary breadwinner isn’t working and doesn’t have income coming in for a long period of time, then college is, in many cases, out of the question. Parents should save for college while simultaneously retaining insurance coverage.

• Don’t forget IRAs. It’s crucial to continue funding both your Traditional and Roth IRAs as much as possible. Roth IRAs are particularly good in case parents want to use some portion of those assets for college, because in some circumstances, after five years the contributions into a Roth IRA can be withdrawn income tax and penalty-free. Roth IRA earnings taken prior to age 59 ½, may be subject to a 10% federal tax penalty and possibly state income taxes.

While financing all or part of your child’s college education is a worthy goal, it’s critical to keep your family’s overall financial picture in mind when making financial planning decisions.

The views expressed here are those of the author and not necessarily those of The Wealth Channel or The American College. Ryan E. Price, CFP®, ChFC®, CLU® is a registered representative and investment advisor representative of Lincoln Financial Advisors Corp., member SIPC, offering insurance through Lincoln affiliates and other fine companies. This information should not be construed as legal or tax advice. You may want to consult a tax advisor regarding this information as it relates to your personal circumstances. The content of this material was provided to you by Lincoln Financial Advisors for its representatives and their clients.

Mastering the Art of Client Conversations

Aaron Hoos, MBA

Formerly a stockbroker, insurance broker, and award-winning sales manager, Aaron writes for the financial and real estate industry as an educator and marketer. His first book, The Sales Funnel Bible, helps advisors master their sales funnel.

Rosemary Smyth MBA, CIM, FCSI, ACC

Rosemary is an author, columnist and an international business coach for financial advisors. She spent her career working at leading investment firms before pursuing her passion for coaching. She lives in Victoria, BC. Visit her website at

Most conversations start off with innocuous questions like, "What do you think of the weather?" If you want to build rapport and trust with clients, you need to have conversations that go deeper than that.

The way you ask the questions will dramatically affect the quality and value of your conversation. Certain types of questions can expand the conversation and others can block it. The better you get at asking conversation-expanding questions, the easier it will be for you to build rapport with clients and the conversations will be more engaging and informative.

In this article, you'll read about four invaluable conversation tools that can help you have more meaningful client conversations.

Conversation tool #1: Listening

Your conversations will only be as valuable to you as your ability to listen!  Active listening is hearing what the other person is saying, evaluating it in your mind and then responding appropriately. Listening is the most important element in communication and a whole-being experience. It’s your ears, heart, eyes and mind.

It takes practice to be a good listener and it’s the way we listen that makes a difference in conversations. Bad listening behaviours such as daydreaming, finishing sentences, interrupting, selective listening and pretending to listen can all be improved with practicing active listening. Replacing old ineffective communication styles will help you to re-wire your brain to communicate more effectively with others.

Barriers that prevent us from listening effectively are distractions such as phones ringing, feeling tired or having other clients waiting on hold for you. The way to overcome these barriers is to focus. By focusing you will hear what the client is saying and will understand what their needs are.

Great listening techniques are to face the person that you are listening to and make eye contact. Non-verbal listening uses your face, eyes and body. For effective non-verbal listening, make eye contact, lean in slightly, nod and respond with the appropriate facial expressions. Body language is a powerful tool to use with your questions and tone of voice. Use a variety of listening cues to signal that you are paying attention. Common ones are “uh huh”, “okay” and “hmm”.

Paraphrasing is restating what the other person said in your own words. By paraphrasing it shows a client that you are paying attention and decreases the possibility of misunderstandings. To focus the discussion and summarize major concepts say, “If I heard you correctly, what we discussed was....”

Conversation tool #2: Broad questions

Broad questions are open-ended and ask for opinions and thoughts, and they leave the client with limitless replies. They allow the client to choose the topic and encourage them to think creatively. Examples of broad questions are, “What are you planning to do when you retire?", "What did you think of your vacation resort?", and "How was the process of getting your mortgage?”

Start by asking broad questions and then listen to the answers and build on those answers.

Conversation tool #3: Narrow questions

Narrow questions are direct and ask for yes/no answers of factual information. For example, “Do you have life insurance?", "How many credit cards do you have?", and "Is this a copy of your current will?”

Use narrow questions to learn more about specifics.

Conversation tool #4: Leading questions

Leading questions are opinions that also seek agreement. If you want honest answers, avoid leading questions. They usually start with a negative contraction such as: "aren’t", "wouldn’t", "don’t", or "isn’t". For example, “Isn’t this a great office?" and "Don’t you like the new portfolio?”

Transforming a leading question can create an open dialogue with clients and have you sounding less pushy and domineering. If you want feedback you can change a leading question to a statement and broad question. For example, “Wouldn’t it be great to have quarterly reviews?”, can be altered to “I think it would be great to have quarterly reviews. What do you think?”

If a client asks you a leading question, decide if you want to focus on the opinion, the question or both. You can rephrase the opinion and the question and check for understanding. For example if a client asks, “Don’t you think this is the best mutual fund?” you can respond, “It sounds like you think this is the best mutual fund and you want to know whether I agree. Is that right?”

Use leading questions to get "buy-in" from prospects.

Putting these conversation tools into practice

Developing your skills at discerning between broad, narrow and leading questions and how to rephrase leading questions will improve your conversations and client engagement.  With good communication skills you can inform, negotiate and influence people.

Before you engage a client in conversation, it’s important to relax and stay present. Pay attention to the body language of the client such as the tone of voice, facial expressions and body gestures that will give you clues to what there are really thinking and feeling. Try to speak slowly and briefly and if you are communicating something important, break down the information into smaller segments and then wait for the client to acknowledge that they understand you.

Invest all of your energy and attention into making your client feel important, understood and be confident in your ability to solve their problem. For clients that are angry or upset it is important to empathize with the client’s feelings and to take a break. For example, “I’m sorry to hear that. I can understand how frustrating the situation is.” Silence and pausing allows the client to gather their thoughts and for you to take a breath and refocus.

Taking notes will help you to effectively summarize the conversation. Good notes will highlight the key points and action steps. Transfer the notes to your CRM daily and be succinct so that you can review them quickly later on.


The views expressed here are those of the author and not necessarily those of The Wealth Channel or The American College

Linked Benefits—Long-Term Care and Life Insurance

Richard Olewnik, JD, CLU, ChFC, FLMI

Richard Olewnik is Assistant Vice President of AXA Equitable Advanced Markets.

Mark Teitelbaum, JD, LL.M, CLU, ChFC

Mark Teitelbaum is Vice President of AXA Equitable Advanced Markets.

The statistics are compelling. With an aging population, there will be increasing reliance on third-party care facilities and less reliance on informal home care offered by friends and relatives. According to a Congressional Budget Office (CBO) study, in 2004, approximately 36 percent of long-term care support was offered informally, with only 3 percent covered by private insurance and 38 percent covered by Medicaid and Medicare. For 2004, out-of-pocket payments covered 21 percent of costs. However, the CBO expects greater pressure on private insurance. Among the items the study noted are declining family size and an increasingly fractionalized family, often living away from a parent, coupled with an increasing elderly population will put strain on informal services. In fact, by 2050 the percentage of the U.S. population age 65 or older will be 21.5 percent, up from 12.4 percent in 2000 and 8.1 percent in 1950. The most significant will be those aged 85 or older, the people who have the most likely need for long-term care assistance, at 5.2 percent in 2050, nearly triple that of the 1.5 percent of the population in 2000. Add to that increasing pressures to cut review to programs such as Medicaid, and there is an increasing awareness to cover some or all of the cost of long-term care.

Options have increased in recent years
A few years ago there was one insured long-term care option: standalone long-term care policies. Today, clients have an increasing number of insured options. In addition to standalone policies, clients now can choose long-term care coverage from the following:


• Life insurance linked benefits and annuity linked benefits. (For example, clients purchase life insurance seeking financial protection and upon the insured’s death, beneficiaries receive a death benefit.).
• Life insurance with single premium, asset-based contracts.
• Life insurance products with annual premium approaches with riders attached (the primary focus of this article).

As many long-term care carriers have exited the market or have significantly raised rates, life insurance linked products have increased in number and in their purchase rates. Many clients have looked upon these linked benefits favorably because they offer benefits that will not otherwise evaporate; they will be made available either during life or at their death. Of course, where a life insurance linked benefit is considered a means of addressing long-term care health needs, a separate need for life insurance protection is paramount to the success of this planning approach.

Life insurance linked benefits
In many situations long-term care riders available with single premium, asset-based life insurance contracts provide an attractive alternative. They offer a return of premium option, often with a growth factor. If death occurs before use of long-term care features, they offer a modest death benefit policy. This can be an appropriate solution for clients with modest estates. But, for clients with more significant estates who have a need for significant life insurance amounts, long-term care riders on policies with annual premium approaches cannot only provide the life insurance that is needed, but access to policy benefits to address estate liquidity and transfer goals.

Long-term care riders attached to life insurance policies
In recent years, long-term care riders attached to life insurance policies have become increasingly popular. These riders accelerate the payment of the policy death benefit upon the occurrence of a triggering event, typically those associated with traditional long-term care policies, such as the inability to perform two activities of daily living or a mental impairment. As with standalone long-term care policies, life insurance linked benefits are available on a reimbursement or a per diem/indemnity basis.

As with traditional long-term care policies, a rider attached to a life insurance contract purchases a predetermined long-term care benefit. In most cases, the maximum total long-term care benefit amount is tied to some or all of the underlying death benefit, and it is set when the contract is issued. When the long-term care benefit is triggered, the death benefit is accelerated based on a predetermined percentage of the face amount and is typically made available on a monthly basis.

These riders are set up on two types of models. These are critical in determining how a client, or policy owner, can access the benefit on the triggering of a long-term care event. A careful understanding of these helps plan for the appropriate rider for a client’s needs.

With a reimbursement approach, policy payments are limited to the lesser of the monthly policy benefit purchased and the actual amount expended by the policy’s insured to cover long-term health care expenses. With reimbursement benefits, policy payments must be made to the insured or directly to the facility providing care.

With a per diem/indemnity approach, the amount available from the policy when the long-term care benefit is triggered is usually based on the lesser of the annual HIPAA amount or a predetermined percentage of the policy face amount.

This will determine how much is available for a given month. For example, a client with a $1,000,000 death benefit and a 2-percent long-term care rider could potentially receive as much as $20,000 a month for a long as the death benefit remains. The monthly HIPAA amount in 2013 is $9,600 ($320 a day times 30 days), or $115,200 per year. The payment limit in the current year would be $9,600, but has the potential to increase in future years as the HIPAA amount increases.

In general, per diem life insurance long-term care riders can offer greater planning flexibility than the reimbursement approach. They provide access to policy benefits to a policy owner (trust, child, spouse, etc.) rather than limit payments to the insured or benefit provider. In contrast, they do not require receipts to trigger payments and allow for payments in excess of actual qualified expenses. A client with a reimbursement contract may preserve more of the underlying death benefit if their expenses run less than the allowed monthly benefit, however, an indemnity contract might offer planning opportunities.

Under an indemnity contract, it is usually the status of the insured alone that triggers the benefit. In this instance, a client/policy owner might receive a benefit if the insured becomes eligible for long-term care coverage even if they do not actually incur the long-term care expenses. Although this may sound counterintuitive, this offers substantial planning benefit.

The indemnity rider offers planning opportunities in both estate and business settings. Consider an irrevocable trust where a life insurance policy with an indemnity rider is owned by the trustee. If the insured had a long-term care triggering event there is significant post-event planning that the family could do. They could do nothing, running down the client’s estate to cover long-term care costs and replenishing the lost funds by the death benefit. Or, they could trigger some or all of the long-term care benefit/death benefit acceleration:

• Buying assets from the estate to remove future growth and provide a liquid source of funds for the client.
• Making loans to the client, and then having the client accumulate or accrue interest that will help deplete the estate.
• Making distributions to the trust beneficiaries who, in turn, could use some of those funds to cover medical costs for the client. Remember, because this is a medical expense the ability to gift is less restrictive than the current $14,000 annual exclusion.

In a business setting, triggering the rider can be used to help support a business that might be impaired by the loss of a key individual who covers part of a lifetime buyout.

And what about cost of living? Almost every carrier that offers these riders does so on an Option A design. However, in some instances the life insurance contract might allow for a long-term care benefit tied to an Option B design, so a client has the ability to receive an increasing long-term care benefit.

Other considerations
Purchasing this rider comes at an additional cost. In most cases, the rider is paid as an acceleration of the life insurance death benefit. This may offer the client a low-cost approach to address long-term care health needs. Where the benefit is provided by a rider attached to a life insurance policy, at least some benefit will be received by the insured’s beneficiaries. In effect, if one doesn’t use the rider all is not lost, other than the additional cost. In addition, life insurance riders may be available to clients where they might not otherwise qualify for separate long-term care coverage.


There are also a number of different features that clients need to weigh when considering such a rider. These relate to the manner in which the rider can be accelerated, how much can be paid out and how the benefit is paid out.

In most instances, when the benefits are paid out to individual taxpayers they can qualify to be received income tax-free. The limitation would be the greater of the annual HIPAA amount or the actual amount expended by the taxpayer for the long-term care for the insured. At least one carrier allows for two times HIPAA, although some states, such as New York, limit the amount to one times HIPAA. Attention to state variations is critical. In business situations the amount received may not be received income tax-free, and that will run to whether the contract qualifies under IRC 101(g) or 7702B.

An important distinction in life insurance policy riders that frequently goes unnoticed is “qualified riders” versus “chronic care riders.” As a general rule, riders that only qualify under IRC 101(g) as accelerated benefits are deemed chronic care riders. They require that in addition to the medical certification of the insured’s inability to perform two activities of daily living or cognitive impairment, there must be verification that the condition is permanent and the insured is not expected to recover. As a general rule those riders that are deemed to be qualified riders, qualified under IRC 7702B, can trigger benefit availability even if the condition is not permanent.

It is obvious that the need for long-term care heath assistance in our society will increase with our aging population and improvement in health care. Various forms of personal insurance are available to help individuals with their personal planning.


Life insurance linked benefits are a flexible planning tool that offers a valuable planning alternative for many situations. Variations exist in how these benefits are classified by states and the Federal Government, which may impact when benefits are triggered and what amounts may be available to the policy owner.

Originally published in the Spring 2013 issue of The Wealth Channel Magazine, How Fast Can YOU Adapt?

Unlocking the Communication Code of Seniors

David L. Solie, MS, PA

David L. Solie, MS, PA, is President of RiskTutor, Inc. and a communication consultant, speaker and author of the book How To Say It To Seniors: Closing the Communication Gap with Our Elders.

Writer George Bernard Shaw wisely said, “The single biggest problem in communication is the illusion that it has taken place.”

Perhaps that’s why, despite the unprecedented opportunity afforded advisors by an aging population, many find themselves unprepared to successfully communicate with seniors. Instead, they wind up frustrated and confused about what went wrong with their best opportunities. While it would be easy to blame this disconnect on the eccentricities of seniors, new research on aging identifies poor signaling based on misinformation as a primary cause of these communication setbacks. Despite their best efforts, advisors wind up sending the wrong message. Fortunately by updating their understanding of the psychology of seniors, advisors can open the door to more productive and rewarding relationships with older clients.

The updating process begins with a new insight about aging: Older adults are still growing. But aren’t older adults merely diminished versions of their younger selves, looking backward instead of forward, having lived past their developmental peak? While this is the physical reality of aging, assuming that the loss of physical capabilities implies a mandatory loss of mental capabilities and the end of personality development has proven to be incorrect.

New research confirms that the brain maintains the vast majority of its capabilities throughout life and personality development is as vital at 85 as it was at 45. If advisors are going to be successful with seniors, they will have to update their assumptions about a poorly understood part of aging. They will need to become fluent in the language of developmental tasks.

Different age groups, different tasks
Developmental stages in life are characterized by sets of oppositional tasks that need to be completed so the individual can move on to the next stage. These tasks are the drivers of personality growth, the internal engine that propels a person forward. These stages and their tasks are well documented in children and teenagers. Their identification and impact on the development in old age has only recently been understood.

Beginning in the mid-60s, seniors are confronted with two seemingly paradoxical tasks that provoke conflict and change: preserve control in a world where all control is being lost, and create a legacy in a world where time is running out.

One task requires hypervigilance to guard against an unending series of losses that threaten to push life out of control. The other task requires a reflective pause, a review of life’s events and an eventual letting go. Each task is pulling in a different psychological direction, one struggling to last and one preparing to leave.

The battle for control
In addition to the losses associated with changes in health and physical strength, seniors are experiencing equally painful losses in other areas of their lives that intensifies the scope and complexity of the battle for control. These losses can include:

• Family
• Peer group
• Status
• Identity
• Home
• Driving privileges
• Financial independence

As the losses mount and control is involuntarily surrendered, seniors run out of options. Underestimating the intensity and impact of these losses can derail the best intentions to be helpful. Good advice may be rejected in favor of illogical or shortsighted choices because, from a developmental perspective, the need for control is greater than the need for medical, financial or social correctness.

Control signals
Given its central importance in communicating with seniors, how do advisors signal they understand the importance of control? It requires a new approach in two primary areas: utilizing language that resonates with control and linking products and services to control.

Words like independence, dependence, choice, loss and control can be used to enhance essential communication skills in open-ended questions and reflective summaries:

• Would you tell me more about your choices for preserving independence?
• How were you able to navigate that loss?
• So you feel your living situation is slipping out of control.
• Let me see if I understand how you plan to preserve your independence.

A similar developmental resonance can be embedded in the why of the planning process with statements like:

• We plan to preserve choice.
• We have found lack of planning results in loss of control.

Renaming familiar planning techniques that lack developmental resonance may also be necessary. For example, long-term care planning might be recast as long-term control planning. A simple alteration in language can help create a control-focused conversation that reinforces the perception that the advisor is both a control confidant and facilitator.

The search for legacy
The developmental counterpoint to preserving control is creating a legacy. While advisors are familiar with the legacy concept, they may be less informed about its origin and purpose.

The origin of legacy in older adults begins with a new focus on life review, the retrieving and reconsideration of a lifetime of people and experiences. This great retrospective gathers the raw material that will answer the primary legacy questions seniors face at the end of life:

• What’s the meaning of my life?
• How did I make a difference?
• What are my last instructions?
• Will I be remembered?

Like the need for control, the need to create a legacy is not optional. Legacy insists on being addressed, either consciously or unconsciously. It is a developmental mandate that flows out of life review for those privileged to survive into old age.

Legacy signals
Given its significance in needs analysis for seniors, how do advisors signal they understand the importance of legacy? It requires a new approach in two primary areas: utilizing questions that facilitate life review, and linking products and services to the legacy.

Successful communication with seniors about legacy issues involves a well-rounded repertoire of life review questions that might include:

• What was the world like when you grew up?
• What was the most significant event of your childhood?
• What were your family’s greatest strengths?
• Tell me about your best friend when you were growing up.
• What was the happiest time in your life?
• What has been your greatest accomplishment?
• If you could change anything in your life, what would it be?
• What are you most thankful for?

These questions provide a conversation on ramp for seniors to tell their stories. The telling of stories is as much discovery for older adults, a connecting of the legacy dots, as it is recalling people and events. As important, these stories reveal values and themes that propel legacy planning.

As with control, a developmental resonance regarding legacy can be embedded in the why of the planning process with statements like:

• We plan to honor your values.
• We have found lack of planning results in loss of legacy.

It may also be necessary to rename familiar planning techniques that lack this developmental resonance. For example, estate planning might be recast as legacy search. A simple alteration in language can help create a legacy-focused conversation that reinforces the perception that the advisor is both a legacy sounding board and facilitator.

Unlocking the code
Seniors are crossing the most formidable and complex frontier of their lives. They are engaging developmental tasks that provoke an overwhelming need to maintain some element of control in their lives while at the same time coming face to face with the meaning and significance of their lives as they prepare for the end. This is their mission, their last contribution while they are still here. If advisors are going to facilitate their mission, they are going to have to become better versed in how older adults think and communicate. Their increased knowledge and skills will allow them to unlock the communication code of seniors, giving them the compassion and tools they need to work with seniors, not against them.


Originally published in the Spring 2013 issue of The Wealth Channel Magazine, How Fast Can YOU Adapt?

Your Last Will and Testament

Kevin M. Lynch, MBA, CFP®, CLU®, ChFC®, RHU®, REBC®, CASL®, CAP®, LUTCF, FSS

This issue of The Wealth Channel Magazine is all about change, so I thought this would be an ideal opportunity to discuss the last changes you may ever have the opportunity to make.

Do you have a last will and testament? Whether you think you do or not, you do. Allow me to explain. Hopefully, you are one of the approximately 40 percent of Americans who have sought out the services of an attorney and had them help you craft your last will and testament so that it reflects your exact wishes. If, however, you are in the 60 percent majority of Americans who have failed to carry out this duty to your family or loved ones, the state in which you reside at your time of death has crafted one for you. Unfortunately for you, and especially for those you leave behind, it most likely will not reflect your desires.

Dying without a last will and testament is known as dying intestate. It means just that: You failed to craft your own will and testament before your death.

As life and financial services professionals engaged in the sales of products that change people’s lives, we are often involved in talking about a client’s possible demise. As a trusted advisor, I am confident you have told your clients that among the most important things they can do to get their affairs in order is the acquisition of appropriate estate planning documents. While these documents may have different nomenclature depending on the state in which the client lives, these estate-planning documents might include:

• Last will and testament
• Living will
• Medical directive
• Power of attorney
• Medical power of attorney

Just as important as having these documents drafted and updated on a regular basis is the ability of the client, or his designated representatives, to access the documents when the need arises.

This brings up the matter of where your client should store these documents for safekeeping, while at the same time making them accessible to the aforementioned designated representatives. I contend that the best place for the storage of these documents is not a bank safety deposit box. Why? Because, unless you have the foresight to also add your designated representative as a deputy on the signature card at the financial institution where the safety deposit box is located (and according to bankers I have contacted this is rarely done), at the time of your death your final instructions will be locked in a bank vault and not be accessible to those individuals charged with carrying out your wishes. 

In addition to having your attorney retain a copy of your will, what are some other solutions to this problem?

• In those jurisdictions where it is permitted, consider filing your last will and testament with the Clerk of Court, or similarly positioned public servant, in the county where you live, and notify your executor or executrix that you have done so.
• Consider giving a sealed copy of your last will and testament directly to your executor or executrix. You might also give similar documents, such as your power of attorney, living will, etc., to those whom you have elected to act on your behalf under those circumstances in which the documents would be required.
• Keep a copy of your will in a plainly marked envelope with your other important papers at home.

As long as you have also followed one of the aforementioned recommended options, you can keep a copy of your will in your safety deposit box if that’s what it takes to give you peace of mind.

Is this issue really important enough to deserve so much attention? On May 26, 2010, my stepmother passed away. In spite of my having told her on multiple occasions not to file away her will in her bank lockbox, like many older clients set in their ways, she decided to ignore my advice. (After all, that is where my father had kept his, along with countless others of his generation.) What she failed to remember was that when my dad died, she still had access to their safety deposit box. When she died, however, no one else had access to her box as she had no deputy assigned on her signature card. In addition, as I found out the hard way, stepchildren are not legally related to stepparents, unless legally adopted. Having been raised by a woman you have considered to be your mom since you were 5 years old carries no weight with the court.

Suffice it to say, the three weeks following my mom’s death were filled with frustration, red tape, and multiple phone calls to courthouses, funeral homes and cemeteries, all of which would not have been necessary if my mom had not filed her one and only copy of her will in her bank safety deposit box.

In the world of life insurance there is a saying: “No one buys life insurance unless they love someone or they owe someone.” I would like to think that, like the love demonstrated to loved ones by the purchase of life insurance, taking the time to record your final wishes on the last legal document you will ever have the chance to change shows just as much love.


Originally published in the Spring 2013 issue of The Wealth Channel Magazine, How Fast Can YOU Adapt?

Are You Ready for the Toughest Questions Every Financial Advisor Is Asked?

Aaron Hoos, MBA

Formerly a stockbroker, insurance broker, and award-winning sales manager, Aaron writes for the financial and real estate industry as an educator and marketer. His first book, The Sales Funnel Bible, helps advisors master their sales funnel.

Rosemary Smyth MBA, CIM, FCSI, ACC

Rosemary is an author, columnist and an international business coach for financial advisors. She spent her career working at leading investment firms before pursuing her passion for coaching. She lives in Victoria, BC. Visit her website at

As your plane taxis down the runway, the person beside you strikes up a conversation. The what-do-you-do-for-a-living question will usually come up. When it does, you know that they will inevitably follow up with another question – perhaps something like: "My brother-in-law is really into gold stocks. Do you have any hot tips?"

Many professions have these dreaded questions. Even in social settings, doctors are frequently asked for an impromptu diagnosis of a rash, mechanics are frequently asked to identify engine trouble, and you as a financial advisor are probably asked for some kind of portfolio-related guidance.

These questions happen everywhere – in airplanes, at family get-togethers, at neighborhood barbecues, or while you're watching your kid's ballgame. People hear that you're an expert and they have questions and expect answers from you.

Rather than stumbling around an answer, savvy financial advisors prepare answers to the most common questions and have them ready to deliver when the questions inevitably come.

The 5 Types of Questions

Below, you'll find the 5 types of questions you'll be asked. Although some of these may seem similar when you first read them, it's helpful to have responses for each type so that a question doesn't catch you off-guard.

1. Analysis/due diligence questions include questions like, "what do you think about XYZ Company?" or "what do you think about stocks in the ABC industry?" These are questions invite you to add to their knowledge about a particular company or industry.

2. Forecasting questions include questions like, "where are interest rates headed?" or "what will the market do this week?" These are questions about what you think could happen in the future.

3. Advice questions include questions like, "should I buy XYZ Company?" or "is the ABC industry going to turn around soon?" These questions ask you to provide portfolio-specific advice.

4. Story questions include questions like, "what's the most money you ever made on a trade?" or "did you have any money in XYZ Company before it tanked?" These questions are looking for stories of big wins or losses in the marketplace and often precede a story that they'll share with you.

5. Testing questions include questions like, "do you sell a lot of this new product?" or "have you ever heard of ABC Company?" These questions may seem innocent enough but they are actually testing you to see what you are like as an advisor and how you stack up to their perceptions of what an advisor should know.

These questions are a mixed blessing. On the one hand, they show that the person may be a potential prospect (or may know someone who is) and their questions demonstrate their interest in learning more about us. On the other hand, they are all-too-common questions that could be asked with the hope of getting free financial advice.You know you'll face these questions. So prepare now to respond to them advantageously.

How to Prepare Your Response

First, you'll want to make sure that you can readily identify the likelihood of that person's client potential. (This is done by knowing in advance who your perfect prospect is and what expertise you provide to your target market). This is key to ensuring that the rest of the conversation will provide value to both you and the person you are talking to.

Second, you'll want to speak generally to their question (so it doesn't look like you are avoiding their question) in a way that demonstrates your knowledge of the topic. For example: "XYZ Company has been volatile in recent months and there isn't a lot of consensus among analysts."

Third, provide a friendly disclaimer that explains how you can't provide a specific answer without analyzing their portfolio or determining if it's right for them. Do so in a professional way that shows how you care about providing the best advice possible. For example, "Whether or not I would recommend XYZ Company to you? Well, that's a harder question and it really depends on the asset mix in your portfolio and your risk tolerance."

Fourth, pivot to an action step for them. If they have the potential to become a client, invite them to your office for a further conversation with something like, "Why don’t I give you a call this week and set up an appointment…". Or, if you know that they won't become a client (i.e. because they live too far away or are not in your target market) then say something like, "your own advisor could give you far better advice than I could because he or she knows your portfolio and your financial goals."

Additional Tips to Formulate Your Responses

As you think about your responses to the 5 types of questions all financial advisors are asked, use the following list to help you craft your answers:

• Know who you want to serve and how you help them. It's fine to say that you don't know the answer to a question you're asked, especially if it's not something your clients need you to pay attention to.

• Avoid the temptation to expound knowledgeably on the topic, which will only lock you into the conversation and make it harder to pivot to an action step.

• Craft answers that are neutral (so they don't give advice) while at the same time positioning the industry and the other person's advisor in a positive light. Don't disparage other advisors if they do things differently than you.

• Always move the conversation toward an action step – one that draws the potential prospect closer to you (if appropriate) or one that steers them to a professional who can help them.

• Be authentic. You'll build rapport with the other person and you'll enjoy your conversation more, and you'll position yourself in the right way in case they know someone they can refer to you.

Action step: Write each of the five types of questions and then craft a professional, authentic response with two potential action steps, depending on how likely they are to become clients.


The views expressed here are those of the author and not necessarily those of The Wealth Channel or The American College

It Can’t Happen to Me

Arthur D. Kraus, CLU®, ChFC®, CAP®

Arthur D. Kraus, CLU®, ChFC®, CAP® is a nationally recognized advisor who was a pioneer in full financial planning and a former CEO of the National Association of Insurance and Financial Advisors.

Many of us travel through life with the emotional comfort of the expectation that our lives will be rosy — a happy childhood, a good education, a happy marriage, good health, wonderful children and grandchildren, and more. I should know. I used to be one of those people.

Most of us wish for financial success, as well, and I have been blessed beyond my fondest dreams. The financial services business has been good to me and in analyzing what I have learned and what I can pass on to others, I realize how much I have been influenced, both in obvious and not-so-obvious ways.

Obviously, to succeed in business you need a few tools. You need to know what you are talking about. Getting by with some knowledge is just not a good long-term strategy. Knowledge takes work and most of mine came from listening to my peers at industry meetings and by taking the time to take stretching courses. In my case they were almost exclusively through The American College. I am a CLU®, ChFC®, and a CAP®. My son and business partner, Mitchell, is a CFP®, CLU®, ChFC®, LUTCF, and is studying to be a CAP®. We really believe in professionalism.

Another obvious need is to learn how to sell, which did not come naturally to me. I was nervous and found myself as a new agent rushing to get to the close. I just wanted the process to end! Of course, it did, and not usually well. Studying my peers and understanding that the sales process is merely helping the prospect get what they want rather than selling what I want boosted my career. It isn’t about us – it’s about them. Once I understood that, my education really kicked in.

The last obvious task is perspiration. It is the rare person who does well without working hard. And a long workday is just the beginning. It is how productive you are that is critical. Many years ago, financial services titan Al Granum taught me how to be productive by sharing the “One Card System”. He shared a tool that in its most simple form told me whether I was doing productive work or just going through the motions.

So the obvious has been stated, and you can probably add more ingredients than I have to the mix. But the real challenge is not the obvious; it is your passion and desire to give ultimate service to all the people you meet. That might already be a part of you. But I admit that it wasn’t for me. I think I rarely went above and beyond what was expected.
I knew I could discuss with my prospects their needs and find solutions using my insurance and investment products. But where was the passion? Where was that belief that comes from your innermost core that helps the prospect understand that “it can happen to me”? Yes, I could hold my own intellectually, but the passion to go beyond that wasn’t part of my makeup. I could give analytical advice, but not emotional advice.


Until it happened to me.

It was early in the morning about 15 years ago. My habit was to arise at 5:30, exercise, dress, then be at the office by 7:30. That morning was no different than any other until I went to the bathroom and noticed my urine was red. My mind raced and I made an excuse to my wife that I couldn’t walk with her. Not wanting to upset her, I went into another room and called my doctor for an appointment. He told me to come in immediately.

My doctor gave me an examination and said that I needed to see a urologist. He had called ahead to get me an appointment right away.

Driving to the urologist’s office, I worried. Did I need surgery, of which I was deathly afraid, or would a pill solve the problem? I won’t go into detail about the urological exam because when the doctor told me what he was going to do, I thought I would faint. Scared describes my emotional state.

When the exam was over (and it wasn’t as bad as I’d expected), he told me I had bladder cancer and that surgery was required. 

The good news is that while it took a few surgeries, they were not awful, and I was cured. Many years have passed without any recurrence. It was a blessing to get through that, but a blessing without a lesson is an experience unlearned.

The evening before a passed blood in my urine, I was a preferred life insurance risk. The following morning I was uninsurable. It wasn’t somebody else; it was me. The realization of my mortality was immense. My wife needed me and I needed her. My children needed me. I had objectives in life that were not accomplished.

Life changed for me in literally minutes. Life changes for others the same way. Can that happen to you, others you care about, others you have yet to meet? Of course it can. The lesson is that those things that need to be done, need to be done now.

The visceral understanding made me realize that what I had to give to prospects was not just my knowledge and training. More importantly, they needed time from me. Time to establish a relationship. Time for me to explain as often as I could in as many ways as I could the financial decisions they were making or not making. Time to explain consequences with emotion. Time for them to get to know I would do whatever I could for them—regardless of compensation or expertise. It changed my life from a life of work to a life of service.

My son, Mitchell, and his wife, Cynthia, have the most precocious 3-year-old in the history of mankind. If you don’t believe it, just ask this proud grandfather. We were overjoyed when they announced to us that little Zachary was going to have a brother. All of us were excited and even “Zach Attack” was naming the baby during the pregnancy. How he determined that the baby’s name should be Bob was a mystery to all of us.

Cynthia experienced a normal pregnancy and we received a call that she was in labor. Mitchell was with her and we took Zachary out to dinner with his parents’ instructions to bring him by the hospital between 6:00 and 6:30. We did as requested and we were ushered into a waiting room. We didn’t see Mitchell, but he kept texting us that things were moving along and that she would deliver soon.

Then Mitch texted us that something was wrong with the baby. He wasn’t sure what, but the baby was being rushed to another hospital where they had special facilities to take care of the health issues he was facing. “Please take Zachary to your home to go to sleep. We will call later!” he wrote.

A few days later, baby Nicholas died. His life was brief but meaningful to his grieving family. Great anticipated joy became anguish. It can happen to you and it did to us.

Can an infant have a legacy? Though he only lived a few short days, how can anyone say that his life didn’t count? Mitchell and Cynthia, as well as others in the family, suffered greatly with the question, and for me, I found I could not live in peace without something good coming from the tragedy.

Maybe it was the convergence of circumstances, but we found an answer. Mitchell is enrolled in the Chartered Advisor in Philanthropy® (CAP®) program and within its textbook pages was a wealth of information about finding your passion. What Mitchell and Cynthia understood was that there needed to be a memorial to their child. All lives need meaning, even those that are brief, and Nicholas’ short life could help others.

So when the time came to make public the tragedy that had befallen us, Mitchell and Cynthia were able to let friends and family know that they wanted any donations that people might want to make to go to a local charity that would help families suffering from similar circumstances move through their grief with professional help. There is great meaning, and healing, in that.

So, to be successful you need to know and practice your craft diligently. But that is not the only requirement. We must learn from our own experiences and from the experiences of others. We must use those life lessons to better serve our clients.

Philanthropist businessman W. Clement Stone, said, “When you discover your mission, you will feel its demand. It will fill you with enthusiasm and a burning desire to get to work on it.”

You are blessed. You have chosen a profession where you can make a difference to others. Do it.

Originally published in the Spring 2013 issue of The Wealth Channel Magazine, How Fast Can YOU Adapt?

Lizzie the Learner

Heather L. Davis, J.D., CLU®, ChFC®,

Heather L. Davis, J.D., CLU®, ChFC®, is The American College Alumni Association Board of Advisors Communications Committee Chair and the Corporate Vice President of High Net Worth Marketing Management with the New York Life Insurance Company.

Nobel Prize-winning author William Butler Yeats once said, “Education is not the filling of a pail, but the lighting of a fire.” And often, in the insurance and financial services industry, when you meet an up-and-comer or rising star, you notice a difference in the dedication to his or her career. You see that spark. 

Meet Elizabeth Dipp Metzger. Lizzie, as she prefers to be called, is an agent in the New York Life El Paso General Office. In 2010 she was named the company’s New Org Agent of the Year, and in 2011 she became the first female to win Agent of the Year for her General Office. Lizzie is a member of a select group of top-producing agents in the Latino community.

Becoming a licensed agent only three years ago, Lizzie is obviously on the fast track to success, which includes pursuing her Master’s degree and other professional designations from The American College. 

Lizzie became interested in a career in financial services when she began assisting her husband, who was an agent (and is now in management), around the office in an administrative capacity. “We had a new baby at the time, and I became well known in the office for balancing a baby on one arm and client files on the other,” she said. Eventually, the office’s Managing Partner, Steve Nagy, approached her about the idea of becoming a licensed agent, and that opened the door to a new career. 

Initially, Lizzie decided that her market would be focused on women and young people, but through her father who is a real estate developer, she had access to higher net worth individuals, and she tended to gravitate to independent professionals, business owners and the affluent, rather than the middle market. She began researching New York Life’s resources to bring expertise beyond her own to her high net worth prospects and clients, and learned that she has access to consultants within the company who have expertise in business and estate planning. 

Lizzie was able to schedule appointments with four of her prospects to meet with the company’s Advanced Planning Group, a team of professionals with years of practical experience as lawyers, accountants and financial services professionals. The consultants introduced planning opportunities and solutions to the clients that Lizzie said she would not otherwise have been able to address on her own. In one situation, the planning techniques that were presented helped to reduce the clients’ estate tax burden down to about $10 million on a $100 million estate. 

“I’ve told my clients this a million times: If I don’t know something, I’m not going to pretend I do. I’m going to go and get someone who can help me, because I can. I have access to some of the best, most experienced consultants in the industry, and I have the backing of a Fortune 100 company,” she said.

Of the three characteristics that Lizzie feels her clients value most, the first is that you have the proper knowledge base to help them. She suggests that you do some homework on the client, learn about their industry and their particular issues, before your first meeting. 

Second, she thinks clients value having a planning team, and she suggests that you make sure to utilize other qualified professionals to help clients in areas where you cannot.  

Third, she feels that high net worth clients, in particular, don’t want to be sold. The relationship is absolutely the key. “Make sure the clients understand that you have more than one product available that can help them and that you’re there to present a comprehensive solution, not to make a sale,” Lizzie said.

While her access to the company consultants opened the door for Lizzie early on in her career, she says becoming more educated on issues wealthy families face is absolutely imperative for her continued success in this market. 

“Clients want to know my professional background, especially when I’m dealing with millions of their dollars,” she said. “They want to know that I know what I’m talking about, and they won’t just take my word for it. You have to prove that you have the experience and credentials first, and then they’ll take you seriously.”

Lizzie feels it’s not just her clients who want to know about her credentials; it’s just as important to the other professionals on the planning team, like the lawyers and accountants. “The accountants know the difference between a CPA and a bookkeeper,” she said, “and the attorneys I work with who are board certified make a big deal out of their credentials. So to me, if I study and earn a Master’s degree and industry designations after my name from The American College, those credentials demonstrate to the entire planning team that I’m committed, that I’m doing what they did by taking the next step in my education. 

“The more you know, the more you can help your clients. It’s a real differentiator in our community.”

Forming lasting relationships with her clients is the most important aspect of Lizzie’s work. Learning about the issues the client’s family or business is facing, focusing on long-term planning objectives, and growing with the clients as their estates mature and transition is what makes her feel successful. “I want to work with people who are interested in aligning their long-term strategy and who will work with me to help them create a better future,” she said. 

Lizzie has some advice for new agents who are just starting out in the insurance and financial planning business:
• Get going as hard and as fast as you can. Those agents who succeed in this business have an unparalleled work ethic right from the start.
• Obtain as many licenses as possible, as quickly as possible. Having an insurance license without being a registered representative is like having one hand tied behind your back.
• Enlist others to help you. Everyone you know understands that you’re new at this. Let them know about what you’re doing and ask for help with referrals or in brainstorming ideas. Even if they don’t do business with you right away, they may later. 

Originally published in the Spring 2013 issue of The Wealth Channel Magazine, How Fast Can YOU Adapt?

Commissions in the Crosshairs?

Keith Hickerson, MSM

Senior Strategy Consultant at The American College, Hickerson, MSM, previously served as Vice President of Marketing at The College and, before that, at Unum Corporation.

Be thankful you’re not providing financial advice in the United Kingdom. Now that we’re into 2013, the Financial Services Authority’s (FSA) ban on commissions as payment for providing financial advice is in full effect. According to an estimate by a major consulting firm, 5.5 million people will stop using financial advice as a result.

Surveys repeatedly show that consumers are unwilling to pay large up-front fees for financial advice, especially families with smaller amounts of savings or investments. They’d rather use their money to purchase investments or products. Purists argue that consumers are paying for their advice through commissions anyway, but it’s a very different client experience. According to recent surveys, two-thirds of investing consumers in the UK say financial advice is worth no fee at all. The remaining consumers dramatically underestimate the fair value of financial counsel.

High-net-worth individuals, many of whom are under fee-based arrangements already, will not be dramatically affected. The middle-income investors who arguably need the most assistance, however, will be disproportionately harmed. Many will decide to take a do-it-yourself approach using random Internet advice and suggestions from friends and colleagues. It’s a perverse outcome from a well-intentioned, over-reaching regulatory structure and a recipe for disaster when it comes to retirement planning and financial security. The number of financial advisors serving middle-income customers has already seriously declined in the UK, and the ban just went into full effect.

Because new exams and financial advisor qualifications are also part of the new approach (further advisor education is the one part of the mix the FSA may have gotten right), the advisors who do continue to practice may ultimately be more qualified. The final result could be somewhat better financial advice for a small percentage of the population (those with the highest incomes) and none at all for the rest of the market.

The commission ban extends to life insurance products with any investment or savings component as well. There is a general sense among regulators there that commissions, in whatever form they take, should be replaced by fee-based compensation.

What do we have to worry about here?
Yes, that’s across the pond, but the anti-commission trend is spreading. It has also hit the Netherlands, Australia and other countries. In the United States we’ve already seen commission pressure in the healthcare arena, and all eyes are now on the Department of Labor (DOL) as they regroup and re-propose their rules on new fiduciary standards under the Employee Retirement Income Security Act (ERISA). The DOL’s move could well impact IRAs, subjecting any advisor who works with IRA clients to a strict fiduciary standard. It’s certainly possible that commissions could be impacted. The details won’t be clear until the DOL’s new proposal is made public, but the final outcome could be a real blow to middle-income investors looking for affordable advice on their IRA investments.


Where the SEC’s fiduciary standard is concerned, Dodd-Frank’s language made it clear that receipt of commissions and/or access to only a limited product set would not, in and of themselves, place an advisor in any violation of a new fiduciary mandate. The wording is ambiguous at best, however, and does permit the SEC to ban any type of compensation they feel is detrimental to investors.

We can feel secure in established distribution models if we like, but we would be wise to be both a little worried and very aware of the trends impacting regulators’ thinking in this area. The assumption is too often made that an advisor working under a fee-based arrangement is somehow more ethical, more consumer-friendly and more objective than one who is paid through commissions. It doesn’t matter much that the perception isn’t true and that payment methods by themselves do not lead to increased conflicts of interest or creation of investor harm. The anti-commission bias has become the latest rallying cry of those who are not particularly knowledgeable about insurance in the first place, and it fails to consider consumer preferences and product access.

So what do consumers think?
For all of the wrangling about how advisors are paid and the standards of care under which they should operate, consumers are not particularly attuned to either. Their concept of providing advice completely and purely in their best interest may also be different from the way we think about it. For a consumer, the pertinent questions may be more outcome based than process based: “Did I gain a better rate of return?” or “Did you lose any of my money?”


As part of the overall debate, it’s important that consumers, legislators and regulators understand how vital insurance products and services are to the economic health and security of our country. How often do you hear politicians talking about how important Social Security is to our citizens? The latest numbers I have show that Social Security pays out $1.9 billion daily in benefits—and insurers pay out $1.5 billion daily. But where’s the high rhetoric singing the praises of insurance and how it protects a full 20 percent of the long-term savings of Americans through a distribution system that’s unparalleled in terms of reach and access to products and services?

Isn’t it time we change the conversation?


Originally published in the Spring 2013 issue of The Wealth Channel Magazine, How Fast Can YOU Adapt?

Develop an Expert Status That Attracts Your Target Market

Aaron Hoos, MBA

Formerly a stockbroker, insurance broker, and award-winning sales manager, Aaron writes for the financial and real estate industry as an educator and marketer. His first book, The Sales Funnel Bible, helps advisors master their sales funnel.

Rosemary Smyth MBA, CIM, FCSI, ACC

Rosemary is an author, columnist and an international business coach for financial advisors. She spent her career working at leading investment firms before pursuing her passion for coaching. She lives in Victoria, BC. Visit her website at

When you have a toothache, you don't go to your local mechanic's shop to have a cavity filled and when your car isn't running properly, you don't pay a visit to your dentist. Rather, you go to the professional who has the education, experience, and qualifications to solve it. You go to the EXPERT.

As a financial advisor, you have a level of expertise in the industry. Unfortunately, so does every other financial advisor out there. The perception among prospects is that financial advisors are all clones; they look and act the same, they all know the same information, have basically the same products and they all provide similar care and attention to their clients. So what would motivate a client to go to one advisor versus another?

You can separate yourself from the pack by building a unique and compelling expert status. An expert status provides new advisors with a head-start advantage in the industry and seasoned advisors with a way to strengthen their client base. An expert status benefits you by:

       • Clarifying and focusing your marketing efforts.
       • Helping you to zoom in on a specific target market.
       • Making you more memorable to those you connect with.
       • Assisting your existing clients to refer you to others.
       • Guiding how you develop your career.

Creating your expert status
Start with these steps. You may need to get some help from trusted friends or family members to help you.

1. Make a list of your strengths and values that describe you best. List as many as you can (although be cautious to avoid listing the characteristics that you wish described you but really don't. Start with what you have, not what you aspire to be.)
2. Make a second list of the things that are interesting and memorable about you. This might include your background, your interests your personal style, and even your hobbies.
3. Make a third list of the things that you have in common with your target market. For example, there might be demographic or psychographic similarities, such as language, ethnicity, education, philanthropy, etc.
4. Make a fourth list describing the problems that you solve for your target market. Focus on the problems you like to solve and are particularly good at versus everything you can do. (And remember: Keep it focused on problems you solve rather than products or services you offer. This is a key difference).

Now you have four lists that describe aspects of who you are, who you like to work with, and how you can help them. Using these four lists, choose a couple of items from each list as a starting point to put together a unique expert status that not only describes you in a way that is unique among financial advisors. Here are some examples of excellent expert statuses advisors might create:

• "I'm an expert at helping women as they navigate the financial complexities of divorce."
• "I'm an expert at helping seniors who are downsizing and need estate planning."
• "I'm a Mandarin-speaking advisor who works with new immigrants and their families."
• "I'm a former Olympian who works with athletes to help them with their unique financial planning challenges."

Notice how these one-sentence descriptions immediately portray expert status, demonstrating problems that are solved, target markets that are served, and the advisor's experience and available financial solutions.
Using the four lists you made earlier, create a few of these one-sentence expert status descriptions for yourself and review them against the following questions:

• Do you like how this describes you?
• Are there people with whom this expert status would resonate?
• Can you see a growing demand for this expert status in the future?
• Which expert status feels the most authentic and motivates you to get up each day and give your very best?
• If you have some experience in the industry already, what has worked for you?

Ask family and friends for feedback. Don't expect to nail down an answer immediately, and expect to adjust this expert status over time.

If you're not sure how to construct these one-sentence expert statuses, here is a useful template to use: "My intention is to work with (my perfect prospect) ______ because I am particularly adept at helping them with _________, and they get ________ as a result."

How to use your expert status
Once you have an expert status that you feel is authentic to you and attractive to your target market, revisit your prospecting efforts to ensure that everything you do aligns with this new expert status:

• Does your expert status resonate with your audience as something they find trustworthy and memorable?
• Does your marketing communicate your expert status to your audience?
• Are there networking activities that are more closely aligned with your new expert status than the ones you are currently using?
• How can you communicate your expert status to your existing clients to help them refer others to you more actively?
• What education and personal development can you invest in to help you strengthen this expert status?
• How can you serve in the community to enhance your expert status and to build your reputation as an expert?
• What other experts can you add to your network to act as centers of influence (COIs), who would help to support your expert status and assist you in helping your clients?
Your expert status may seem like it has the potential to limit the number of people who come to you, as well as the services you offer. Counter-intuitively, it can actually make you more attractive to your prospects because an expert status separates you from your peers and elevates you.

Get started!
Take action to start building expert status today by making the four lists and gather those components together into an exciting, authentic, attractive sentence that describes why your prospects should view you as THE expert.

The views expressed here are those of the author and not necessarily those of The Wealth Channel or The American College

Disability Insurance & Barefoot Running

Scott D. Dial, DIA

Scott D. Dial, DIA, is a Disability Income Supervisor with the Guardian Life Insurance Co. of America, Financial Process Group.

I’m a one-dimensional, DI geek. I’m also a barefoot runner, which got me to thinking the two things have a lot in common.

Running is in our nature. Humans actually evolved to run—as marathoners, not sprinters. As evidence, we have an Achilles tendon, a hefty gluteus maximus and a nuchal ligament. Why did we evolve to run? To catch prey. And how did we do that? By running them to exhaustion! As further evidence, we’re the only mammal that sheds most of its heat by sweating—animals pant. Chris McDougal, author of Born to Run, said, “Humans, with our millions of sweat glands are the best air-cool engine that evolution has ever put on the planet.

“All you have to do is scare [the animal] into a gallop, on a hot day. If you stay just close enough for it to see you, it will keep sprinting away. After about ten or fifteen kilometers worth of running, it will go into hyperthermia and collapse. If you can run six miles on a summer day, then you, my friend, are a lethal weapon in the animal kingdom.”

And the best way to run? Barefoot!

Author of Barefoot Running Michael Sandler confirms: “The truth is that running in shoes is high impact, heel-centric, promotes bad form, is relatively unstable and inflexible, [and] tends to weaken rather than strengthen the feet … In contrast, barefoot running is low-impact, toe-centric, promotes good form, enhances stability and adaptability [and] strengthens your feet in miraculous ways.”

Bottom line: Less is more. Least is best.

Selling income protection is also in our nature, our professional nature. It’s what most of us were originally trained to do in this profession—it’s called life insurance! Just like life insurance, disability insurance (DI) provides future income when the client can’t. Life insurance is, in essence, a single use, catastrophic DI policy. To me, life and DI are always a dual sale. Why would you only want to insure the future income against a single event when you can insure it against thousands of events with DI? And you do you do this by selling a single concept: income protection, dead or alive.


Here’s the real key: 90 percent of the time, any policy that is purchased is that in which the agent believes. If you don’t believe in it and aren’t willing to go the distance with your product, it’s unlikely you will sell it.

So, how do you run down a DI sale? You do it simply (less is more). You diagnose and prescribe, just like your doctor or your auto mechanic. If the problem is income protection, then DI is part of the solution, and you recommend what, in your professional opinion, is the best DI policy. Remember, it’s barefoot running, not running in Moon Boots® over tube socks and a toe ring. GOOGLE teaches in its vendor seminars that the chance of selling anyone anything is about 50 percent. Add a second choice and the chance drops to 15 percent. Jim McCarty (author of The Sale They Never Told you About) put it another way: “The chance of selling a DI policy is inversely proportional to the thickness of the illustration(s)!” Again, less is more.

How do you determine which is the best DI policy? It’s the one that “pays the most benefits in the most claims situations.” You determine that by simply reading the definitions in the policy. For DI, the shorter the definition (the fewer words), the more protection for the client. For example, one Own-Occupation definition simply reads, “… unable to perform the important duties of your occupation.” Least is best.

One other commonality of barefoot running and selling DI, some might say: it’s hard. But some things are good when they’re hard, and there is a definite upside. For runners (even for non-runners), some physicians believe that every common foot ailment could be wiped out by going bare. And for selling DI, you’re protecting your clients’ most important asset—their incomes—in an insurance market with the least competition, the best persistency and an excellent renewal income stream.

Your formula for success? Lose the shoes. Sell DI.

Originally published in the Spring 2013 issue of The Wealth Channel Magazine, How Fast Can YOU Adapt?

Positive Change through Community Foundations

Bobbie Chapman, CAP®

Bobbie Chapman is currently the Director of Business Development at the San Francisco Community Foundation, responsible for developing relationships with prospective donors and their wealth advisors. She holds her CAP® designation from The American College.

Financial advisors frequently overlook or underestimate what community foundations offer. Many community foundations not only offer great opportunities for an advisor’s clients, but they also offer the advisors themselves a depth of knowledge, expertise and a change in perspective that is not readily available elsewhere.

Change is constant
As we grow older, the pace of change seems to get faster and faster. I’ve found that it’s how one embraces that change and shares it with others that allows one to keep pace and continue growing.


Change happens
My career was in the travel business for more than 20 years. Five years ago I decided to be my own change agent and went to work for a national donor-advised fund provider. They hired me because of my relationship skills, not my financial knowledge. I had to learn that new area from the ground up and I did so through the Chartered Advisor in Philanthropy (CAP®) program at The American College. That certification provided exactly the foundation I needed to succeed. The next challenge was learning to speak to different kinds of professional wealth advisors about the value of charitable giving and the different vehicles that can be utilized in planning.


Change is difficult
Making appointments with wealth advisors to talk about charitable giving was very different and a little scary. Some were very excited and others just didn’t see how community foundations could help their clients or their practice. What I learned was that if I told the story of how a donor became engaged with their giving—what it looked and felt like for them—advisors could start to see how their clients could benefit from a relationship with a community foundation.
Advisors often ask how to introduce charitable giving to their clients. Here are a few simple opening questions:

• What was the best gift you’ve ever heard of someone giving?
• How would you like to be remembered?
• Is there a nonprofit organization that helped you along the way to your success?
• What’s important to you and how do you see helping make that change?
• What would you like to see changed in the world—what can you do now, or later, to help make that change?
• What has been the most satisfying gift you have made and why? 


Change is universal
As professional advisors, your clients will inevitably experience changes in their own lives. They will experience personal changes, like the marriage of their children, a new grandchild or the death of a loved one. Clients will also experience professional changes, such as the sale of their company. Helping clients prepare for those changes is a key responsibility of professional advisors, and charitable giving may help address and even enrich some of these life changes:

• Help clients maximize the sale of their business.
• Help clients prioritize what is truly important in their lives.
• Build a charitable legacy for their families that can last for generations.
• Teach children the value of giving back to their community.


Change made easier
I strongly urge professional advisors to partner with their local community foundation. They provide a simple, powerful and highly personal approach to giving, and offer a variety of tools to help people achieve their charitable goals. Many have expertise in planned giving and the different vehicles that can be utilized to facilitate and promote a client’s philanthropy, and they are a great philanthropic resource because they understand the pulse of the community and charitable organizations. Community foundations have  nearly a century of experience working with families and professional advisors. Here are ways they can help:

They work through and with you. You stay in control of your client relationships; they are there to help you serve your clients’ charitable giving needs. Community foundations have deep knowledge of the nonprofits in the area and will help your client find those effectively working on the issues they care about most.
They partner with you by providing support, information and expertise related to charitable giving options. Many have professional advisor councils that you can become involved with—they want to work with you.
They help you build stronger relationships. Studies show that many high-net-worth individuals want to talk with their advisors about giving as they make financial plans. Clients will appreciate the charitable impact and tax advantages you help them achieve by working with a community foundation.
They connect across generations. When you help families establish donor-advised funds at their local community foundation, you and your client begin an ongoing process of involvement with current and future generations.

Change for the good
As a professional advisor, you are there to serve as the expert to help clients build their assets, to protect and guide them through their business and family financial needs. When life’s ever-changing moments come up with your clients, talk to them about charitable giving. If you want assistance, call your local community foundation. They will be happy to guide you through the discussion and help offer charitable options that work within your clients’ financial plans.


There is true joy to be experienced for both you and your client when you assist them in giving during their lifetime. That is creating change for good.

Originally published in the Spring 2013 issue of The Wealth Channel Magazine, How Fast Can YOU Adapt?

Getting at the Emotion Behind the Money

Julie Murphy Casserly, CFP®, CLU®, ChFC®

Julie Murphy Casserly, CFP®, CLU®, ChFC®, is a 17-year veteran of the financial services industry and founder of JMC Wealth Management in Chicago. Check out her award-winning book, The Emotion Behind Money. Connect with her at Julie.casserly@wcinput.

As a nation, we have a huge macroeconomic problem because of the microeconomic problems happening. Major businesses—ones that most thought were unbreakable—have fallen quite far, and entire industries have failed.

It was no surprise to me during the last market downturn that individuals who worked for big companies like General Motors were in a similar personal financial situation as the major corporations they worked for. On the surface they were staying afloat, but underneath the manicured lawns in large suburban neighborhoods lay a financial wreck. They, like their major companies, were just a few bad decisions away from total collapse.

Our responsibility
When the market failed, the blame game started. Individuals who were laid off from their jobs blamed their employers. The government blamed the big banks. The American people blamed the government. And our clients sometimes blamed us, because aren’t we the ones who suggested specific investments and laid out solid financial plans for their future? This is all true, but it’s also not blame we should take to heart.


Our egos give us our drive to be planners, and that’s why less than 5 percent recruited into our industry survive past five years. But our egos often keep us from changing, so we need to check them at the door. We need to stop apologizing for the work we do. It’s time for the advisor and the consumer to both have skin in the game; let’s focus on collaboration as opposed to dictation.

As advisors, we are there to do just that: advise. Our job isn’t to make a decision for our clients despite the fact that many would love for us to do so. Remember, this is their money. Their financial past, present and future should be in their hands, and you should just be a guide. While it can be difficult to relinquish that control, we have to get clients to internally own their decisions, not just take our advice and blame us later.

One of the first steps you can take is to make sure your business model supports client advocacy relationships. If you are still operating on commission only, then perhaps you are setting yourself up for failure. Money is energy. How are you energizing that client relationship? If you always have to sell, sell, sell, are you really in tune with where your clients are emotionally? 

Consider getting paid to listen. Charge hourly for the advice you offer or charge planning fees outside of asset management fees. They are two completely different services we provide. When doing asset management, you can get that recurring revenue coming in the door for maintaining the relationship and your revenue goals for your life’s desire at the same time. It can be done; you just have to make a conscious shift. The day I realized my recurring revenue was $500,000 annually, my life got a lot easier. And my client relationships got more rewarding.

Be courageous
We have to ask more questions on topics not typically associated with finances. We need to create strategic alliance relationships that are more than the normal estate planning attorneys or accountants. One of my best referral sources is a psychologist who understands why people create scarcity in their relationships, and it all has to do with how they process their money decisions.


You could even go more esoteric and find those working in the energy psychology sector. Clients either work things out or they act them out. Most people act them out through their health or money choices. Energy psychologists are phenomenal at getting clients to clear their path for a more abundant life, which, in turn, gets us more assets under management. More so than ever before, we must connect emotionally with those we advise. Some of us have started doing that through discussing life planning, coaching and reading behavior finance experts. But it’s time now to step out further; we must do more than focus on the outside, looking at more than rate of return. Looking, dressing and speaking like our clients may get them in the door, but it won’t keep them coming back.

It’s about tapping into your clients’ heart space. Impact your clients’ lives emotionally and they will become an advocate for your business. According to the Heart Math Institute, the magnetic force of our minds only goes for a couple of feet, yet the magnetic force of our hearts goes for miles. This is the difference between a market dip causing a client to negatively place blame and an advisor-client relationship emotionally rooted and based in trust. Which one of those situations do you think will lead to lower compliance complaints, higher client retention, higher revenues and more referrals? The key is having the courage to start building your business outside of just the numbers. You have to bring humanity back into finance.

The true cost
Recently, I did a WGN Radio interview where I spoke extensively about the emotional side of our relationship with money. A caller, whom I’ll call John, disagreed with my approach. He said that money was cheap; we should borrow cheap money and make a big return on it. People who get themselves into debt for the wrong reasons through uncontrollable spending, lack of consciousness around cash flows, or as victims of the current economic downward cycle need to shift. It is our job to get them to take a close look at what they’re doing and shift to a space of complete awareness.


I’ve worked with several clients like John. What I’ve found in my own business is that they operate mostly from their left, logical brain. They have a more technical, straightforward type of job like engineering or accounting. On average, about two-thirds of society is operating in dysfunction, and I believe this is because we focus too much on the left-brain aspect of our finances.

So what’s the true cost of viewing our finances from a technical standpoint as opposed to an emotional one? Continued dysfunction: in our finances, our business life and our personal lives. Our clients have gotten addicted to their lifestyles, and it has cost them their security. Their finances are out of whack, and that disconnect has seeped into the other areas of their lives. This is why on a macro scale we have governmental and corporate financial dysfunction. If clients don’t master how to operate personally with their finances, they cannot run companies or governments effectively. As advisors, we must lead the charge to change this.

Education over dictation
To repair our clients’ experience, we have to help them with more than the dollars and cents. They must unplug from jobs they hate and plug into jobs that feed their soul. They will find more success as a result because they are bringing positive energy to their work life instead of drudgery in a job that sucks the life out of them. Instead of surrounding themselves with people they hope will help them, we must encourage them to build a team that will support them in their endeavors, a personal board of directors, if you will. Otherwise, they will surround themselves with people who reinforce the behaviors they need to change. I call these their “crabs in a bucket.” Help them get those crabs out of their lives so they can start to pursue the life of their dreams. You are likely not qualified to do this on your own, but you can pull in those alliances that can help them.


The thought of relinquishing control to other experts is frightening. We are taught to be as all-knowing as possible when it comes to money. We keep up on investment news, stay connected with other financial experts and thought leaders, and do our best to stay informed on the different financial challenges and changes within our industry. So why, then, would I suggest that you allow other experts to guide your clients instead of you?

I believe that we all need to align ourselves with people who can help us create a full, authentic life. Money is a large part of that, but so are other factors like physical and mental health, professional guidance and even where we lay our heads. Your clients will be happier, more fulfilled and thankful once they are connected with people who can help them create their ideal lives.

More than just money
These strategic alliances are more than just advice givers; they are true guiders. They dig deep into what your client is really craving—a better job, more time for loved ones, a creative outlet—and they work with you to get your clients just that. The only way that you know exactly what your clients need, however, is to ask them.


How do they feel about their aging parents and the responsibility it brings them? Is their marriage putting such a strain on their lives that it’s affecting their other relationships? When do they want to retire, and how can they make that happen with loads of debt and an insatiable appetite for spending?

These types of questions have very little to do with money and more to do with the emotions behind it. Talk about the uncomfortable stuff with your clients even if you have different views from them. Of course we must hit the numbers with our clients, but in this tenuous financial state that is becoming a commodity. If you’re only talking about the numbers, you’re going to be left in the dust.

Originally published in the Spring 2013 issue of The Wealth Channel Magazine, How Fast Can YOU Adapt?

The Financial Needs and Attitudes of Women of Color

Sandra Carr

Sandra Carr is the Assistant Director, State Farm Center for Women & Financial Services. She is also the project manager for the Women’s Leadership Academy Summit. Sandra has an extensive background in communications and non-profit management. She has worked for a radio station, a PBS television station and a newspaper. Most recently, Sandra was the Director of Development for the Sunshine Foundation. As the former Executive Director for the Center for Responsible Funding (CRF), she managed Philadelphia employees’ charitable giving campaign which raised over one million dollars in annual contributions. Sandra has a Master of Science Degree in Integrated Marketing Communications from Chicago’s Roosevelt University.

The State Farm® Center for Women and Financial Services at The American College has released a landmark report entitled The Financial Needs and Attitudes of Women of Color. The purpose of the study was to better understand the financial position, goals and concerns of women of varying racial and ethnic backgrounds.

One of the key findings of the study revealed that most women do not feel financially secure. This overview of the report highlights some of the contributing factors creating this sense of fiscal uncertainty among women of color.

Reducing or eliminating debt is a top priority for three-quarters of women of all racial and ethnic backgrounds. However, the pressure to pay off debt amid the challenge of meeting their own and their family’s immediate needs are key circumstances preventing many women of color from saving and building cash reserves. This ongoing strain results in a state of financial insecurity that is consistent across women of all racial and ethnic groups.


Insufficient retirement savings
Although nearly three in four women indicate that saving for retirement is a high financial priority, only 28 percent of women are highly confident in their ability to calculate how much they need to save for retirement. Hispanic (67 percent) and Asian women (68 percent) are less likely than women in the general population (predominantly Caucasian, 73 percent) and African American women (74 percent) to place an emphasis on retirement savings.


Lack of cash reserves/emergency funds
Virtually all women surveyed (95 percent) report the need to build cash reserves and an emergency fund. Yet most have not calculated what they need or set up a plan. The lack of cash reserves exists across all income levels, hitting middle-income households the hardest. The survey indicated that the presence of cash reserves generally correlates with income. Women who reported annual household earnings of more than $80,000 are more likely to have these funds. Specifically among women of color, seven in ten Asian women (71 percent) report having this type of savings, which is significantly higher than the 56 percent of Hispanic women and 51 percent of African American women who report having an emergency fund.


Attitudes toward financial advisors
Women of color, regardless of economic background, are more likely to think they can’t afford a financial advisor than women in the general population. However, the majority of all women believe that working with one could help them achieve their financial goals. Among women with household incomes of $75,000 or greater, women of color are significantly less likely than others to report having a financial advisor. Specifically, fewer than one in three Hispanic, Asian and African American women are working with a professional advisor versus 43 percent of their counterparts in the general population.
When it comes to what women look for in a financial counselor, the advisor does not need to be a woman; only 15 percent call this even somewhat important. The study revealed that an advisor who understands their unique financial needs is far more important to women of color than sharing the same demographic traits, such as age (7 percent), race (6 percent) or gender (4 percent).


Additional insights
In conclusion, this study provides relevant financial insights into a segment of the American population that is growing in affluence and influence. Despite the challenges and the general lack of financial security, women of color report greater optimism about their financial futures. In fact, across all income levels, African American women expressed the most hope for an improved position in the coming years (74 percent compared to 56 percent of the general population). Additionally, the majority of women believe they are making progress on their goals, particularly those ages 55 and older.


As advisors increase their understanding of the core values, challenges and needs of women of color, they will be better prepared to assist these women in developing a financial future that is healthy and secure.

For the full report, visit the Women’s Center website at A video about these findings and their implications can also be found on The American College’s Wealth Channel.


Originally published in the Spring 2013 issue of The Wealth Channel Magazine, How Fast Can YOU Adapt?

Practical Perspectives that Make a Difference

Maggie Baker, PhD

Maggie Baker, PhD, is a clinical psychologist and financial therapist in the Philadelphia area and author of Crazy About Money: How Emotions Confuse Our Money Choices and What To Do About It.

As a psychologist and financial therapist, I work with the constant ebb and flow of people’s lives. As financial planners and advisors, so do you. Plus, you have to react to risk and volatility in your clients’ lives as well as in the financial markets. I’m sure that many financial advisors would love to have less change. The stability of low risk and low volatility would make decision making simpler. But change is inevitable—and not necessarily in anyone’s total control. I offer some ideas that can help you, as a financial planner or advisor, to better anticipate your clients’ reactions to major life changes.

The areas that most likely affect your clients’ money situations are health problems, divorce, death and retirement. What causes stress for people is any change that disrupts the structure and rhythm of their daily lives, even good change. Take, for example, Joe. At age 53, he was fit and engaged in an absorbing professional and family life. Biking one day, Joe fell off his bike and sustained a severe concussion and hurt his back.

Stunned, he was reduced to no activity and severe pain that lasted for several months. He and his family were overwhelmed. His financial advisor was thrown into a state of uncertainty because no one knew how long Joe would be incapacitated. Unlike most families these days, his wife was a stay-at-home mom and didn’t take care of the finances. Joe consulted his financial advisor, who, after listening to his story, encouraged him to engage with his wife to estimate his current and future medical costs, and to estimate how long he would be out of work.

Another common major financial change happens when clients divorce. Depending on the contentiousness of the divorce, the age and number of children and the couple’s assets, a divorce can be a nightmare for even the most skilled advisor. If the divorce is complicated, the process can get drawn out. And couples may perceive their advisor is taking sides even when she/he has proclaimed neutrality.

Take the example of Kevin and Dawn. Kevin earned a good living teaching at a prestigious university. He and Dawn lived with their two children in an affluent area near the university. Dawn insisted they have the best of everything. Kevin worried about their growing debt, but he was scared to disappoint his wife and children. He avoided dealing with his finances and began to fudge the truth to his financial advisor. When Dawn realized how stuck and irresponsible Kevin had become, she filed for divorce.

Although death might seem to be the most difficult of changes for an advisor to handle, retirement often presents even greater challenges because of the number of factors, some known and some unknown, that can affect retirement. An example: Sue and Don both had good-paying careers. They had been vigilant about their spending habits and systematic about saving for retirement. They were a financial advisor’s dream! As Sue and Don neared age 60, their college-age son contracted dystonia, a serious neurological disorder. At the same time, Sue’s parents, now in their 80s, confessed that they had been gambling away much of their retirement savings and would need help. Sue and Don had planned to retire from their demanding careers at 62, given the stress their work created. All the work they had done with their advisor had been geared to a specific retirement age. This dream was now no longer possible, given the added expenses of their son’s illness and Sue’s parents’ needs. All the planning in the world could not have foreseen the events that befell Sue and Don.

When bad things happen to good people it is only human to both sympathize with their misfortune and feel the urge to avoid confrontation of it. The push and pull of these feelings can often delay a call to your client because you may have to deliver bad or at least disappointing news to them. Of course, those very stressful times are exactly when your clients need the most support and empathy, not just sympathy. Being empathetic, clear and direct about the financial consequences of a change in your client’s circumstance may not be what they want to hear in the moment. In the long run, however, telling them the truth will build trust, the sine qua non (the indispensable mark) of a well-functioning client relationship.

As a psychologist and financial therapist, I can offer another important piece of guidance: Get to know a self-administered stress test called the Holmes and Rahe Life Change Scale Stress Test. This simple-to-administer paper and pencil scale (also available online) lists 41 life events and you asked, “What events have happened to you in the past 12 months?” The assigned values of each life stress event (Life Change Unit or LCU) checked off are added up. The test’s creators, Holmes and Rahe, found that individuals scoring below 150 were much less stressed and had a 35 percent chance of an illness or accident within the following two years; a total of 150-300 predicted a 51 percent chance and over 300 between an 80 and 90 percent chance of an illness or accident within the following two years.

This easy scale can give you an indication of what kind of stress level your clients are living with. If they are in the 300 LCU group, you can expect a high probability that they will suffer illness or accident within the following two years if they do nothing to reduce the stress. On the other hand, if their score is very low, they are living with stress levels they can manage well. A low score reduces some important risk factors that create instability and volatility.

Another benefit of giving your clients the Holmes and Rahe Life Change Scale Stress Test is that it will convey your concern with your client’s lives and show that you are engaged with them and looking out for their best interests.

To illustrate the usefulness of the Holmes and Rahe Stress Scale, consider Hal, aged 48. How did he get a total of 374 points putting him at serious risk of poor health and vulnerable to an accident? Let’s start with his leaving his wife and three children to live with another woman. Efforts at reconciling with his wife boomeranged him back to his lover. His finances were strained because his new business wasn’t growing fast enough. He was chronically concerned about his children’s welfare, but unhappy when he returned home to them. To top Hal’s story off, he had gotten very good at having an upbeat air about him so no one would ever guess how stressed he really was.
Knowing the results of the Holmes and Rahe Stress Scale will help his financial advisor get a snapshot of Hal’s distress level. His advisor can show that he understands how much stress Hal is under and offer suggestions, including the common sense reminder that checking in with his doctor might be warranted. The overall effect of better understanding your client’s life stressors will strengthen your relationship with them and build trust.

Another effective tool you can offer clients under change and stress is perspective. It is easy for clients to get lost in the immediacy of difficulty. As the advisor, you can maintain perspective and more easily see eventual outcomes your clients may know are possible but cannot relate to in their immediate confusion and panic. For example, Susan, the main breadwinner in her household, just got laid off. She and her stay-at-home husband (looking after two small children) panicked. When would she find another job? Fortunately, she got a good severance package and they had a three-month emergency fund. In helping them see that their situation was short term and holding their hand through this rough patch, their trust in their advisor will increase.

There may be times when you feel overwhelmed by the responsibility you carry for your client’s welfare. When this occurs, you may find yourself going to the extreme of either becoming too involved in your client’s difficulties or too detached. If this happens, it is wise to seek the wisdom of a more seasoned advisor, a mentor or even a therapist ( if all else fails.

A critical goal for all financial advisors is to understand your client well enough to mutually engage with them and map out an effective strategy to deal with changed circumstances, be it a change in health, marital status, death or retirement.  Accurately communicating the strategy can calm clients down. One thing you really don't want is for an anxious client to act based on fear.

Decisions made in anxiety states are usually foolish. Understanding their changed situation, being straight with them about the reality and giving them thoughtful advice, will in and of itself lower their anxiety. The best financial advisors aren't only technical wizards. They are also people who deal with upsetting circumstances and emotions that are always a part of the chance process. Likewise, advisors can have too much change in their lives which can affect the advice they give to clients.

Originally published in the Spring 2013 issue of The Wealth Channel Magazine, How Fast Can YOU Adapt?

Take Charge of Your Prospecting and Revitalize Your Sales Funnel

Aaron Hoos, MBA

Formerly a stockbroker, insurance broker, and award-winning sales manager, Aaron writes for the financial and real estate industry as an educator and marketer. His first book, The Sales Funnel Bible, helps advisors master their sales funnel.

Rosemary Smyth MBA, CIM, FCSI, ACC

Rosemary is an author, columnist and an international business coach for financial advisors. She spent her career working at leading investment firms before pursuing her passion for coaching. She lives in Victoria, BC. Visit her website at

Before embarking on a road trip, you need to know a few important facts – not only your point of origin and your desired destination but also a detailed map of the route you want to take. Your prospects go on a similar journey on their way to finding financial services. Their point of origin is the realization that they need sound financial advice from a professional. Their destination is opening an account at your office and transferring their assets to you.

Just like a road trip is made easier when the route is laid out with precise turn-by-turn directions, your financial practice will benefit from a road map (also called a "sales funnel") that outlines the exact activities you do to help prospects turn into clients. It doesn't matter if this is your first year of business as a financial advisor or if you're on the home stretch and looking to finish well, you'll gain some surprising insight into your business when you go through this sales funnel exercise and the questions that follow.

3 Steps to create your sales funnel

On a blank sheet of paper, create the following 3 lists, which correspond to the 3 stages of your sales funnel:

1. Stage 1: Contact-generating activities: Start at the top of the page and list the activities you do to meet people – your contact-generating (or lead-generating) activities. The goal of this stage is to capture some information about a lead (such as their name and contact information) so you can follow up later. This might include networking and marketing activities in which you gather names and contact information. It might entail any print or broadcast advertising that you or your firm does, public seminars you offer, a landing page on your website that invites people to know more about you, your cold calling, and any networking activities where you are meeting new people and handing out your business card. A lot of online marketing falls into this category as well.

2. Stage 2: Relationship-building activities: Then, in the middle of your page, list the activities you do to build relationships with your leads, to learn more about them and to qualify them as prospects. Here, you are connecting with people whose contact information you collected from your contact-generating activities, or from referrals, and you are now building a relationship and rapport with them. This might include follow-up phone calls and letters, newsletters, invitation-only seminars, and so on. Some marketing, like certain social media marketing, can be used for relationship-building activities. Some professionals use credibility-enhancing activities like educational materials, brochures, a book, or a series of videos to help them build a relationship with their contacts, and other professionals who prefer face-to-face relationship-building activities might meet these prospects for coffee or participate at networking events such as a Chamber of Commerce event.

3. Stage 3: Closing/selling activities: And near the bottom of your page, list the activities you do to actively persuade these prospects to become clients. This might include consultative meetings or some other sales presentation. For example, you might offer to review your prospect's portfolio and give them a second opinion, or you might uncover a specific problem that they need solved and offer to put together a plan to help them, or you might offer to help them with some of their assets so that you prove yourself to handle more of their portfolio.

This exercise should help you understand how your client-generating activities all work together: Once you have a new lead, what do you do to turn them into a prospect? And once they're a prospect, what do you do to get them to open an account with you?

Note: These aren't always clear-cut activities. The speed that someone moves through your sales funnel is partly determined by the urgency that they feel about how you can help them! Some leads turn to prospects quickly and can even become clients at the end of a relationship-building meeting. But not all prospective clients feel that sense of urgency so professionals should think about building a sequence of relationship-building activities.

Analyze your sales funnel

This is the roadmap that all of your prospective clients use on their journey toward becoming your clients as they move from lead to prospect to client. Look at the sales funnel you've just created and answer these questions:

• Reason to advance: Why should your prospective clients even go on the journey to end up at your office? Some professionals try to rush the process, attempting to jump people from the first stage of their sales funnel to the last stage (without any relationship-building in between). So, what would the impact be if you adjusted your message – instead of convincing leads to become clients, how might you invite them to move from the first stage into the second stage, where you build a relationship with them, and then how might you move those people from the second stage to the third stage where they become clients?

• Clarity and purpose: Do you have a clear and purposeful sales funnel? Once a prospect has started the journey, what can they expect next? Are you proactive in immediately moving them to that next stage or are you waiting for them to take action first? When you meet someone for the first time, what is your process for capturing information about them and following-up? How can you make this process faster for them and easier for you?

• Time and energy investment: Are there too many activities (or too many time-consuming activities) in one stage, and are these activities stealing your time and energy away from better activities? Are there too few activities in another stage, and do you need to bolster this part of your sales funnel with additional effort?

• The very best activities: Do your sales funnel activities resonate with your niche market? (For example: Will you really build credibility on social media with your niche market if they aren't active users of social media?) Which activities were the most influential in bringing your favorite clients into your office? And, which activities were most influential in bringing your least favorite clients into your office? How can you increase the activities that tend to generate the best clients?

Tracking: How do you keep track of who is in each of the three stages of your sales funnel? How do you ensure that no prospective client falls through the cracks? (Another advantage of paying attention to the number of people in each stage: You can forecast your new client sign-ups more accurately). What are the ratios as people move from one stage to the next, and how can you improve your skills to improve those ratios?

• Plug the holes: Not everyone will become clients. Some leads will exit before you can build a relationship with them; some prospects that you're building a relationship with will simply say "no" to your offer of becoming their financial advisor. So, do you know which stage is losing the most of your prospective clients and do you know why? Do you have a way to connect with them periodically just in case something changes for them?

• Skill up: If you want to grow the number of clients you have, but you don't know exactly where to focus, look at the answers to some of the questions above and decide which sales funnel activities are the most effective at bringing in the best clients (while also being effective uses of your time). And, look at the places in your sales funnel where you tend to lose people. Then invest some time in developing your skills in those areas.

Schedule time regularly to review your sales funnel and explore other ways to find new leads, build relationships with them, and invite them to become clients. By now, you should have a clear roadmap for your practice – one that will empower you to lead more of your prospective clients on a journey that culminates with them sitting in your office and opening an account with you.


The views expressed here are those of the author and not necessarily those of The Wealth Channel or The American College

Why Designations Matter

Sterling Raskie, MSFS, CFP®, ChFC®, CLU®

Fee-Only Investment Advisor and Financial Planner

Throughout my career I have had the occasion to talk with several financial advisors, planners, insurance agents, brokers, and other industry professionals about some of the reasons why people choose to pursue or not to pursue designations. I have heard differing views on the topic and thought I’d share some of my insights as to why I chose and still choose to pursue designations and degrees.

Before I do, let me start by talking about some of the reasons why the advisors I have spoken to decide not to earn a designation. More often than not, the typical answers that I receive are not having enough time, not sure which designation to pursue, lack of funding to afford the designation, and lack of support on earning the designation – either from their employer or family. On the latter two points, some companies may not be able to “support” the designation - think captive agents that get the CFP® or ChFC® designation. They may be allowed to earn it, but if they are captive agents to a specific company, meaning that they have to be loyal to the company first, they are not allowed to advertise it, put it on business cards or stationery, and most importantly are not allowed to act as a fiduciary – meaning that they have to put the interests of the company they work for first, then the client. This isn’t necessarily a bad thing, just different. Regarding family, many designations take a lot of time, energy and resources away from the family. Although these sacrifices are short-lived, some family members have a hard time with the time and resources being shifted momentarily.

One of the most ridiculous responses I heard came from an advisor I was having a conversation with regarding the coveted CFP® designation. Having found out that I earned it, we were discussing the finer points of what the designation means, what you have to know for the exam and so on. At the end of the conversation the advisor gave me a slap on the back and said, “I already make enough money and don’t need the designation. But have fun paying all those fees!” (Side note: as of this writing the advisor I was speaking to is no longer in the industry).

In my humble opinion there are reasons why you should and why you should not pursue a designation. As you can assimilate from the information above, it becomes clear of why we should not pursue a designation. It’s not for the “money” and it’s certainly not for the prestige (although you feel pretty good when you earn one). You shouldn’t pursue one if you feel forced to do so (would you want to work with an advisor if you knew he or she really didn’t want the letters after their name?).

Most advisors and planners pursue and earn designations because they want to. They want to better themselves, their clients and their industry. Now, I’d be lying if I said that having designations doesn’t increase your income. It certainly can. That being said, the increase in income is (and should always be) a by-product of learning, putting your clients first, and maintaining the integrity of the industry and the designation earned.

The real beauty of earning a designation is it teaches us humility. Why? Because it’s through learning and earning those designations that we truly realize how much we really don’t know – and how much more we need to learn. This industry has so much to offer and so much of it is ever-changing. To not continue to learn, earn designations and better ourselves is a disservice to our colleagues, our profession, and our clients – and most of all, ourselves.

How Spreadsheeting Ruined Long Term Care

Stephen Forman

Stephen is the Senior Vice President of Long Term Care Associates, Inc.

Do you remember how brisk long-term care insurance sales were in the 90’s? Remember when we didn’t have DRA Training Requirements, and no Google ads offering FREE quotes? Remember when we didn’t have Potential Rate Increase Disclosure forms? You know what else we didn’t have back then either…?

In the last 10 years our industry has been buoyed by such endorsements as the “Own Your Future” campaign, the annual “Long Term Care Awareness Month”, and now the pan-industry “3in4NeedMore” platform, yet the combined lift of all these CTA’s have not been enough to counteract the downward force exuded by spreadsheeting.

The best agents have always been those who do right by their clients. This has traditionally been understood as promulgating and recommending the best LTC solution—no matter the price. Or rather, where price is but one criteria among many.
So-called “needs-based” selling requires that the client’s needs are evaluated, and a plan tailored accordingly. From there, a broker can choose from among his arsenal of carriers to locate the most affordable bid… but “needs” are what are sold to. Walking away without closing on such a plan meant doing the customer a disservice, because he or she was not properly insured.

Enter the spreadsheet. Producers love products such as Stratecision and VitaLTC. They swear by them, in fact. I’m not here to disparage either the products, the companies behind them, or their employees. However, no one can disagree they’ve changed the way LTCi is presented and sold. (In fact, I use the term “spreadsheeting” because this trend goes back as far as Excel and its analogs.)
Comparing multiple products side-by-side for your clients accomplishes many things, not the least of which is a pre-emptive strike against them attempting to obtain quotes from your competitors. It also exemplifies your expertise through a mastery of many products, and your trustworthiness because you’re willing to be transparent with industry pricing. These are all positives.
At-a-glance, your clients can readily see which product is the least expensive, and which costs the most. For the agent, this can become a powerful tool, either for or against a particular carrier. And herein lies the problem.

Selling on price may have always been the crutch of the lazy agent, but spreadsheeting was the great enabler. Its proliferation over the last decade has led to several undesirable consequences for our industry:

1. Bad press. As recently as last week, the Motley Fool repeated an old saw that carriers deliberately underpriced products in an effort to buy business, only to later raise rates. There is no proof that this was the case, but as long as agents continue in a race to the bottom, there will be little defense.
2. Disservice. By turning LTCi into a commodity-sale, we fail our clients and ourselves. First, the benefit configurations we custom-design begin to look like they came off a conveyor-belt. If the plan design is no longer “needs-based”, then cookie-cutters will do…and cookie-cutters is what are produced. Second, we begin to lose our fundamental sales ability over time—techniques such as “selling need”, “telling stories”, “asking questions”. If selling on price is the only tool in your toolbelt, then a “fire sale” is the only time you will make a sale. You could go broke waiting for the next one…
3. Loss of product innovation. Spreadsheets are great for comparing apples-to-apples, but what happens when you want to show an orange? Not so easy. I would contend that one of the underlying causes behind the failure of Prudential’s Evolution or MetLife’s LifeStage Advantage was their lack of “spreadsheet-ability”. During the design stage of new products, carriers are conscious of this fact now, and it has led to a rut in the “traditional” standalone LTCi product.
4. Carrier exit: As I’ve written elsewhere, any carrier marketing LTCi is only one bad product away from exiting the market. In the case of the carriers listed above, their market exits were directly preceded by non-spreadsheetable products. But there can be another reason: Live on price, die by price. If a carrier wants to make its name by being the “low-price leader”, then it must be prepared to suffer the consequences when that day comes to an end. Agents will take their spreadsheets and flee. Is that the industry we want for ourselves?
In case you missed the story, Walmart is now selling life insurance in their stores while Costco is doing the same with health. Both are part of a larger trend to commoditize insurance and de-value the role of the agent. For the life of me I have no idea why some agents would hasten their own demise!

For our part, LTCA has selected each carrier in our portfolio because its products boast a unique value proposition. If you're not promoting that value proposition, then you're vulnerable to any competitor who follows you into the home with a slightly cheaper product.
If we hope to see our industry mature, and develop a deep market rich with innovation, then we must return to “needs-based” selling. A continued focus on price—enabled by spreadsheeting—will only further depress sales by amplifying the negative consequences outlined above. I exhort my hardworking colleagues to return to fundamentals, and as always,

Good Selling.

The views expressed here are those of the author and not necessarily those of The Wealth Channel or The American College

Image Courtesy of
Image Courtesy of

Women and life insurance: The bridge to somewhere

Mary Quist-Newins, CLU®, ChFC®, CFP®

As the State Farm Chair in Women & Financial Services at The American College, Mary is also the author of Women and Money: Matters of Trust.

Pop quiz: Please identify the diagram below:




a) The 2009 Congressional Actuarial Tax Chart
b) Leonardo da Vinci's illustration of "the cycles of life"
c) Hypothetical illustration of the economic value of human life
d) A pizza oven
e) All of the above

The correct answer is (c). If you answered correctly, go to the head of the class. This diagram depicts one interpretation of the "Human Life Value" from Life Insurance, the book by Dr. Dan McGill, PhD, CLU®, edited by Ed Graves, CLU®, ChFC®, and copyright The American College.

As a financial planner, I have frequently thought this line of work had many parallels with bridge-building. We seek to bridge the gaps between today's financial realities and tomorrow's securities -- and across the chasms of risk.

Life insurance is often one of the most fundamental, necessary -- yet sometimes complex -- of the bridges we build. Determining the appropriate amount and type of the life insurance bridge is a function of analyzing and interpreting the economic aspects of human life value. The concept of human life value originated with University of Pennsylvania (Wharton School) faculty member, industry pioneer and founder of The American College, Professor Solomon S. Huebner. In a nutshell, quantifying economic value of human life incorporates annual income, expenses, years until retirement, inflation and the present value of funds needed for retired years.

So what does this have to do with women and life insurance?

Studies have shown that while women indicate they understand life insurance as a product, few have quantified its economic value. Put another way, most women have not "built the bridge" for their family's financial security in the event of their husband's and their own premature death.

Consider the following data from recent research conducted by Prudential Financial:
Nearly 80 percent of women say they understand life insurance well or somewhat well. (It is worth noting that life insurance ranks almost highest in women's understanding of financial products, second only to savings accounts.) (2)

However, few women have put a price on their human life value. In fact, just one in three have preparations for premature death including life insurance, and more than four in ten (44 percent) have not even discussed the issue with their spouse. (3)
The conclusion one might draw from these statistics is that here we have a situation where the product is arguably well understood, but its utility, perhaps, is not.

More data to chew on:
76 percent of women (69 percent of men) rate life insurance as very or somewhat important: (4)

Fifty-six percent of working women who have life insurance coverage do not believe or are unsure that the amount of coverage they have is adequate. (5)

46 percent of full-time working women have not taken any steps to determine their life insurance needs. (5)

Although 69 percent of Americans believe both parents in a household where one parent works and the other stays at home to care for children should have life insurance, just 7 percent report that to be the case in their home. (4)

While women have made significant gains in their economic contributions to both the workplace and home, their connection to her family's security is rarely made. Even if a bridge has been started, it most likely will not span the economic gulf that the family might find itself in. The average death benefit, at nearly $76,000 for a working woman, is about half that of her average male peer (about $143,000.) (6)

And, it's not just women who need a clearer picture of their economic human life value. Certainly, most men are underinsured, assuming an average death benefit in the low $140,000s. One of the most troubling statistics I have come across is that 80 percent of widows living in poverty were not poor when their husbands were alive. (7)

In light of these statistics, it would not be an overstatement to say that both women and men seriously underestimate the monetary worth of their contributions to the household. Here is a great "litmus test" question that dramatically illustrates the common lack of or low life appraisal from Associate Professor Ed Graves, CLU®, ChFC®, Associate Professor of Insurance and holder of the Charles J. Zimmerman Chair in Life Insurance Education at The American College: "Is the amount of coverage that you currently have in-force equal to the maximum amount you would seek in a wrongful death settlement?"

Help build the bridge

As a trusted professional, you are the engineer in helping your clients build better bridges to their financial security. Diligent fact-finding, well thought-out analysis of current and projected sources/uses of cash, researching and presenting alternative product options can set you apart.

As a financial planner, I found risk management, particularly related to human life value, to be one of the most rewarding aspects of financial planning. My experience has been that even the most stalwart opponents to life insurance (often male; sorry, guys) found it hard to argue with the "bridge" presented, including the objective facts, analysis, findings and alternatives. The processes of conducting a thorough and comprehensive data gather, analyzing alternative scenarios, and weighing product options along with their costs, pros and cons, draw one closer to clients. Good relationship building, of course, pays other dividends too -- often in the forms of multi-lining and quality referrals.

If you are in need of bridge-building resources for your life insurance clients, male and/or female, here are two suggestions:
1) Check out the comprehensive life insurance analysis on The site has one of the most robust "free" Internet tools I have seen. As background, Dinkytown develops and sells online calculators to financial advisors for posting on their Web sites. For the curious, Dinkytown is a neighborhood in Minneapolis.)

2) Apply this five-step procedure from the McGill textbook on life insurance for estimating economic value using a computer, financial calculator or compound-interest tables:

1. Estimate the individual's average annual earnings from personal efforts over the remaining years of his or her income-producing lifetime.

2. Deduct federal and state income taxes, life insurance premiums and the cost of self-maintenance.

3. Determine the number of years between the individual's present age and the contemplated age of retirement.

4. Select a reasonable rate of interest at which future earnings will be discounted.

5. Multiply (1) minus (2) by the present value of $1 per annum for the period determined in (3), discounted at the rate of interest selected in (4). (1)
Or, consider taking a Chartered Life Underwriter® (CLU®) course or refresher through

Bridge-builders for life unite!

Double Jeopardy

Mary Quist-Newins, CLU®, ChFC®, CFP®

As the State Farm Chair in Women & Financial Services at The American College, Mary is also the author of Women and Money: Matters of Trust.

Ask any woman about long-term care, and she'll tell you it's not about insurance. It's about her family and her quality of life. It's about understanding the twin risks of LTC that women disproportionately face, determining what those risks mean to her and her loved ones, and guiding a proactive planning process. Women are in double jeopardy here because they are often both caregivers and receivers. This double jeopardy presents significant financial dangers.


For many women, the first exposure to LTC occurs when they provide services or financial support to a loved one. Women are the vast majority of professional or formal caregivers; they're also the primary deliverers of informal home care. Approximately 75% of those providing home care are female, most often daughters. Women also spend 50% more time giving care than men.

While the high cost of facility care is common knowledge, the costs and consequences associated with giving care in the home are less well known. Consider these stark realities:

* Nationally, more than 6.4 million working women provide direct or indirect caregiving assistance. By 2010, 10.1 million employed women will bear this burden. As boomers age, these numbers could double by 2050.

* According to research from the National Center on Women and Aging, family caregivers lose an average of $659,130 over a lifetime in reduced salary and retirement benefits.

* Forty-four percent of female caregivers report high levels of physical strain or emotional stress, while employed caregivers are more than twice as likely to develop depression.

* Women who become caregivers are nearly three times more likely to end up in poverty and five times more likely to depend exclusively on Social Security.


Lack of preparation about her own future care significantly magnifies a woman's financial risks. The chances the general population will need LTC is about 50%; for women over 65, it's more than 70%. Women are also more likely to be cared for in a facility and for a longer period of time. Seventy percent of nursing home residents are female, with an average stay of 3.7 years versus. 2.2 years for men. As a result, the average American woman is likely to incur more than double the LTC expense of the average male.


Despite this double jeopardy, women have a disturbing tendency to avoid the subject of LTC. Consider:

* A Securian Financial survey found that 84% of respondents whose parents required care in their final years said no plans were made ahead of time.

* Just 18% of women talked to their spouse or partner about LTC, according to Prudential Financial research.

* Only 35% of women in a 2009 survey by America's Health Insurance Plan said they had thought about or planned for how they will cover LTC costs.


To develop a well thought-out plan, the advisor must determine what the client understands about her risks and if she's taken any steps to reduce them. This means uncovering the client's own potential for needing care, as well as the likelihood that she will have to provide care for her parents, spouse or both.

Retirement plans that exclude the financial impact of being a caregiver shortchange many women. If indications are strong that a client will be a caregiver, the advisor needs to help develop realistic assumptions and incorporate them into her financial plan.

Regarding the client's own needs for future care, building her awareness begins with questions like:

* How likely do you think it is that you might need LTC?

* How familiar are you with different LTC arrangements and their costs?

* What plans have you made with your family should you require LTC?

Developing a personalized estimate of a client's LTC costs can be an eye- opening exercise. For a particularly good tool, go to Beyond providing a wealth of unbiased information, the site features a personal calculator that gives an individualized projection of care costs and probability based on gender, age and health history factors. Geographic differences in care costs are also incorporated into the estimates. Once a client understands her risks, the advisor will analyze her financial preparedness to meet them. With the help of planning software, this step looks at projected sources and uses of cash in the likelihood of LTC, and how it will impact a spouse or dependents.

When analyzing LTC risks, remember that most planning software has serious limitations, says Craig Lemoine, CFP and assistant professor of financial planning at The American College in Bryn Mawr, Pa. An expert in software programs, Lemoine has extensive financial planning experience as well. Here are the primary questions he asks when evaluating LTC planning applications:

* Am I using goal-based or cash flow software? Goal-based software is top down. That is, total income and expenses are adjusted upward or downward to account for anticipated events (e.g., retirement expenses are 80% of preretirement expenses). Most basic planning calculators, including those found for free on the web, take this approach.

On the other hand, cash flow-based software is bottom up, which allows for line item adjustments to income and expense streams (e.g., turning streams on and off, modifying amounts, inputting independent inflation rates). Cash flow software creates a more detailed output. The advisor can accommodate a variety of expense situations for an at-home spouse, at-home care, assisted living and nursing facility care. Also, as inflation for care will likely outpace other costs of living, the ability to manipulate rates independently allows for far more realistic long-term projections.

* How is LTC coverage built into the program? Both cash flow and goal-based programs generally allow for single inputs on LTC coverage, simplistically reflecting coverage elements (e.g., waiting period, duration, 100% benefit payment). Lemoine says this leads to more of a "check-the-box" exercise than planning. While advisors can adjust expenses to reflect levels of care in cash flow-based software, coverage not needed on the resource side is typically reflected as phantom asset accumulation, leading to an under- or overstatement of net worth.

* How easy is it to compare alternative policies? Most software platforms allow you to analyze only one policy at a time. This makes it cumbersome to perform quantitative analysis and compare alternative coverage designs.

* How is probability modeling addressed? Most financial modeling software revolves around investment outcomes and probabilities, Lemoine says. "These projections largely ignore probabilities associated with personal risks." He says the current generation of software ignores questions like: "Will the benefit kick in?" "Will you outlive the benefit?" "Will inflation outplace the coverage?" To develop a deeper analysis, advisors must recognize and possibly address limitations.


After conducting a thorough risk analysis, one of the main decisions your client must make is whether to buy LTC insurance. Since insurance transfers risk, there are three basic options to consider before even looking at the product:

* Transfer all of the risk (provide 100% gap coverage, lifetime coverage, maximum inflation protection)

* Transfer some of the risk (provide partial gap coverage, limited benefit period, shared policies, simple inflation protection, LTC riders attached to other financial products)

* Transfer none of the risk (self- insure or take one's chances).

Regardless of which option the client chooses, the plan is key. If the choice is, "I will live with the risk," then the planner needs to ensure there are financial and family game plans in place to deal with the consequences. Many families are torn apart and women left destitute by leaving LTC decisions to chance. Financial planners can make a meaningful difference in their female clients' lives by helping them understand, quantify and adequately prepare to meet their risks. As with so many other financial goals, the plan's the thing.


Untapped Market

Mary Quist-Newins, CLU®, ChFC®, CFP®

As the State Farm Chair in Women & Financial Services at The American College, Mary is also the author of Women and Money: Matters of Trust.

ake these numbers, for example. More than half of the investment assets in the U.S. are controlled by women. Women also account for more than 40% of all Americans with gross investable assets above $600,000 and 48% of the country's millionaires, according to Oppenheimer's 2006 study Women and Investing. Nearly half the country's estates worth more than $5 million are controlled by, you guessed it, women.

But wait, there's more. Women's economic future is even brighter. American females have earned more bachelor's and master's degrees than men every year for three decades, leading to increased earning power. Add to that the generational and spousal wealth transfer these women have coming down the pipeline (estimates range from $14 trillion to $25 trillion) and it's clear why many predict that, by 2030, two-thirds of the nation's wealth will be in women's hands.


Despite the opportunity this thriving market presents, however, financial planners largely ignore women. Only a small minority of financial professionals actively seek to attract female clients, leaving a vast and lucrative market for advice significantly underserved.

A 2008 study by the Life Insurance Marketing and Research Association (LIMRA), for instance, found that only about one in six male insurance representatives and roughly half of all female representatives plan to target the female market. Considering roughly three out of four financial professionals are male-regardless of their business model-the weighted percentage of representatives marketing to women is less than 25%.

This makes the women's market one of the greatest growth opportunities for a financial planner today-an opportunity many have disregarded. This is baffling, considering study after study has proven that women are a receptive market.

In fact, women are more interested in receiving professional financial advice than men are. According to a 2008 study by Allianz, one half of women prefer to learn about financial products from financial professionals. Talk about a thirst for knowledge.



This, of course, is good news for financial planners-though that doesn't mean this market is without obstacles. Most significantly, women as a group, are subject to much financial change-even extreme change-over the course of their lifetime. For instance, women today are more likely than men to find themselves in poverty at some point in their life. That's because women are more likely than men to have to contend with lower lifetime earnings, longer life expectancy, singlehood, chronic and disabling health conditions, and lower levels of financial literacy. The death of a spouse can be especially debilitating, and can mean loss of one Social Security check, a pension and, in some cases, health coverage. Widowhood can also leave a woman with the couple's remaining debt, which is often quite high.

Together, these factors can mean a life of destitution-particularly for older women, even those who have been financially secure most of their lives. According to the Deptartment of Labor, women are twice as likely as men to live below the poverty line during their retirement years, and almost three out of four Americans over 65 classified as "poor" are female.

This obstacle, however, is your opportunity. Educated women are aware of many of their financial risks and want to avoid becoming part of a poverty statistic. In fact, according to Oppenheimer's 2006 study, the vast majority of women think they will live to be 80 or older, believe they will spend part of their retirement in a nursing home and expect to outlive their spouses.

Even better, they want to do something about it. One in three women is eager to strengthen her financial planning skills but just doesn't know where to begin, Allianz's survey revealed. Your services can be a solution.

Another potential roadblock in serving the women's market is that most women have high suspicion of-and very low regard for-the financial services industry. A 2008 survey by State Farm revealed that just one in three women trusted financial professionals, and that three in four female respondents were skeptical when first meeting with a financial professional. This trust was surely diminished even further over the last two years, thanks to Madoff and other Ponzi schemers.

Many women also feel disconnected and disrespected by the industry as a whole. According to research conducted by the Boston Consulting Group between 2008 and 2009, financial services ranks as the industry least in touch with what women are looking for. Women complained that financial services reps talk down to them, show a lack of respect and-most disturbingly-provide them with poor advice.

After looking at the numbers, it's apparent that financial planners hoping to attract female clients will have to work to establish their credibility. And sure, what professional wants to surmount such a high level of mistrust? But not doing so ignores an enormous opportunity to provide an underserved market with top-of-the-line service, a long proven strategy for business growth.

An exhaustive list of articles have surfaced over the years revealing ways in which to serve female clients, covering everything from appealing to women's conversational spirit to honing in on the infamous "bag lady" fear. But here's another simple way to serve this flourishing throng of clientele: Educate them.



While financial literacy in the U.S. is low for both genders, women lag behind men in their understanding of even the most rudimentary financial concepts. The good news, however, is that women want to learn. Research by Oppenheimer found that 90% of wealthy female investors want their planner to fully explain financial concepts and that they don't feel comfortable making investment decisions themselves.

The even better news: Clearly explaining abstract financial concepts to women can help you grow your business too. Of course, financial planners who frequently provide information that enhances financial literacy are twice as likely to receive referrals. But happy female clients are especially beneficial to acquiring new business, with a referral rate of 5.1 times. Men refer at a rate of only 1.3 times.

An advisor will hinder his (or her) practice from flourishing by disregarding a female clients' inclination to share experiences. Those who take the time to teach women about their finances will likely enjoy their loyalty, and that of her friends, family and neighbors. Clear, digestible education brings new clients-it's that simple.


Financial professionals can (and some might argue, must) work to improve the lives of American women. This year, there will be an unprecedented opportunity to do so. As part of April's National Financial Literacy Month, more than 100,000 financial professionals, coaches and educators will team up in the largest financial literacy campaign in history, Stand Up for Financial Literacy (www.stand4fl .org). Planners can participate in their local communities by holding town hall meetings and seminars or speaking to community organizations. Other industry groups and companies are offering similar initiatives.

However you choose to participate, financial planners who reach out to women's groups and audiences through educational initiatives will build trust-and quite possibly their business. Now is the time to stand up and make a difference in the lives of American women. Educate them on the opportunities ahead of them-and you just might see your own opportunities multiply.

Retirement and Social Security challenges for women

Mary Quist-Newins, CLU®, ChFC®, CFP®

As the State Farm Chair in Women & Financial Services at The American College, Mary is also the author of Women and Money: Matters of Trust.

Even before our country's current economic woes, one could reasonably argue that the vast majority of both American women and men needed trustworthy, competent and financial professionals to guide them. As markets have continued to unravel in recent months, that need has grown. Moreover, navigating the complexities of Social Security benefits and integrating them into a well-thought-out plan of action require significant expertise.

Here are just a few unsettling statistics for perspective:
Thirty-one percent of the U.S. workforce had no savings set aside.1

Forty percent of all Americans end up retiring earlier than planned.2

The U.S. savings rate experienced a steady decline from 1970 when Americans saved roughly 9 percent of their after-tax income to 2005, when the savings rate actually drifted into the negative.3
Since women, on average, have less savings than men, we can only imagine a more ominous picture. The sad fact is that many women face a nightmare of poverty in retirement. The data that illustrate this phenomenon are as tragic as they are startling:
Almost three-in-four Americans older than the age of 65 living in poverty are women.4

The median income for women over age 65 is more than one-third lower than men in the same age group.5

A full 80 percent of widows living in poverty were not poor when their husbands were alive.6

By some estimates, without Social Security, the poverty rate for elderly females would increase from about 12 percent to more than 50 percent.7
Factors that increase a woman's retirement risks and potentially compromise her Social Security benefits include:
Family matters: On average, women take 12 years out of their working lives to care for children and/or parents. 7 Fewer years in the workforce results in fewer dollars set aside for the future and lower Social Security benefits.

Lower earnings: The wage gap of about 20 cents on the dollar to the average earned by men translates to an even larger proportion of income that should be saved and smaller Social Security payments.8

Greater longevity: This means that a woman's retirement savings and her benefits need to stretch much further. To compensate for both higher life expectancy and a greater need for self sufficiency, some have calculated that women need to save as much as 2 percent more than men every year for 30 years.9

Singlehood: Women are more than twice as likely to be alone in their later years as men10. In 2004, according to the Social Security Administration, 61 percent of women older than age 65 living alone had an annual income under $15,000. Even adjusted for inflation, that income still falls below $20,000 per year.5

Sources of income: For 25 percent of unmarried women, Social Security is their only source of income.11
As financial professionals, it is essential for us to take note of these issues when helping our female clients with their retirement plans. It is all the more important when we consider how vital Social Security is for most Americans. Almost two-thirds of all beneficiaries older than age 70 are female and for three-in-four women, benefits represent at least half of their retirement income.12

Beyond the current state of affairs for women, it is likely we will see an increasing, not declining, dependency on Social Security in light of the current economic climate, persistently low personal savings and other risk factors. As such, it falls to us to not only become experts on the intricacies of Social Security benefits, but also when it might be best for a woman and her spouse, if applicable, to claim them.

In a 2007 article from the Journal of Financial Planning, Alicia H. Munnell, director of the Center for Retirement Research at Boston College, suggested that it is generally advisable for single women to delay claiming as long as possible. For married couples, wives (who are most likely younger) should claim early and the husband should delay.13 However, with these, as with any "rules of thumb," making sweeping generalizations can be dangerous unless our clients are (pardon the pun) "all thumbs."

Since Social Security is the mainstay for many women, it's important for financial professionals to carefully analyze a range of benefits and alternative income (e.g., working and asset-based) options. And, it's not just her benefits that matter. Analyzing various scenarios on both spouses determines the impact of taking benefits earlier or later. As many women outlive their husbands, projections also must take into account what she might be entitled to as a surviving spouse with her potentially higher life expectancy. The health history and longevity patterns of both the husband and wife are also essential to take into consideration.

Simply put: Relying solely on basic assumptions, rules of thumb, or even the annual statement of estimated Social Security benefits will fall far short of what most women will need in a well-developed retirement plan.

An excellent resource for both financial professionals and the public is the Social Security Web site at The site is rich in information, including frequently asked questions and the most comprehensive resource of all -- the Social Security handbook. The handbook provides exhaustive detail on all aspects of the program and will help you build the expertise that will aid many of your clients.

In addition, the Web site provides four calculators to estimate the impact of claiming benefits earlier or later. You can then plug those benefit amounts into planning software, along with assumptions on other income sources (e.g., pensions, asset yield and liquidation, employment, etc.), estimated expenses, longevity and inflation.

Becoming an expert in Social Security and how to optimize benefits in a woman's retirement might literally save her from a life of poverty. Most of us came into this business to help others. Here is a real opportunity for us to do just that.

The benefit of your hard work in putting together a well-thought-out plan? Industry studies show that planning not only increases a woman's confidence, but also increases the rates of implementation and cross-selling. This means not only greater retirement security for your female clients, but also more referrals, higher income and maybe even the satisfaction of knowing you made a real difference.

There’s No One With Endurance Like the Man Who Sells Insurance

Alan Press, CLU®, LUTCF®

Yes, indeed. The Man Who Sells Insurance has been around your neighborhood, motivated by commissions, since about the 1830s. The agency system for the distribution of life insurance has been with us for about 185 years. Now that’s endurance! That’s longevity!

Although we cannot be precise on this detail, he probably worked for the New York Insurance and Trust Company (no relation to the present day New York Life). He was paid 5 percent of the first-year premium and no renewals. Before long, though, competitors realized his value. His first-year commission doubled to 10 percent of the first-year premium. And he also received lifetime renewals of 5 percent. 

Once they understood how valuable the Man Who Sells Insurance could be, other companies began to bid for his services. The Mutual Life Insurance Company of New York (est. 1845), Mutual Benefit Life (est. 1845) and the Connecticut Mutual Life (est. 1846) all flourished, because they understood that their profitability depended on an ever-increasing cadre of highly motivated, well compensated agents, who could consistently do the difficult job of selling insurance every day.

Think of all the neighborhood pharmacies, florists, bookstores, hardware stores, travel agencies and other stores we all patronized. They are almost all gone. Why has the agency system survived, and indeed thrived, when so many other product distribution systems have essentially disappeared?

Every thoughtful reader will come up with his or her own rationale. My instinct tells me that the reasons involve three interrelated forces—the product, the people and the primary element, trust. Since the beginning, insurance producers continue to this day to make the agency system an indispensable element in the equation.

The product 

The sale of our products involves getting people to think and talk about the three things they want least to happen to them, their death, disability or old age. Many will ultimately face all of these without adequate resources to meet those challenges, unless they listen to us and act on our advice.

You can’t park a life insurance policy in your driveway and blow away your neighbors with it. You can’t wear one on your back, your wrist or your finger. If you tried to brag about your new million-dollar policy at a neighborhood cocktail party, somebody would probably ask you, “What are your other symptoms?” It would be an instant room-clearer. 

In contrast, we buy lots of different products from so-called salesmen. Most of them are no more than order takers. They don’t do anything to make us come through the door of their stores. If we don’t walk in, they have nothing to do. And we often know what we want before we enter. 
For example, 
over the course of my lifetime, I have probably bought 20 cars. In every instance I knew the exact brand, model, color and options that I wanted before I walked into the dealership. The various salesmen insisted on telling me how many 
seconds it would take me to get from 0 to 60 miles an hour, 
the number of gears in the transmission, about the speakers for the radio and how many 
miles per gallon I would get. 
I knew all of that before I walked in. The only information I wanted from him was how much it was going to cost me.

Whichever dealer gave me the most competitive price got the sale. 

Not one of them ever followed up with a call and said, “Your car is almost three years old. The warranty will end soon. We’d like to bring a new one with all of the nifty gizmos to your driveway and let you test-drive it for a few days. Then we will show you how we can get you into it at a price you will be comfortable with.” 

How many of you have ever had the experience of a total stranger coming through the door of your office and telling the receptionist, “I woke up this morning and decided that I want to buy a life insurance policy. Is there anyone here that could sell one to me?” 

In my 56 years in the business, it has never happened. But if it did, I would probably respond to him or her with a question of my own: “Are you on your way to New York Hospital for a heart transplant?”
The people 

It takes dedicated, highly motivated, well-educated advisors to sell life insurance. To overcome the procrastination instinct that inhibits so many of our sales. Advisors must face negative responses. We are paid for what we do, not who we are. We must be able to structure our own days. We must get ourselves to do the hardest job. We must continually prospect. 

Paraphrasing Albert E. N. Gray’s The Common Denominator of Success, we must be able to get ourselves to do the things we don’t want to do, the things that unsuccessful people cannot get themselves to do. We must get ourselves do them every single day. And, above all, we must do them all with integrity.

The reason successful advisors can command significant levels of income is simple. Very few people can consistently do the job well. It’s Economics 101: supply and demand. 


We ask our clients to give us a significant amount of their hard-earned money in return for an eight or 10-page document that the vast majority of them will never completely read, and wouldn’t understand most of if they did. It is above all, a trust sale.
Only people can earn trust. There is no such thing as a life insurance company or agency that exists as an independent entity, apart from the men and women who work within it and define it. The organization that attracts and keeps quality people who understand their responsibilities to the individuals who buy from us because they trust us will be a good company, a successful company. And the opposite is equally true.

We tell our clients, “We will be there for you when you and your love ones need us. We will keep our promises when the things you don’t want to happen, happen, as they surely will.” That is an enormous responsibility that must never be compromised. The purchase of a life insurance policy is a trust-driven transaction. It can take years and years of consistent hard work to build and maintain trust. But trust can be lost forever in a matter of minutes if we do not continually conduct ourselves in a manner worthy of our mission.
For 185 years (with certain notable aberrations) the good men and women who manufacture, sell and service our products have been mission driven. There is every reason to hope and believe that we will be around for the next 185 years, if we continue to earn the trust and confidence of all those we serve and maintain the consistencies that are part of the life insurance equation.

“There’s No One With Endurance Like The Man Who Sells Insurance” is the title of a song written by Frank Crumit, published by Decca in 1935.

Originally published in the Winter 2012 issue of The Wealth Channel Magazine, The High Cost of Longevity.

Talking to Clients About Overspending in Retirement

Zachary S. Parker, MBA, CFP®

Although outliving retirement savings has become a major concern for a growing number of adults, many have difficulty reconciling their retirement expectations and reality. Consider that:

• Pre-retirees (age 50-59) expect to live about 21 years after retirement and plan to spend almost 10 percent of their savings in each of those years (Wells Fargo 2009 Retirement Fitness Survey).
• Eight percent expect their standard of living to rise in retirement (Gregory Salsbury, Retirementology).
• Forty-seven percent of retirees have a written withdrawal plan and only 28 percent have a written budget for spending during retirement (2008 Wachovia Retirement Survey).
Financial advisors routinely deal with this disparity. In a 2011 survey conducted by Principal, 73 percent of advisors reported living beyond one’s means as the most common issue on which clients fail to be entirely forthcoming. According to the 2005 On Wall Street article “Confronting the Overspending Client,” financial planners report having to confront 10 percent to 30 percent of their clients regarding spending.

Clients whose spending threatens their retirement have three basic choices to prevent that from happening:

1. Stop overspending,
2. Compromise on retirement goals
3. Work longer

Because clients accustomed to years of overspending may not be able to entirely curb those habits, a combination of these approaches may prove necessary.
Stop overspending
The March 2011 Journal of Financial Planning article, “Motivating and Helping the Overspending Client: A Stages-of-Change Model,” by James Grubman, Ph.D.; Kathleen Bollerud, Ed.D.; and Cheryl R. Holland, CFP, applied a behavioral model previously developed to describe the behavior of drug or alcohol addicts to the issue of overspending clients. The article suggested that by understanding each stage (denial, ambivalence and action) and adapting their communication approach, advisors may be able to more successfully help spending addicts change their destructive behavior.

Advisors working with clients in the denial stage should focus on building rapport and helping the client compare their spending behavior against the retirement goals and dreams they identified during the discovery process. Maintaining a neutral and helpful approach provides the groundwork for the advisor to begin educating the client.

In the ambivalence stage, logical illustrations of the consequences of overspending—charts, graphs and spreadsheets—may have more impact. A summary showing all distributions, with the unplanned distributions in red, may help them visualize how far they have deviated from their plan. A calculator showing how withdrawing an extra $1,000 per month today impacts their plan in 25 or 30 years can help them understand the long-term consequences of their actions.

Clients in the ambivalent stage may respond more to shock therapy statements than they did in the denial stage. Some examples of statements advisors use to shock clients into change include:

• “Please indicate the date on this calendar when you want to receive your last distribution check.”
• “What are you going to do when you run out of money?”
• “What will it feel like to ask a friend or family member for money so you can eat?”
• “Do you think it will be easier to get a job at age 75 or to cut back a little now?”
• “Which of your children are you planning to live with when your money runs out? Have you spoken to them to see if that’s going to be okay? How do you think that will impact their family?”

As clients decrease denial and resistance and increase talking about the negative consequences of their spending, the advisor can begin moving them into the preparation stage. Getting input from the client on how they can change their behavior will increase their buy-in and the likelihood they will follow through during the action stage. In preparing an action plan, clients and advisors may consider emotional-based tools such as therapy or more intellectual or logical tools like budgeting. Advisors should help the client think through additional actions if life events, such as a marriage, divorce or death, derail their progress. Advisors should also be prepared for relapses and help the client examine what caused the relapse and how to get back on track.

Adjust retirement goals and expectations
In 2011, Sun Life’s Unretirement Index found 80 percent of people who planned to work at the age of 67 would do so to earn enough money to live well. The client’s definition of “live well” may require adjustment before or during retirement based on the realities of their accumulated assets and their ability to work. Advisors may need to help clients re-examine their retirement goals and set priorities. Compromising on retirement plans—for example, making trips shorter or reducing a planned legacy—could reduce the client’s feeling of giving up retirement dreams.

Like any skill, living within a spending plan takes practice for those who have never done it before. Some financial advisors help pre-retirees create a budget and ask them to live within it for several months. By testing the spending plan for several months before retirement, the client and the advisor get an idea of how realistic the spending plan will be for the client during retirement.

Work longer
Clients often reach the decision to delay retirement when they understand the spending level their retirement savings can support. The pre-retirement budget exercise may result in clients deciding to work longer and making more conscious decisions about their spending. But working longer is not a guaranteed safety net if clients’ retirement funds become uncomfortably low, particularly given today’s employment market.

According to the Social Security Administration, three in 10 workers will experience a disability that prevents them from working before they are ready to retire. To mitigate the risk that disability will reduce or eliminate a client’s ability to work as long as they hope, advisors should help the client review disability insurance. The number of years clients have until their target retirement date and their current accumulated retirement assets could affect the amount of disability coverage needed. Although many employers offer disability coverage based on a percentage of the employee’s salary, clients may need more coverage to offset the following:

• Loss of income for immediate living expenses
• Loss of money that would have been invested for retirement
• Depletion of current retirement savings to cover expenses related to the disability

Lay the groundwork now for successful retirement later
At some point in their career, most advisors will face the dilemma of approaching a client whose overspending threatens his or her retirement distribution plan. Advisors can help clients understand that having enough income to fully fund their retirement can requires some tough choices.
Because overspending can severely threaten a client’s retirement distribution plan, advisors should start early in the relationship to document their recommendations and the client’s actions. Helping clients change their emotional relationship with money and modify their spending behaviors can be gratifying for advisors, particularly when those clients can then enjoy a less stressful retirement. When advisors have the appropriate knowledge, skills and resources, those conversations can be more productive and can lead to deeper client relationships and higher client satisfaction levels.

Women in Field Management—Why Not More?

Bianca O’Brien, CLF®, CLTC

I began my career in New York Life’s headquarters in New York City and spent 19 years navigating the corporate environment. I loved it and was thriving when in 2004, after having worked more directly with the company’s agents and field managers, I decided I wanted to switch my career from a corporate environment to one that gave me entrepreneurial opportunity, control, flexibility and a path to field management. I never considered my gender an obstacle or a plus. I just knew I was as capable as anyone else to get the job done. You see, I had ambition, the willingness to work hard and a belief in myself and the company that employed me.

I became an agent and excelled. Four years later, in 2008, I was ready to become a partner, which was my first position in field management, and I received a promotion to senior partner in 2011. I currently manage and lead the Jericho Sales Office, which consists of more than 100 agents. 

As the number of women agents increases, it makes sense to believe this would correlate over time to seeing more women in field management positions. How do hiring managers ensure this happens? Here are some tips I use in my managerial role that are not new, but mainly a shift in thinking and mindset.

Tip 1: Take gender out of it completely

Are assumptions that managers have about a woman’s family responsibilities preventing growth? I believe that the skills of motherhood are similar to those required of leading managers—stamina, dependability, delegation, communication, self-discipline and prioritizing. I have witnessed many women who are successful leaders because they work smart and take time off to be with their families. It is not a lack of commitment but an ability to live a whole life that gives women staying power. 

Tip 2: Communicate the opportunity to move into a management role early on

Hiring managers need to present opportunities to men and women early in the interview process and ask them about their management goals up front. Women need to know the opportunity is there and if they are interested, they will take the proper steps to strive for a management position.

Tip 3: Be patient and understand the timeline

Women who will go into management may not follow a traditional timeline. Recruit them young, recruit them early, recruit them late—it all works for women. At New York Life a typical timeline for an agent to transition to management is two years, assuming they meet all the requirements. In my case, although I had met all the requirements necessary to become a partner, due to family needs, I was not able to transition until after my fourth year. This delay did not deter my goals to enter management and was not looked upon negatively. It gave me time to prepare for the move and to set a plan in place for a smooth transition under my own timeline.

Tip 4: Take the fear out of managing women

Remember, it is professional to be professional. There should be no issues with recruiting, managing or developing women. For many managers, they may perceive managing women in the field differently. The environment in the field is performance-based, which can often result in managing to results. Put everyone on an equal playing field and manage for the results expected.

Tip 5: Use the female field managers in your company to help recruit

Having female role models in the field manager position can help women to envision themselves in that role. If there aren’t any in your office, then use someone from another office. Many women’s groups in the industry can also be utilized. Women must be able to paint their own picture of themselves in management. They need to know that to be successful field managers they don’t have to act or look like their mentor. Management looks different to each of us and we must remember that we are not always recruiting ourselves.

To increase the number of women in field management, you may need to look to your own pool of women agents to find them or make a point of recruiting them. If you make finding women part of your recruiting plans and develop a strategy to implement the process, the number in the industry should increase. 

We are all from the same industry and deserve the opportunity to make the move to management. I am proof that women in our industry can be successful field leaders. Finding future women leaders is just a matter of letting them know the opportunity is there if they want it and providing the support required to make it happen.

Originally published in the Winter 2012 issue of The Wealth Channel Magazine, The High Cost of Longevity.

Why Mutual Fund Expenses Matter—a Research Summary

David Nanigian, PhD

In his paper, Nanigian tackled one of the major unresolved questions about mutual funds: Why, unlike in the market for most products, does a negative relationship exist between price and quality in the market for mutual funds? Drawing upon prior research in behavioral finance, Nanigian developed a theory that relaxed monitoring standards by fund investors explain much of the perplexing negative price-performance relationship. He also showed that the more capital an investor has at stake in a fund, the more intensely he or she will monitor the mutual fund.

Mutual funds differ considerably in their minimum initial purchase requirements. This allowed Nanigian to test his theory through first sorting funds into two groups based on whether or not they had a minimum initial purchase requirement of at least $100,000, and then examining the elasticity of the expense-performance relationship within the two groups through regression analysis. He discovered that expenses generally do not have a significant impact on the performance of funds with a minimum initial purchase requirement of at least $100,000. However, consistent with the prior empirical studies that did not consider minimum initial purchase requirements, he showed that expenses have a negative and statistically significant relationship on the performance of funds with minimum initial purchase requirements of less than $100,000. The divergent results between these two groups provided empirical evidence in support of Nanigian’s theory.

Nanigian believes that most mutual fund managers do not have an adequate incentive to exert effort in managing their funds. He believes that investors should more carefully evaluate funds prior to investing and more rigorously monitor them afterwards. More intense monitoring will incentivize fund managers to exert greater effort and ultimately provide their investors with a level of quality that is justified by the price they charge. He also suggests that “investors who lack the specialized skill needed to evaluate mutual funds should obtain assistance from a competent personal financial planner.”

David Nanigian is an Assistant Professor of Investments at The American College and holds a Ph.D. from Texas Tech University, an MBA from UC-Irvine and a BBA from San Diego State University. He is an avid researcher on various topics related to mutual funds and regularly teaches a course on mutual funds in the MSFS program. A current draft of his paper is available for free download from the Social Science Research Network at

Originally published in the Winter 2012 issue of The Wealth Channel Magazine, The High Cost of Longevity.

Living too Long: Where will You Live and how will You Finance it?

Kevin M. Lynch, MBA, CFP®, CLU®, ChFC®, RHU®, REBC®, CASL®, CAP®, LUTCF, FSS

When a person retires, a shift in spending patterns tends to manifest itself throughout the different stages of a person’s retirement. Initially, as you leave the work force, there is, of course, a reduction in the taxes you pay. In the preretirement period, you were paying FICA taxes and spending money on work-related needs, such as commuting expenses, meals away from home, etc. After retirement, many of these expenses decrease while others increase. Household expenses decline steadily with age. Using age 65 as a benchmark, household expenses decline by 19 percent in the first decade of retirement, 34 percent by the end of the second decade of retirement and 52 percent by the end of the third decade in retirement. “Home and home-related expenses remain the single largest spending category for older Americans,” according to Sudipto Banerjee, of the Employee Benefit Research Institute. Banerjee further reports, “Health-related expenses are the second largest component in the budget of older Americans. It is the only component which steadily increases with age. Health care captures around 10 percent of the budget for those 50-64, but increases to about 20 percent for those ages 85 and over.”

As financial service professionals, what does this mean to you? How can you use this data to better advise your clients on retirement issues?

Because home and home-related expenses play such a major role in a person’s post retirement budget, it is important that you understand your client’s needs and desires for where they want to live and how they can afford to pay for it. 

To begin with, we will look at the age-old assumption that when people retire, they will downsize. I am, of course, referring to the practice of selling the larger family home, usually paid for, and using the proceeds to purchase a smaller, more suitable home in an area where the client wants to live during retirement. It is assumed that the proceeds from the sale of the older, paid-for home will be sufficient to pay for the new home in cash, and perhaps even have a surplus to be added to the client’s retirement income-generating assets. According to a Rand Labor and Population Working Paper (Banks, Blundell, Oldfield, & Smith, 2010), since the first studies of downsizing in the U.S. (Merrill, 1984, and Venti and Wise, 1989, 1990), there has been a reduction in the number of rooms in household residences as age increases. This research would tend to verify the commonly held belief that older Americans do downsize in retirement. In addition, when researchers study mobility in Americans age 60-70, there is evidence that, among the considerations primarily influencing the older American’s decision to relocate, is pursuit of a warmer climate, lower taxes and lower cost of living. For the oldest Americans, however (especially those over 80), being closer to family ranks higher in importance than do those considerations previously mentioned. For these oldest Americans, the need for care due primarily to the frailties of older age takes precedence over lifestyle and amenities available elsewhere. Because of the limitation of sample sizes of these oldest American’s, though, statistics do not tell the complete story. As your clients’ trusted advisor, you must explore their specific feelings and desires in this area.

Another issue with which your client may have to contend where downsizing is concerned is the major disruption to the housing market since 2008. In addition to major turmoil in the financial markets, which caused many to delay retirement between 2008 and 2010 due to decimation, or at least partial depletion, of their retirement nest egg, real estate values plummeted during the same period. The housing market, as we knew it, may be changed forever, according to research by The Demand Institute (Keely, van Ark, Levanon, & Burbank, 2012). The Institute’s findings indicate that although the worst is over for the U.S. housing market and a recovery is beginning, the recovery will occur in two stages and be led by a demand from buyers for rental properties. It is estimated that rental demand will help clear out the huge supply of existing homes on the market, which were a result of large numbers of foreclosures. Using 2005 as a baseline, during the recent disruption in the housing market, there was a 129 percent increase in foreclosures from 2005 to 2011. The Demand Institute estimates that it will take two to three years to clear out the oversupply of existing properties.

What does that mean to you and your clients? These factors in the real estate market may have a negative impact on older Americans wanting to sell large, expensive homes during the initial recovery stages, because rental demands will come primarily from younger people and immigrants, and younger people were hit particularly hard during the recession that is currently ending. In addition, the recovery will not be uniform across the states and will even be vastly different within states. This could affect your clients, as well, by making it hard to sell their current property and being in competition with others seeking to purchase smaller homes in which to spend their retirement.

“Where do I want to live in retirement?” and “How will I finance my retirement housing and household expenses?” are both important questions for you to help your clients resolve. The challenges in doing so will require your best efforts and perhaps the assistance of a real-estate professional to help your clients through the various stages of the market’s recovery.

Originally published in the Winter 2012 issue of The Wealth Channel Magazine, The High Cost of Longevity.

Finding a Balance in Retirement Planning

Craig Lemoine, CFP®

Craig is an Assistant Professor of Financial Planning at The American College and holds the Jarrett Davis Distinguished Professorship in Finance and Accounting.

Financial professionals are constantly struggling to manage the dissonance between rational recommendations and the actual behavior of their clients. This dissonance reaches a crescendo as clients retire and age. Advisors face the challenge through planning investment portfolios, planning future spending and setting life expectancies. The rational client maintains an optimal portfolio, spends wisely and passes away according to actuarial tables. Actual clients rarely color in-between the lines. 

Rational investors buy when the market is low, hold their positions when times get tough and spend appropriately. Modern portfolio theory (MPT) is the basis for traditional investment philosophy and guides us to buy risk-appropriate, diversified portfolios. MPT encourages investors to seek an optimal combination of lowly correlated assets (domestic and international equities, bonds, cash, real estate, fixed accounts and commodities) that have the greatest risk-adjusted net performance.

MPT encourages investors to attain an optimal portfolio by building a market portfolio of assets that are tangent to an investor’s highest indifference curve and the capital market line. Conservative investors will invest in a higher percentage of risk-free assets, and more ambitious risk takers will lean more towards an optimal risky portfolio. As assets have lower correlations to one another, investors can create less risky portfolios and decrease their overall risk exposure. In layman’s terms, MPT asks us to buy a combination of risk-free and risky assets we are comfortable with and adjust them to stay in line with risk tolerance (see Figure 1).


With investments squared away, a rational client needs to address spending during retirement. The seminal permanent income hypothesis (Milton Friedman, A Theory of Consumption Function, Princeton University Press; helps guide rational consumption decisions and provides a background for retirement. Stated simply, consumers tend to adopt the lifestyle of their parents and spend accordingly over their lifetime. For most of us, consumption is constant over a lifetime while income is not (see Figure 2).


Rationally, retirement planning is nothing more than finding a way to consume after our income line drops below a retiree’s consumption line. Ideally, a retiree saved while their income exceeded consumption; and they can utilize their nest egg through the remainder of their lifetime. While no uniform theory exists on how to spend down their nest egg, some measure of constraint dominates conversation. Financial advisors engage in conversations and debate if constraining withdrawals to 3 percent, 3.5 percent or 4.0 percent is an appropriate technique. Other advisors recommend practicing withdrawal constraint when viewing how many dollars can be distributed from one asset allocation bucket to another.

Rational clients make consistent distributions over their lifetimes, and if a rational client happens to be a 60-year-old woman she lives to be 84, according to the Social Security Actuarial Life Table ( To summarize, rational clients invest optimally while they are working and predictably spend their savings until they die at a point defined in the future. These three assumptions shape traditional thinking about retirement planning and each of them is fundamentally flawed.

Challenges to investing optimally
Clients are rarely invested in an optimally allocated portfolio, and they tend to favor simple and conservative investments. Actual clients sell when the market drops. Losing hurts and our very instinct is to avoid hurt and practice loss aversion (Erev, I., Ert, E., & Yechiam, E., 2008. “Loss aversion, diminishing sensitivity, and the effect of experience on repeated decisions,” Journal of Behavioral Decision Making). Clients sell after losing because they don’t want to continue pain; they miss out on periods of recovery and gain fear and trepidation. Fear can lead to avoidance of future losses, which may curtail investing in equities or other key components of a diversified portfolio.

Building an optimal portfolio requires access to a universe of investments that have low or negative correlations with one another. This universe extends well beyond traditional stock, bond and insurance options, and outside the comfort zone of many clients and their advisors. Commodities, international exposure, hedge funds, real estate, derivatives and nontraditional investments play a role in achieving optimal diversification. With additional diversification comes increased complexity and higher minimum buy-in thresholds/costs, both of which lead actual clients back to simpler and less diversified solutions. Clients who sell non-traditional asset classes lower their diversification, which increases their overall portfolio risk.

Actual clients have hobbies and emergencies. Either can derail the best of assumptions and retirement plans. Plans are generally structured to emulate a percentage of pre-retirement spending (70% is a popular number.) or from the ground up, determining a monthly target amount based on client goals. Both mechanisms work well for the first month a client retires.  The rational client may continue to spend exactly a target amount. Actual clients will spend dramatically less and dramatically more on a monthly basis. Spending must be structured in a flexible and fulfilling way.

When we don’t die at 84
Stagnant life expectancies are troublesome on two fronts. The obvious: outliving a set life expectancy can cause financial hardship. Life expectancy tables are not dormant—they adjust on an annual basis. A 60-year-old woman has a 50 percent chance of living another 23.97 years. When she turns 61 she has a 50 percent chance of living another 23.14 years, and when she turns 70 her life expectancy moves to 86. When she turns 86, there is a 50 percent chance she will be alive at 92. Retirement plans must be built for this contingency. Healthy people in 2012 can live a very long and productive life. 

Practicing excessive constraint is equally as troublesome. Clients have accidents, they are diagnosed with cancer and they have heart attacks. If half of 60-year-old women live to 83, half of them die before then. Excessive constraints on retirement spending may prevent clients from enjoying the wealth they built.

Financial professionals must remember that actual clients are never rational. Advisors must find harmony between quantitative recommendations and how clients actually behave. This harmony requires updates, monitoring and regularly engaging the client. When first retiring, monthly check-ins will help stabilize the plan and learn the difference between the actual retiree and rational client who engaged in the retirement planning process.

Retirement modeling requires advisors to assume rates of return, spending and life expectancy. Initial assumptions provide clients with a starting point but are not enough to provide lifelong guidance. Consistent monitoring and updating must take place through retirement to help clients achieve a balance between their retirement plan and actual behavior.

Originally published in the Winter 2012 issue of The Wealth Channel Magazine, The High Cost of Longevity.

The Long-Term Care Risk—a Developing and Accelerating Crisis for Seniors

Christopher P. Woehrle

the Guardian/Deppe Chair in Pensions and Retirement Planning at The American College and also teaches charitable gift planning in the LLM (Tax) program at Villanova Law School.

Ted Kurlowicz, JD, LLM, CLU®, ChFC®, CAP®

Ted Kurlowicz, JD, LLM, CLU®, ChFC®, CAP® Ted is the Charles E. Drimal Professor of Estate Planning and a Professor of Taxation at The American College.

The risk created by the costs associated with long-term care (LTC) should be easily understood and easily transferable to a private and/or social insurance mechanism. However, the risk has thus far been unprotected and costs have been largely borne by the individual through private payment or handled under the public option of the Medicaid reimbursement system. A number of factors are converging to make this risk even more untenable in the United States.

First, the population continues to age rapidly with the maturity of the Baby Boomers. The 2010 U.S. Census revealed that more than 42 million Americans are age 65 or older, and this cohort is expected to double by 2050. As the population ages, the risk of disability and the need for long-term care also rises. Also, most individuals eligible for Social Security are taking reduced benefits at the earliest possible age of 62, leaving them with reduced purchasing power compared to starting benefits at normal retirement age. Of all the projections that would affect the economy and the ability of the public sector to absorb these costs, the demographic forecasts are the most predictable.

Second, the size of the national debt and the impact of the slow-growing economy on the state budgets will increase the pressure to reduce both the number of claimants and the size of the reimbursement available through Medicaid. The primary weapon that the federal government has in its arsenal to reduce health care costs is to control the reimbursements provided by Medicare and Medicaid. This could further increase the costs of long-term care for private-pay individuals. The impact of the Affordable Care Act on Medicaid in this area has been considerable.

Third, the private option of long-term care insurance (LTCI) has not adequately addressed this problem. Although the Medicaid system has provided opportunity for an individual who purchases LTCI to preserve more assets through the states’ LTCI partnership programs, the benefit of such a program has not been clearly or persuasively marketed by either the states or private insurers. Perhaps even more ominously, three large insurers have terminated sales of new LTCI policies in the last two years.

The cost of LTC is staggering
Recent Medicaid numbers indicate that nursing home costs vary from a high of $10,285 per month in New York City to a low of $4,000 in Louisiana. The average cost nationally is more than $75,000 annually for a semi-private room in a nursing. The average monthly cost for assisted living facilities is 3,300 per month. In-home care will be costly and can exceed institutional care, depending on the amount of care the special needs person requires, but full-time nursing care would be an average of $432 daily. Recent data on inflation is even scarier. The inflation rate for nursing home costs far exceeds the inflation rate for other goods and services. This means that the inflation-adjusted real cost of nursing home care will double in 23 years.

Medicaid’s public option requires impoverishment
We need to start this discussion with a disclaimer. The rules for qualification for Medicaid are complex and involve an interaction of federal law and state administrative rules. Federal law provides guidelines and mandates implemented at the state level. The Department of Welfare at the state level often operates in a perceived gray area that may not mimic every aspect of the federal rules. On a case-by-case basis, it is critical to work with an attorney that specializes in elder care at the state level. However, the qualification for Medicaid does require impoverishment of the applicant, which ought to gain the attention of anyone in the population without unlimited assets and/or LTCI. Let’s examine the general guidelines for qualification for Medicaid and indicate where there may be significant state variance.

The state Medicaid programs must provide certain minimum benefits to qualifying persons including in-patient hospital services, nursing home care, and physicians’ services. States have discretion to provide additional services such as home health care services, private duty nursing services, hospice care, dental services, physical therapy and related services, nurse-midwife services, community supported living arrangement services, as well as other services. The states must also pay the Medicare B premiums of Medicaid recipients who also qualify for Medicare.

There is a three-pronged eligibility test for applicants to qualify for Medicaid, including the categorical status of the Medicaid applicant, his or her income and assets. The eligible categories are financial need persons, individuals over age 65, blind, disabled and U.S. citizens.
The income limitations depend on whether the state is an income-cap or a spend-down state. The income-cap states restrict Medicaid eligibility to those below the supplemental security income (SSI) limitation (actually three times the SSI monthly benefit amount). In these states, if the Medicaid applicant’s countable income exceeds the limit ($2,094 in 2012) by even one dollar, the applicant is ineligible for Medicaid. However, this is a maximum limit. A limit of $5,000 of annual income would cause ineligibility in at least one state. The worst scenario is the pure cap state, where any excess prevents coverage, or states that exclude nursing home care in their medically needy program. This could leave many individuals in a bind, unable to afford long-term care, but unable to qualify for Medicaid reimbursement. 

Other states have an income spend-down approach to cover individuals once their medical expenses reduce their income below the limit. Spend-down states would begin eligibility once the Medicaid applicant has spent income on health care to reduce income to the eligibility threshold.

The income test is based on amounts deemed available to the Medicaid applicant. In general, “anything received in cash or kind that can be used to meet needs for food, clothing and shelter” is available income. The state may consider the income and resources of the applicant and his or her spouse to determine whether he or she can qualify for Medicaid. States cannot require your other relatives to contribute, but any contributions other relatives make in cash or to provide and shelter are considered income. This rule may require rethinking the strategy of making gifts up to the annual exclusion for financially struggling older parents.

Only a portion of countable income is required to be expended for the applicant’s LTC. A number of deductions are subtracted from countable income for Medicaid purposes. The balance of income must then be used for the costs of care. These deductions include:
          • A personal needs allowance of $30 per month for an individual or $60 per month for an eligible institutionalized couple
          • An additional amount for the maintenance needs of a needy spouse or needy family living at home
          • Incurred medical expenses not paid by a third party, including Medicare or other health insurance premiums, deductibles or coinsurance charges, and care not covered by Medicaid
          • At the state’s discretion, an amount for maintenance of a residence for up to six months if a physician certifies that the applicant is likely to return home after that period

There is also an asset or resource limitation that would cause an individual to consume all assets on health or LTC expenses before Medicaid is available. Individuals whose resources and deemed resources exceed $2,000 (down to a low of $1,000 in one state), if single, or $3,000 ($2,000 in the lowest state), if married, may be ineligible for Medicaid benefits (until resources go below the applicable limit). The resources that must be counted for this purpose vary from state to state; however, the following rules generally apply.

Non-excluded resources (resources that must be counted to determine your eligibility) are cash, financial instruments convertible to cash, and real and personal property, which may be liquidated. The community spouse (the spouse not currently receiving LTC) can also retain a certain amount in non-excluded resources without affecting the institutionalized spouse’s Medicaid eligibility. The community spouse is allowed to keep a minimum of $22,728 (2012 figure) or half of the couple’s pooled nonexcluded resources, whichever is greater, but not more than $113,640 (2012 figure). Some states limit the retention of nonexempt assets to the floor amount. States have the right to increase the floor amount, but not the ceiling amount. However, some states have hardship exceptions if the budget of the community spouse can demonstrate the need for higher income and/or resources. Any resources retained by the community spouse in excess of this allowable limit will count as a resource of the institutionalized spouse and create ineligibility.

Excluded resources (not countable for eligibility purposes whether the institutionalized or the community spouse own such assets) vary by state, but the following are typically not counted as resources:
          • The house, trailer or mobile home used as a home
          • Household furnishings
          • Clothing
          • Personal effects
          • One family automobile
          • Burial space for the Medicaid applicant and certain enumerated family members
          • Life insurance coverage not exceeding $1500 face amount for the spouse and each dependent
          • Income-producing real property if the value and income produced are reasonably related
          • Irrevocable burial reserves
          • The community spouse’s pension funds
          • A qualifying annuity

Note that the individual practice with the state’s Department of Welfare may provide some limits on excluded assets, such as the value of the automobile. Also, even excluded assets will probably be subject to estate recovery to reimburse the state for Medicaid benefits provided to the decedent while he or she was alive.

These impoverishment rules should certainly frighten anyone in the family of someone needing to qualify for Medicaid. There had been planning techniques that could help a family preserve more assets, but such planning was significantly curtailed by the Deficit Reduction Act of 2005. Like most planning, it is clearly advantageous to begin as soon as possible with qualified advisors. The planning should begin well before any Medicaid application will be made. There is a five-year look back for any transfers made by the Medicaid applicant. Any currently available planning techniques will potentially be on the chopping block for future government cost-containment legislation.

Filial responsibility laws—a terrifying new development
States provide that parents have a legal obligation to support minor children. Most states have requirements that provide for spousal support. However, 30 states also have filial responsibility laws. Pennsylvania recently moved its filial responsibility law into its Domestic Relations Code. It provides that the following individuals (with some exceptions) will have responsibility for the financial needs of an indigent person:
           • Spouse of the indigent person
           • Child of the indigent person
           • Parent of the indigent person

Note there is no limitation that the child be a minor to potentially obligate the parent for the indigent-child’s expenses.

Thus far, it does not appear that states will use the filial responsibility statutes to deny the eligibility of an indigent person to Medicaid. However, nursing homes or health care facilities have begun to initiate suits under the statute. A very troubling result was reached recently in a Pennsylvania decision (HCR v. Pittas, 2012 PA Super 96 (May 7, 2012)). The Court held a child financially responsible to the tune of $92,943 for the nursing home expenses of his parent. Interestingly, the nursing home resident had a pending appeal for qualification under Medicaid. And the parent had not made any asset transfers to the child held responsible for these expenses. Nothing in the filial responsibility statute required the court to take into consideration that public resources would soon be available to provide for the parent’s LTC. Also, the law allows the health care provider to institute a lawsuit against any of the children for the indigent parent’s support without any consideration of the impact this might have on the relationship between siblings. Do we have your attention yet?

Why aren’t Americans dealing with the LTC risk?
Although there has been some growth in the private LTCI marketplace, only a small percentage of potentially affected Americans have any form of LTC coverage. Surveys indicate a surprising lack of understanding of the LTC risk. For example, 75 percent of individuals under age 55 reported that they had no idea of the cost of institutionalized LTC. These individuals would certainly be affected if a parent became impoverished by the costs of LTC. Presumably, there will be less ignorance among the senior population. Data is certainly available. MetLife and Genworth have annual cost-of-care reports available to the public. Maybe the cost of LTC is too staggering and creates deniability for those at risk and their family members.

There are also appears to be a general state of denial among individuals most likely to face the risk of LTC in the immediate future. A recent survey by the National Council on Aging indicates some surprising opinions of seniors concerning their future state of health. For example, survey respondents age 70+ indicated that 66 percent felt their health would be the same, somewhat better or much better in the next 5 to 10 years. Only 31 percent expected their health to be worse.

Multi-generational solutions—there may be no other place but home
The cost of LTC and the impoverishment rules of Medicaid will have an impact on both the individual who needs LTC and his or her heirs. A recent study by three college professors (Poterba, Venti and Wise) found that 46.1 percent of Americans die with assets less than $10,000. The costs of LTC certainly have added to that depressing statistic. Even if the Pittas case previously discussed is an aberration, the high cost of care in the impoverishment rules of Medicaid will reduce or eliminate the inheritances of many family members of individuals who have the need for significant LTC.

Given the current financial stresses on Federal, state and local governments, the expansion of any public program to assist with the costs of long-term care expenses is unlikely. All the traditional public options are stressed and will be so for the foreseeable future.

So where does a senior citizen turn for help? A recent MetLife Mature Market Survey “Multi-Generational Views on Family Financial Obligations,” suggests parents would do well to rely upon their adult children who often have a strong sense of obligation or responsibility. But even that sense comes with a limit. According to the study, many adult children are willing to allow a parent to live with them if the parent is not healthy enough to live alone without caregiving, or if a parent is having difficulty making ends meet.

While planning for an increasingly uncertain future with LTCI policies may seem an inadequate response, it well may be the only viable one assuming parents do enough advance planning to make the cost of LTCI manageable. Perhaps the cost sharing of premiums by family members interested in preserving Mom and Dad’s estate could be a viable strategy.

If elderly parents are anticipating assistance from adult children, they need to raise the possibility of that need sooner rather than later. Adult children need to be on the alert early for signs that support of their parents may be required. Proactive communication between the generations leading to timely planning likely will help the elderly dealing with some of the severest financial and economic challenges in recent memory.

Originally published in the Winter 2012 issue of The Wealth Channel Magazine, The High Cost of Longevity.

(How) Do You Estimate Your Client’s Life Expectancy?

Michael Kitces, MSFS, CLU®, ChFC®, CASL®, CFP®, RHU®, REBC®

Michael is the Director of Research for Pinnacle Advisory Group, a private wealth management firm located in Columbia, Md.

To do a financial plan for a client, it’s necessary to determine the client’s time horizon, which most commonly is the length of time the client is expected to live. The client’s life expectancy can impact the number of years of anticipated retirement, and even the age at which the client chooses to retire. Unfortunately, though, it’s difficult to really estimate how long a client will live, and the consequences of being wrong and living too long can be severe—total depletion of assets. As a result, many planners simply select a conservative and arbitrarily long time horizon, such as until age 95 or 100, just in case the client lives a long time. Yet in reality, the life expectancy statistics are clear that the overwhelming majority of clients won’t live anywhere near that long, which can mean unnecessarily constraining their spending and leading to a high probability of an unintended large financial legacy for the next generation. As a result, some planners are beginning to use life expectancy calculators to estimate a more realistic and individualized life expectancy for a client’s particular time horizon. Will this become a new best practice?

Setting a retirement time horizon
While being conservative in setting a time horizon for retirement withdrawals and taking into account an individual’s personal and family circumstances (e.g., good genetics and longevity in the family) is certainly prudent, is it too conservative to just arbitrarily set a long life expectancy of until age 95 or even 5 years longer based on longevity in some family members? After all, as the following chart indicates (from “Spending Flexibility and Safe Withdrawal Rates” by Michael Finke, Wade Pfau, and Duncan Williams from the March 2012 issue of the Journal of Financial Planning, and based on the Social Security Administration period life table for 2007), the probability of a joint life expectancy of 30 years for a 65-year-old couple (to age 95) is already as low as 18 percent. A 35-year life expectancy for that same couple (to age 100) has a mere 3.7 percent likelihood, which means adding 5 years of longevity for good genetics on top of an already low probability scenario is a pretty huge adjustment.

While genetics do clearly play a role in longevity, it’s important not to adjust too much based on limited family data. For instance, in many cases planners add 5 years of joint life expectancy for what in the end is just one family member who happens to still be alive in very old age! The reality is that even a relatively unhealthy family with poor longevity can still end up with one long-living family member due to random chance! In other words, taking the life expectancy of one or two family members from the recent past and generalizing it to the client’s future isn’t necessarily much better than taking an example of one technology stock like Apple and concluding that all technology stocks will be fantastically profitable in the future. Especially if you’re planning for a couple, and the family member is only from one side of the family!

Individualized life expectancy
So what’s the alternative? Some planners are beginning to use life expectancy calculators available on the web, which analyze a wide range of factors from family longevity to health issues to behavioral habits, to try to get a more accurate picture of the client’s life expectancy than a few anecdotal family data points. The most popular option appears to be the site LivingTo100, which draws on data from the New England Centenarian Study to try to get a good picture of how likely it is for the client to live to age 100 and what his/her individualized life expectancy would be.

Following this approach, the client (or each member of the couple) goes through the calculator’s questionnaire and gets a personalized life expectancy. The plan can then be crafted according to the customized life expectancy factors rather than generic assumptions. While this is straightforward for a single client, it’s a little messier for a married couple, as the software still only gives an individual life expectancy for each member of a couple, and not a joint life expectancy for both. A rough rule of thumb would be to add about 5 years to the longest life expectancy of the couple to adjust for joint life expectancy. Ideally, the life expectancy tool should accurately calculate a joint life expectancy.

At the client’s discretion, the planner may then add further to the life expectancy to be more conservative, as a life expectancy by definition is a 50th percentile result, meaning there’s a 50 percent chance the client could outlive the time horizon (and therefore potentially outlive his/her money). On the other hand, it’s worth noting that if the Monte Carlo results are already very conservative, it’s important not to also make the life expectancy factor extremely conservative, or the combined probabilities of failure may be so low that the client’s lifestyle is unnecessarily constrained when small adjustments along the way would have been sufficient to keep the client on track. After all, a 90 percent Monte Carlo success rate for a 90th percentile life expectancy is actually a 99 percent probability of success for the overall plan!

Is it worth estimating life expectancy at all?
Many planners I know still suggest it’s not necessary nor appropriate to estimate a client’s life expectancy at all, given that life expectancy is just a probabilistic estimate, and there’s always still a risk that the client will live to age 100. Accordingly, they suggest we should just set every client’s retirement time horizon to an arbitrary conservative number like age 95 or 100, just to be certain the client doesn’t run out of money on the planner’s watch.

The reality of the life expectancy tables is that the overwhelming majority of clients will never live this long, or even come close. And even while life expectancy continues to increase over time, most improvements in life expectancy have been driven by eliminating diseases and reducing mortality for the young (especially infant mortality); the death rate for people in their 80s and 90s has only fallen modestly in the past 50 years.

This is problematic because, in the end, excessive conservatism does have a cost—it can greatly impinge on the client’s ongoing lifestyle and opportunity to enjoy the money while health is good enough to do so. For instance, according to the research, the difference between a 40-year time horizon and a 20-year time horizon is a 5 percent+ safe withdrawal rate versus a less-than-4 percent withdrawal rate. This means a couple that has some health issues and a low likelihood of living much beyond 20 years, who still receives a 35-40+ year arbitrary time horizon, must endure a lifetime spending cut of 20 percent, per year, forever (and a very high likelihood of' accidentally leaving a giant unspent financial legacy behind)! Alternatively, a client with a shortened life expectancy might even choose to retire earlier, knowing that the retirement time horizon isn’t as long, and that consequently not as much savings is needed.

Ultimately, because being too conservative does have a cost—just as being too aggressive—life expectancy calculators may well become a best practice for planners in the future, as they represent an effective means to ensure that the client’s plan matches a time horizon that is reasonable given his/her life expectancy. Of course, clients may adjust up or down from there, but at least they will be grounded to a reasonable life expectancy starting point.

So what do you think? Have you ever used a life expectancy calculator to estimate a time horizon for your client’s retirement plan? Would you encourage a client to spend more if he/she had a materially below-average life expectancy? Is a life expectancy calculator a more objective way to estimate life expectancy and time horizon for a client? Is there a particular tool that you use? Or do you just consider it a waste of time, or a risky alternative to just picking a conservative time horizon?

Originally published in the Winter 2012 issue of The Wealth Channel Magazine, The High Cost of Longevity.

Senior Designations Back in the Spotlight—a Regulatory Update

The period before a major election typically generates little action on regulatory and legislative issues in Washington, but two items do bear watching this fall. The Consumer Financial Protection Bureau (CFPB) has begun work on recommendations for the use of senior designations, and the SEC and the Department of Labor continue to struggle with how to approach any broader application of a fiduciary standard of care.

Will there be fewer professional designations in the future?
The American College estimates that there are now about 287 financial services credentials that could be used with the public. Because consumers have no real means of determining which of those represent rigorous education, letters after advisors’ names are all viewed equally. The American College has been speaking out about this issue for almost a decade.

Some lighter programs may be valuable as continuing education for advisors. Not all marks, however, are legitimate designations appropriate for use on an advisor’s business card.

Enter the CFPB. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the CFPB’s Office of Older Americans is empowered to promote financial literacy for consumers 62 and older. While the CFPB has no jurisdiction over insurance, the recommendations they make to Congress and other regulators as well as the guidance they offer consumers can have an impact on the educational marks advisors choose to pursue.

The CFPB issued a request for public comment this summer about the use of senior financial advisor certifications and designations. When their work is complete, we believe that for the first time there could be a way for seniors to gain a qualitative view as to which credentials are meaningful for their advisors to hold.

What separates a good credential from a weaker one?
In our public comment letter to the CFPB, The American College suggested that any designation used with a senior should represent at least nine semester credit hours of education. That’s the acid test between lighter marks and those that are meaningful: is the education there? It is a criterion that was missing from the earlier model rules on senior designations adopted by many states. A minimum national standard for the level of education required for valid credentials will go a long way in eliminating the public use of lesser designations.

Candidates for an acceptable designation should also meet appropriate experience requirements and complete closed-book, proctored exams covering the coursework. Continuing education requirements are essential as well.

Two areas—accreditation and standards of practice—have caused confusion among regulators and even some certification providers. The top level of accreditation is regional accreditation, the mark of educational excellence given to top colleges and universities. Other types of process-based accreditation are not as rigorous. While top designations and certifications should have enforceable ethics codes, the best marks should not discriminate against certain business models by attempting to mandate standards of care that differ from what regulatory authorities require.

A better-educated advisor is a significant benefit to seniors.
Regulators should encourage quality professional education for advisors serving seniors. It isn’t enough to focus on reducing the use of light or “weekend” credentials. Advisors with more professional education pose fewer compliance risks and are more likely to counsel seniors in appropriate ways. FINRA and other regulators should be cautious about releasing ambiguous guidance that results in companies prohibiting the use of high-quality professional designations.

We believe the CFPB may get it right.
The CFPB’s orientation toward consumer education for seniors may have a significantly positive effect on the quality of advisor education. With a governmental agency clearly identifying the minimum national standards for a meaningful designation, we see advisors, client companies and consumers all gravitating toward designations that represent real educational value. Stay tuned for more on this issue as the CFPB prepares recommendations over the coming months.

There has been no significant movement on an expanded fiduciary standard.
While several vocal proponents of a broader fiduciary standard continue to pummel the SEC with their views, it seems the SEC may be taking seriously their responsibility to do a full cost-benefit analysis. Still with no identified problem a change in established standards of care is intended to solve, regulators are beginning to understand just how complex the issue is relative to preserving the consumer choice, access and value provided by multiple business models.

The Department of Labor also continues to work on a revision to the standards of care under the Employee Retirement Income Security Act (ERISA), seemingly without adequate coordination with the SEC. Because their original proposals in this area met with such strong resistance from all sides, we can only hope that their next draft will present a more rational solution, especially relative to standards of care for advice on IRAs.

Pay attention. We’re moving into a period of opportunity and risk.
While no significant movement may occur before next year on any of these issues, it is important that we stay aware of any progress and continue to support our industry advocacy groups. What is good for consumers is ultimately good for our profession, and we need to make our voices heard to ensure that good intentions on the part of regulators are translated into what is truly in the best interest of the public.

Originally published in the Winter 2012 issue of The Wealth Channel Magazine, The High Cost of Longevity.

Why Advisors are Getting the Gen Y Pink Slip

Maria Ferrante-Schepis, MBA

The insurance industry remains befuddled by Gen Y, more specifically those born after 1980. Carriers are trying to figure out when and how to build products for them. Intermediaries are trying to capture them on social media. Advisors are trying to figure out how to keep them as clients after their parents die.

Finding and attracting youth to this industry has become tougher. We’ve been blaming the economy, the inability to reach the middle market profitably and a host of other things for why this is true. But are these problems, or are they symptoms of a bigger issue?

After examining this for years and hearing opinions from people who are outside of the industry, it is very possible that the life insurance industry is losing relevance to the newer generations.

Irrelevance sounds strong. However, we must recognize that irrelevance is a perception, and perception is reality, and reality impacts business. There are three main drivers and all present opportunity for those willing to explore new ways of thinking.

• Death isn’t what it used to be. Back in the days when life insurance sales were good and more families had coverage than they do today, death was a top-of-mind risk. Disease, workplace hazards, even wars brought to mind the impacts of the loss of the family’s breadwinner. Today, we have far greater workplace safety standards. People are living much longer due to medical technology advances, and the financial impacts have been severely lessened when you consider the growth in households with two working spouses. This is social progress. Some would consider it a threat.
• They don’t understand us. The language of insurance has not changed much at all over centuries. Maddock Douglas’s 2010 study reveals that Gen Y does not relate to our language. For example, the word “retirement” is a positive word for boomers. It means freedom. Gen Y sees it as something to do with old people. They don’t see the cessation of work as part of their future.
• They can’t engage with us. Younger consumers are driving a trend that Wikinomics calls prosumerism. A prosumer is a mash-up of professional and consumer. Examples include YouTube, where you can be your own movie star, and Shutterfly, where you can create your own photography studio. Prosumers want to engage and create custom experiences. They can’t do that with insurance products. A Gen Y CEO of a new company indicated that life insurance is the only product that she’s forced to buy in a way that she cannot control. People like her feel the process is outdated.

Let’s examine how the problem manifests for the advisor.

Boy meets girl. Boy advises girl. Boy fails to stay relevant to girl’s children. Girl dies. Children take the money and run.

If Gen Y sees our industry as irrelevant, then when the time comes for them to manage their own or inherited wealth, they will resort to means that are the most familiar to them.

Where do they turn to for advice?

Gen Ys turn to parents for some advice, but will go to their friends and co-workers most. They even turn to their employer’s HR director to determine what 401k choices they make.

What are their aspirations?

Gen Y wants to do many things with their money. They are a charitable, cause-driven and social generation. They are full of ideas to make the world a better place. This sounds like a good job for the financial and insurance industry to be involved with.

Innovation is a solution.

While the word innovation conjures up many different definitions in people’s minds, in our business we are required to define innovation in a specific way, so that it is applied correctly. Innovation is when a consumer insight drives an idea, and then the idea is executed well and you make money from it. An idea without insight is just an invention. For example, the Iridium phone by Motorola was a multibillion-dollar invention to allow people to communicate from the most deserted parts of the world, and relevant to a very small number of people. Time magazine considers it one of the top 10 biggest tech failures of the last decade. The insurance industry has many such failures, but they have not gone on record in the business journals.

Insight unearths tension that is unresolved. When it is resolved, opportunity is abundant. We define insight in a form that looks like this: I [statement of fact] because [reason] but, [tension].

Gen Y insights might include the following:

• “I believe getting financial advice is important because I don’t want to risk losing the money I’ve saved, but I am afraid that advisors are just trying to sell me something.”

• “I would like to be covered for risks because I care about my family’s future, but I find it is confusing and boring to think about.”

• “I want advice I can trust because I care about my future, but I don’t really know who to turn to.”

• “I want to plan for my future because I have big aspirations, but I am more worried about risks to my career success than to my health/life.”

Some of the tensions may make industry professionals uncomfortable, but the most forward-thinking people use it to invent the future.

What are some of the things that you can do to invent the future using the new consumer insights? Consider these:

• Be present in your client’s kids’ lives. I don’t mean attending their weddings, sending them birthday cards or trying to sell them anything on Facebook. Figure out how to be found by them. The prosumer is out there looking and forming opinions anyway. If you find your specific area of expertise on a subject they really care about, they will find you.
• Stop word pollution. Consider the words, phrases, tonality and form of your communication. Does it sound like a conversation or a dissertation? Is it really long and linear, or is the information chunked into digestible pieces? Could visuals and videos help bring your points to life? Younger consumers don’t read the same way we used to. It is not because they are illiterate; it is just survival in an information overloaded world.
• Get Gen Y practice. Find places where you can serve Gen Y. My best friend is one of those HR directors that young employees turn to. She is well aware of the liability she is taking on by giving 401(k) asset allocation advice and wants to be relieved of it. Can you find a few smaller employers that might be open to having you come in and assist their employees with choices? Even if you don’t make much money doing it, the Gen Y muscles you build will be valuable to your practice.
• Redefine the business you are in. – If death/illness in not a top-of-mind risk, what is? Are there ways to partner with the insurance companies and financial institutions you work with to find the risks that young people care about today and help mitigate them? Can you broaden the definition of what you do for clients?

Find ways to identify with potential Gen Y clients and meet them where they live rather than expecting them to come to you, and your potential for new, younger clients will increase exponentially.

Originally published in the Winter 2012 issue of The Wealth Channel Magazine, The High Cost of Longevity.

The Future of Independent Life Insurance Distribution

Executive Summary

This research paper provides an insightful and comprehensive review of the evolution of the consumer, the profile of the independent producer, the impact of the financial crisis of 2008, as well as the historical trends, future threats and opportunities for the life insurance industry.

The evolving consumer presents future opportunities and potential threats resulting from increased diversity, changing family structures and the erosion of industry trust. Key research findings include:

          • Hispanic, Asian and African American ethnic groups growing at an accelerated rate
          • Basic family structures evolving toward multigenerational households
          • Women as the primary decision-makers in African American and single households
          • Generational differences’ influence on the propensity to purchase life insurance, the preferred delivery method and product preference
          • The middle market determined to be an under-served segment for pure protection products and the wealthy with upside market potential for investment-related life insurance products for wealth transfer and estate planning purposes

Research regarding the independent producer reveals key differentiators among producer segments, provides an overview of behavioral trends and identifies critical sales support issues.
          • Producers in the independent channel are differentiated by affiliation, type of firm if affiliated, compensation structure and the product mix of their book of business.
          • Troubling behavioral trends include the aging of the life insurance sales force, the lower productivity of experienced producers, the discontinuation of securities registrations, and the agent turnover and exodus from the industry.
           • Four critical sales support areas that facilitate growth, efficiency, productivity and proficiency of a producers practice are defined as: marketing and business development, technology, back office support and professional development.

The study of the financial crisis of 2008 provides a discerning overview of its significant, negative impact on the life insurance industry including the erosion of earnings, decrease in capital and surplus, forced bankruptcies, necessitated government bailouts, stimulation of rigorous regulation and the damage to the industry’s reputation.

The analysis of historical performance in the life insurance industry addresses the industry’s shrinking capacity, past sales trends, market share by product type and the recent consumer “flight to safety.”
          • Historical trends in the life Insurance industry reflect a decline in the number of insurers as a result of economic factors, regulatory environment, and industry competition and consolidation. 
          • The number of independent agents is projected to continue to decline.
          • Life insurance sales had been demonstrating steady sales growth peaking at $14.3 billion in 2007 (influenced by STOLI and IOLI purchases) and then dropping precipitously by 18% to $11.8 billion in 2009, with fixed universal life dominating market share from 2004 to the present.

This research paper concludes by identifying and examining threats and opportunities and their implications for the future of independent life insurance distribution. An overview of a LIMRA scenario-planning article provides an insightful, futuristic view of four unique scenarios based on assumed, predictable trends and unpredictable uncertainties.
Under all four scenarios with varying, underlying, environmental circumstances, there were common themes: the consumers’ view about the need for life insurance as pivotal to the future of the life insurance industry; government regulation as important and influential in driving or discouraging competition and/or consolidation; the three ethnic groups, Hispanic, Asian and African American, as important demographic segments on which to focus; face-to-face, producer-driven life insurance sales dominating distribution; and fixed universal life insurance maintaining the largest market share.

Opportunities and threats are defined for the consumer market, the independent distribution channel, and product design and pricing; the influence of different but possible economic and regulatory environments is also contemplated.

Consumer opportunities are identified in the:
          • Three ethnic groups, Hispanic, Asian and African American, with the Hispanics making up the largest segment and the African Americans with the greatest probability of market penetration
          • Aging Gen X and Gen Y with increasing income and accumulated assets providing life insurance sales opportunity with the development and implementation of technology and online tools
          • Middle market and wealthy household segments presenting pure protection and investment-related life insurance product sales potential, respectively
          • Evolving, multigenerational family structure indicating the need for revising contract structuring and titling
          • Women’s market representing a unique opportunity for future life insurance sales due to their high level of engagement in the workforce and their position as the primary decision maker in single and African American households

Insurers will attract independent producers through “best practice” sales and service desks and a broker-dealer platform that provide optimal sales support for prospecting, technology to increase efficiency, back office support and professional development. The insurer of tomorrow must be able to attract and support multilingual producers and understand broad cultural differences. Unique product design and pricing opportunities are presented by the ethnic groups, middle market and the wealthy. A sluggish economy may influence consumer concerns and raise awareness of the need for life insurance, and a steady, stable regulatory environment will support and sustain life insurance sales growth.

Threats include the inability of the insurance industry to reach important ethnic groups, recruit and retain talent, provide adequate producer practice management support, curtail the expansion of online distribution and maintain product profit margins, which could individually and/or collectively have serious implications for the future of life insurance distribution. The backdrop of a peaceful and prosperous economic climate coupled with either a restrictive or relaxed regulatory environment could potentially create an untenable situation for the future of independent life insurance distribution.

Originally published in the Winter 2012 issue of The Wealth Channel Magazine, The High Cost of Longevity.

Renae Gupta

Jon Dressner

Jon is Senior Vice President/Chief Creative Officer for the LIFE Foundation. He has served as a member of the LIFE staff since June 2003. jdressner@lifehappens. org

Renae Gupta and her two siblings never lived a charmed life, but they were comfortable.

“We lived in a nice house in the suburbs, a classic white picket fence house,” said Renae, 20. “But everything changed.”

When Renae was only 9, her mother Celeste Rye was diagnosed with colon cancer. 

During Celeste’s eight-year illness, she was unable to work. The family received financial help from Renae’s dad, who had been divorced from her mom since Renae was 4, and the children did what they could to earn money.

Celeste received a small monthly check from Social Security’s Supplemental Security Income (SSI). It wasn’t enough.

There was no disability insurance.

Renae’s older sister Shereen took on work to help with the family’s bills. But when she graduated from high school and started college in 2006 when Renae was 16, it was Renae’s turn to step up. 

“When Shereen left I kind of took the main spot of oldest sibling, so I started working two jobs to help bring money into the house and support the family,” she said.

Renae worked as a grocery store cashier and in retail sales, but what she really wanted was to attend Penn State University to study biology. While she kept her grades up, helped care for her mom and worked, she realized a costly college like Penn State was a long shot.

Before long, Renae was accepted to her dream school for the 2009-2010 academic year. She wanted to make it work, but because of the high tuition and the needs of her family, Renae decided to delay her start for a year.

“Soon enough I realized how unrealistic this dream was,” she said. “I knew the most important thing now was not myself, but my family.”

She kept working, and in 2008 her mom’s condition worsened. Her sister Shareen left school and came home to care for Celeste, who could no longer get through a day on her own. 

There was no long-term care insurance.

There was no shortage of encouraging words from Celeste, who believed in her children and wanted them to find success — and she never wanted to hold them back.

“Even in the midst of her death she was not only strong for herself, but for her three kids as well, assuring us that we could and would go on fine without her,” Renae said. “We were shocked when we realized this was her pride speaking, and that we had just taken on a huge financial burden that no one knew how to handle.”

That’s what happened in 2009, when Celeste died.

There was no life insurance.

“Had there been life insurance I think that the transition would have been a lot easier,” Renae said.

The Gupta children were in for an enormous life change. They stayed in Missouri for a few more months so that Renae could graduate from high school, and then the children moved to Rhode Island to be with their father.

No more four-bedroom home. They would now live in a one-bedroom apartment with their dad.

And a pricey college like Penn State?

“I decided not to go. It’s so expensive,” Renae said.

The siblings continued to do what they could to raise the money they desperately needed, even selling off their possessions — including the ones that reminded them of Celeste — for cash.

“All of the furniture, art and items connected with my mother and the time we had with her were put out for sale,” Renae said. “I tried to stay strong as I watched not only my dreams of college, but all the memories of my mother disappear.”

The difference insurance could have made
Renae said she doesn’t remember ever talking about insurance with her mother, but now she sees that disability, long-term care and life insurance policies would have meant a different future for her siblings and herself.

“It would have made a huge difference for this family because it wasn’t just one person who was suffering,” said Brian Ashe, treasurer of the LIFE Foundation and president of Brian Ashe & Assoc. in Lisle, Ill.

Ashe says insurance is not just about the person who falls ill or passes away. It’s about the survivors.

“If you love somebody, or you owe somebody, or you owe somebody because you love somebody — people are going to have to go on and they will be left with liabilities that can hamstring them for a lifetime,” he said.

Families with bills to worry about say that finding room in a budget for insurance premiums can be a challenge. Or, they say, “It will never happen to me.”

We know that’s not true.

To drive home that point, Ashe tells a story based on the famous scene in the movie The Deer Hunter, in which several characters are forced by their captors to play Russian roulette.

It’s a game of odds.

“With a one-in-six chance of taking a bullet, your chances of success are about 83 percent. Pretty good. But would you take that chance?” Ashe said. “Of course not, because the consequences of being wrong are catastrophic even though the chance of success is high.”

When people make decisions about disability and long-term care insurance, they shouldn’t concentrate on the probability of it happening to them, Ashe said. It’s the consequences of doing nothing that families should focus on.

When helping a family gain perspective about the costs of insurance policies, it’s essential to ask the right questions so that a family can imagine those harsh consequences. For example, with disability insurance, Ashe suggests asking potential clients what their most valuable asset is. Most people will say their home or their 401(k).

“Wrong,” Ashe said. “It’s their paycheck.

“If we say to a wage earner, ‘Would it make a significant difference in your life if you had $200 less per month?’ most would say it would be tight but not a significant difference. If we then ask, ‘What about $4,000?’ they say that would be a significant difference,” he said.

Then explain to the client that if they pay $200 per month for a disability policy, if they get sick or hurt, they’ll receive the $4,000 per month to stay in the world they’re in right now.

Long-term care insurance, while a very different coverage, can also help ease the burden of an unexpected illness.

“From the consumer’s viewpoint, there can be the perception that health insurance will pay the bills for rehab or a custodial care situation,” Ashe said. “If you look at averages, it’s somewhere around $5,000 to $7,000 a month for care. A family can be brought to its knees and in most states they’d have to spend down their assets before there would be any assistance from Medicaid.”

Looking to the future
Though Renae declined her Penn State admission, she was later accepted to Alaska Pacific University where she received a very large scholarship. As a freshman, she plans to study environmental science.

Still, money is tight, and Renae worries about her dad, her sister and her younger brother Clayton.

She said her father took out his own life insurance policy when Celeste was ill, but he doesn’t have disability or long-term care. It’s something she plans to discuss with him, she said.

“It’s not just the responsibility of the person whose life is on the line. At the end, it will affect everyone around you,” she said.

Renae says when she has a family of her own she’ll absolutely have insurance.

“I don’t want anyone’s life to be put on hold or have to suffer because I make the decision not to get insurance,” she said. “You have to be prepared. Then, maybe it doesn’t have to be as difficult if something happens.

Originally published in the Winter 2012 issue of The Wealth Channel Magazine, The High Cost of Longevity.

Charitable Retirement Planning for High-Capacity Clients

Phil Cubeta, CLU®, ChFC®, MSFS, CAP®

You are sitting with a couple, age 62. She is a successful executive; he teaches high school. Soon, she will exit her job with more than either need for lifetime financial security. Her main concern is what she will do with her life, her time and talents, along with her money, once she stops working. He, too, wants to live a purposeful life. To help such clients, you might ask:

          • Where would you like to have a positive impact?

          • When would you like to have a positive social impact? Now? Later? At death? Beyond death?

          • How active would you like to be in driving that impact? Just give money? Invest time and talent?

         • Who joins you in this work? What nonprofits? Your children too?

          • What does your ideal day look like in retirement? Are you taking it easy? Playing golf? Or are you active in the community making a difference?

Consider these 12 strategies to enhance your client’s life and impact.

1. Life insurance
Don’t just think of insurance as a gift. Consider it a tool in an overall plan. Maybe heirs get insurance proceeds and charity gets an asset the kids don’t want. Perhaps insurance in a family trust cherry picks assets from the estate that the children want, leaving cash in the estate to go via bequest to charity. Or insurance replaces gifted assets. Or, maybe the insurance goes to the kids in the right amount, and the rest of the estate goes to charity.

2. Charitable remainder trust (CRT)
The donor gives an appreciated asset or cash and receives an income back. The appreciated asset can be sold without capital gain inside the trust. In addition, with a CRT the donor gets an income tax deduction for the remainder interest. At the end of the trust term, the remainder goes to charity.

3. Gift annuity
These are a promise by the charity to pay the donor an income for life in return for a gift. They work much like CRTs in that the donor can gift cash, securities or other assets, get an income back and have the remainder for charity at the donor’s death. Again, the donor gets a deduction upon setup for the actuarial remainder interest. The median size gift annuity is in the range of $50,000. Some go as small as $10,000.

4. Commercial immediate annuity
No, a commercial immediate annuity is not charitable in itself. It is just a great way to guarantee a life income, or income for a term of years. Yet, such annuities, and other security products like Long Term Care and health insurance, are critical parts of a comprehensive charitable plan. In the case of our affluent couple, the clients might secure their own income with a commercial immediate annuity, secure the children’s inheritance with insurance or a bequest, and then think of the rest as money for social impact.

5. Family foundation
Within limits allowed by law, the donor gets an income tax deduction for gifts during life into the foundation. At death, anything that goes in reduces the taxable estate. Grants from the foundation go to charities in line with donor aspirations. Family foundations can be a great way to teach values to heirs and to pass on a family tradition of informed generosity. Generally, private foundations are funded with cash or gifts of appreciated publicly traded stock.

6. Donor advised funds
These funds are offered by, among others, community foundations and the nonprofit subsidiaries of many for-profit mutual fund complexes. A donor advised fund can accept cash or assets. Some will accept hard-to-value or illiquid assets such as land or closely held stock. In any case, when the asset goes in, the donor gets an income tax deduction and the estate size is reduced. Grants, as with a foundation, are then made from the fund to the donor’s chosen charities.

7. Life estate
Say the donor has a residence, vacation home, farm or ranch. With a life estate, the donor can live on the property until death, at which time the charity takes possession. For setting up this life estate in proper form, the donor gets a hefty income tax deduction. Consider using the tax savings to buy insurance. 

8. IRA to charity
IRAs are great assets for retirement income, but are subject to both income tax and estate tax at death. Why not consider sending the IRA to charity at the donor’s death, and replacing it with life insurance for the heirs? 

9. Bargain sale
Here the donor sells an asset to charity at a bargain price. The donor has made a gift, then, of the bargain element, and has made a sale of the sale element. If it is an appreciated asset, the basis is spread proportionally across the gift and sale elements. The bargain element creates an income tax deduction. Meanwhile, the charity has the asset to advance its mission, and the donor has cash for whatever purpose he or she wishes.

10. Volunteering and board service
In making a commitment to a charity, donors may consider volunteering, or taking a board seat. 

11. Bequest
Most planned gifts to charity are bequests. Gift planning does not have to be complicated.

12. Integrated planning
Get clients going with “giving while living.” Then think about how best to keep it going after they are gone.

Your role
By asking good open-ended questions, you can help wealthy clients articulate the life they want to lead. Through charitable strategies within an overall plan, you can help them achieve a fulfilling retirement and a lasting legacy. They will appreciate what you have done and will refer others who need such purpose-driven planning set up.

Originally published in the Winter 2012 issue of The Wealth Channel Magazine, The High Cost of Longevity.

Prospecting in the Senior Marketplace

David Cohen, CLU®, ChFC®, LUTCF

David Cohen, CLU®, ChFC®, LUTCF A member of the MDRT, David has served as president of both the Columbus NAIFA and FSP chapters.

Every financial advisor seems to want to do business in the senior market. How come? It’s simple—like bank robber Willie Sutton once said—that’s where the money is!

Just because the senior market may have more money to buy insurance and other investments doesn’t necessarily mean they are excited and willing to do business with you. Before you make that first phone call or seek that first referral, my advice is to understand their common characteristics and needs. From that point forward you can create a prospecting and marketing plan that can help you become their most trusted advisor.

The primary desire for the senior market is safety and security. As retirees, they are tremendously apprehensive about spending down their assets and worried about outliving their resources. The fear of outliving their financial resources ties in directly with their desire to remain independent. The last thing they want to do is burden their children financially or otherwise. Seniors take great pride in their ability to remain independent and active.

For obvious reasons, mature adults are much more sensitive to healthcare issues, especially those related to Medicare and long-term care. They understand the frailties of aging and the need for associated medical care, and they are concerned about the affordability of such care, if needed.

Other senior characteristics are more subtle. The primary goal of retirement for most people is to have more time to do things not possible during their child-rearing and working years. Seniors have time to take trips to exotic places, get involved in community or non-profit organizations, pursue hobbies and interests, and learn new things. And, unlike your younger clients and prospects, they have more time during the day to meet with you. However, they are also more deliberate. Dealing with safety and coming to investment decisions may take them more time, and their buying cycle may be extended. The key to success in marketing financial products to them is patience and maintaining a low-pressure consultative sales demeanor.

Let’s now turn our attention to the common needs and concerns of seniors. The first issue, financing healthcare, is certainly an attention getter. The healthcare needs facing older Americans provide financial advisors with an opportunity to serve their community while growing professionally. Many seniors do not fully understand the risks they face. They know that healthcare costs are rising and that Medicare has some limitations. They realize that a serious illness can wipe out their life savings. The problem is that they are unsure of how to manage these risks. As a financial advisor you can help seniors find the answers to these concerns. They simply need your expertise and guidance.

Everyone is interested in increasing their disposable income, and the senior market is no different. Where seniors differ is in their sources of income. Prospects in the senior market may or may not be working. What your prospects will typically have in common is a pool of accumulated assets representing a lifetime of savings from working. You may be able to offer them valuable advice them on annuities, mutual funds and life insurance.

Closely associated with increasing their retirement income is reducing taxes and reaching their estate planning objectives.

Seniors’ paychecks may have been replaced by generous pension checks. Mortgages may have been replaced by equity in their homes. However, once income tax deductions for mortgage interest and exemptions for children are no longer available, many seniors find that they are paying taxes at higher, not lower, rates than in earlier years. We, as financial advisors, have products that can help seniors to reduce taxes. Our goal is to be able to sit down with them and explain how annuities and life insurance can offer substantial tax benefits.

Lowering estate taxes and estate settlement costs are traditional planning goals for seniors. Traditionally, estate planning has focused on the disposition of assets at death. Unfortunately, traditional estate planning has often ignored the impact of long-term care. Too often, individuals become incapacitated without having formalized plans for healthcare or asset management. The results have been smaller estates with sometimes little or nothing left for heirs. This situation can be resolved with our help in conjunction with a qualified estate planning attorney and CPA.

Now let’s turn our attention to four prospecting methods you may want to consider to integrate the senior market into your overall goals as a financial advisor.

1. Current clients

Go through your current client list and determine how many senior clients you have. Sit down with each of them and simply ask if they would refer you to other seniors. Perhaps you could review with them how you have helped others reach their financial goals in later life. Never forget, satisfied clients are your greatest source of new prospects. Ask if they could arrange a breakfast or lunch meeting with you and their referrals. Retired seniors have the time for a leisurely breakfast or lunch, and this third-party influence can help you secure many appointments.

2. Strategic alliances
Who are the eldercare lawyers in your community? Call for a time to sit down with them so you can explain how your products and services fit into the overall financial plans for seniors. The lawyers prepare wills, trusts and healthcare agreements; you can fill in the rest.

3. Seminars and workshops
Probably the most popular prospecting method for seniors is conducting seminars or workshops. At a seminar or workshop you can introduce an array of subject matter, from annuities to Medigap policies. You can either conduct the seminar yourself or bring in other experts such as lawyers, CPAs or trust officers. I recently attended one of these seminars where the presenter, who was from the Social Security Administration, discussed Medicare and Medicaid. It was highly received and valued by the attendees. Please remember, the purpose of a seminar or workshop is not to sell anything—just educate. To begin this process, perhaps you could invite three or four of your current clients who think highly of you and ask them to bring along one or two couples. This can get the ball rolling. The financial advisors who are successful in the seminar business understand that in order to succeed you need to plan a number of seminars in advance. You may want to plan six seminars over the next 12 months. This will give you an opportunity to judge if this prospecting method is working for you.

4. Retirement communities
Talk about target marketing. Everyone living in a retirement community is generally retired. Keep in mind, though, that just because it may be called a retirement community doesn’t necessarily mean the people who live there are not in good health. Retirees often choose to live there because they have downsized. The kids have gone and a huge home is more of a burden than a blessing. If you can find just one person living in a particular community, you may eventually be able to speak with almost all of them.

I would suggest that you make a list of all the characteristics and needs of the senior market and be able to explain to some of your selected clients how important it is for seniors to review their individual situations to ensure they have peace of mind, knowing either what needs to be done or confirming that everything is okay. This very same approach can be used with CPAs and attorneys who specialize in a senior clientele. Having a written document or even a brochure adds tremendous professionalism. It demonstrates how much time and research you have devoted to helping seniors. I assure you, the referrals and introductions will flow your way.

When it comes to seminars, check with the various marketing companies and inquire about the various costs associated with a public seminar. If you choose to provide seminars for various businesses or social organizations, talk with the executive director of a particular organization and offer a short preview of what you would be presenting. This adds tremendous prestige to you as a professional financial advisor.

Retirement communities and condominium associations have at least one meeting per year. Again, sit down with the president of the retirement community and discuss the various characteristics, needs and concerns of seniors and discuss how you can help seniors reach all of their goals and objectives.

By following these tips, you should have all of the referrals you will ever need.

The senior market is huge and getting larger. The baby boomers of the 1960s are becoming seniors and the wealth they control is enormous. However, with increased life expectancy and increased healthcare costs, the risks of not having enough money are also on the rise. The basis of the financial services profession is to provide money when it is needed most, including death, long-term care needs and an income that clients cannot outlive. What a great time to be in our profession.

Good luck, good prospecting, good selling.

Originally published in the Winter 2012 issue of The Wealth Channel Magazine, The High Cost of Longevity.

Retirement Strategies that Beat Father Time

Curtis Cloke, CLTC, LUTCF

While most people refer to him as Father Time, in the financial industry we have a more accurate, yet slightly less friendly, name for him: longevity risk.
If longevity risk, the risk of outliving one’s money, was an easy problem to solve, most companies would probably still be offering pensions. But, for most people, that benefit is long gone. And with reports projecting that Social Security trust funds will run dry by the year 2033, this problem only looks to become more complicated.
However, with a well-developed retirement strategy that incorporates the use of deferred income annuities (DIAs), boomers and seniors can establish a floor of essential retirement income using fewer assets, while also leaving room for liquidity, additional growth and opportunity, and legacy goals. If implemented correctly, advanced laddering techniques can lessen longevity risk, combat inflation and even provide extra income to deal with long-term care needs that arise. In addition, by incorporating the right kind of option riders, installment or cash refund and life or joint life with period certain, you preserve and protect your principal deposit and some guaranteed growth dead or alive.

Why living long has become so complex
If you look back just 100 years ago, the average U.S. life expectancy was close to age 50. Now, data shows us that if you take a married 65-year-old couple, there is a 50 percent chance that one spouse with live to 92, and a 25 percent chance one will live to 97. Also consider that centenarians, the age group of people 100 and up, are the fastest-growing age segment in the United States. People are living longer and longer, and what used to be a 10 or 15-year retirement may now be 35 years or more. That is a long time to go without a salary!

Retirees are exposed to numerous other risks, including those associated with:
• Health care
• Long-term care
• Sequence of returns
• Market volatility
• Inflation
• Deflation
If they only live a few years into their retirement—say they retire at 65 but only live to 68—none of these risks will likely matter. From a financial standpoint, their retirement will likely be successful, although short. However, the longer they live, the more exposed they become to all the other risks, any of which could have a devastating impact on their portfolio.
For instance, consider the impact of inflation. Let’s assume 2 percent annual inflation (which is less than most financial advisors would). Over the course of 10 years, the purchasing power of $1,000 goes down to $817. While this is a steep drop, most likely it would not completely ruin a person’s retirement plan. However, if you consider the same inflation rate over a 35-year period, $1,000 would decline to a measly $493 of purchasing power. That’s like taking a 50 percent pay cut! Inflation and longevity alone can have major consequences, but with the other retirement risks mixed in it can become deadly.

DIAs: the best cure for father time
DIAs, basically a single premium deferred annuity with an income annuity component, are the ideal vehicles to create a floor of essential retirement income. Just like the single premium immediate annuity, the income payments are known and fully defined at the time of purchase. In this case, however, the income payments can be delayed from as little as 13 months up to 50 years into the future. Modern DIA contracts may also allow a change date rider and some flexibility of the actual start date even after the purchase of such contract.
With no fee drag, favorable tax treatment, mortality credits and the option for built-in inflation protection, DIAs provide the opportunity to create more income using fewer assets, which allows room in the portfolio for liquidity, growth and legacy objectives. Because the annuity is deferred, it allows the principle more time to grow over an established period, and thus can generate a high payout rate for the annuity holder. In short, it pays to delay.
DIAs can also help mitigate the sequence of returns risk. The worst time for your clients to take a major hit to their portfolios is the five years before and after they retire, frequently referred to as the retirement “red zone.” A major financial hit during this stage can dramatically decrease the amount of money they can safely withdraw each year and increase the chance of living too long. With the DIA, a person could invest their money at age 55 with a 10-year deferral, protect it from market volatility and know the exact income payments they will begin to receive at age 65.

Advisors must always prepare clients for inflation and the high health care costs associated with living beyond 90. One option is to mix a DIA with a fixed index annuity (FIA) or variable annuity (VA) that has a guaranteed withdrawal benefit (GWB) rider so that clients can start taking income if needed. This approach allows the FIA and VA assets to accumulate over a longer period of time and, if the FIA or VA is needed for additional income, it will provide higher withdrawal rates at older ages. Some contracts even allow for turning the income on and off. If the income is not needed, it can be used for the client’s legacy goals. Another option provides an increased payout if your client requires long-term care. By managing health care risks this way, you reduce the likelihood that your client will have to dip into legacy assets to pay for long-term care expenses.

While Father Time presents a complex problem for retirees, with new product developments and some creative financial planning, advisors will be able to make their clients money last as long as they need. The key is to take the retirement income they have into consideration and determine how much more they will need to maintain their lifestyle. Then DIAs can offer a powerful option to fill that income gap and create a solid foundation upon which to build a successful and long-lasting retirement.

Originally published in the Winter 2012 issue of The Wealth Channel Magazine, The High Cost of Longevity.

Understanding Grief: What Financial Professional Need to Know

Paul M. Brustowicz, MSM, CLU®, ChFC®

In 2010 life insurance companies paid out billions of dollars in death claims to widows, widowers, children and other named beneficiaries. Delivering the proceeds of a death claim is a part of the financial planning process that happens every day. In her book, Widow to Widow, Genevieve Davis Ginsburg recommends that widows keep their insurance proceeds at interest with the insurance company until they feel comfortable making a financial decision. Although it is common sense advise, common sense is often lacking during the grieving process.

The financial professional knows what has to be done for the survivor: cover other claims filed, assets gathered and bills paid and maybe a new financial plan. What they may not be aware of is that they are working with someone in a fragile state of mind, someone who may not be thinking rationally because they are grieving the loss of a loved one.

What is grief? What can an advisor expect from the bereaved? What are the challenges of working with the bereaved? How will an advisor grieve the death of a client?

This author is neither psychologist nor grief counselor. My interest in the subject comes from my experience in the industry and in life. I have delivered life insurance proceeds to five widows and a bereaved parent. I have observed grief in widows, widowers and bereaved parents (Did you know that there is no word for bereaved parent?). I have attended seminars and workshops on grief, and I have read extensively on the subject. I have grieved the loss of my parents, my grandparents, my wife’s parents, my friends and my son. Am I an expert? No. Am I experienced? Yes.

Grief defined
The death of a loved one brings on an emotional mélange known as grief. According to author Alan D. Wolfelt, Ph.D., “Grief is the constellation of internal thoughts and feelings we have when someone loved dies.” Grief is internal while mourning is external.

Mourning is everything the bereaved may do to express his or her grief. Some outward signs of grief include crying, dressing in black or wearing a black armband or ribbon. Those roadside monuments that appear at an accident site or location where someone died represent mourning by the friends and relatives of the deceased.

The bereaved are often affected with a wide range of emotions, physical symptoms and even cognitive impairment during the first year of loss. What is important to remember is that no two people will grieve in the same manner. The grief experience is as unique as the widow or widower experiencing it. The financial advisor should be aware that their client may experience shock, fear, anxiety, rage, anger and many other emotions. These can appear immediately or even simultaneously, and the bereaved has no control over these emotions. What counts is how the bereaved deals with his or her emotions. And it is the emotional well-being of the bereaved that psychologists study.

In the 19th and most of the 20th century, the psychological community thought of grief and bereavement as forms of depression. The bereaved had to work at their grief to overcome it and become healthy and functional survivors. In the latter half of the 20th century the stages of grief emerged as the road map for the bereaved. If the bereaved didn’t pass through denial, anger, bargaining, depression and acceptance, they weren’t healed. Current research has pushed aside the stages of grief in favor of a natural or innate resilience that accounts for the recovery from grief.

Another view of grief
In The Other Side of Sadness, Professor George A. Bonanno presents research that demonstrates grieving does not occur in stages but in waves. He references Bisconti, Bergeman and Boker, who measured the emotional well-being of 28 widows over 98 days. In a controlled experiment with two of these widows, the variability pattern of their emotional well-being—happiness and sadness—oscillated over time. They both eventually plateaued into a level emotional state close to happiness: one after 61 days and the other after 92 days.  

Bonanno attributes the individual uniqueness of the grief process to what he calls resilience. He defines it as the ability to deal with extreme stress. He characterizes the resilient person as someone who has many positive factors. The resilient person has better financial resources, better education, better physical health, a broad network of friends and relatives, and fewer life stressors to worry them. He contends that this resilience is innate but has not gone so far as to say it is genetic. What the financial professional needs to take away from this is that some clients may bounce back from their grief a lot sooner than others. The resilient are able to make their loss more bearable by bringing up comforting memories of the deceased and move to reconciliation and acceptance much faster.

I have observed resilience in the various bereavement support groups I have attended. The resilient person shares his or her grief experience with the group describing how feelings have changed over the months or years since the loved one died. Anger has subsided; there is no more bargaining; sadness comes and goes but is no longer a permanent guest. Her life is getting back to normal, a new normal without the deceased. The newly bereaved find it hard to believe what they are hearing from the resilient person, but she assures them that she was just like them when she was widowed. She is nearing the end of her grief journey and looking forward to a different life.

Five ways of grief
So if grief comes in waves like a roller coaster ride, rather than stages, what happens when the ride ends? Susan A. Berger, Ed.D. proposes that most bereaved will take one of five exits to embark on a new life as a Nomad, Memorialist, Normalizer, Activist or Seeker. Berger’s premise is that the bereaved reinvent themselves to successfully work through their grief. I believe that an understanding of the five ways of grief will position the advisor to provide advice that is meaningful, relevant and specific to the individual bereaved. 

Nomads are the wanderers of griefdom. These are the bereaved who would rather run away, literally or figuratively, from the feelings that have beset them since the loss of a loved one. Nomads can be self-destructive, abusing alcohol and drugs; or they can appear to be fully functional for short periods of time before they move on to the next job or community where they think they might be fulfilled.

It is important to recognize that all newly bereaved will exhibit the characteristics of Nomads for a time before they move into one of the other four ways of grieving.

A good example of the Nomad is Neal Peart, the drummer of the famous rock band RUSH. Peart became a Nomad when his daughter and wife died within 12 months of each other in 1997. He recounts his nomadic way in the book, Ghost Ride - Travels on a Healing Road. Peart traveled more than 20,000 miles on a BMW motorcycle throughout Canada, the United States and Mexico before he returned to his home in Ontario.

Memorialists want to honor their loved one in a tangible way. It might be a scholarship, a memorial fund or a foundation. You won’t have any trouble recognizing memorialists. They want to accomplish some good for society in the name of their deceased loved one. The Nobel Prizes and Susan G. Komen for the Cure are two well-known organizations that have their origins as memorials to the deceased. One of the most famous memorials in the world, the Taj Mahal, was built by a grieving widower.

The concern of memorialists is that their loved one will be forgotten, that no one will remember the deceased’s name, life or accomplishments. Financial planning takes on a whole new dimension when working with a memorialist. The whole realm of estate planning that involves charitable giving may now come into play. There may be a need for trusts, annuities and life insurance to achieve the goals of the memorialist.

Normalizers tend to be in the majority of the bereaved. They look to recreate their life as they knew it. Widows or widowers may remarry. Bereaved parents may adopt a child or children. There may be more or enhanced family activities. The challenge here is for the normalizer not to move quickly into the new normal. The advice about not making large financial decisions for at least a year applies to family decisions as well. I know of one widower who in his haste to get back to normal remarried within a year of his loss and then headed to divorce court a year after that. Aside from the emotions involved, there were financial repercussions. This is where financial planners can advise clients to exercise caution when considering financial decisions that could have dire consequences.

Social justice is the domain of the activists. With compassion and empathy, activists will pursue a cause to bring about a change for the good of society. Their mantra could be: “What happened to me should never happen to another parent, child or spouse.”

Mothers Against Drunk Drivers (MADD) is a well-known organization that started with an activist mother. Another activist parent is responsible for Amber Alerts, legislation that requires public notification when a child is missing. For every public story, there are dozens of private stories of activists making a difference in the everyday lives of others. 

As with the memorialist, the financial planner can assist the client in finding ways to honor their loved one with a charitable foundation or a charitable gift of life insurance.

Seekers are the existentialists or the spiritual among the bereaved. Seekers were not necessarily religious before their loss but now are looking for answers in a spiritual dimension.

Seekers are asking the big questions—the hard questions. What is life all about? Is there really a God? Is there life after death? Will I see my loved one again?

Frank Bianco’s teenage son, Michael, died in a car accident. Frank sought answers to his son’s death from a higher power. His search led him to several monasteries where he encountered God on a level he never expected through prayer and interviews with the monks. Frank’s search became a book, Voices of Silence, about Trappist monasteries and the men who inhabit them. Frank took his book on the road. He spoke to bereavement groups and church groups about his search for answers, acceptance and reconciliation with the death of his son.

Another seeker who turned his loss into a book is Rabbi Harold Kushner. His book is better known than his name: When Bad Things Happen to Good People.

If the Seeker is looking to change his/her lifestyle, then the advisor needs to help him/her draft a new financial plan and manage resources. The seeker will need a financial plan that allows him/her to make the journey without financial worries to distract them.

Intuitive and instrumental grievers
There is yet another way to look at grief. As previously mentioned, people grieve in different ways, and it should be no less surprising that women and men grieve differently. These differences have been labeled as intuitive and instrumental by researchers Terry Martin and Kenneth Doka. According to them, women are intuitive grievers who go with the emotional flow, whereas men are instrumental grievers, holding back on the emotions by doing busy work.

Mortality tables will not be denied and the financial professional can expect to be working with more widows than widowers as the client base ages and death claims start to materialize. The financial professional should be prepared when working with a widow to encounter someone whose emotions are at the surface. Most women are ready, willing and able to share their feelings and cry as intuitive grievers.

The financial professional can expect the widower to be more stoic, the manly man. An instrumental griever, a man will find things to do and keep busy rather than acknowledge his feelings. He will throw himself into his job, his hobby or sports. He will build a deck, paint the house or clean out the garage rather than confront his feelings of loss.

There is a paradox about life insurance industry and the concept of intuitive and instrumental grievers. According to LIMRA, 80 percent of life insurance producers are men. Most often, it will be a man who works with a widow to settle the death claim and plan the future. As an instrumental griever, a male financial professional can provide a sense of normalcy and security to the widow and the family. The challenge for the male financial advisor will be to display some feelings or emotion at the family’s loss so as not to be considered non-caring. 

On the other hand, an intuitive female financial professional, aware of her own feelings, can provide emotional comfort and support to the widow along with financial advice. Her challenge will be to keep emotions under control so that she can be an effective advocate for the family.

The financial professional should not be surprised by the emotional energy required to successfully deal with the grief that comes with the loss of a client or friend. It is the degree of the relationship that determines the reaction to the loss: was the deceased a stranger or a friend; was the death unexpected and did it come as a shock or was there a lingering illness? Financial advisors are not immune to the dimensions of grief and need to be aware of their feelings.

Grief and the financial advisor
By understanding the ways of grief and the male/female coping styles, the financial professional can approach the bereaved with confidence and compassion.

The financial professional is in a unique position to advise the bereaved client, not as a grief counselor, but with financial advice. They can help the nomad find the way home, the memorialist keep their loved one’s name alive, the normalizer stay in the family home and community, the activist achieve social justice and the seeker realize the depths of their soul.

Finally, the advisor needs to do what they do best: be a good listener. The bereaved will want to talk about their loss and their loved one. The financial professional needs to be prepared to listen and understand the grief the bereaved are experiencing.

Originally published in the Winter 2012 issue of The Wealth Channel Magazine, The High Cost of Longevity.

Advisors Key to Averting Long-Term Care Crisis

Shawn Britt, CLU®

Shawn Britt, CLU® Shawn is Director of Advanced Sales with Nationwide Financial in Columbus, Ohio.

Don’t expect the Affordable Care Act to help solve America’s long-term care dilemma. While the Supreme Court’s decision to uphold the health care overhaul is significant, health care costs in retirement remain an issue, and having to pay for long-term care out of pocket is devastating many retirees’ finances.
However, financial professionals can be key to helping their clients avoid a long-term care crisis; and if they address the issue with their clients, they can build stronger relationships and begin building their business as well.
People living to age 65 have a 70 percent chance of needing some type of long-term care (LTC) in their lifetime (according to LTCI’s Revolutionary Evolution, Nov. 1, 2011, Life Insurance Selling). Nevertheless, only 17 percent of Baby Boomers currently have any type of LTC plan. Despite the statistics, people just don’t see the need. It’s also hard to talk about an unpleasant topic like nursing homes.

Have “the talk”
Bringing up the subject of long-term care may be difficult but, in fact, may be one of the most important discussions clients will ever have with their financial professional. Unfortunately, too many clients avoid the subject like a contagious disease; thus, too many financial professionals shy away from the topic. But first put careful thought into your approach and proposed solutions.
The most common mistake a financial professional makes is in the approach. When you say the words “long-term care” to clients, they often hear the words “nursing home.” This can cause the client to shut down, for this is not a discussion they want to have. The good news is we know statistically that 49 percent of new LTC claims are for home health care, and another 24 percent take place in assisted living, which may simulate a home-like setting (according to The American Association for Long-Term Care Insurance (AALTCI) 2011 Sourcebook).
Because most people would prefer to receive care in their home as long as possible, consider using an approach such as: “Mr. and Mrs. Smith, as part of what we want to accomplish today with your financial strategy, let’s discuss how to keep you in your home longer should you no longer be able to care for yourself.” This approach can help change how the client views the conversation into something positive—being able to remain in his or her home.

Focus the discussion toward women
Discuss long-term care with both the husband and wife present, and position long-term care planning as a way of protecting the surviving spouse from financial impoverishment. But focus the discussion on women because they are the ones most affected as caregivers and the cared for (according to a Caregiving in the U.S. study by the National Alliance for Caregiving, 2008 WISER).
Not surprisingly, more long-term care policies are issued to women—66 percent, compared with 34 percent to men. The claims experience is almost identical with 67 percent of all LTC claims for women while only 33 percent are for men (according to the AALTCI 2011 Sourcebook).

Use analogies to help with client objections
Anyone with a mortgage is required to have homeowners insurance. Virtually no one would dream of not having it. For the vast majority of Americans, our home represents our largest financial asset, and its loss, without insurance to replace it, would be devastating to our financial security.
The chance of losing your home to fire or major damage is 840 times less than the chance of needing LTC (LTC Tree, What are the chances of needing long-term care? June 2010), and yet, most affluent households carry homeowners insurance while only 22 percent have a plan for long-term care in retirement (The MarcoMonitor, 2010-2011). And when you consider the population as a whole, even fewer people (10 percent) have planned for LTC coverage.
If this risk is not addressed with some form of protection, the costs associated with LTC are just as capable of devastating a person’s financial security. What clients may not realize is that the costs of long-term care are expected to quadruple by 2030 when the last of the Baby Boomers will reach retirement age. By then, a semi-private room in a nursing home is expected to cost around $265,000 per year (according to Life and Health Advisor 2010, Don’t let clients get blindsided by unexpected long-term care costs).

Make sure you understand the important differences between products and their features
Understanding the various LTC options available opens the door for LTC sales you may have overlooked. In addition to traditional stand-alone LTC policies, there are now asset-based LTC products and solutions linking LTC riders to life insurance and annuities. Each of these products addresses a different client need and/or obstacle. Make sure you understand what protection the products offer. The type of care that qualifies for coverage varies between companies, and some companies may limit claims to permanent conditions only. By having a thorough understanding of the different categories of LTC solutions—as well as their features—you will have a better chance of putting a solution in place for your client.

Connect the dots among the client’s LTC needs, goals and financial picture
Once you know what products are available, it is important to connect the dots. Each client has a different big picture outlook and/or ability to qualify for an LTC solution. For example:
• Stand-alone LTC policies may appeal to a client who is looking for the most customizable and comprehensive coverage. These clients have the needed liquidity combined with a desire for choice in plans. And for those with a significant family history of LTC events, this offers the best source for maximum coverage.
• For someone unable to pass health qualifications, or someone with limited assets for annual premiums, an annuity/LTC-linked product may offer assistance. Good news: Some available annuity/LTC products require no underwriting. While this solution may provide less monthly benefit and fewer coverage options than other solutions, it’s still a help to someone with no alternatives. Plus the unused contract value goes to a beneficiary.
• For people who can afford a large single premium and are looking for good LTC coverage with asset retention and a return-of-premium feature, an asset-based product may be appropriate. However, your client may not have the desire or ability to lay down a large sum of money at once.
• For clients looking to leave as much money as possible to beneficiaries, preferring flexible premium options and choice of base insurance product, a life/LTC-linked product might supply a suitable plan. The entire pool is available to be paid as monthly LTC benefits, and whatever is left in the pool is paid as a death benefit. While this plan may not provide quite as much in LTC benefit, it generally does provide a greater amount that can be left to beneficiaries.
Careful analysis of a client’s financial situation, thorough knowledge of product opportunities, a compelling story and forethought to approaching the LTC discussion will allow you a better opportunity to offer your clients the type of LTC coverage they are more willing to purchase for protecting their assets, protecting their family from burden and protecting their own choices for care. Knowing how to talk with clients about long-term care and offer solutions for their specific needs can help you strengthen your current client relationships and forge new ones.

Originally published in the Winter 2012 issue of The Wealth Channel Magazine, The High Cost of Longevity.

Practicing techniques to stay relevant is key to satisfying your clients.

Debra Boblitt, CLF®

Our customers’ expectations are constantly evolving. Competition and technology drive consumers to demand products faster, cheaper and with a better customer experience than ever before. Unless you deliver perfection, customers will continuously have a reason to keep looking for their definition of a better deal. The phrase “instant gratification” isn’t just a term for younger generations.

This pace of change challenges us to remain relevant in a world where our products can be purchased online faster than you can drive to your client’s home. The following four skills will assist you with maintaining the edge needed for success.

1. Pace
Do you know the commercial in which the woman says, “That was so 27 seconds ago”? Although quite funny, the premise holds true outside of cell phone speed—the pace of change today is nothing short of dramatic. If you take too much time to make decisions, you will lose your clients’ interest and risk your credibility with them. In our world of text messages and news at the touch of a screen, learning to respond quickly under pressure is vital. I have recently implemented a 48-hour rule. Any decision is to be made within 48 hours of my leadership team discussing the situation. Pace is driving our clients’ expectations and it’s imperative we exceed them.

2. Flexibility
Most of you reading this article are in personal production. The makeup of your clients couldn’t be more diverse: demographically, economically or socially. Similarly, there is no one-size-fits-all methodology to sales. It is not about you—it is about your customers. Creating an environment promoting flexibility and responding to changing customer expectations is essential. Who decides if the way you deal with your customer is effective? You? I would argue it is your customers’ expectations that should drive the method in which you market, hold conversations and close a sale. It is not about how you want to meet with them or the discussion you want to have. Instead, being flexible with your customers is about putting their needs and expectations first. You must evolve with your customers. What they expect today will be different than their expectations tomorrow.

3. Relevance
Have you ever asked yourself how best to compete with companies whose sole marketing strategy is price? Clouds of competitors surround us. The grocery store near my home actually has pamphlets for life insurance near the checkout line! Agents must challenge themselves to remain relevant in the eyes of consumers. They expect companies, and their sales associates, to be powerful, confident and experts in their field.

• Power is the ability to accomplish tasks quickly and accurately for your clients the first time.
• Confidence is the ability to portray certainty in your purpose.
• Expertise is a factor for clients. We can continue to develop our expertise through self-development, continuing education, embracing innovative technology and being adept at social media.

Now is the time to change the status quo. It’s your responsibility to make yourself relevant to current and prospective customers.

4. Communication
Did you know there are more cell phones in the world than televisions and computers combined? From texting to Facebook, email and click2chat, consumer preferences for communication methods change frequently. Most agents look for a silver bullet for success. My advice: Know your customers’ communication preference. Period. Ask them, and execute on it consistently.

During the time it took you to read this article, more than a thousand people have signed up on Facebook. Change is all around us, continuous and gaining momentum with each passing day. Embracing this pace, intentionally keeping yourself relevant, being flexible with your clients and communicating with them in the method they prefer will help you not only stay in the game, but most importantly, exceed customer expectations.

As Senior Vice President at State Farm Insurance Companies, Debra Boblitt, CLF®, develops vision, strategy and direction for more than 4,500 State Farm agents and employees in Tennessee, Ohio and Kentucky. She has served on The American College Foundation’s Board of Directors for two years and in 2012 was selected as Secretary of the Executive Committee for the Board.


“Creating an environment promoting flexibility and responding to changing customer expectations is essential today.”

“Pace is driving our clients’ expectations and it’s imperative we are running ahead of it.”

Originally published in the Winter 2012 issue of The Wealth Channel Magazine, The High Cost of Longevity.

There’s No One With Endurance Like the Man Who Sells Insurance

Alan Press, CLU®, LUTCF®

James O. Mitchel, PhD, CEBS

Yes, indeed. The Man Who Sells Insurance has been around your neighborhood, motivated by commissions, since about the 1830s. The agency system for the distribution of life insurance has been with us for about 185 years. Now that’s endurance! That’s longevity!

Although we cannot be precise on this detail, he probably worked for the New York Insurance and Trust Company (no relation to the present day New York Life). He was paid 5 percent of the first-year premium and no renewals. Before long, though, competitors realized his value. His first-year commission doubled to 10 percent of the first-year premium. And he also received lifetime renewals of 5 percent. 

Once they understood how valuable the Man Who Sells Insurance could be, other companies began to bid for his services. The Mutual Life Insurance Company of New York (est. 1845), Mutual Benefit Life (est. 1845) and the Connecticut Mutual Life (est. 1846) all flourished, because they understood that their profitability depended on an ever-increasing cadre of highly motivated, well compensated agents, who could consistently do the difficult job of selling insurance every day.

Think of all the neighborhood pharmacies, florists, bookstores, hardware stores, travel agencies and other stores we all patronized. They are almost all gone. Why has the agency system survived, and indeed thrived, when so many other product distribution systems have essentially disappeared?

Every thoughtful reader will come up with his or her own rationale. My instinct tells me that the reasons involve three interrelated forces—the product, the people and the primary element, trust. Since the beginning, insurance producers continue to this day to make the agency system an indispensable element in the equation.

The product 

The sale of our products involves getting people to think and talk about the three things they want least to happen to them, their death, disability or old age. Many will ultimately face all of these without adequate resources to meet those challenges, unless they listen to us and act on our advice.

You can’t park a life insurance policy in your driveway and blow away your neighbors with it. You can’t wear one on your back, your wrist or your finger. If you tried to brag about your new million-dollar policy at a neighborhood cocktail party, somebody would probably ask you, “What are your other symptoms?” It would be an instant room-clearer. 

In contrast, we buy lots of different products from so-called salesmen. Most of them are no more than order takers. They don’t do anything to make us come through the door of their stores. If we don’t walk in, they have nothing to do. And we often know what we want before we enter. 
For example, 
over the course of my lifetime, I have probably bought 20 cars. In every instance I knew the exact brand, model, color and options that I wanted before I walked into the dealership. The various salesmen insisted on telling me how many 
seconds it would take me to get from 0 to 60 miles an hour, 
the number of gears in the transmission, about the speakers for the radio and how many 
miles per gallon I would get. 
I knew all of that before I walked in. The only information I wanted from him was how much it was going to cost me.

Whichever dealer gave me the most competitive price got the sale. 

Not one of them ever followed up with a call and said, “Your car is almost three years old. The warranty will end soon. We’d like to bring a new one with all of the nifty gizmos to your driveway and let you test-drive it for a few days. Then we will show you how we can get you into it at a price you will be comfortable with.” 

How many of you have ever had the experience of a total stranger coming through the door of your office and telling the receptionist, “I woke up this morning and decided that I want to buy a life insurance policy. Is there anyone here that could sell one to me?” 

In my 56 years in the business, it has never happened. But if it did, I would probably respond to him or her with a question of my own: “Are you on your way to New York Hospital for a heart transplant?”

The people 

It takes dedicated, highly motivated, well-educated advisors to sell life insurance. To overcome the procrastination instinct that inhibits so many of our sales. Advisors must face negative responses. We are paid for what we do, not who we are. We must be able to structure our own days. We must get ourselves to do the hardest job. We must continually prospect. 

Paraphrasing Albert E. N. Gray’s The Common Denominator of Success, we must be able to get ourselves to do the things we don’t want to do, the things that unsuccessful people cannot get themselves to do. We must get ourselves do them every single day. And, above all, we must do them all with integrity.
The reason successful advisors can command significant levels of income is simple. Very few people can consistently do the job well. It’s Economics 101: supply and demand. 


We ask our clients to give us a significant amount of their hard-earned money in return for an eight or 10-page document that the vast majority of them will never completely read, and wouldn’t understand most of if they did. It is above all, a trust sale.
Only people can earn trust. There is no such thing as a life insurance company or agency that exists as an independent entity, apart from the men and women who work within it and define it. The organization that attracts and keeps quality people who understand their responsibilities to the individuals who buy from us because they trust us will be a good company, a successful company. And the opposite is equally true.
We tell our clients, “We will be there for you when you and your love ones need us. We will keep our promises when the things you don’t want to happen, happen, as they surely will.” That is an enormous responsibility that must never be compromised. The purchase of a life insurance policy is a trust-driven transaction. It can take years and years of consistent hard work to build and maintain trust. But trust can be lost forever in a matter of minutes if we do not continually conduct ourselves in a manner worthy of our mission.
For 185 years (with certain notable aberrations) the good men and women who manufacture, sell and service our products have been mission driven. There is every reason to hope and believe that we will be around for the next 185 years, if we continue to earn the trust and confidence of all those we serve and maintain the consistencies that are part of the life insurance equation.

* “There’s No One With Endurance Like The Man Who Sells Insurance” is the title of a song written by Frank Crumit, published by Decca in 1935.

Originally published in the Winter 2012 issue of The Wealth Channel Magazine, The High Cost of Longevity.

So Many Studies Can’t All Be Right

There was a large dose of “wait and see” embedded in the overwhelming Dodd-Frank financial reform legislation in the guise of an extensive number of studies to be conducted by various government agencies. While the purposes of the studies vary, many will constitute the basis for additional regulation or rulemaking. The SEC alone is creating more than 100 rules and completing 20 separate studies required by the law, all in a limited time- frame with no additional resources.
Three hotly anticipated studies have recently been released—two by the SEC and one by the Government Accountability Office (GAO)—that have the potential of changing the way financial ad- visors work and the way they are regulated. First the good news: the GAO, which had been charged with determining whether regulation of financial planners is adequate, reached a balanced and well- reasoned conclusion. They found that while most, if not all, of the activities planners engage in are already fully regulated, there may be some issues with uneven enforcement and opportunities for in- creased consumer clarity on roles, titles, and duties.

GAO study: new layer of regulation for financial planners not warranted The primary challenge with the Dodd-Frank approach in initially mandating the GAO study is that it was built on a false premise. It assumed that “financial planning” is a separate and distinct profession, which, of course, it isn’t. Instead, “planning” is a discipline that crosses many professions
and could be used by accountants, insurance experts, attorneys, investment advisors, and others. How would you begin to define what constitutes a planner for purposes of separate regulation and oversight other than through the wide range of activities they perform? Using that approach, almost any financial services professional could be deemed a “planner.”
Luckily for both advisors and the public, the GAO didn’t see the need for duplicative regulation and appeared to see through the private agenda that was behind the study’s inception. A few planner groups want to set up their own self-regulatory organization (SRO) reporting to the SEC to control education, credentialing, and standards for their membership. The GAO didn’t buy it.
What the GAO did observe—and it continues to be important—is that consistent enforcement must be in place to protect consumers at both the state and federal level. They also found that some consumer confusion remains as to the titles, duties, and standards of care for various types of financial professionals. Some advocacy groups have concentrated on the use of particular titles, which is arguably the least critical issue for consumers. If, for example, separate regulations were established for anyone calling herself a “financial planner,” advisors could quickly change their titles to “wealth man- ager” or “financial consultant” instead.
It’s much more relevant to talk about the credentials and qualifications that stand behind any one of a dozen common titles being used with the public. The American College continues to carry on the fight for strong credentials. Consumers deserve the expertise of advisors who hold their CLU®, CFP® certification, or ChFC® —along with other quality marks—rather than rogue designations earned in a few days at a seminar.
The GAO ultimately made three recommendations: (1) for the NAIC to review consumers’ understanding of standards of care relevant to the sale of insurance; (2) for the SEC to take up the issue of titles and designations; and (3) for the SEC to collaborate with states to better understand complaint data associated with financial planning activities and which practices might benefit from additional oversight in the future.
As for the SEC, as noted earlier, they have their hands full. It seems unlikely that they would willingly broaden the scope of any of their current studies. It is fitting that the NAIC should look at standards of care for insurance sales, because the various groups yelling “fiduciary” every time there’s an open microphone or editorial page don’t seem to understand how insurance works. To be an agent of the company and a fiduciary for the client at the same time is not really workable, at least not in the true sense of what being a fiduciary means. What’s a little sad about the whole debate is that the various voices in the standards of care debate all really want the same thing—to serve consumers well with the highest ethical standards—there’s just disagreement on how to achieve that end and assure the continuation of consumer choice, product and service availability, and low-cost distribution models.
That brings us to the SEC studies, including their examination of standards of care for broker/dealers and investment advisors. Broker/dealers have operated effectively for years under a rules-based suitability standard, while investment ad- visors have worked within the framework of a principles-based fiduciary standard. Some argue that the suitability standard is easier to enforce and that it promotes “before the fact” regulation, while the fiduciary standard is more nebulous with actions more often evaluated “after the fact.” Nevertheless, there has been a long push to harmonize the two standards when advisors are providing investment advice about securities to retail customers. The argument goes like this: why should ad- visors performing essentially the same function, albeit under two different business models, operate under different standards? Isn’t that confusing to consumers?

SEC study: a uniform fiduciary standard for broker/dealers and investment advisors?
An SEC staff study followed that line of thinking and recommended that the SEC pursue rulemaking to move to a uniform fiduciary standard for broker/dealers and investment advisors when providing personalized investment advice about
securities to retail customers. The specific standard would be to act in the “best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment adviser providing the advice.” In addition, the study recommends harmonizing disclosures (making sure they’re in plain English), and addressing disparity in other regulations and consumer protections between the two business models.
On the surface, there’s nothing much there with which to disagree. The trouble lies, as it often does, in the details. Will consumers actually benefit from this fundamental change in regulation? Will their costs go up? Will their investment results be better? Will their choice of and access to products and services be diminished? On the subject of cost impacts alone the study spends almost two dozen pages essentially

Saying, “who knows?”
In conjunction with the report two SEC commissioners, Kathleen L. Casey and Troy A. Paredes, issued a statement op- posing the study as it is currently written. Their main com- plaint was that the fundamental research wasn’t done on any of the issues above, and that the case wasn’t effectively made to justify such a major overhaul of regulatory structure. Separately, NAIFA surveys also have indicated that implementation of these changes could force some of their members to change business models or move away from middle-market clients to effectively mitigate the added cost and compliance burdens.
Are consumers actually better served if broker/dealers determine—once the new standards and rules are in place—that it’s in their financial and compliance interest to move to a fee-based model? How will the availability of variable and proprietary products be impacted? It’s true that Dodd-Frank has language that says receipt of commissions or selling from a limited product set should not violate a uniform fiduciary standard per se, but that’s not the same as assuring that the implementation rules for the new standards are business mod- el neutral.
And that’s the key question: if the SEC moves ahead with this rulemaking—after any Congressional intervention or the impact of public comment periods—will the resulting interpretive guidance be workable for all business models and avoid significant additional compliance burdens and costs? Will it protect consumer choice and access?

During a recent House Financial Services subcommittee hearing, legislators appeared concerned about where the SEC is headed, both on the fiduciary duty and on the issue of advisor enforcement. Here’s hoping the SEC is more thoughtful about this issue than some of the self-interested advocacy groups and coalitions who are attempting to drive this debate. Keeping middle-market consumers front and center in the discussion is critical, and we can only hope their true best interests will be protected in the final analysis.

SEC study: who should be watching investment advisors anyway? Another SEC staff study deals with the core issue of enforcement. Over the years broker/dealers have been examined much more frequently un- der FINRA’s jurisdiction than investment advisors have been by the SEC’s Office of Compliance Inspections and Examinations (OCIE). It’s a sore point for broker/dealers, who would like to see more balanced enforcement, and it’s clearly in the best interest of consumers to toughen the oversight of investment advisors.
The SEC has an enforcement capacity issue. While the number of investment advisors has grown and the assets under management have grown faster still, OCIE staff has been reduced. The number of ex- aminations of registered investment advisors has dropped 29.8 percent since 2004. Only 9 percent of RIAs were examined in 2010. With the current budget battles front and center in Congress, it’s unlikely the resource issue will be mitigated anytime soon.
Responsibilities for regular oversight is split with state authorities based on assets under management, and Dodd-Frank raises the thresh- old from $25 million to $100 million. Even given that change, growth in RIAs subject to OCIE examinations will continue to outpace the SEC’s resources.
The SEC study on this subject punts the issue back to Congress with three alternatives to consider: (1) leave enforcement with the SEC but fund increased resources with user fees; (2) set up one or more new SROs to manage RIA enforcement at the federal level; (3) let FINRA handle examinations for dual-registered advisors. While none of these solutions is ideal, the problem clearly needs to be addressed. User fees will overlay additional costs on advisors, and some feel FINRA is not experienced enough in enforcement under a fiduciary standard of care.
The idea of multiple SROs and giving advisors a choice of which to join sets up the possibility of regulatory arbitrage and extraordinary complexity. You can bet some interest groups will be engaged in trying to carve out their own regulatory areas if this path is pursued. While the answer will probably be either user fees or FINRA, we’ll have to wait and see where Congress goes with this issue.

The bottom line: stay engaged in the debate
Regulatory issues too dry for your taste? Too apt to change with the vagaries of political fortunes or too distant in impact? Let’s not kid ourselves. The resolution of these contentious issues can change the way we are able to serve consumers and conduct our practices. Stay informed through your connections with The American College, state your opinions vigorously in the public debate and comment periods, and support industry advocacy groups such as NAIFA, AALU and others. Your involvement in these issues has never been more important to achieve the ultimate result of steering public policy toward the public good.

Originally published in the Spring 2011 issue of The Wealth Channel Magazine, Tune in Turn On: Technology you can use.

Mildred F. Stone, Insurance Trailblazer

Virginia E. Webb

Virginia E. Webb Managing the Knowledge Center at The American College, Virginia does research for faculty, students and graduates, as well as administers the technical services department of the Vane B. Lucas Memorial Library.

Mildred F. Stone came of age when the life insurance industry was predominantly a male-dominated business. Born in Bloom- field, N.J., in 1902, Mildred graduated from high school in 1920, the same year that the 19th amendment was approved and women were given the right to vote. Well-traveled and bright, she was encouraged to continue her education.
Stone chose Vassar, was elected to Phi Beta Kappa and graduated with a B.A. in 1924. After a short stint as a part-time home economics instructor at the local high school, a friend urged her to explore other career possibilities. He was a young assistant vice-president at Mutual Benefit Life Insurance Company in Newark, N.J. Stone joined the company in 1925 intending to work for only two years; she worked for Mutual Benefit Life for 43 years.
Back then The American College had not yet been incorporated. Stone was only the second woman to earn her CLU® designation in December 1928. When asked about the complexity of her exam questions, Stone related her questions were “simple,” and not “like a graduate degree as it is to- day.” She attributed that to the lack of quality books in the field of life insurance and life insurance selling at the time. She thanked Dr. Huebner for making this area “a major source of study.”
Stone encouraged many other women to enter the business of life insurance. In a 1976 American College Oral History interview with late historian and archivist Marjorie Fletcher, Stone explained: “The American College and the CLU® movement
gave women a chance to be established ... smart women took the CLU® exam ... women who were aggressive and ambitious saw this as an opportunity.” She saw The American College as recognizing women in leadership positions, even in its earliest days. She strongly believed in the visibility of women. Stone would later go on to write the biography of Ellen Putnam, another woman industry pioneer who received her CLU® in 1930 from The American College.
Although Stone never sold life insurance, her legacy in the industry is assured. In 1934 she was elected the first woman officer at Mutual Benefit Life. The industry at that time had expanded greatly due to “World War I’s military life insurance pro- grams that had set $10,000 as a standard premium for young men.” Stone’s first job title was as Agency Personnel Secretary. Her role was to maintain “positive employee relations” in the company. In 1957, she wrote “A History of the Mutual Benefit Life Insurance Company,” and she retired in 1968.
Stone never forgot the education she received at The American College. She began her writing career with “A Short History of Life Insurance” in 1942.
In 1950 she published “Better Life Insurance Letters” (second edition in 1957). In 1960 she published the quintessential biography of Dr. Solomon Huebner, founder of The American College. The Teacher Who Changed an Industry was written to “present Solomon Huebner the man as well as the educator ... writing the story of (this) remarkable man has been a great privilege.” The year 1963 saw the publishing of the first history of The American College, called “A Calling and Its College.” Placing a great value on history, she noted: “His- tory enables us to look with two eyes... and to know why things are as they are. His- tory shows how problems have been solved. History leads us to appreciation of what has been done for us by people who have gone before. From this kind of understanding comes a proper evaluation of what we have today, guidance for the developments of tomorrow and inspiration for us to serve in our times.”
Stone found the time to give back to her New Jersey com- munity, where she lived her entire life. Diverse organizations such as the Bloomfield Board of Education, Phi Beta Kappa, Audubon Society and Bloomfield Cultural Commission all benefitted from her effort and expertise. Other positions
Stone held included serving on the Board of Governors of Northeastern Bible College and as a founding trustee of the Oakeside- Bloomfield Cultural Center. Throughout her life and career, Stone was a speaker before many life insurance, civic and club groups. She was honored with Bloomfield’s Outstanding Citizen Award in 1956, and Fairleigh Dickinson University honored her in 1964 as one of New Jersey’s Outstanding Women. Stone was awarded The Huebner Gold Medal (the College’s highest honor) in 1981.
Mildred Stone certainly enjoyed a life well lived. She reached the milestone of her 100th birthday and in May 2002 was honored by The American College with a Resolution of Congratulations. The Bloomfield Public Library also honored Stone with an exhibit showcasing her life. She laughingly recounted that she never found the right man and was affectionately known as “the
mother of the agents.” She died in November 2002.

The author gratefully acknowledges various works written by Mildred Stone and biographical works that were used as source material for this article. Many thanks to the Women’s Project of New Jersey, the National Women’s History Museum and The American College 1976 Oral History Mildred Stone interview by Marjorie Fletcher.

Originally published in the Spring 2011 issue of The Wealth Channel Magazine, Tune in Turn On: Technology you can use.

The Risk of Public Pension Plans

Karen Eilers Lahey, Ph.D.

Karen is Professor of Finance at the University of Akron, a Charles Herberich Professor of Real Estate, a Fitzgerald Institute Fellow in Entrepreneurship and a member of The American College’s Board of Trustees.

Defined benefit (DB) plans are the predominant type of retirement plan provided to individual workers by public pension plans and, historically, by private pension plans. Corporations have gradually shifted to defined contribution (DC) plans in an effort to reduce the liabilities that DB plans create for them and the increasing requirements for reporting these liabilities on their balance sheets (FASB 158). Leigh Anenson and I noted in the Notre Dame Journal of Law, Ethics & Public Policy in 2007 that the public sector has seen an increase in DC plans in recognition of the continuing problem of underfunded DB plans and increasing demands on state budgets. There are two major differences between corporate and public DB plans. Public DB plans are not regulated by the federal government and there is no guarantee of benefits to employees as provided by the Pension Benefit Guaranty Corporation (PBGC) to corporate DB plans.
From the individual state employee’s viewpoint, the risk of a public DB pension plan is that he will not receive the benefits that he anticipated in retirement. For 10 of the 50 state teachers pension systems, there is no contribution to Social Security. For these individuals, a reduction or elimination of pension benefits would mean that the basic safety net provided by Social Security would not be avail- able. From the viewpoint of governors and state legislators, the risk of public DB pension plans is that the necessary contributions will place such a strain on state funds that other necessary commitments will not be met. Compounding the risk to state governments is the fact that, historically, many
states have failed to make necessary yearly payments to their pension plans.

What do public retirement plans look like? State and local retirement plans offer a wide variety of plans, benefits, contributions, vesting requirements, retirement requirements and funded ratios. Each of the 50 states has different plans, and within each state who is covered and what coverage is pro- vided varies. Public pension plans can include those for teachers, fire and police, judges and other state employees. The largest plans are offered at the state level and include both DB and DC plans. In a DB plan, the government must provide an annual retirement income benefit that is based on a formula using the number of years worked, final average salary and some percentage of that salary. The assets in the plan remain with the pension plan, and it has the responsibility for choosing appropriate investments and bearing the risk of poor selections be- cause the plan guarantees the benefits to employees. A trust fund manager in the form of a politically appointed or member-elected board is responsible for managing the plan and this may imply an opportunity for politicians to influence decisions that should be made on a fiduciary basis. The DB plan’s riskiness is a function of market declines in port- folio investments, an aging work force with an in- creasing number of retirees with higher salaries and insufficient funding from the state.
In a DC plan, the government makes a contribution to the plan and has no further liability for the employees’ retirement income. The trade-off for the employee is that the funds in the plan belong to the individual rather than the plan and can be moved when a job change occurs. Additionally, the individual decides on the as- set allocation for the funds that are needed to provide retirement benefits and may not have sufficient understanding of the process to provide an adequate retirement.
Stuart Michelson, Natalie Chieffe Vickie Bajtelsmit and I provided a base line analysis of DB and DC plans for college faculty at public institutions of higher education as of 2007 in the Financial Services Review. Our sample was based on the largest institution by enrollment in each of the 50 states. A total of 68 percent of universities offered their faculty a DB plan, 90 percent offered a DC plan and 50 percent offered faculty both. The average employer contribution was 7.46 percent and the average employee contribution was 4.92 per- cent, for a total average contribution of 12.38 percent. Unlike corporate DB plans, no federal rules govern vesting in public pension plans. This leads to a wide variety with the average number of years required for vesting being 5.79 years. All DB plans specified the youngest age at which faculty can retire and the average age was 56.65 years. The funding ratio (market or actuarial value of assets divided by liabilities) measures a plan’s financial health, and 79 percent of the funds in 2005 were underfunded. The average assumed rate of return for public DB plans was 8.01 percent.

What are the projections for public pension plans in the future? Authors of the 2008 working paper “The Intergenerational Transfer of Public Pension Promises,” Robert Novy-Marx and Joshua Rauh, found there was a “50 percent chance of aggregate underfunding greater than $750 billion and a 25 percent chance of at least $1.75 trillion (in 2005 dollars)” of under- funding by 2020. Their estimates were based on 2005 state pension funding, asset allocation and estimates of liabilities.
In a 2010 study by the Pew Center on the States, the estimated gap between assets and promised benefits for state public DB pension plans and healthcare benefits was a trillion dollars as of 2008. The estimate did not include the market downturn in 2008, which occurred after the reporting fiscal year for most plans. A grade of solid performers (16), needs improvement (15) and serious concerns (19) was provided for each of the state pension plans as the basis for suggesting that state legislatures should reform their states’ retirement plans. The study argued that the underfunding problem is a result of failure by state governments to provide adequate funding, volatility of pension plan assets, increase in benefits that are not funded, and inaccurate assumptions.
Julia Bonafede, Steven Foresti and Russell Walker provided the 15th yearly report in 2010 by Wilshire Consulting on public pension plans based on 125 plans. This is the same number of plans examined by the Pew study. They estimated that the funding ratios for 2008 have dropped to 65 percent, noting that this result did not reflect the recent market rally that started in March 2009. Asset allocations increased from 65 percent in equities including real estate and alternative investments in 2000 to 66.8 percent in 2009. Lastly, they forecast a long-term return of 6.9 percent, which is below the median actuarial expected return assumption of eight percent.
Mary Williams Walsh, in her New York Times business piece, “Public Pension Funds are Adding Risk to Raise Re- turns,” stated that corporate plans that are well funded are moving their pension funds out of stocks. Public pension plans and corporate plans that are not well funded are adding junk bonds, foreign stocks, commodity futures, mortgage- backed securities and hedge funds to their pension portfolios in the hope of improving their return
According to the Wall Street Journal article “Gurus Urge Bigger Pension Cushion” by Gina Chon, the question of an appropriate discount rate (expected return on investment) has recently received attention because of a proposal by the Government Accounting Standards Board (GASB) to require a reduced rate and asking for comments (Chon, 2010). Sixty-one pension plan administrators and 27 state treasurers expressed opposition. Other GASB issues include calculation and re- cording of pension liabilities by funds as well as a shortening of the amortization period.
Potential solutions to the public DB problems appeared in Chris Farrell’s Bloomberg article, “Pension Envy Vexes Underfunded Public Workers.” He suggested bringing all public employees into Social Security so that there is a floor benefit. Employees could then be offered a supplement 403(b) plan with a low-cost guaranteed annuity. DB plans need to slash their future payouts to levels similar to the income replacement offered by Social Security if they are to become solvent.

The current state of public DB plans predicts a continuing problem that must be solved if employees are to receive a reasonable retirement benefit and state and local governments are going to be able to fund the plans. While it would seem that the solution is to move to DC plans, that is only feasible for new employees and would not solve the problem of current liabilities of these plans. Both public and corporate retirement plans need to be examined at the federal and state levels if future employees are going to be able to retire in a financially secure manner.

Originally published in the Spring 2011 issue of The Wealth Channel Magazine, Tune in Turn On: Technology you can use.

You Don’t Need Compliance Approval to Listen

Robert Shore

Rob is the CEO of shorespeak, LLC and Wholesaler He coaches financial services distribution professionals and publishes I Carry The Bag...the official magazine of wholesaling.

Since the dawn of the age of social media a short five years ago, financial professionals have been analyzing their potential entry point into this new world of connectivity, transparency and conversation. Most are still on the sidelines. As evidence of the this fact, in October 2010 at the Schwab IMPACT conference in Boston some 1,600 financial professionals gathered for a session with the co-founder of Facebook, Chris Hughes, and the co-founder of Twitter, Biz Stone. At the end of the session, in a live poll of the audience, they asked two questions: 1. How many members of the audience were
using social media as part of their practice?
2. How many members of the audience, after listening to the panel discussion that just took place, would start to explore using social media for their practice?
In both cases less than 10% of the hands in the room were raised.
So, why is it that financial professionals are so reluctant to step out into the social media world?
One reason trumps all others: compliance. Most governing bodies frown on the social media engagement; others ban it outright.
For example, FINRA views participation in online conversations the same as public appearances, and blog posts as advertising. Those wishing to make their businesses present via the big three platforms of LinkedIn, Facebook and Twitter need to do so while trying to navigate both the choppy compliance waters and the simple fact that deter- mining an entry point from which to drink from the social media fire hose is overwhelming at best.

How do you select an entry point for social media? When asked the same question at the conference both social media leaders had the same suggestion: Start by listening.
Social media is comprised of three distinct levels of participation:
• Listening: wherein your goal is to simply consume the enormous amount of information that is available to you via these social media channels.
• Talking: when you choose to join in the conversation and offer your opinion or perspective through comment, tweet or post.
• Collaborating: has you contributing to a body of work next to others. Think Wikipedia.
While talking and collaborating might be difficult to compliantly navigate, the important news is that you simply don’t need compliance approval to listen. Add to that the fact that listening via the technology described here is free, and you have no reason not to make this your point of entry.

Why listen?
Our research has led us to the conclusion that the sales process in a post Great Recession world is different than it has ever been. Most prominent among the differences is that your prospects (and even your clients) are now prepositioned to not trust a thing that you say. And that’s not surprising. Our general suspicion of politicians, bankers, Wall Street and government has never been higher.
With that in mind, we need to establish a more expeditious path to a foundation of trust, and we need to build the trust root system as deep and strong as possible—and that’s where listening comes in.
We’ll use the technology to find valuable insights and/or common ground from which to either start building, or improve upon, our relationships.
Here’s an example: Recently I was preparing for a speech in front of a large broker-dealer. As part of my preparation I started to listen to the available information and insights that I could glean about the firm. Among the pieces of information I picked up was that the CEO was a member of the National Speakers Association (NSA). In fact, he was well thought of in his Atlanta chapter and regarded as a fine speaker. As luck would have it, I am also a member of the NSA.
When we met do you suppose that our mutual connection through the NSA expedited the formation of trust in the relationship? You bet it did.

What are you listening to?
The best-in-class financial professionals are always great students of the business. As such, they take the necessary time to stay informed and consume as much information as necessary to keep them on the leading edge of their craft, listening to:
• Competitors • Centers of influence
• Strategic partners
• Product partners
• Clients • Prospects
• Industry information

How to listen?
We always recommend that our clients set up an RSS reader to access all of this information. Think of an RSS reader as a personal listening outpost. You tell the reader what you want to get information on and it collects that data from across the Internet. By having the reader do the work you are no longer repeating the process of clicking on bookmarks and rifling through sites in search of interesting content every day.
The most popular reader, and one of the easiest to use, is Google Reader located at
From this one place, you can access your favorite dailies, periodicals, trade journals, etc. If they have an RSS feed (and most do) you get the information served to you without you clicking through endless web pages to find it. In addition, you’ll be able to get posts from your favorite columnists, commentators or bloggers within hours—no need to go to their site to get it.
Using Google Reader also gets you a direct channel to in- formation as it develops from social media sources like Twitter and LinkedIn.
In the case of Twitter, simply go to Twitter Search at search. and key in a search term. For example, say you have a need to follow an industry, consumer brands, and a large player in that industry, Coke. Type in Coke and see real- time results of what people are tweeting about Coke. With the click of the RSS button you can save that search and let your personal listening outpost, aka Google Reader, take over. It will deliver all of the tweets that develop mentioning Coke. Every day, all day.

Using this same example, you can now search for Coke in- formation:
• Via all blog posts at Google Blog Search: blogs
• At over 5,000+ news outlets via Google News: google. com/news
• By subscribing to the Coke company page on LinkedIn to learn about who is new to the company or who has recently departed at
• Directly from Coke by going to their corporate communications page at www.thecoca-colacompany. com and clicking on RSS
• With Google Alerts at

Repeat this process for any and all people, industries, key- words or topics on which you want to stay abreast. Once set up, your stream of information to your outpost will continue until you tell it to stop.
Want to get step-by-step instruction on setting up Google Reader? Visit our site at reader/.
While the next evolution of social media may or may not include the same big three players (Facebook, Twitter and LinkedIn), what is certain is that the immediacy, transparency and hyper-connectivity of communication will not suddenly recede. And in a world where the need to stay informed conflicts daily with the constraints of available time it is critical that financial professions find a way to access this information in the most efficient way possible.
While you may still be trying to crack the social media code and post your first tweet or send your first poke, use the avail- able technology to stay informed and get the upper hand— just start to LISTEN.

Originally published in the Spring 2011 issue of The Wealth Channel Magazine, Tune in Turn On: Technology you can use.

You Can Make a Paperless Office Happen

Donald F. White, CLU®, ChFC®, AEP

Donald is CEO of Treasure Coast Financial Services in Stuart, Florida. He is an Excalibur Knight of the MDRT Foundation and a current Top of the Table qualifier.

Just 10 years or so ago the idea of having Adobe Acrobat on a PC was cutting edge. Today, Acrobat is on version 10 and a printer option on virtually every machine. Yet, in spite of the technology avail- able, the vast majority of life insurance agents and financial planners cling to their file cabinets like they are the Holy Grail. But I’m here to tell you that going paperless is not only possible, it is really no longer optional.

My story
It was 2002. Filing and keeping track of mountains of life insurance application requirements, trade confirmations, investment statements, tax documents and other account paperwork was becoming overwhelming. Our worst nightmare was compliance audits. They normally took all day and we were constantly written up for one deficiency or another because of a lack of paperwork. We generally had it all, but with one person filing one way and another person filing another, we just never knew for sure exactly where it was. Paper documents consumed 20 four-drawer file cabinets and wasted more than 150 square feet of our office space. Additional staff was going to be needed just to handle the paper- work! Finally, I woke up and said, “There has to be a better way.”
So, that year we decided to build our own building, with one condition—no file rooms. We were going paperless.

Ditch the paper
We began drawing up the plans for our building. I decided biting the bullet and investing in scanning and electronic filing software would save us time, a bunch of money and create a more efficient work environment. First, we invested in desktop scanners. Then we purchased an easy-to-use electronic filing software system called Cabinet NG, which provided a simple way to categorize our electronic files in much the same way I would have liked my paper files to be organized.
Once we had the software and the scanners in
place, our initial commitment was to eliminate any new paper. Every new application, account statement, new account form, whatever, was scanned and filed in Cabinet NG. There was a learning curve, but in a few weeks, my staff was used to scanning all documents and then shredding the paper copies. But what were we going to do with the file drawers full of old paper? The truth was that appeared to be our greatest challenge. With construction on the new building without a file room well underway, it was time to tackle the old stuff.
At this time, my assistant, Kathy Walsh’s daughter was in college and we asked her if she would work for us that summer scanning and reorganizing our paper files into electronic files. Working closely with her mom, Jennifer methodically reviewed, scanned and electronically filed every piece of paper. It took a couple of months, but by August she was done. Every cabinet was empty. Save for current cases not yet to the filing stage, we were a paper- less office.

Our first audit—surprise, surprise!
A couple of months after we moved to the new office (circa 2003), we had our first compliance audit. The auditor had never conducted an audit where the records were filed electronically. What normally took a full day was over in two hours. Better yet, we had zero deficiencies.
A while later the head of compliance called me. He was thrilled with the efficiency of our system, all e-mails and client communication handled and filed in one place. No more sticky notes. But he was also concerned about security. How were we backing up? What assurance could I provide that if the system crashed we could get back up and running? I called my systems management consultant and he recommended a double redundant backup. So, every night we backed up to a tape drive sys- tem, and every week we download our entire system offsite to an online backup service provided by Iron Mountain. In 2003, this was all new ground. Today most B/D and insurance companies understand electronic filing, but then we were plowing new earth.
The compliance people signed off on our backup system but the true test came a year later when Hurricanes Francis and Jeanne hit. For a week after the eye each storm hit our town communications were nonexistent. The phones were in and out, and the electricity was out for a full week. Many offices and homes were completely destroyed. Water and paper files do not coexist very well, but once our phones were back and the power restored, we did not skip a beat.
On another occasion our server crashed. Everything on the server was gone. Two days later we had a new server, and an hour after that everything was restored from the backup tapes.

Results: effectiveness, efficiency, professionalism Today we have a seamless system of scanning, backing up and shredding paper. Our client files are organized in Cabinet NG. On top of the electronic file cabinets, we have an automated database through Advisor’s Assistant (AA) and an online as- set tracking system through Albridge. These three tools have changed the way we do business. Albridge gives us the ability to consolidate client accounts. AA gives us a way to save correspondence, make notes, track our calendars and manage client information online and through a local network. Everything in our office is internally networked. So anyone in the office can see my calendar, access client accounts and manage files.
Going paperless has not only promoted a more efficient and effective means to manage client accounts, but has made us much more professional. Now if we could just get the insurance companies into the 21st century.

Originally published in the Spring 2011 issue of The Wealth Channel Magazine, Tune in Turn On: Technology you can use.

Tablet Computers Coming on Strong

Matt Henry

Matt is Consultant to The American College on The Wealth Channel. Since 1995, he has helped clients, from start-ups to Fortune 500 companies, effectively and responsibly use mobile and web technologies to better sell to and service their clients. matt.henry@ theamericancollege. edu

The ability to consume and present multiple forms of content on a portable, connected device, as well as access a depth of productivity and other business-related apps, has led to the emergence of the tab- let computer as a legitimate business communications and presentation tool. Financial services and insurance businesses have led the way, with some estimates suggest- ing that more than 35 percent of all busi- ness usage for tablets occurs within those industries.
Tablets provide inherent benefits over other presentation devices. Lighter and more portable than laptop computers, tablets still have the capability to present written, visual and video-based documents quickly and clearly. With more than 60,000 native iPad apps available, a figure that should double this year, financial professionals have access to a number of productivity, content and presentation tools.

Apple ipad
Apple has clearly led this trend, with more than 15 million iPads sold in their first year of launch. The successful launch of the iPad 2, with some estimates at one million in sales on its first day, shows that Apple is still a firm leader in this market. The sec- ond-generation iPad offers a number of notable up- grades from its top-selling predecessor. It includes a faster processor and more memory, improving performance, particularly with regard to the viewing or presentation of graphics-intense or video- related content. It has multiple cameras to allow for full-screen video conferencing. The iPad 2 also has a slightly different physical design; it’s lighter and thinner than the original iPad.
The launch of the iPad 2 has brought with it a flurry of new accessories and add-ons, including a simplified and more seamless way to connect to presentation screens and projectors. A variety of keyboards are available as well, making data input on the device more practical. Additionally, Apple’s distribution deal with Verizon ends the AT&T monopoly and allows users a broader choice of connectivity plans.
This combination of new features and accessories will enhance the iPad’s ability as a tool for financial professionals to communicate and present to cur- rent and prospective clients. The device, best known for its entertainment purposes, has evolved into a functional and effective business tool.
Other manufacturers have begun to capitalize on this tablet trend as well, and this year will see the launch of multiple competitive devices.

Blackberry playbook
Late in 2010, Research in Motion (RIM), the manufacturer of Black- Berry smartphone devices, announced a launch for the BlackBerry Playbook, intended to compete directly with the iPad and Android tablet devices. The Playbook is expected to first gain traction among cur- rent BlackBerry users, who will enjoy its synchronization capabilities.
The Playbook has several notable differences from the iPad, including a much smaller size (7 inches versus 9.7 inches for the iPad). The Playbook also boasts a faster processing speed than the iPad, and it will fully support open Web standards such as HTML 5. Perhaps most importantly, the Playbook supports Flash video and applications, allowing access to a richer variety of Internet-based content. This enhanced access to Web content will help to mitigate the relatively small number of apps available on the Blackberry platform, currently only 20,000 but expected to more than triple by the end of this year.

Android tablets
Led by the Samsung Galaxy Tab, the Android-based tablet market has significantly impacted Apple’s previous near-monopoly on the tablet market. During the first three quarters of 2010, the iPad represented more than 90 percent of all tablet sales, a number that fell to around 75 percent during the fourth quarter. Unlike the Apple and BlackBerry tablets, the Android operating system developed and supported by Google is open to multiple manufacturers. As such, a long line of companies, including Motorola, Asus, LG and Dell, have announced their own Android-based tablet for 2011.
The variety available among Android devices is expected to further erode Apple’s dominance in this market, resulting in more choice among financial professionals. Like the Playbook, Android devices support open Web standards and Flash video/ applications, an issue that Apple will need to address to keep its market share.
Tablet computers have proven to be an effective tool for financial professionals to stay current on important industry issues, to communicate with clients and prospects, and to enhance general business productivity. The growing diversity in this market, once controlled by Apple offers professionals new choices in features, functionality and available apps that will help them better achieve their business goals.

Originally published in the Spring 2011 issue of The Wealth Channel Magazine, Tune in Turn On: Technology you can use.

Joining the iPad Revolution

Mike Scovel, MSM, CLU®, ChFC®

Mike is Senior vice president in charge of the west central zone at New York Life, and is a member of the Presidents Circle at The American College.

Laptops—They are so 1990s! What are you doing to distinguish your agency as cutting edge and relevant in today’s market place? A step in the right direction might be as simple as a $500 investment in your technology program within your firm. I am talking about investing in an iPad or Android tablet to demonstrate that you are connected to what’s current and hip. Laptops are what the Gen Y’s parents used. When a touch pad is pulled out during a meeting with a prospect, the typical first reaction is “How do you like it? How does it work? I want to get one of those myself someday.” Instantly, you have gained a level of sophistication beyond the typical yellow pad and pencil salesperson. Clients perk up as they realize that you are in the know on the most effective, up- to-date technology for building client relationships and maximizing space.
What can you use an iPad or other touch pad for in your current business practice? It’s a great pro- gram to show the typical sales slides you use when pitching your clients or prospects. Using the iPad as the display vehicle versus using laminated slides or a laptop is much more powerful because of the sharp display and size. Most companies’ sales talks are set up as PowerPoint presentations or PDF files, which work fabulously on the iPad and bring a new flare to the presentation. The quick shift to the Internet to get data from the company Web site or third-party confirmations takes just seconds, as the switching from program to program is almost instantaneous. Many other applications can be just as quickly accessed, such as financial calculators and note-taking tools that make fact finding fast and transferrable. Company-created videos can be readily available to promote a process or product and add a different element to your sales presentation. All together, the visual combinations you can use to show opportunities to your clients become limitless and give a new face to the old sales process.
The first step in incorporating an iPad or similar device into your work life is knowing what model to purchase by understanding the differences between the multiple versions on the market. The models come with different storage capacities and an ability to use 3G service to connect to the Internet in areas where Wi-Fi is not available. Models range from 16 to 64 gigabytes of storage. If only used for business, the 16 is probably be fine, but if you want to use an iPad for a movie player while traveling or on personal time, or you have a large number of company- owned videos to load, these items use up more storage. The other option when purchasing a touchpad devise, the ability to add 3G service, is a business essential for visits with your clients away from the office. 3G costs approximately $25 a month.

If you already have one or plan to purchase an iPad soon, here are some notable programs (apps) you might find effective for use in the financial services industry:
• Goodreader – This file management program allows you to bring in Word, Excel, PowerPoint and numerous other data formats and disperse them to other programs once in your iPad.
• Keynote – This program becomes your presentation program. Download your company sales talk into this program and you will have a professional way to walk your clients through your process.
• AudioNote – This must-see application is an incredible tool for taking notes, either by typing or in free hand while at the same time fully recording the entire conversation in audio format, which can be saved to your files back at the office.
• PowerOne – This financial calculator with hundreds of financial calculations is both easy to work and easy to demonstrate with your clients. This program can be mastered in minutes and provides effective computations that even your clients can use.
• Notebooks – This might be the most critical program to organize one’s thoughts into an effective reference library to keep all creative ideas, client information, personal information and business models in one spot. Use it to compile the key initiatives you plan on implementing in your business.
• Neu.Notes – This free program creates an electronic white board that can be projected to show everything you are writing on the screen. Just imagine the impact of replacing the white board with an electronic tablet you hold in your hands; it removes the need for a physical white board or easel at your future meetings.
• Priority Matrix – Based on well-known author Steven Covey’s priority matrix that divides tasks into what’s urgent, important, not important, and so on, this program is a great way to organize your time and ensure you are devoting enough time to the important issues in your business.
• World Cultures – This clever program allows you to look up what is socially acceptable based on your client’s culture or community. It will keep you in the know on appropriate greetings, communication style, personal space habits, eye contact rules, gender issues and taboos, to name a few. For example, if you had
a meeting with a potential client from Ireland, you would want to know that you should avoid referring to the Republic of Ireland as part of the United Kingdom, or that “Mick” is a derogatory term and a major insult to an Irishman.
Of course, everyone has a little non-urgent, unimportant time on their personal priority matrix. For those moments, check out Word With Friends. It’s basically Scrabble® for your iPad.
To sum up, I am suggesting we all bring our technology into the next decade. I have chosen the iPad to be the tool on which I run my business, but there are many options. Do your homework, select the process you can most quickly in- corporate into your business model and bring your business into 2011!

Originally published in the Spring 2011 issue of The Wealth Channel Magazine, Tune in Turn On: Technology you can use.

The American College Has Gone Mobile

I am from Generation X and used to think Atari was fascinating technology. I grew up in the infamous era preceding computers, a time when I used to knock on my friends’ doors to see if they could come out and play. In high school, we would talk on phones that were connected to walls, and we even had one that was a rotary. In college, everyone took notes with pen and paper and completed essay exams in those
little blue books. Today I watched a lecture on my phone while waiting for my train to arrive. Oh, how the times have changed.
By the way, this lecture was free and from Harvard University. Yes, Harvard—because we live in the Information Age where knowledge is shared freely and immediate access to information is easier than ever. Educational institutions now have the opportunity to allow their students to access courses online, interact with other students virtually and learn without physically attending class on a cam- pus. Having the ability to take practice quizzes, use discussion boards and download content has made learning not only easier and more engaging but, ultimately, more powerful. Technology has revolutionized the idea of what can be gained through homework and learning outside of the classroom.
Speaking of revolutionizing technology, iTunes U was released in 2007, and it has radically changed our ability to distribute knowledge over the Inter- net. Apple made the decision to allow institutions to use iTunes for free management and distribution of content. This is a game changer in terms of how educational institutions can teach and reach their students. We can now use multiple forms of instruction and provide options to students that have never been available to them before. And think about this: Some content just requires passive learning, meaning that teachers must explain to students the concepts and information they must understand before they can move on to the next stage of learn-ng. Obviously, this takes time, and in the past that always meant classroom time. But imagine that a student listens to that required lecture before attending class. Now the very important face-to-face time between teacher and students can be spent using other, more hands-on learning strategies such as debates, dialogue, brainstorming and Q & A. Online games, simulations and virtual worlds, which provide an engaging, interactive environment, are also changing the way students are learning. For example, Penn State now requires academic advisors to be available for meetings within the virtual world of Second Life (a free 3D virtual world where users can socialize, connect and create using free voice and text chat). While this may seem like just fun and games, people learn in many different ways—that’s the point. It has been researched, proven and written about time and time again that students retain more information with these strategies.
To reinforce my point, I like to reference a graphic originally developed by Edgar Dale, a U.S. professional educator. His Cone of Learning illustrates that as a student progresses into more engaging learning activities, the likelihood of retaining knowledge is much greater. And isn’t this really our primary goal as educators, for students to retain as much knowledge about a subject as possible? As convenient as it is to access educational materials online, we have until recently always needed access to the Internet through our PC or laptop to use it. Fortunately, there’s now an app for that. In the spring of 2010, Blackboard, Inc. released an app for Apple and Sprint products that provides Internet access via mobile devices. The American College is on top of this cutting-edge technology. Just one month after Blackboard’s app was re-
leased, we downloaded it to our test environment and began creating courses for use with the application. The engagement and convenience of online learning is now completely mobile for our students.
At the same time, we partnered with Apple to distribute our content through iTunes U. In addition to providing audio and video content, we also are creating standard downloadable ebook textbooks viewable on most ebook readers.
So, back to that lecture I watched from Harvard University. I downloaded it for free directly to my iPhone. Maybe it’s not the most ideal viewing device, but it’s definitely the most convenient. And that’s the goal, to give students the option to learn at the place, time and method of their choosing. Mobile learning!

Originally published in the Spring 2011 issue of The Wealth Channel Magazine, Tune in Turn On: Technology you can use.

Leveraging Technology to Build Customer Value in 2011

Matt Henry

Matt is Consultant to The American College on The Wealth Channel. Since 1995, he has helped clients, from start-ups to Fortune 500 companies, effectively and responsibly use mobile and web technologies to better sell to and service their clients. matt.henry@ theamericancollege. edu

Technology continues to grow at a rapid pace, not just in terms of speed and availability, but also in user adoption. The growth of social media and the pervasiveness of mobile devices suggest that the financial services industry will continue to see change at an even faster rate.
Two key areas of current and future technology growth provide real and immediate opportunities for financial professionals.

Mobile devices
The fastest growing segment in consumer technology, smartphones are expected to represent 30 per- cent of mobile devices by the end of 2012. Added to the sales of the iPad and its competitors, there will be more than 100,000,000 mobile smart devices actively used in the US alone.
Carriers, agents and advisors have recognized this trend, and they have begun to launch new initiatives to take advantage. While some of the following options provide better opportunities than others for financial services professionals, it is important to understand each.
• Mobile ad banners, similar to traditional Internet banner ads, appear on the phone’s screen along with mobile web and application content. Most current mobile advertising is geared towards music, entertainment and games, aligning with the content most readily available via mobile device. As mobile financial and insurance transactions evolve, there will be more relevant opportunity for financial services professionals.
• App development refers to customized applications, or apps, that are either preloaded by the device manufacturer or downloaded by the user. With more than 300,000 apps available for the iPhone, and countless others available for BlackBerry and Android devices, it can be difficult to differentiate within the app world. Many carriers and independent agents have, successfully launched apps that range from simple to highly complex and interactive. The American College has just introduced an app for The Wealth Channel. Visit the App Store in iTunes now.
• Mobile web development is the development of a mobile version of a standard Web site. Set to display properly on the smaller phone screen, the mobile Web site will typically have a streamlined menu and limited content. Mobile web sites are different from apps in that they are platform independent and will run on an iPhone, BlackBerry, Android or any device with a web browser.

Social media
Social media has become a catchall term to de- scribe the proliferation of professional networking and personal interaction sites and platforms that have emerged over the past several years. Three of the most important, as many are already aware, are Facebook, Twitter and LinkedIn.
• Twitter ( is a free service, with 150 million users, that allows the broadcast of text-based messages limited to 140 text characters to specified followers. And while corporate policies and legal restrictions limit some uses by financial professionals, Twitter has proven effective as a way to share information among peers and clients. It can also provide consumers with a direct line of feedback to a carrier, agent or advisor.
• LinkedIn ( is a professional networking site that facilitates discussion and interaction between specialized and industry groups. With 100 millions users, LinkedIn has evolved into a robust set of like-minded communities that have access to the experience and knowledge of the other participants.
While there are restrictions related to the use of LinkedIn by some financial services corruptions, active participation in LinkedIn forums can provide advisors and agents with a broader, deeper knowledge of industry issues and real-world suggestions for problem solving, which can help to create more customer value.
• Facebook ( is an online community that allows users to post immediate information to their group of friends. With 500 million+ users, Facebook is the undisputed leader in the social media world. Financial professionals, however, have struggled with how to include Facebook as a part of their marketing efforts.
Continuing advances in technology are inevitable. The carriers, agents and advisors that succeed will be those who balance the use of this technology while remaining focused on providing customer value.

Originally published in the Spring 2011 issue of The Wealth Channel Magazine, Tune in Turn On: Technology you can use.

Trading the Golden Years for a Platinum Engagement

Larry Grypp, CLU®, ChFC®

Larry Grypp, CLU®, ChFC® Larry is President of the University of Cincinnati’s Goering Center for Family and Private Business and Co-founder of the Center for Executive Transitions.

As veteran financial advisors, many of you have the opportunity to counsel clients on various major life transitions—starting a new family, selling a business or planning for the wealth transfer of an estate. You may even have experience in managing the financial elements of another profound client transition: retirement.
But when the lens turns on our own preparation for this transition we often find that we have not done the due diligence necessary to make the right decisions for our families, our businesses and our- selves.

It’s time to take those steps
I spoke to the Quarter Century attendees at the Million Dollar Round Table (MDRT) annual meeting in Vancouver last year and we reviewed aspects of their succession and transition plans as they made decisions on whether they would rev up, slow down, step down or sell their practices. For financial services professionals, there are four distinct succession possibilities:
• Continue working—or “die with your boots on in the saddle;”
• Sell your business to someone in your current practice, agency or broker dealer;
• Sell your business to an outside party; or
• Develop and sell an institutionalized business.
While each of these approaches has benefits and drawbacks, the three selling options normally take years to complete—from initial planning through final integration. Even with an interested buyer, structuring the deal, identifying the management and leadership of the successor firm and ironing out terms of client management takes time. It’s a complex process. If you are considering your business succession, Mark Tibergen and Owen Dahl authored an excellent book that covers these topics and more. “How to Value, Buy, or Sell a Financial Advisory Practice” emphasizes ways to maximize the value of a practice and offers vital information for both buyers and sellers.
However, there is an entirely separate consideration that financial advisors, or any business professionals, must consider as they plan their succession transition, one that receives strikingly little attention: your personal transition beyond a traditional career.
The first element we often consider when faced with the prospect of our own retirement is, of course, financial. Establishing a secure foundation to see us through our golden years has likely been a primary focus of our retirement planning, if not our only focus. But another critical element to a successful retirement transition lies beyond that base level of financial security in a sense of purpose.
During my 38-year financial services career I would suggest that people plan, save and invest, telling them, “You must be prepared for three de- cades of life after your traditional career.” Then, on March 1, 2008, came the realization that I, myself, had three decades of life ahead. What would I do? Who would I be?

What will you do? Who will you be?
These are more challenging questions than many realize. In my own situation, I knew that a future of just leisure was not a viable solution. After all, I had been in a leadership role in business for de- cades. To suddenly not have a role to play was deeply unsettling. I felt empty, even resentful. I did not even like being called retired. But that’s what I was, and it was up to me—as it is up to each of us—to define the next period of our lives.
I realized that I needed to engage in something fulfilling, work that allowed me to spend time with my family but also to give back to the community, whether that community was down the street or around the world. Uncovering the specifics of meeting that need took focused work and guidance, including deep discussions with those who had walked the path before me.
Much of the research suggests that transitions to the third quarter of adult life are most effective if begun while in your traditional career—ideally during the last two or three years. I did not earnestly begin the process until I was already transitioned out of my traditional career, but, in working with others, I have found the process is far less tumultuous if you plan for the next stage of your life before you embark upon it.
During my transition, I met and began working with Bob Parsanko, a business coach. While describing my disciplined process and goals in my next life phase, Bob indicated there was an opportunity to assist others like me. Together we founded the Center for Executive Transitions to address this powerful need among business owners, executives and professionals for guidance in successfully shaping life after retirement and creating encore careers.
Many baby boomers realize as we approach this next phase that we have a need to understand how to live with purpose, joy and contentment. Some retirees, particularly men, have a difficult time sculpting a new self-definition entering retirement. For many, the very concept of retirement is profoundly distressing. In fact, the highest suicide rate by far is found
among Caucasian men aged 65 and older. George Eastman, founder of Eastman-Kodak Company, ended his own life just two months after his retirement. He left a note that read: “My work is done, why wait?”

We don’t think that is a viable solution to the retirement question?
The true solution is to identify your purpose as you transition into the third quarter of your adult life. Whether there is something that you WANT to accomplish, NEED to accomplish or that you are CALLED to accomplish, this purpose holds the key to your fulfillment, and to your ability to leave a lasting and meaningful legacy.
There is no one solution for everyone—nor should there be. Your retirement transition and the purpose that you find are as unique as you are. The beginning place, however, is simply to start asking questions. If you want more ideas and suggestions, consider visiting The Center’s Resource Library at There you will find articles, websites and movies—along with the top 12 books that we have read on this subject.
No matter what, know that whether you are on the brink of retirement or considering it within the next five or 10 years, if you want to make the most of this platinum opportunity, the time to begin is now.

Originally published in the Spring 2011 issue of The Wealth Channel Magazine, Tune in Turn On: Technology you can use.

Innovative Strategies to Enhance Charitable Giving

Jerry Borrowman, MSFS, CLU®, ChFC®, CAP®, LUTCF

Jerry Borrowman, MSFS, CLU®, ChFC®, CAP®, LUTCF Director of Advanced Markets for the Penn Mutual Life Insurance Company at Cambridge Financial Center in Salt Lake City, Jerry is also a member of The American College Alumni Association Advisory Board of Directors.

The classes I took live at The American College to qualify for the Chartered Advisor in Philanthropy (CAP®) designation are among the most meaningful of my career because of the potential to use life insurance products to help worthy causes. Plus, charitable giving devices can often reduce a family’s estate tax burden with tax-favored replacement of donated values to heirs using life insurance. I find philanthropy to be an intriguing and exciting aspect of our business. Returning home, I made an effort to reach out to charities to share ideas on how to build their endowments only to find that many charities are unaware of the power of life insurance and annuities to help them achieve their goals. In some cases fund-raising professionals are even suspicious of our motives and worried that planned gifts will reduce much needed current gifts. Since those early days I have moderated my approach to first provide basic training to key individuals at the charities on how life insurance and annuities can help build the endowment while providing excellent planning opportunities for clients. Because of that I have been invited to speak at conferences in several states on “10 Innovative Strategies to Enhance Charitable Giving.” It is gratifying to hear the “a-ha” moments in the group as individual fund-raising professionals, attorneys and accountants catch the vision of what we can do to help their best donors and clients. Two of those strategies strongly illustrate the flexibility of life insurance as part of the planning process.
Let me start by saying that these ideas will only have traction with well-established charities that have a dependable current cash flow that provides for their staff and charitable needs. Planned giving means that the benefit of the gift will often be received at a future date, most often to help build an endowment fund. Charities must be patient when courting large gifts to fund these programs, so it’s important that you acknowledge to your key contacts at the charity that you are aware of their current needs for donations, and that the ideas you share will supplement what their donors are already doing rather than replace it.

Using life insurance to magnify a charitable gift
Life insurance may provide a charity with a depend- able rate of return on donated funds that mature as a death benefit. You should be aware of two tax regimes in considering this strategy:

1. Charity owns the policy: A client donates money to the charity, which then pays the premium on a policy owned by the charity on the life of the donor. This provides a current tax deduction to the client, but he or she has no ownership rights in the policy. The charity is the beneficiary and has access to policy cash values during the life of the donor. Some practitioners suggest that the charity should take partial withdrawals or dividend surrenders, not policy loans, as policy loans may create Unrelated Business Taxable Income (UBTI), which creates unnecessary taxable income. State insurable interest laws may restrict a charity’s ability to make the initial purchase of life insurance on the life of a donor. In that case most practitioners feel that it is appropriate to have the individual apply for the policy on his or her own life and, once in place, donate the policy to the charity, because insurable interest applies only at the time of application.

2. Client retains ownership: In this case, the client names the charity as the beneficiary and does not receive a current tax deduction because the policy owner retains all interests in the policy, including the right to change the beneficiary. At death the proceeds will be paid directly to the charity free of both estate and income taxes (because of the unlimited charitable deduction available to estates). This strategy allows the policy owner to retain access to policy cash values just in case he or she needs them, but to benefit a charity at death.
Giving a charity an interest in a life insurance policy is a generous act on the donor’s part. In some cases the rate of return on policy values may be so attractive to a charity that it wishes to add additional funding to the policy beyond that contributed by the donor whose life is insured. As long as the charity has permission to do so from the donor, this is a generally accepted practice. This may be a great way for the charity to increase the return on its money, particularly in the current environment of low interest rates on certificates of deposit and other fixed income accounts. Consider annual premiums and single premium life insurance policies using whole life and guaranteed no-lapse universal life policies.
For example, suppose a 60-year-old male client wishes to provide a $1 million endowment to his alma mater at death. He can do this a number of ways using life insurance:
• $31,471 equals annual premium for whole life insurance. In this case the initial death benefit of $1 million grows to $1,649,584 at age 85 and the cash value grows to $651,000 (based on 2011 dividend scale, which is not guaranteed. This provides an annual internal rate of return of approximately 3.5 percent
on cash value and 5 percent on death benefit at life expectancy), which is very favorable in today’s market. The charity has use of policy cash values as needed.
• $14,304 equals annual payment needed to guarantee a no-lapse universal life policy. This contract builds nominal cash value, but the internal rate of return (IRR) on death benefit is very positive.
• $8,879 equals annual payment needed to guarantee a no-lapse survivorship index universal life policy assuming a spouse of age 60. Again, cash value build is nominal ($270,844 at age 85, decreasing thereafter), but if held to the joint life expectancy, the IRR on
death benefit is more than 7 percent guaranteed. That’s a remarkable benefit in today’s economic climate.
Think of it this way: A client is able to donate $8,879 per year to a favored charity. Certainly the charity will be grate- ful, but they’re not likely to name a building after him. But that same tax-deductible $8,879 used to pay the premium on a survivorship policy is guaranteed to result in a $1 million endowment. Not only will that provide great recognition for the donor’s family, but it also will provide an ongoing stream of income to the charity in perpetuity, if desired. That’s the power of life insurance to help a charity build its endowment program.
But it’s not the only way. A charity may wish to acquire life insurance on the life of a well-established donor whose death would adversely affect the charity—most likely a member of the Board of Directors or fundraising committee. If the char- ity has the means, it could acquire $1 million of protection on the same 60-year-old male using a single premium policy:
• $470,000 is the single premium needed to fully fund a whole life policy. This creates an immediate death benefit of $1,004,581 and an end-of-year cash value of $447,849. The cash value at the end of year two
is $474,673, more than the initial premium. If held to life expectancy at age 85 the cash value would grow to $1,684,344 at the 2011 nonguaranteed dividend scale, and the death benefit would more than double to $2,007,917. Even at a zero dividend rate, the guaranteed cash value would grow to $804,993 with a death benefit of $1,004,581. The IRR on this approach currently exceeds 5 percent by year 10, demonstrating a favorable way to reposition charity assets to increase rate of return while providing a death benefit.
• $219,169 is the single premium cost of providing $1 million of guaranteed no-lapse universal life.
• $160,439 is the single premium needed to fully fund a guaranteed no-lapse index survivorship universal life. This provides an IRR in excess of 7 percent per year guaranteed. The $160,439 is guaranteed to mature for $1 million with no market risk.
As you can see, life insurance may be a great way for a charity and its donors to provide guaranteed returns on their assets.

Using SPIA/Life to provide increased current income
How do you provide a 75-year-old with 6.1 percent income guaranteed for life? You do it using this strategy, which also may be used by a charity to increase the real return on its existing cash assets. This is an idea I learned about from John Homer, CLU®, ChFC®, a great local agent who is a leader in MDRT, as well as an advocate for advanced training in the industry. John has used this idea to provide enhanced cash flow to his clients, as well as to help charities realize a much greater return on their existing assets. He wrote an article for another publication entitled “The Perfect Storm for Charities.” As you may know from watching the movie or reading the book The Perfect Storm, there must be three conditions for a perfect storm to form (the kind that has incredible force of unusual magnitude). In the case of the charitable perfect storm, the three elements are: 1) reduced contributions, particularly from wealthy donors; 2) increased demand on charities because of lost jobs; 3) lower return on existing assets because of the historic low interest rates being paid on certificates of deposit and other interest bearing accounts.
How can financial services professionals help? Consider two products sold by insurance companies: life insurance and life income immediate annuities. Used in combination they can provide some great benefits. Consider an example:
A 75-year-old male in excellent physical condition purchases a single premium immediate annuity (SPIA) with no refund from Insurance Company A. The current payout is $103,000 per year guaranteed for life (10.3 percent of the original premium). This same client goes to Insurance Company B and applies for a $1 million guaranteed no-lapse universal life policy. He is approved at an annual premium of $42,000. The difference between these two numbers ($103,000 - $42,000) is $61,000 per year. In other words, the client has taken a $1 million asset that may be earning 1 percent to 2 percent in a certificate of deposit and replaced it with a guaranteed net life- time income of $61,000 while his heirs or charity will receive $1 million income tax-free from the life policy at his death. That’s the same as providing 6.1 percent income for life. And, once approved, it is risk free (benefits are paid based on the financial strength of the life insurance companies that issue the annuity and life insurance policy).

Annuity payout versus life insurance premium
Here is a table of sample values. This table assumes an insurable client who purchases a guaranteed no-lapse universal life policy from a $135 billion highly rated mutual insurance company, as well as an annuity from a second carrier. Rates are based on November 2010. Actual rates and payout will depend on the medical insurability of the client/donor, payout rates in effect at time of purchase and companies selected.

As you can see, this presents a great opportunity in the right circumstance, but there are limitations. For example, once the strategy is initiated there is no cash available except for the annual net income, because 100 percent of the premium used to purchase the life income immediate annuity is nonrefundable. This means the charity must be able to function with annual income for an unknown period of time without access to the original principal for the annuity. At the death of the key person the charity will receive an amount equal to its original annuity purchase payment by virtue of the guaranteed death benefit. Plus, this will only work when the charity has an established relationship with an individual who is both willing to allow the charity to own life insurance on his or her life and whose medical insurability will provide the needed spread to make the strategy meaningful. The IRS takes a dim view of charitable stranger-initiated life insurance because the investors wind up with the greatest economic benefit. Therefore, the charity should use existing funds, not borrowed or investor monies as, in this strategy, the charity gets 100 percent of the benefit.
Hopefully, you can see that there are many noncharitable applications for this strategy, including lifetime income for a widow, reducing the value of an otherwise taxable asset to zero when owned in the estate (because the life income immediate annuity has zero value at death) with asset replacement to heirs in a policy owned outside the taxable estate, and so on. But it has unique application for charities that have an existing endowment fund who desire to increase the guaranteed rate of return they earn on assets during the life of a selected donor or key employee.
I’ve touched on just a couple of the available options, but what I hope you get from this brief discussion is the important partnership role that we as financial services professionals can play in the estate planning/charitable giving arena. We offer the products that enable the use of planned gifts because we can provide for all parties at the table—charity, grantor and heirs.

Time for Disability Income Insurance?

Bob Herum, MSFS, CLU®, ChFC®, RHU®, REBC®

Bob is Second vice president of disability income sales at Union Central Life Insurance Company.

The last couple of years have been extremely difficult for many Americans. Many business segments have struggled. Your clients, both personal and business, have suffered. Each of you has likely had to retool your practice and probably made some tough decisions. So, why should you look at adding disability income insurance to your day-to-day sales efforts? First, the disability industry has righted the ship. Carriers are profitable and loss ratios are satisfactory—the number of claims hasn’t spiked de- spite the difficult economic conditions. The larger disability carriers have relaxed some of the financial documentation requirements and, particularly when combined with teleunderwriting, eased the medical requirements. There is a reduced dependency on Attending Physician Statements (APS) and paramedical exams due to other tools that have been developed to validate the proposed insured’s medical status. Another recent innovation is to simplify the medical and financial requirements through combo Life and Disability Income (DI) insurance sales. The internal underwriting efficiencies that can be exploited by the Home Offices of companies that have both life and disability income insurance policies allow you to provide streamlined underwriting processes and take care of the life and disability needs of your clients. Your clients really need both. You make two sales, your client’s family has financial protection against loss of family income due to death or disability, and you have a much stronger relationship with your client.
Another reason to re-explore disability income planning with your current clients and prospects comes from an understanding of what the last couple of years have highlighted for so many. Your clients or prospects are much more aware of the effect of lost income on their lifestyle. The need for planning and preparation is not a sales gimmick.
• According to the Social Security Administration’s Disabled Worker Beneficiary Statistics, new Social Security Disability Insurance (SSDI) applications increased 21 percent from 2.3 million in 2008 to 2.8 million in 2009. Two major drivers of this increase were the poor economy/high unemployment rate and the aging of America’s working population.
• According to the Council for Disability Awareness (CDA) Personal Disability Quotient calculator, 61percent of surveyed wage earners personally know someone who has been disabled and unable to work for three months or longer.
• The CDA also reports that the average long- term disability absence lasts two-and-a-half years.
• More than one in five workers will be disabled for five years or more during their working careers according to the JHA Disability Fact Book.
Product and pricing options designed to improve the offering to professionals, white- and even gray- collar business owners are now available. Unbundling the product and providing multiple product options can allow you to meet the pocketbook needs of your clients, yet provide quality products and the ability to increase their benefits as their financial situation requires or allows. Another area of tremendous opportunity exists when working with executive benefits for small- and medium-sized employers. You are uniquely positioned to look at these plans and suggest valuable product or plan design changes that provide needed and valuable benefits to the firm. These options might include executive Life and/or DI plans that supplement or augment the underlying group plans.
In many group scenarios, the decision-maker may be some- one in HR. However, when working with individual products, particularly life and disability income products designed for executives, the decision to create and implement executive- level benefits is generally made by the CEO or CFO. Design- ing and implementing executive benefits on a group basis, using individual disability products with Guarantee Standard Issue (GSI) offers, along with significant discounts for each participant, allows you to design and implement plans that the employer sees as part of their executive-level benefits. More importantly, demonstrating significant shortfalls when trying to use group products to handle the specific needs of the high net-earners within a firm is relatively easy.
Think about the non-W2 income that key executives and owners might receive that is not protected under the standard group Long Term Disability (LTD) contract. The following illustration shows an average employer-paid

Sales Opportunity 1
This first scenario is the small, closely held business. Often these firms have 25 or less employees; the most have less than 10 employees. Often this type of group has limited disability options. A few group plans are available in this market, but the need for disability planning is extremely high. These smaller employers are often without anything other than an employer-provided accumulation of sick days. Most companies limit these to 10 or 15 days, and any disability lasting longer puts the employee at financial risk. Typically, the employer is not going to be in the position to do something for everyone, but perhaps for the owner and one or two key employees. Most insurance companies have pricing breaks at three or more lives on an employer-sponsored plan. Additionally, most insurance companies use sex-neutral rates on their list bill cases. Your goal in these types of situations is to show the owner (and other key employees) how they can use individual disability policies, sold with a list bill discount and sex-neutral rates, to provide the key employees a valuable benefit. The employer can use individual disability policies as golden handcuffs. Additionally, the business owner often realizes that they would most likely (or already do) continue their own or a key employee’s salary if disabled. This is extremely common, and few business owners are aware of the tax consequences of continuing salary to a disabled employee. They also are unaware of the risk they assume if they have paid a key employee and, later, another less-key employee becomes disabled and assumes they also will have their salary continued. Once someone continues to receive a salary while disabled, a precedent is established for the firm.

Group plan covering 60 of earned income to a $5,000 monthly maximum. This is a very common scenario, and few highly compensated employees or executives fully appreciate their plan’s deficiencies, which include the is- sue of what income is covered, the fallacy of 60 percent of income and, finally, the likely taxation of benefits.
In the example to the right, the individual earning $240,000 only has 25 percent less taxes of his/her income covered ($60,000/$240,000). What do you think their response will be when confronted with this?
Following are a couple of other common disability scenarios.


Originally published in the Spring 2011 issue of The Wealth Channel Magazine, Tune in Turn On: Technology you can use.

What to Know About Long-Term Care and Medicaid

Shawn Britt, CLU®

Shawn Britt, CLU® Shawn is Director of Advanced Sales with Nationwide Financial in Columbus, Ohio.

Long-term care (LTC) concerns are growing in the United States. With the passage of the Deficit Reduction Act 2005, signed into law Feb. 8, 2006, those concerns loom even larger. This act brings new rules that make it far more difficult for seniors in need of long-term care to get assistance from Medicaid. Currently, only 10 per- cent of Americans over the age of 65 own some type of long-term care protection, and only 17 percent of baby boomers have planned for long- term care needs. People assume their health insurance will pay LTC bills, but it won’t. Even those who qualify for Medicare benefits will only be provided with a maximum of 100 days of nursing home care, and individuals are eligible only when going to a nursing home immediately after a three- consecutive-day stay in a hospital. Then the first 20 days are covered, but a co-pay ($141.50 per day for 2011) will be required for the remaining 80 days. All benefits end after 100 days.
So how have Americans been paying for long- term care needs up to this point? Currently, 49 percent of LTC recipients are relying on Medicaid, but keep in mind, while some in this group come
from our nation’s poor, many in this group start out paying out of pocket then go on Medicaid after their assets are exhausted (sometimes purposely). According to the National Clearinghouse for Long- term Care Information, only 7 percent of people are actually paying for long-term care with private insurance coverage they have purchased. The government took a step to reduce Medicaid roles with the passage of the Deficit Reduction Act (DRA) of 2005, making Medicaid eligibility more difficult. The three-year look back is gone. Under the new law, the look back period is five years for all transfers, and the beginning date for the penalty period is now the later of the date the person enters a nursing home (or begins a Medicaid waivered care pro- gram) or the date the person applies for Medicaid.

What this boils down to is the penalty period will not begin until the nursing home resident is virtually destitute. One purpose of the new legislation is to prevent the use of Medicaid as an inheritance protection program for the middle class. However, gifts made by seniors in the most innocent manner could jeopardize their eligibility for Medicaid even if it is legitimately needed. For example, a grandparent making a monetary gift to a grandchild for a wedding or college graduation present could end up delaying their Medicaid eligibility. To determine the penalty period, the amount of assets transferred will be divided by the average monthly cost of a nursing home in the area in which the applicant lives. If an individual lives in an area that averages $5,000 per month, the penalty for a $15,000 gift to a grandchild would be a waiting period of three months before Medicaid benefits would begin. If other monetary gifts had been given, the penalty period would be even longer. Some also refer to the DRA of 2005 as the “nursing home bankruptcy act.” It is illegal to force a nursing home resident out of a facility while they are waiting for Medicaid benefits to commence. For the grandparent in our example, the nursing home would have to continue care for the three- month penalty period, even though the bill could not be paid. This is where seldom enforced “filial responsibility” laws come in. Nursing homes could use these laws to go after the adult children of residents to pay their parents’ bills inflation starting 2011). This could have severe implications to older residents in California, New York and other areas of high real estate values.

• Some advantages in using interest-only annuities have also been eliminated. These annuities provided a small income during life (which did not risk Medicaid eligibility) and left the original investment to heirs upon the senior’s death. Under the new rules, the state must be named beneficiary of any leftover funds in the annuity for at least the amount of the medical assistance paid on behalf of the annuitant. The community spouse of a nursing home resident may still purchase an annuity to convert assets to noncountable income, but the state must be the first recipient of any leftover funds up to the amount Medicaid paid for the nursing home spouse. In other words, the community spouse can be protected for life, but the remaining assets may not be protected for the children.

• A senior can no longer loan money to their children to get it out of their estate, then forgive the loan. In order not to be considered a transfer of assets, the repayment of a loan or mortgage must be actuarially sound and cannot be forgiven or cancelled upon the death of the lender.

What do all these changes mean to people planning for their senior years? Projected growth in the senior population has caused states to seriously review Medicaid programs, which are consuming 32 percent of the overall Medicaid bud- get. State budgets cannot continue to sustain the expense of increasing LTC services. In addition to considering a cutback in programs, states are trying to shift LTC services from in- stitutional settings to less expensive community-based services such as assisted living or home health care, according to a 2010 article in the Columbus Dispatch. This shift could be positive not only for state budgets, but for recipients who are better suited to a more independent living arrangement. In addition, the federal government is attempting another foray into encouraging citizens to take responsibility for their own LTC expenses by including a national long-term care insurance program called Community Living Assistance Services and Support (CLASS) into the Health Care Reform Bill signed into law March 23, 2010.

Seniors still thinking about hiding assets to impoverish themselves to qualify for Medicaid may want to think again and consider the following:
• In trying to give their money away, they could be liable for gift taxes, which could cost far more than implementing another plan such as purchasing LTC coverage, assuming of course that these transfers exceed the lifetime gifting threshold.
• If you are married, the spousal impoverishment provisions limit what a nonconfined spouse may keep. The at-home spouse may keep the primary residence, a car, personal and household items, a small amount for burial and a maximum of $109,560 (in 2011) in financial assets. There are also income limitations. Social security and pension benefits count toward this limit, and these funds that can’t be hidden.
• States that have allowed the practice of spousal refusal are taking another look. This allows a healthy spouse to refuse to share marital assets. The sick spouse then assigns their right of support to the state and goes on Medicaid for LTC support. But, according to the New York Times, states are now coming back and suing the healthy surviving spouse to recover the cost of care.
• Once the money has been transferred, the senior loses legal control of the assets. Many things could go wrong here, the least of which is the possibility of needing to ask your children for your own money.
• While Medicaid may pay the bill for nursing home care, you may not get to live where you wish. Many of the nicer nursing homes require proof that the prospective resident can pay privately for a defined period of time and can refuse to take new patients on Medicaid (though they must keep current residents who can no longer private pay and go on Medicaid).
LTC protection should be looked at as a more logical inheritance protection plan. Furthermore, LTC coverage can help provide financial proof for acceptance into a care facility of choice. In addition to LTC Insurance, there are hybrid products. For a reasonable cost, life insurance with a long-term care rider can be purchased. This plan will provide funds for the insured should they need long term care, protecting the loss
of other assets they have worked so hard to accumulate. How- ever, in the event no long-term care is ever needed, the insured has a death benefit to leave to heirs, enhancing even further the legacy they will be able to leave their loved ones. This plan generates a benefit to someone no matter what circumstances ensue, and may provide the insured a measure of protection for the inheritance they hope to leave their heirs.
Riders are offered at an additional cost and may not be available in all states. A life insurance or annuity purchase should be based on the life insurance or annuity contract, and not optional riders or features. The cost of an option may exceed the actual benefit paid under the option.
Keep in mind that as an acceleration of the death benefit, the LTC rider payout will reduce both the death benefit and cash surrender values. Care should be taken to make sure that your clients’ life insurance needs continue to be met even if the rider pays out in full. There is no guarantee that the rider will cover the entire cost of all the insured’s LTC, as these vary with the needs of each insured.
Retirement and estate planning must include a serious look at long-term care needs. The changes brought about by the DRA of 2005 will make transferring assets to children much less practical with the five-year look back. And the transfer could become a moot point if filial responsibility laws are en- forced, forcing adult children to use those transferred assets after all to pay their indigent parents long-term care needs.

Life Insurance and Qualified Plans

Andrew J. Fair, JD

Founder of Fair, FitzGerald & Hershaft, P.C, Andrew is a nationally recognized attorney who specializes in the areas of estate, business and retirement planning.

Henry A. Deppe, CLU®

Henry A. Deppe, CLU® Former general agent of Guardian Life Insurance Company, Henry has served on the faculty at Purdue University, Farleigh Dickinson University and The American College.

he use of qualified plan funds to purchase life insurance has long been an option for those with a life insurance need. In some cases, limited liquidity dictates the use of such funds; in all cases, there can be significant tax and business ad- vantages to funding life insurance needs through a qualified plan. Premiums paid with qualified plan funds are paid with amounts not subject to income tax. As a result, the actual cost of paying the premiums is significantly lower than if after-tax funds are used. This can reduce the cash flow required to provide the benefit or permit the purchase of a greater amount of life insurance than would otherwise be possible. This also can permit the purchase of more secure forms of life insurance as the higher premiums are offset by the tax savings. With the tax leverage, it is less expensive to purchase insurance for individuals whose health is impaired because the additional cost for any rating is also paid with pre-tax funds.
While each year a policy is held in a plan an amount determined under IRS Table 2001 is taxed to the participant, this amount is usually a small portion of the actual premium cost, but in most instances the taxable amount constitutes basis to the heirs. This reduces any income tax on the death benefit and any tax should the participant receive a distribution of the policy.
When a participant dies, life insurance proceeds in excess of the cash value (and any basis in the policy) are received by the beneficiaries income tax free. The beneficiaries can transfer the cash value portion
subject to income tax to their own individual retirement accounts, permitting the heirs to take advantage of the long-term deferral opportunity available to IRA rollovers by non-spouse beneficiaries. This enhances the value of the death benefit to the heirs and permits the blending of family insurance needs with the tax deferral opportunities normally avail- able from a qualified plan. In some cases, if the qualified plan will continue after the participant’s death, the beneficiaries can leave the insurance proceeds in the plan. This permits the investment of those funds on a pre-tax basis for as long as the plan continues. The beneficiaries are required to take minimum required distributions each year, but the balance held in the plan can be invested as part of the plan assets.
Life insurance needs arise from both personal and business concerns, and the qualified plan can be used to satisfy the needs in both circumstances. Funds held in a profit-sharing plan can be used to purchase any type of life insurance, including survivorship insurance and insurance on individuals in whom the participant has an insurable interest, per- mitting planning flexibility to address both family and business needs. For example, if the insurance is needed to provide benefits on the second death of the participant and spouse, survivor- ship insurance can be purchased. This would be the case if the estate is significant enough to result in estate tax liabilities, or funds are desired to assure a college education for grandchildren or to fund a trust, including a special needs trust, for a disabled child or grandchild. For these and similar second death concerns, second-to-die insurance is often the policy of choice.
If the insurance is needed on the participant’s death, per- haps as a result of a second marriage and conflicting concerns for spouse and children by a prior marriage, insurance on the participant can be purchased.
In some cases, the need is to equalize the inheritance of children not involved in a business with that of children who are involved. The business owner can acquire life insurance inside the plan payable to the children who are not involved in the business, avoiding the need to leave some interest in the business to inactive children. In other cases, the insurance pro- vides additional security to a surviving spouse, again allowing the business to pass to the children active in the business with- out placing the spouse in a vulnerable position and dependent on the success of the children. The insurance can be used to avoid unnecessary conflicts between spouse and children.
Funds held in a participant’s account in a qualified plan can also be used to purchase life insurance to fund a buy-sell agreement. In that instance, each participant purchases insurance on the other business owners, and the insurance is paid to the participant’s account in the plan. With proper planning, the insurance proceeds other than the cash value can be distributed without tax to a surviving owner and used to purchase the interest.
A primary concern when insurance is purchased with funds in a qualified plan is the procedures involved to remove the policy from the plan in the appropriate circumstances. For example, if an insured participant terminates employment or retires, removing the policy from the plan is generally necessary. If the plan must terminate, the policy will also have to be removed.
A policy can be removed from a plan by either distribution or purchase. The policy can be distributed as part of the plan benefit any time the participant is entitled to distributions from the plan. The value of the policy at that time would be treated as a taxable distribution.
The policy may also be purchased from the plan. The law provides that policies can be purchased by the insured, a relative of the insured, or a trust created by the insured or for the benefit of the insured’s family. A purchase can be made at any
time so long as the policy can no longer be retained in the plan. The Department of Labor has ruled that a policy purchased at the direction of the participant will be treated as one no longer able to be maintained in the plan if the participant directs that this should be the case.
There is, of course, a cost involved with the distribution or purchase of a policy from a plan. If the policy is distributed, the participant is subject to income tax on the value at that time. If the policy is purchased, the purchase price must be paid to the plan. Such a purchase, however, is mostly a cash flow concern, because the amount used to purchase the policy is paid to the plan and deposited to the participant’s account. In all cases, however, the availability of the insurance at significantly lower cost while the policy is in the plan and the portability of the policy at the time of termination or retirement generally offsets the cost of distributing or acquiring the policy should the need arise to do so.
While the use of qualified plan funds to purchase life insurance is not a technique for everyone, such a purchase will of- ten permit the satisfaction of a life insurance need at a substantially reduced cost, and with the same or more flexibility as would an individual purchase of a policy. Because in a profit- sharing plan the purchase can be on the life of the participant, the joint lives of the participant and another person, or anyone in whom the participant has an insurance interest, insurance can be purchased in a qualified plan to satisfy virtually any life insurance need.
In addition, qualified plan funds are generally subject to income tax, which reduces their value to the heirs. A life insurance policy will in virtually all instances return more value when the participant dies than the investment of the funds in any other manner. The additional income tax-free amount payable as a death benefit because the funds were used to pay life insurance premiums permits more dollars to be available to the heirs.
Qualified plan funds should be recognized as another source of premium dollars, and one with a great deal more relevance in a difficult economic environment. Such funds are generally not viewed as readily available for day-to-day expenses, and their inaccessibility for those expenses makes the funds ideal for payment of life insurance premiums when personal funds are needed for other immediate purposes. Even if funds might otherwise be available for insurance premiums, the tax lever- age dictates consideration of the qualified plan funds for this purpose given the extra value for the heirs.
All planning requires a degree of care when implemented, and the purchase of life insurance in a qualified plan is no exception. But with proper planning the purchase can provide meaningful benefits to the participant and beneficiaries.

Originally published in the Spring 2011 issue of The Wealth Channel Magazine, Tune in Turn On: Technology you can use.

Indexed Universal Life

Bobby Samuelson

Bobby Samuelson Founder of Samuelson Design, and presenter to industry groups.

Indexed Universal Life (UL) has been the shining star of the life insurance industry since its resurgence in 2005, clocking double-digit growth figures in spite of a relatively stagnant overall industry environment. With its promise of market-linked upside with principal protection, Indexed UL is a compelling and unique asset class story for cautiously optimistic investors. But Indexed UL has also found favor with promoters of aggressive leveraging strategies. Amidst increasing complexity of both product and application, how do you deter- mine what is sizzle and what is steak? This article flips the normal Indexed UL sales story on its head, starting with a discussion about how a carrier hedges Indexed UL with bonds and options and ending with practical considerations for the sales process.

The Basics
Indexed UL is a general account product that offers participation in the performance of an equity index, such as the S&P 500 excluding dividends, with the safety of a guaranteed interest floor. Carriers position Indexed UL between Fixed UL and Variable UL on the risk spectrum, offering some potential long-term upside over Fixed UL with- out the downside risk of Variable UL. No Indexed UL premium dollars are directly invested in equity indices. Market upside is limited by a nonguaranteed participation rate and/or interest ceiling. Most contracts have a 0 percent to 1 percent guaranteed annual crediting floor. Like crediting rates in Fixed UL contracts, participation limits in Indexed UL contracts may float with economic conditions and carrier discretion.

Beneath the Glossy Pamphlet
What differentiates Indexed UL from Fixed UL at the carrier level? Fixed UL offers a near-perfect match of assets and liabilities on a carrier’s balance sheet, linking policy crediting rates to payment streams from fixed income assets. Indexed UL does not offer the same asset-liability match as Fixed UL because equity returns are not directly correlated to general account yields. The carrier would be ex- posed to loss in a year when equity-based returns promised through participation limits in Indexed UL outstrip general account yields.
Insurance carriers are generally in the business of taking risks they know, primarily mortality and interest rate risk, and avoiding other types. Virtually all carriers with Indexed UL products choose to offload the equity risk inherent in Indexed UL to a third party, typically an investment bank, via derivatives. The carrier’s budget for risk transfer is based on investment yields for the same period over which the risk transfer takes place. High general ac count yields mean a large hedging budget. The carrier, in effect, transforms the equity risk of Indexed UL to interest rate risk akin to Fixed UL by purchasing hedges.
This hedging transaction is at the core of understanding Indexed UL products. Everything about the product that carriers promote in their glossy pamphlets is tied, directly or indirectly, to the cost of transferring risk to a third party.

Upside Participation Limits
Participation limits on the upside of the product can float at the carrier’s discretion, subject to rock-bottom guaranteed minimums. A hedge to protect the carrier against a high participation limit is more expensive than one to protect against a low participation limit. Because the carrier offloads all of the equity risk, profitability for the hedging trade is determined by how well the cost of the hedge matches up with the general account yield. If the carrier is earning 5 percent on its general account assets, the carrier should set a participation limit that costs approximately 5 percent to fully hedge. Any negative mismatch between the general account yield and the hedging cost means retained risk or direct subsidization of the product. Sustained mismatch typically forces the carrier to change participation limits to maintain profitability.

Indexed UL Account Options
To cope with increasing competition in the Indexed UL space, carriers have built products with a dizzying array of indexed account options. Agents are often attracted to the sales spin of one particular account, such as a participation rate that is greater than 100 percent. However, the cost to hedge the indexed liability is virtually identical for each account option, indicating that the expected future return for all account options will be, at most, only marginally different. In short, don’t be fooled by a seemingly attractive account option. The math and hedging strategy is largely the same for all of them. Likewise, products with currently stated participation limits above market average are either earning higher yields on their general account assets, taking shortcuts in hedging or packing additional charges into the product to provide funding for the elevated options budget.
Illustrated Rates
Indexed UL products are commonly illustrated at rates be- tween 200 and 450 basis points above Fixed UL products, making Indexed UL appear to be an exceptionally attractive return proposition for a low interest rate environment. Carriers typically derive illustrated rates by applying currently
stated participation limits to historical equity market data. Indexed UL illustrated rates using this method range from approximately 7 percent to 10 percent. All parties admit that this method is fraught with poor assumptions. For example, participation limits would almost certainly have been different in the higher interest rate environment of the 1980s and through the 1990s’ bull market. Perhaps the biggest problem with showing an Indexed UL illustrated rate against a Fixed UL rate is the lack of comparison between Fixed UL crediting rates and hypothetical Indexed UL rates over the same period.
But why should Indexed UL be illustrated at a rate higher than Fixed UL? We’ve already determined that carriers trans- form equity risk inherent with Indexed UL products to interest rate risk by offloading the equity risk. To a carrier, there’s not much difference between profitability in Fixed UL and fully hedged Indexed UL. Both products offer effective asset- liability matching for general account yields. The only instance where an Indexed UL product would outperform its Fixed UL counterpart is by turning a consistent, long-term hedging profit against the investment bank counterpart writing the derivatives the carrier is using to offload risk. The probability of that occurring in the aggregate over a long period of time is most likely very low.
As such, Indexed UL products should be illustrated at a relatively small spread over Fixed UL. I recommend a spread of approximately 50bps to account for relatively large but highly volatile long-term hedging profit. Data released by a large insurance carrier on the actual performance of its in- force block of Indexed UL policies shows, at most, a 50bps spread over Fixed UL. The whole set of data since the year 2000 actually shows Indexed UL underperforming Fixed UL by about 35bps. “Hypothetical Historical” spreads released by carriers are just that—hypothetical. A better basis for illustrations should be long-term expected gains on options or the very limited data that carriers have released about the actual performance of their in-force blocks of Indexed UL.

Sales Applications
If Indexed UL were regulated to be illustrated at 25 to 50bps above Fixed UL, would it damage the appealing story of an asset class offering marketing upside potential while retaining principal protection? Absolutely not. Indexed UL is a compelling asset class for accumulation and retirement planning sales even without an illustration showing a rate higher than Fixed UL.
Death Benefit Protection
Indexed UL, as currently priced in the marketplace, is typically not an effective product for low-cost death benefit protection. The average Indexed UL product has substantially higher costs, especially at and beyond life expectancy, than its Fixed UL counterparts. However, Indexed UL products with No-Lapse Guarantee features may provide competitive death benefit-oriented coverage.
Most of the big-ticket sales catching the attention of agents across the country involve premium financed Indexed UL. Marketing groups and carriers are pouring into this space with different flavors of the same claim—financed Indexed UL offers more upside than financed Fixed UL. Some promoters even go so far as to claim that financed Indexed UL is so powerful that the client can pay nothing out of pocket while still retaining large amounts of insurance. Indexed UL is an inherently leveraged product based on its options and bond exposure. Financing Indexed UL adds an additional layer of leverage, creating a huge distribution of outcomes. A few clients will profit immensely from financed Indexed UL, a few will be catastrophically affected, but no one knows the average result. Illustrating Indexed UL at a rate more in line with Fixed UL almost always causes these types of hyper-aggressive financing arrangements to unwind with outstanding liability to the policy owner. Any program that purports to provide a “pay nothing out of pocket” approach based on a single spreadsheet and set of assumptions is showing but one of an infinite number of possibilities. What matters to you and your client are the outcomes that aren’t shown in the sales materials.
The simple story about Indexed UL is that it is an asset class offering a timely mix of upside potential and downside protection. There is little reason to suspect that it will underperform or drastically outperform Fixed UL. Any sales application relying on a sustainable performance spread is likely to come undone with consequences to the policy owner. Instead, position Indexed UL for its story as an asset class rather than its performance promises, and view with trepidation any strategy that can’t be replicated at Fixed UL crediting rates.

Originally published in the Spring 2011 issue of The Wealth Channel Magazine, Tune in Turn On: Technology you can use.

Five Guidelines to Achieving Success

Michael C. Davidson, CLU®

Michael C. Davidson, CLU® Chairman of the Board of Trustees at The American College, Michael is the Vice Chairman and Chief Agency and Marketing Officer at State Farm Mutual Automobile Insurance Company®.

In the summer of 1978, I began my career as an insurance agent in Richmond, Mo., population 6,000. That summer, the Bee Gees were Stayin’ Alive, gasoline cost 63 cents a gallon and Grease was No. 1 at the box office. I shared a tiny office decorated with $200 worth of used furniture with one staff assistant. I made hundreds of sales calls, many times visiting customers and pulling up to their homes in my 1970 Ford Maverick.
Although it seems all that happened in another lifetime, I remember it like yesterday. Back then, leadership and success were just concepts. After all, I was just learning the ropes.
Today, I sit in a different, larger office. I’m proud and grateful to work with 19,000 agents and field leaders at State Farm Insurance. But, I’m still learning.
Over the years, I’ve come to realize that being a successful leader is not only mastering the business, but it is developing habits essential to success, regardless of where you are in your life and career.
Whether you’re a veteran independent producer, a corporate employee or a new member of a small office team, you can increase your chances for success. Maybe you’re a visionary. Perhaps you’re the team pacesetter. Each of us has the potential to lead in our roles.
The key is to continuously take stock of where you are, assess your progress, learn from what you discover about yourself and always ask, “How well am I serving my customers?”
Thirty-three years in business have taught me a lot. Here are five guidelines to achieve success that serve me well.

1. Keep Your Head in the Game
Long-term goals are important, but it’s just as important to keep your head in today’s game. Discipline yourself to focus on the present. Take one step at a time, one action at a time. Focus on what you need to do today to be ready for the next customer, the next assignment or the next sale.

2. Be Relevant
Find a way to distinguish yourself. The public is more discriminating than ever. People want to know, “Why should I do business with you?” Consumers are searching for experts to help them navigate the trials and tribulations of planning for the future.
Due to the recent economic crisis, people are keenly interested in talking about how they might manage their finances in thoughtful, long-term ways. This mindset has opened doors of opportunity that haven’t existed for 20 years. There’s new energy surrounding traditional products, such as whole life insurance. Make yourself relevant by helping people find a solid foundation to build their financial future.

3. Manage Technology (Don’t Let it Manage You) There’s been a phenomenal change in how people obtain and use information and in how they interpret community. In the past, “community” usually meant the town where you lived. Today, it often means an online chat group with members from across the globe.
Technology and customer needs require us to constantly look at how we do business and evaluate what we should do differently. This practice can be intimidating—even threatening—to those who do not want to change with the times. It’s critical you’re familiar with and use today’s technology. The ability to provide just-in-time information to current and potential clients is amazing.
This issue of The Wealth Channel Magazine is packed with information about leveraging technology, from using the Social Security website to social networking tips to how to use webcams in the office.

4. Keep Learning
You might expect me, as Chairman of the Board for The American College, to give a plug for continuous learning. But it’s more than just lip service. I’m a big believer in the power of education, and I still take American College courses. And customers today expect the professionals they do business with— particularly financial services agents and advisors—to be up to date on the latest information.
When it comes down to it, learning is about changing behavior. Changing behavior is paramount if you expect to keep up with emerging business practices. As a business person, you cannot afford to get left in the dust because you have not contemporized your skill set. Business people who challenge themselves to gain more knowledge make themselves more competitive. And it’s a great feeling to know your talents have been validated by a rigorous curriculum.

5. Invest in Relationships
Today, people use Twitter, Facebook, texts and e-mail to stay in touch. That’s good, but it’s all about balance. If you choose to only communicate electronically with customers, employees or superiors, you’ll miss meaningful conversations. This is particularly true if you’re helping customers plan for the future. You can’t plan a retirement in a 140-character tweet.
Technology changes constantly, but people still want to know someone cares about them. Today’s successful leaders recognize that technology can help them keep in touch but face-to-face conversation remains essential.
About six months after I started as an agent, I talked with a couple about life insurance. The customers, John and Rita, and their three children, lived in a small home on a farm. I could’ve handled the sales call over the phone, but I knew sit- ting across a kitchen table would be more meaningful.
The couple purchased a $50,000 life policy for John and, after quite a bit of convincing, they also purchased a $10,000 policy for Rita. All they could afford was term insurance. I spent hours with the couple that cold winter evening—what some people might not have considered a productive use of time. Certainly my motivation was not the commission. Rather, it was an investment in a relationship.
A few years later, John called with the sad news that Rita had passed away. “I can’t thank you enough,” he said. “It’s been a rough year on the farm. Without that $10,000, we wouldn’t have had a decent funeral for the children’s mother.” John became a lifelong client.
That’s just one story; I’m sure you have many of your own. Through professional agents, advisors and producers across the country, our industry is positioned to deliver this kind of security in a way that few other industries can.
History will look back on the past few years, and the years ahead, as a watershed period for the financial services industry. Now, more than ever, is the time for companies and producers to come together to serve the public. We are truly surrounded by opportunity, and you play a key role in this pivotal period for our industry.

Originally published in the Spring 2011 issue of The Wealth Channel Magazine, Tune in Turn On: Technology you can use.

Practical Advice for Creating a Diverse Firm

Marcia Ellett

Gerry Herbison, MSM, ChFC®, CFP®, CASL®, CLF

Gerry is Assistant Professor of Management Studies and Director of the CLF Program with The American College.

The need for diversity in the financial services realm is ever present. To stay relevant, financial advisors must be able to tailor their services to mirror the ethnic and cultural changes in society. Remaining cognizant of such changes will continue to open up new business opportunities as the years roll on.
No one knows this better than Sal Farina, MSM, CLU®, ChFC®, CLF®, an American College graduate who has been in the insurance business with New York Life for 25 years. He took over the Long Island, N.Y., agency in 2002 when it consisted of one office, three managers and 132 agents. Today, the same agency has five locations, 20 managers and 480 agents. Such enormous growth wouldn’t have been possible without a solid understanding of the diversity landscape. Particularly because when he arrived at the agency, “it was not culturally diverse,” Farina said. So he set about changing the makeup and, therefore, the outlook of the Long Island office by keeping some basic tenets in mind.

Build Trust
You’ve got to recognize cultural differences to embrace and take advantage of diversity in the market. On introducing agents with a different cultural background into the business, he said, “You need to be able to respect their culture, who they are, what they believe in and why they believe in different things.”
Language can also be a barrier, and patience is required. “People aren’t comfortable being the first at anything,” Farina explained. “People don’t like to feel isolated; they can feel uncomfortable. You also need to be respectful of people’s dietary needs.
Representatives from diverse backgrounds want to know that you understand all of these issues.”
Then you’ve got to be mindful of the potential for culture clash. “Sometimes, when you build your momentum in one ethnic group, you start adding services and support in that specific group,” he said. The danger there is that “it can be harder to get the second or third group because you are so com- mitted to the first, and they compare. They ask, ‘How come the other group gets this support and we don’t?’”

Identify Emerging Markets
Farina arrived in the Long Island office armed with the knowledge that New York Life focused internationally on the three fastest-growing emerging markets: Chinese, Indian and Hispanic. So he looked at the local landscape through this lens and found that there were agents who could serve the traditional, affluent markets but that the middle, more culturally diverse markets were being underserved. “The middle market is a large part of our community,” he said. “Rather than fight with 100 different companies for affluent business, we target the middle market. We also recruit people who have never been in the business before. They start out in the middle market, not the affluent market.”

Choose Future Leaders
By the end of 2002 Farina had promoted all of his existing managers out to lead other offices. “This is our culture,” he explained. “We promote field leaders when they are ready; we don’t hold them back.”
That meant 2003 kicked off with the opportunity to build a new management team. Farina identified a Hispanic and a Chinese agent that he believed were potential management candidates. He recalls having a candid conversation with the Chinese agent. He went to her and said, “Can you help me? I need someone who is willing to go into management and help me recruit more Chinese agents inside this community.”
His agent accepted the challenge and Farina opened a location in- side the Chinese community with three people. “They saw it as a sign of pride that we were going inside the community and becoming a part of that community by participating in cultural events and programs,” he said.

Learn to Nominate
You must get involved in the community you are trying to reach and take the time to identify local candidates to grow your business. “Let people know that you are there to serve,” Farina said. And this must be a long-term goal. To make a lasting impression, you must become a fixture, a familiar face, and only through repeatedly talking to people will you learn who would be a valuable addition to the company. “Nominating takes months, not one day,” he said. “It took me three years to build relationships in the Chinese community through nominating and word of mouth. If you have a short-term plan, it is not going to work because people will forget you.”
With representatives in the community on a regular basis, you can take advantage of the opportunities when they present themselves. For example, one individual with whom Farina had fostered a relationship lost his job when his employer was downsized. Farina was able to re- mind him of the potential job with New York Life and the relationship truly became a win-win for both parties.
“Now we have 100 Chinese agents because we became a visible presence,” he said. “We spent hundreds of thousands of dollars on rent, advertising and community affairs. People saw us as part of the community, and we kept growing from it. Now, instead of having one Chinese manager, I have eight.”
Successfully building a culturally diverse financial services firm is about tolerance and understanding. It’s about active, ongoing communication. It’s about embracing differences and keeping your eyes open to the possibilities. “You build the relationships,” Farina said, “and then you get serendipity.”

An Employer Bright Side to Healthcare Reform?

Arthur Tacchino, JD

Since the enactment of Healthcare Reform, it has been one of the most publicized and controversial topics in our nation. The Patient Protection and Affordable Care Act along with the Health Care and Education Reconciliation Act (referred to as the Affordable Care Act or Healthcare Reform), truly is a total reform of the current healthcare system. Accompanying the new law is a sense of fear felt by employers all over the country. This fear is created by rising healthcare costs associated with the new law. This reform shifts the costs of healthcare away from consumers and puts the burden of higher healthcare costs on employers and insurance companies. Employers will absorb the costs associated with several new provisions of the law, including the prohibition of lifetime maximum limits, the restriction on annual limits, the dependent coverage age extension, new patient protections, new external review requirements, new taxes and several other provisions of the law. For employers it appears to be a bleak future as far as rising costs are concerned. So, what can you as their healthcare consultant tell your client to console them? Is there any bright side to this overhaul of the healthcare industry? As luck would have it, there are a few healthcare reform bright spots on which you can focus.
the small business health care tax credit One bright spot for employers is the Small Business Health Care Tax Credit. The Affordable Care Act amended the Internal Revenue Code (IRC) and created this credit. This is a great opportunity for small employers to lower or maintain their health- care costs. This credit allows an eligible small employer to receive a credit for up to 35 percent of the nonelective employer contributions paid toward the premium costs for employee healthcare, and up to 25 percent for tax-exempt small employers.
To qualify for the tax credit, a small employer must meet the following three requirements within any given tax year:
• The employer must not have more then 25 full-time equivalent employees (FTEs) for the tax year.
• The employer’s FTEs must have annual average wages that do not exceed $50,000.
• The employer must have a contribution arrangement in effect that meets the requirements of the IRC.
Tax-exempt small employers have different eligibility requirements. Eligible tax-exempt small employers are any organization described in Code section 501(c) and are exempt from taxation under Code section 501(a).
The maximum tax credit (35 percent or 25 per- cent) is only available to employers with 10 or fewer FTEs and average annual wages of $25,000 or less. The tax credit is phased out as the number of FTEs and average annual wages increase.
Eligible small employers will use the tax credit to offset actual tax liability. They will claim the tax credit as a general business credit on their tax re- turn. The IRS has created a new Form 8941, The Credit for Small Employer Health Insurance Premiums for 2010, to help eligible small employers calculate and report their credit. This is just one bright spot in the health- care reform law that will help employers control those rising costs.

Wellness Program Grants
Preventive care and increasing wellness at a younger age are really at the heart of healthcare reform. If achieved, these two objectives would reduce healthcare costs in the long term. With that in mind, the Affordable Care Act created a grant program to assist eligible employers in providing comprehensive wellness pro- grams for their employees. These grants are available beginning this year. The law has appropriated $200 million for these grants from 2011 to 2015. Employers eligible for this grant money are those with less than 100 employees, where those employees work 25 hours or more a week. Additionally, the employer must not have provided a wellness program as of March 23, 2010. Grant eligibility also requires that the employer make the comprehensive wellness program. If properly designed and implemented, a comprehensive wellness pro- gram could help employers control and lower their healthcare costs.

The Early Retiree Reinsurance Program (ERRP)
The Early Retiree Reinsurance Program (ERRP) was created during healthcare reform to encourage employers to continue to offer healthcare coverage to their early retirees. Once accepted into the program, which is run by Health and Hu- man Services (HHS), plans may then submit qualified claims for healthcare expenses that exceed $15,000 and fall below $90,000. Eligible plan sponsors will be reimbursed 80 percent of the cost of these qualified claims. Plan sponsors that receive reimbursements are required to use the reimbursements to “lower their health benefit premiums costs,” to “lower the costs for plan participants,” or a combination of the two. This 80 percent reimbursement for qualified claims is a great way for employers to lower their healthcare costs that are spent on early retirees.

The Class Act
The Community Living Assistance Services and Supports (CLASS) Act portion of healthcare reform is a new long-term care program. The Affordable Care Act lays out a basic frame- work for the program. Several pieces of the law still need to be formulated before the program can take effect. What we know so far is that employers must automatically enroll employees into the program, and employees can opt out. Employees who choose to participate in the program will pay monthly premiums. Nominal premiums will be available to certain low- income employees. The first benefits of the CLASS program will be paid out after five years of collecting premiums. To qualify for benefits, participants must be unable to perform a certain number of activities of daily living (ADLs), such as bathing, dressing and so on, which will be determined by the Secretary of HHS. Participants are eligible for the benefits for as long as they meet the required standards, meaning the CLASS program could pay benefits for life. The speculation on the amount of benefits CLASS will offer is somewhere in the range of $50 to $75 a day. Employers can use this program as an opportunity to offer long-term care coverage to their employees with low or no costs at all. It will be perceived as a great benefit from the employee standpoint and is a winning situation for the employer.

These four provisions of Healthcare Reform are bright spots for employers under the new law. By most indications healthcare costs are going to rise for employers, but these pro- visions of the law offer employers the opportunity to lower or control those rising costs.

To learn more about the provisions mentioned in this article and for a comprehensive overview of healthcare reform, consultants should sign up for HS 345 Essentials of Healthcare Reform. This new course is just one piece the of The American College’s new premier healthcare designation, the Chartered Healthcare ConsultantTM (ChHCTM). This course will be followed by HS 346 The Healthcare Consultant, which will provide agents and brokers the skills to shift from a commission-based model to a fee-based consultants model. These new courses, and this new designation, will provide industry members with the knowledge and tools needed to survive in the new landscape of the healthcare industry.

Originally published in the Spring 2011 issue of The Wealth Channel Magazine, Tune in Turn On: Technology you can use.

Retirement Perspectives

David Littell, JD, ChFC®, CFP®

David Littell, JD, ChFC®, CFP® David is Professor of Taxation and holds the Joseph E. Boettner Chair in Research at The American College. He also serves as the Co-Director of the New York Life Center for Retirement Income. david.littell@ theamericancollege. Edu

When we think of financial software, we don’t often think about programs available through the government. However, over the last several years the Social Security Administration has added a number of useful calculators at
Being able to calculate Social Security benefits under a variety of scenarios can be quite helpful. The Social Security statements your clients receive are based on certain assumptions—they assume that participants will continue to work, earning today’s salary until benefits begin. But what if your client would like to know what his benefits would be if he stopped work now and began benefits later? Or maybe your client would like to start working part- time and see how this impacts her benefits. Also, Social Security statements only illustrate retirement at specified ages—maybe your client wants to begin benefits at a different age.
Here are brief descriptions of the four calculators Social Security has made available for determining benefits. Each has its strengths and limitations.

Retirement Estimator
The most recent addition to the Social Security site is the Retirement Estimator. After a secure login requiring the recipient’s name, Social Security number, date and place of birth, and mother’s maiden name, the estimator:
• Provides an estimate of retirement benefits based on the individual’s actual Social Security wages, which is comparable to the estimate provided on the Social Security Statement each year.
• Lets the taxpayer create additional “what if ” retirement scenarios based on current law.
One limitation of this calculator is that it will not include the possible effect of the Windfall Elimination Provision (WEP), which can reduce benefits for those who work for an employer who does not withhold Social Security taxes, such as a government agency.
Advisors should note that the WEP also is not considered on the benefit estimates provided on annual Social Security Statements. This means that those affected could be quite surprised when their Social Security benefits are lower than the estimate they have been seeing for many years.
Social Security offers three other calculators to estimate potential benefit amounts. These calculators show retirement benefits as well as disability and survivor benefit amounts.

Quick Calculator
The Quick Calculator provides a simple, rough estimate after inputting a date of birth and current year’s earnings. As its name implies, this is the easiest to use, but also provides the roughest estimate. The Quick Calculator also does not include reduction for WEP. However, this calculator may be helpful to an advisor meeting with a potential client for the first time, before extensive fact-finding has been done. It can provide at least a ballpark estimate.

Online Calculator
The Online Calculator allows the user to input a date of birth and complete earnings history to get a benefit estimate. This calculator also allows for projections of future earnings until retirement date. This is clearly more accurate than the Quick Calculator—and it can be completed on line. If the advisor has the client’s Social Security Statement, benefits can be estimated under various scenarios.

Detailed Calculator
Finally, the Detailed Calculator provides the most precise estimates. This calculator must be downloaded and in- stalled on a computer. Unlike the others, this calculator does allow consideration of a reduction for the WEP. This is probably the most useful calculator for the advisor. With this program and your client’s current benefit statements, you can model the widest number of alternatives and be sure to get the most

Accurate Numbers.
If you haven’t visited the Social Security website recently, it’s definitely worth the visit to take a look at these calculators and other available tools. For the technically minded, the Social Security Handbook contains all the details, while other publications address specific issues. Maybe one of these publications would be helpful to your clients facing specific situations. Finally, note that much of the information is available in Spanish, as is the Online Retirement Estimator.

Myths and Realities of the New Estate Tax Changes

Ted Kurlowicz, JD, LLM, CLU®, ChFC®, CAP®

Ted Kurlowicz, JD, LLM, CLU®, ChFC®, CAP® Ted is the Charles E. Drimal Professor of Estate Planning and a Professor of Taxation at The American College.

Now that the initial shock and surprise resulting from the long-overdue estate tax reform has subsided, there’s been some time to pause and reflect. At first glance, the immediate reaction of many estate planners that I spoke with was that Armageddon had arrived. This certainly is not the case, but paralysis or procrastination will result in lost opportunity. In the discussion that follows, I’ll try to debunk some of the myths that have been offered in the immediate after- math of the new estate tax rules. The implications of the law will be viewed prospectively and I will, by design, ignore 2010’s rather interesting situation where the compromise bill provided a choice to be made by executors on whether to elect the federal estate tax with the basis step- up or no federal estate tax with a modified carryover basis for assets left to heirs.

MYTH: The increase in the exemption amount to $5 million and the reduction in the estate tax rate to 35 percent were the biggest surprises in the estate tax compromise.

REALITY: The attempts by some in Congress to reach a more timely compromise in the 2008 to 2010 interval revealed that there would not be enough votes in the Senate to fix the federal estate tax at the 2009 levels of a $3.5 million exemption and a 45 percent tax rate. In fact, the Senate had previously agreed in principle to these critical components of the law as finally enacted.
The biggest surprise in the new legislation was the reunification of the estate and gift tax systems with the increase in the gift tax exemption to $5 million. This presents many tax-saving opportunities. Table 1 on the opposite page provides the recent history and projected path of some critical numbers with respect to the federal wealth transfer taxes.

MYTH: At least the uncertainty has been solved and clients can plan their estates without the questions that have been haunting us for a decade.

REALITY: This compromise bill was enacted for a two-year period, so we face the same scenario of a return to the June 2001 tax law in 2013. If Congress handles this new sunset in the same manner as the estate tax repeal of 2010, the next resolution will not be provided until the eve of 2014 and won’t be permanent then either.

MYTH: The $5 million exemption ($10 million for a married couple) is large enough that estate planning can be ignored for 99 percent of the U.S. population.

REALITY: Estate planning should never have been driven by taxes, and ignoring the estate plan to concentrate on other agendas would be a real dis- service to most clients. We still need to discuss the client’s legacy plans and assist the client in answering the who, how and when with respect to both accumulated wealth and wealth added by death benefits from life insurance or employee benefits.

Many risks other than federal estate tax could diminish the efficiency of the client’s estate plan. For example, the client may wish to plan for long-term care or capacity issues. Most people will want to distribute their estate with the mini- mum of delay or probate costs. Perhaps the intended heirs have creditor problems or lack the capability for managing the inherited assets. Finally, many people will have testamentary charitable intentions irrespective of the federal estate tax.
Another important tax issue to ad- dress with many clients well below the $5 million threshold is the state-level inheritance or estate taxes. In states with a separate inheritance tax (such as Pennsylvania) a tax is imposed on estates for assets left to anyone but the surviving spouse without a significant exemption. A number of states that decoupled from the federal exemption and impose what was formerly known as the credit estate tax or sponge tax have state estate tax rates up to 16 percent with exemption amounts either at $675,000 or $1 mil- lion depending upon how their law is structured.

MYTH: The $5 million exemption will eliminate the need for filing gift or estate tax returns for most Americans.

REALITY: This is no time to get sloppy with estate and gift tax compliance. The rules with respect to filing Form 709 for lifetime gifts have not changed. Any taxable gift requires a federal gift tax return. Hence, any gifts that are not excluded (those under the $13,000 annual exclusion) or deducted from the gift tax base must be reported even though the exemption for taxable gifts is $5 million. In addition, the three- year statute of limitations that prevents the IRS from disputing a gift after the statutory period only applies if a return was filed. We will continue to recommend filing gift tax returns to secure this protection. In some instances, filing a gift tax return is prudent even if the return is unnecessary to receive protection from the statute if the asset transferred lends itself to valuation disputes. For example, a gift tax return should be filed for gifts of units in a family limited partnership (FLP) even if the donor believes the gifts fall below the $13,000 annual exclusion.
The Form 706 federal estate tax re- turn has been made more important by the new law in many otherwise nontax- able estates. The portability of the ex- emption between spouses requires the filing of the federal estate tax return for the first spouse to die to report the Deceased Spousal Unused Exclusion Amount (DSUEA) that is being transferred to the surviving spouse.

MYTH: The portability provision will dramatically simplify planning.

REALITY: “How do I love thee? Let me count your DSUEA.” The portability provision contains a serial remarriage prevention clause. The surviving spouse does potentially (if the return is filed) take the deceased spouse’s un- used exemption. However, a subsequent marriage and death of the new spouse eliminates the first deceased spouse’s exemption and leaves the two-time survivor with the second spouse’s unused exemption. Confused yet? The DSUEA is not indexed for inflation and this re- marriage issue would seem to indicate that the survivor ought to make a gift first from the DSUEA available if there is the inclination and capability of making gifts. This will have to be somehow cleared up by IRS guidance and a timely filed gift tax return.

MYTH: The portability provision will make the unified credit (exemption) trust extinct.

REALITY: The portability provision al- lowing the surviving spouse to inherit the deceased spouse’s unused exemption does present a tempting opportunity to simplify the estate plans of couples whose wealth is sufficient to consider federal estate tax planning. Remember, the $5 million exemption is only enacted for two years and many couples may find themselves more concerned about the estate tax again in 2014.
The use of the traditional marital deduction and unified credit (exemption) trusts would still be indicated in many circumstances. In the estate plan of a couple with $10 million or more in assets, the use of the exemption trust funded with $5 million at the death of the first spouse to die creates an estate freeze. The $5 million exemption amount could be applied at the first death to the value of the assets at the time of that death, and any subsequent appreciation would avoid tax later. The use of the $5 million exemption at the time of the first death would be particularly beneficial if Congress decides later to allow these provisions to lapse and the exclusion goes back to some lesser amount.

MYTH: The use of trusts will decrease dramatically.

REALITY: Most trusts are designed for reasons other than the federal estate tax. The most substantial trusts in terms of value were created by families who view the difference between the $3.5 million and $5 million exemptions as a rounding error. And the reduction in the number of Americans subject to the federal estate tax will not change the fundamental reasons for creating trusts. That is, the need still exists to provide creditor protection, defer the distribution of assets to beneficiaries until appropriate ages, delegate distribution decision-making authority to independent third parties, reduce probate costs and manage assets for heirs with special needs.

MYTH: The use of life insurance for estate planning purposes has diminished in importance.

REALITY: There are two estate planning purposes for life insurance. First, there is the estate enhancement need to increase the insured’s estate to some desired level. This purpose could be as simple as providing income replacement for someone who dies prematurely prior to accumulating enough wealth to provide for his or her family. In some instances, the estate enhancement need extends beyond the insured’s working years because of the need to support one or more heirs after the insured’s death. For example, the client could have one or more children or grandchildren who will be unable to support themselves due to a disability or other cause. The estate enhancement use of life insurance is unaffected by the federal estate tax.
The second estate planning purpose for life insurance is wealth replacement/estate liquidity. One major need for wealth replacement is the estate or inheritance taxes imposed on the client’s estate. To some degree, this need has been diminished for estates between $3.5 million and $5 million as a result of the increased exemption. The wealth replacement target amount is reduced for all taxable estates as a result of the reduction in the rate from 45 percent to 35 percent. However, the federal estate tax change does not sound the death knell for wealth replacement cover- age. My experience has shown me that wealth replacement coverage in estates that are somewhat marginal with respect to the exemption amount often face persistency problems. For estates well over the $5 million exemption amount, the federal estate tax remains a significant risk.
The estate liquidity needs for life insurance often apply even in nontax- able estates. The lessons learned from the recent past with respect to the large reduction in asset values indicates the problems an estate might face holding assets during a market crash. For ex- ample, there must’ve been a lot of dis- appointed heirs of estates holding real estate during the last three or four years. The federal estate tax or other inheritance taxes only exacerbate the liquidity problems because assets must be sold to pay these taxes. The need for life insurance for estate liquidity purposes continues to be a viable planning solution.
Certainly, the change in the federal estate tax laws presents an opportunity to revisit clients with existing life insurance. Examining the existing coverage
with respect to the estate planning purpose and the current status of the policy is fitting. Now is the best time to discuss the value of the policy as an asset class with the client and make adjustments to the policy or the estate planning structure as appropriate.

MYTH: The $5 million federal estate tax exemption has diminished the importance of lifetime gifts in the estate planning process.

REALITY: The single largest opportunity created by the new estate tax law is the ability to make $5 million of taxable or generation-skipping gifts without paying gift or GST taxes. Remember that this change potentially has a two- year shelf life. Although the estate tax exemption had risen as high as $3.5 mil- lion in 2009, the gift tax exemption was permanently set at $1 million. While the rollback of the gift tax exemption is certainly possible, it seems very un- likely that Congress would attempt to later tax gifts made in 2011 and 2012 under the temporary $5 million exemption. Following is a list of suggested opportunities for using the $5 million gift tax exemption:
• Transfer substantial interests in the closely held family business to successor generations sooner than otherwise possible.
• Use valuation discounts to transfer wealth as efficiently as possible for high net worth families.
• Make use of both spouses’ $5 million gift and GST tax exemptions in high net worth families. The ability for a high net worth couple to fund a $10 million generation-skipping trust during their lifetimes is an incredible opportunity. This trust could be funded with life
insurance or assets that have been discounted to further leverage the exemption amounts into greater wealth transfers.
• Use the $5 million exemption amount to make larger life insurance purchases in irrevocable life insurance trusts (ILITs) than could otherwise be supported by the available $13,000 annual exclusion Crummey powers.
• Use the $5 million exemption amount to repair previous estate planning efforts that have gone awry. Manyestate planning techniques previously implemented have not performed as planned. For example, the policy performance in an ILIT may be below the initial illustrations, and additional contributions may be required to support the policy. Perhaps a split dollar life insurance plan needs to be terminated. Maybe a policy was funded through premium financing and the outstanding loans are substantial. Or, the grantor retained annuity trust (GRAT) created by the client is underperforming as a result of the drop in value of the underlying trust assets. The $5 million exemption can be used as a repair tool to make sizable additional gifts to address these and a multitude of other scenarios.

In the wake of the federal estate tax reform, being mindful of what is true and what is misconception about the impact of the changes on estate planning is crucial to capitalize on the opportunities available to clients.

Originally published in the Spring 2011 issue of The Wealth Channel Magazine, Tune in Turn On: Technology you can use.

Key Competencies for Proper Retirement Income Planning

Kenn B. Tacchino, JD, LLM

Kenn is Professor of Taxation and Financial Planning at Widener University and Co- Director of the New York Life Center for Retirement Income at The American College. kenn.tacchino@ TheAmericanCollege. edu

David Littell, JD, ChFC®, CFP®

David Littell, JD, ChFC®, CFP® David is Professor of Taxation and holds the Joseph E. Boettner Chair in Research at The American College. He also serves as the Co-Director of the New York Life Center for Retirement Income. david.littell@ theamericancollege. Edu

The New York Life Center for Retirement In- come at The American College recently brought together retirement experts and practitioners from various branches of the financial services industry to discuss the knowledge, skills and competencies needed to provide successful retirement income planning, or decumulation planning, for a client. The conversation was fascinating as the group discussed their thoughts about what it takes to provide answers and strategies for clients dealing with the financial planning challenge of maintaining their standard of living throughout retirement in the face of unknown longevity, inflation, market conditions and other variables.
Not all members of the group agreed on every is- sue, nor were they representing their official company position during the frank discussions. However, all participants agreed that further examination of the emerging field of retirement income planning is essential and timely.
We decided it might be enlightening to pose some of the issues discussed as a series of questions. If you’re working in the decumulation area, or are
planning to go into it, these questions can be a checklist to test your knowledge. If you find gaps, you can learn more about many of these subjects at no cost by viewing the videos available at The American College’s New York Life Center for Retirement Income Web site (www.theamericancol- You may also want to consider earning a Chartered Advisor for Senior Living (CASL®) designation to raise your level of expertise.

What is a Retirement Income Plan?
Most planners are aware of what needs to be in an estate plan or the steps required for a comprehensive financial plan, but one major topic of the day was that we don’t yet in the industry have a clear consensus of what is retirement income planning. Everyone did agree that a retirement income plan was not handing a client a computer spreadsheet showing that they had an 83 percent chance of not outliving their assets. We all saw the need for retirement income planning to go beyond industry bias (investment-only solutions from wire houses and insurance-only solutions from insurance companies).
During perhaps the most interesting part of the day the group decided to tackle a definition of retirement income planning. What resulted was the following:
• A retirement income plan develops stable sources to meet the client’s income needs.
• The plan must ensure that stable sources of income can last a lifetime.
• The retirement income plan should optimize the remaining portfolio so that it addresses the client’s ability to meet discretionary spending or legacy goals.
• The plan must address the major risks that retirees face.
• Because retirement income planning is process- oriented, dynamic and holistic, comprehensive planning is required.
Developing a plan requires following the steps of the financial planning process, from forming a client relationship, identifying goals and gathering data, to analyzing the client’s situation, offering alternatives, implementing and monitoring the plan. With retirement income planning, there needs to be an increased emphasis on understanding the client and helping the client to determine goals and objectives. Another intensified focus of retirement income planning centers around monitoring the client’s plan and making adjustments. Unexpected investment events, spending too much, health changes and other changes in the client’s situation can all require plan modification. Maybe more than any other planning process, retirement income planning requires a lifetime partnership be- tween the advisor and the client.

Does the Advisor Understand What Motivates Their Clients?
Retirement income planning means wading into issues such as what money means to your client. A client’s “money personality,” risk tolerance, level of anxiety about outliving income and general psychological makeup need to be understood and factored into the decision process. Planners need to delve into what motivates clients to save, spend and to feel secure financially. This process may be more difficult when working with couples, as each partner may have totally different ideas and concerns. All of this requires a tremendous amount of communication and may require discussing uncomfortable issues with clients. It can help a planner to have some background in the field of behavioral finance. In the end, if the plan doesn’t meet the clients’ psychological needs it will not be perceived as successful.

Has the Advisor Taken the Time to Understand the Client’s Retirement Vision?
A successful retirement income plan must meet the client’s goals and objectives. Some clients will be able to clearly state what they want to achieve, but many others are going to need some help in shaping a picture of their retirement. A successful financial advisor can, and should, help the client identify their goals, envision their retirement years and help them set up a blueprint for the rest of their lives. The group agreed that this process is time-consuming but critical for success. The process can be facilitated through a systematic approach using sophisticated fact-finding and planning tools.
Also, clients may have an easier time envisioning the first few years of retirement. That may include work for some, or an extended trip around the world for others. However, planning for issues that occur later in retirement, which are not al- ways pleasant, is also critical. Caregiving for the client’s frailty or the frailty of a loved one may not be on a client’s radar. But it needs to be. Planning must include the go-go, slow-go, and no-go phases of retirement, and apply appropriate strategies and products for each.
Have advisors helped a client develop a budget that identifies both basic and discretionary expenses?
Retirement income planning is about budgeting for the remaining years. While a client is still working, the budget process is not as rigid because the client can recover from over- spending by earning more future income and adapting living circumstances to income limitations. The group agreed that many Americans today are not budgeting at all.
Developing a reliable budget for the early years in retirement, having a sense of changes in lifestyle that will occur over time and distinguishing between necessary and discretionary expenses is a monumental task—and one that your clients may not look forward to. However, all of this really is required to develop a retirement income plan.
Each client is going to have a different interpretation of what are necessary and what are discretionary expenditures— and that is ok—as the goal is to meet their individual planning needs.

What Major Risks Does the Retiree Face?
One of the recurring themes for the day was that a retirement income plan must address the risks and uncertainties of retirement. One panel defined this as “stress-testing” the plan. The risks discussed included:
• Longevity risk
• Early death of a partner
• Rising health care costs
• Increased need for health care
• Expense of long-term care
• Impact of market volatility
• Sequencing of returns risk
• Liquidity risk
• Inflation risk

What are the Key Differences Between the Accumulation Process and the Decumulation Process?
The accumulation phase of retirement focuses on encouraging clients to save to meet a targeted amount. The investment recommendations center on maximizing return within the clients’ risk-tolerance parameters. The decumulation process is entirely different. The focus is on ensuring that clients can meet their income needs and maintain their standard of living throughout their lifetime. Even the risk/return paradigm is different in retirement income planning. Return is measured as the amount that can be withdrawn from the portfolio each year, and risk is the possibility that the portfolio will be exhausted before the end of the client’s life.
The panelists at the Retirement Income Summit were concerned that while many planners were familiar with the tactics and strategies for the accumulation phase of retirement, they were less familiar with the vastly different process of planning for retirement income needs. Carrying forward the same accumulation strategies into decumulation planning will not be successful. For example, investing regularly using the dollar cost averaging strategy can work well when accumulating as-
sets, but taking systematic withdrawals over time as the price of assets varies will have the effect of spending down assets more quickly. Additionally, time horizon and tax planning considerations change significantly from the pre-retirement to the post-retirement period.

Does the Advisor Understand the Strategies and Products Available to Solve Retirement Income Issues?
The advisor needs to be familiar with a wide range of strategies used to create and protect retirement income, including the following:
• The systematic withdrawal strategy: choosing an appropriate withdrawal rate and ways to modify the strategy to increase portfolio sustainability.
• Lifetime income annuities: understanding the implications of mortality credits.
• Longevity insurance: how deferred life annuities can limit the client’s risk and increase portfolio sustainability.
• Deferred annuities with lifetime guaranteed benefit provisions: understanding how this strategy allows for growth and protection.
• Multiple portfolios: creating different portfolios (buckets) to address different time periods and/or concerns in retirement.
• Noninsurance approaches to creating stable sources of income, including laddered bonds, Treasury Inflation- Protected Securities (TIPs), structured products (synthetic annuities) and mutual fund income funds.
• Long-term care insurance and other funding methods to address the added expense of long-term care.
• Medicare supplement options, as well as controlling retiree health-care costs through appropriate choices under Medicare.
• Life insurance: appropriate uses to provide for survivor income and/or legacy objectives.
• Reverse mortgages: appropriate uses for tapping into home equity to meet current income or liquidity needs.
• Techniques to protect assets from claims of creditors or lawsuits: for example, incorporation and contract provisions.
• Strategies for maximizing Social Security benefits:
for example, choosing a start date or options available to working couples.
• Strategies for maximizing pension distributions: for example, timing and the form of payment.
• Tax harvesting strategies: what types of accounts should be withdrawn first (e.g. taxable, tax deferred [IRA], tax exempt [Roth]).
• Legacy strategies: strategies to insure that a client’s estate plan is meeting its goals and objectives.

Does the Advisor Understand What the Software Program is Illustrating?
We discussed concerns that advisors may not understand what the retirement software they are using is illustrating. For ex- ample, many programs today use Monte Carlo analysis, but whether advisors understand what the output from such pro- gram means is unclear. Also, advisors should be using software tools that are consistent with their planning process.

Does the Advisor Have Sufficient Product Knowledge?
Retirement income planning requires expert product knowledge. New products are being designed constantly in this evolving field and advisors need to keep up. One concern here is that advisors are only familiar with product options from their own part of the industry. For example, those in the brokerage industry may not be familiar with insurance solutions, and insurance professionals may not be familiar with investment products that can provide for stable income. Another concern is that advisors get in a comfort zone with certain products and offer only those to their clients.

Does the Retirement Income Plan Ensure Enough Liquidity?
A key to retirement planning is balancing finances so that the client has enough income and available assets to meet contingent events. Having an emergency fund continues to be an important consideration in retirement. Also, careful fact- finding is required to determine whether a client may have future liquidity needs to purchase a second home, to pay for long-term care expenses or to help a grandchild pay for college education expenses. In addition, certain retirement in- come solutions, such as life annuities, are an inexpensive way to guarantee lifetime income, but may come at the price of the loss of liquidity.

Can an Advisor Help a Client Maximize Social Security Benefits?
Retirement income planning means properly appreciating the relevance of Social Security benefits in the overall plan.
It also calls for a full understanding of Social Security rules and planning strategies. One critical choice for clients will be when to start Social Security benefits. Recently, many experts have been writing about the advantages of deferring benefits, but more than half of Americans are beginning benefits as early as they can, at age 62. For married couples this decision affects benefits throughout their joint lifetime. When men have the larger Social Security benefit, choosing to begin benefits early may harm their wives because women tend to live longer and will inherit (as the death benefit) the reduced Social Security benefit that their husband was receiving.

Does the Retirement Income Plan Address the Contingencies of Unexpected Health - Care Costs and Long-Term Care needs?
Clients must be counseled on risk-management techniques to address rising health-care and long-term care costs in retirement. This starts with making the appropriate health insurance choices. Those eligible for Medicare can choose between the original program and a managed care program. They also can choose from a number of Medicare Part D drug plan options. Most choose to supplement Medicare through a supplemental policy, a managed care plan or through an employer-provided retiree health-care plan. Clients also should plan for the possibility of needing extended long-term care at some point in their lives. This planning requires consideration of long-term care insurance and other ways of funding long-term care. Counseling clients also can include discussing risk-avoidance techniques to help avoid health problems from falls and other physical infirmities.
What is the Best Strategy for Tax Harvesting?
An important part of retirement income planning involves tax planning. Today clients have accumulated assets in taxable (brokerage) ac- counts, tax deferred accounts (IRAs and qualified plans) and tax-exempt accounts (Roth IRAs). Choosing which account to withdraw first and which to defer depends on the client’s current tax situation as well as an expectation of tax rates in the future. There are some rules of thumb. For example, in most cases, withdrawing taxable accounts first, saving tax-deferred and tax-exempt accounts until later is most tax efficient. These choices are important because they have an impact on how long retirement as- sets will last.
As co-directors of the New York Life Center for Retirement Income at The American College, we want to thank all the participants of the Retirement Income Summit for their valuable time and expertise. As we hope you have found, this group took tremendous strides in helping to define the field of retirement income planning.
We hope meetings like this continue to in- form this interesting and evolving field. As knowledge in this area grows, company training, The American College courses and the New York Life Center for Retirement Income can incorporate these valuable new insights into their programs—which will help us all better serve clients’ needs.

Originally published in the Spring 2011 issue of The Wealth Channel Magazine, Tune in Turn On: Technology you can use.

Clients, Cloud Computing and CTOs

Craig Lemoine, CFP®

Craig is an Assistant Professor of Financial Planning at The American College and holds the Jarrett Davis Distinguished Professorship in Finance and Accounting.

January 1, 2011 marked the death of the hundred- page financial plan. The date may have passed you by; there were a limited number of Hallmark cards marking the event. Even if you did not get a card in the mail, your smart phone likely sent you a text, perhaps “OMG PLN :- x.” Technology continues to march forward in the financial services industry. This year advisors will continue adapting how and where they engage, gather data, analyze plans and present recommendations to clients.
Last year saw arching trends continue from 2009. iPhones gained momentum, with CNN estimating sales of more than 30 million iPhones and 40 million BlackBerrys. These trends support a market reality: Your clients have smartphones. iPads raced onto the scene, with sales estimates around 10 million. You likely have a smartphone or iPad, as well. More importantly, your clients use these de- vices to follow up on sales, fact check, shop, dine out and engage in on-the-spot financial literacy. Clients continue to use technological tools to search for information and are less dependent on financial service professionals to provide knowledge. Instead, they rely on professionals to help them sort, filter and prioritize all that they find online.
Last year was a year of changing expectations for clients and advisors. Smartphone and instant communication have created a culture of now. Clients want instant access to their advisors through texts, social networking and e-mail. Advisors must balance immediate client satisfaction with compliance consideration and thoughtful answers. Establishing communication expectations and boundaries is critical for success with today’s client.
Advisor expectations also have taken a step for- ward. Advisors not only want to work in their office or the office of their clients, but also meet with clients at third-party locations—“Starbucks Planning.” “Cloud computing” became a buzzword last year and can help advisors satisfy their urge to plan with a cappuccino. Cloud computing allows users to work together simultaneously on a remotely located computer. Companies and individuals can efficiently outsource processing power to the cloud (a group of remote accessible computers) and dedicate their personal desktop or laptop computers to more immediate or local tasks. Financial advisors are be- ginning to benefit from cloud computing applications in home office environments, and will begin to realize the power of sharing software platforms with support staff and working in simultaneous and interactive software environments with clients. Independent advisors can benefit from innovations in cloud computing by downsizing their personal system. Paying monthly access fees to share part of a cloud-computing environment may be more cost effective than purchasing top-of-the-line PCs or notebooks.
Google continued to dominate the technology landscape and will likely continue to in 2011. Google Documents follows a cloud computing model and allows users to edit and share word processing, spreadsheets and limited presentation documents in a secure environment. A small firm may find Google Documents or a similar service a refreshing alternative to hosting a server and dedicated network computers at each financial advisor and support employee’s desk.
As markets slowly gain ground lost over the past few years, financial service professionals continue to be cost sensitive. Financial professionals must approach their communication and analytical needs with the same planning and diligence that they approach selecting mutual fund or variable annuity products for their clients. Financial service firms should use 2011 as the opportunity to charge a key employee or agent with the role of chief technology officer (CTO). A CTO must be responsible for answering key technology questions for any financial advisor or firm.

1. How do we communicate, plan and advise? What tools do we need to adopt to realize our ideal atmosphere?
Financial advisors have been challenged with hurdles in how to present information, case facts, documents and outcomes to clients. Is presenting a 200-page written financial plan the most effective method of coaching a client to act? Would a concise multimedia presentation and a shorter executive summary have a more meaningful impact? Firms must determine their culture before deciding on what tools they need to achieve it. Will clients call, e- mail, message or text advisors? Calling and e-mailing may not require any more than a phone and netbook, while video chat, messaging or secure texting could require firms to adopt BlackBerrys and high-bandwidth communication systems.

2. How much will we spend on technology, from computers to phones?
Generally, financial service firms should budget between 5 percent and 15 percent of gross revenue to technology costs. Consider investments in technology to have a tangible return on investment from one of two perspectives, time or referrals. A firm may choose to make an investment in camera phones to replace in-person office meetings. Assuming an upfront cost of $300 per phone, a CTO makes a $3,000 investment for a firm of 10 advisors. Each advisor saves about two hours a week commuting to the office. This $3,000 investment would save the firm about 1,000 hours of productivity annually—well worth the cost! Alternatively, returns on investments can be measured in referrals. Spending $20,000 to equip a conference room with an 80-inch plasma television and sound equipment may seem excessive, but the wow factor from using those tools in a financial planning presentation will help the firm generate referrals.

3. Can we buy the latest and greatest toys, that is, are new technologies in compliance?
Unfortunately, a CTO must live in the reality of their home office. FINRA rules and recordkeeping are often well behind the latest and greatest communication tools and techniques available in the market. Consult the most technologically savvy compliance officer at your home office before adopting radical changes.

4. How will the firm implement changes and new acquisitions?
Firms often consider the financial cost of adopting new hardware, software or communication systems, but they rarely consider the lost productivity associated with updating and installation. A change as simple as migrating from an iPhone to a BlackBerry could present potential hurdles. How will the contacts be imported? How will e-mails be checked on the new system? Will my passwords change? Can I sync the new system with my old calendar? Consider the actual time costs associated with making any technology changes.

The CTO plays an important role in any financial services firm, and that role cannot be understated in 2011. Today’s average million-dollar client has a home theater system, smartphone and more than 100 cable channels. Financial advisors must be able to create an experience to wow this client and make an impact in a very busy and cluttered world.

Originally published in the Spring 2011 issue of The Wealth Channel Magazine, Tune in Turn On: Technology you Can Use.

Washington Surprise: A Glimmer of Agreement in the Fiduciary Wrangle?

It’s common knowledge these days that the right and left never agree on anything. So why is Barney Frank writing letters to the SEC cautioning them on overreach in their extension of the fiduciary standard? Why are House Republicans and some Security and Ex- change Commission (SEC) com- missioners expressing concerns? It’s becoming increasingly clear that it’s middle-income Americans who may get hurt by an unreasoned, one-size-fits-all approach to a fiduciary standard that could force brokers and dealers into a new business model.

What’s an Average Investor to Do?
This change is much more of a problem for those making $50,000 a year than for those making $250,000 a year. Let’s suppose a broad fiduciary standard is put in place for broker-dealers, creating additional compliance costs, potentially limiting the distribution of proprietary products and resulting in more financial professionals moving to a fee- based model. Would an investor of average income want to pay for a standalone financial plan? Would she meet the required asset threshold to be a meaningful client for a

Fee-Based Advisor?
For average investors, the consequences could include fewer individuals seeking qualified financial advice. In fact, a recent study suggests that the cost of advice could double for those at the lowest end of the investment spectrum. According to a high-ranking official at Morgan Stanley Smith Barney in a recent issue of Investment News, the first signs of the business-model shift may already be occurring as brokers work to get ahead of the coming regulatory change. It quickly becomes clear why neither liberals nor conservatives want to be tagged with this one.
runaway regulation is the order of the day The Dodd-Frank bill took a decidedly odd approach to regulation, missing an opportunity to do more on derivatives or with the government- sponsored entities that helped cause the mortgage crisis while meddling in everything from debit card fees to creating an unwieldy new consumer agency. One result of the massive legislation was to send government agencies scurrying off to conduct studies and write rules ad infinitum.
The mandated SEC staff study on standards of care came back advocating a single standard of care for investment advisors and broker-dealers, after spending dozens of pages explaining why they weren’t sure what the impact of the change would be. Nowhere did they identify the specific consumer harm they hoped to mitigate. Still, they thought implementing a uniform standard of care was a good idea. The proposed standard would require broker- dealers and investment advisors providing personalized investment advice to retail clients to “act in the best interest of the customer without regard to the financial or other interest of the broker, dealer, or investment advisor providing the advice.” Certainly sounds good, doesn’t it?

Let’s Play the Best-Interest Game
Every successful financial professional works hard to serve clients effectively and well, and acting in the long-term interest of clients is the only path that leads to customer satisfaction, retention and referrals. Using the legal definition the SEC staff study suggests, however, creates some issues. There’s nothing in the language about risk tolerance, client circumstances or the financial professional’s best knowledge at the time the ad- vice is delivered. There is also no suggestion as to when best interest might be determined: Over the next quarter? The next year? The next 20 years?
Consider the timing of making that best interest determination as it might relate to the sale of a variable life insurance product. If the client were to die within a few years after the sale, in hindsight, a policy with the highest death benefit would have been in the client’s best interest. If a raging bull market occurs over an extended period, an aggressive variable policy with exposure to a portfolio of equities might have been the best choice for the client. Were the market to fall, stronger guarantees would have been a better choice. What seems simple—a noble concept of client best interest—is actually very complicated as the basis for regulation. It’s easy to see the increased litigation potential, as well.
Remember, too, that the uniform standard will technically change the existing definition for investment advisors. Even though the SEC has suggested interpretive guidance may not change, the core language that drives regulation and litigation will be transitioning for both business models, advisors and broker-dealers.
Broker-dealers work now under a suitability standard, with clear rules established before the fact that govern their bus ness activities. Advisors working under the fiduciary standard, however, face conduct evaluation after the fact. Regulating a principles-based fiduciary standard based on the lack of clear
rules for action is much harder. Currently, broker-dealers are inspected every two years, while investment advisors are inspected only once every 10 years on average. In fact, according to the SEC, one-third of investment advisors have never been inspected. Fiduciaries like Bernie Madoff can escape detection for a long time, creating considerable investor harm in the interim.

Where’s the Consumer Benefit?
The oversight disparity between the two models leads to a fundamental question: will consumers be better off practically with more financial professionals working under a fiduciary standard? Ask advocates of a universal fiduciary standard for a concise description of how consumers will benefit, and you’ll get few solid answers. Most will say that eliminating consumer confusion is important. There’s some truth to the fact that consumers are confused by the entire issue of standards of care, but they also indicate that they are happy with their financial professionals and their level of market choice. Any issue of consumer confusion—if that’s really the core issue— could be solved much more easily, with less potential harm, through more robust disclosure requirements.
Consumer advocates also talk vaguely about increased consumer protections of the standards change, but pushed for details they offer few. Strangely, these same advocates mention none of the potential harm to consumer choice, costs and access—harm that could be significant and hit middle-income consumers hardest.

Has the Department of Labor (DOL) Seen the Light? The Employee Benefits Security Administration (EBSA) has also been working to update its definition of which retirement plan professionals are fiduciaries. The long-standing multi-part test could be broadened, with potentially negative impact to investors with IRAs or employer-sponsored plan participants who are seeking professional advice.
The fundamental issue is the same as in the SEC debate: the “fiduciary” concept may sound appealing, but without careful attention to the way consumers access advice and the business models that make that advice readily available, consumers at the lower end of the in- vestment spectrum could be harmed— especially those with IRAs. Less access to professional advice and products is a critical concern when families are facing significant retirement income shortfalls over the coming decades.
Finally, following wave after wave of protests from virtually every quarter, the DOL is backing down. They’ve agreed to re-propose their rule sometime early next year, hopefully in a more acceptable form that does less harm to consumers.

Where Do We Go From Here?
As the debt and deficit discussions continue in Washington, the SEC has slowed somewhat their work on the fiduciary issue because of the emerging complexity of their regulatory challenge, limited resources, and the pursuit of (at last!) a stronger cost/benefit analysis. They have indicated that they will study the potentially negative impact to consumers of their staff proposal, but it is unclear how extensively they might apply their limited resources to that important work.
Congress recently held hearings that touched on these important issues – with fewer of the same tired groups chanting the word “fiduciary” while offering no supporting consumer benefits or analysis of potential consumer harm. The testimony and dialogue began to generate a greater understanding of the real issues at play for middle-income investors. Good intentions have never protected consumers. Well-reasoned public policy can, and there’s a glimmer of hope now that more nuanced and practical thinking may ultimately prevail.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Debt Reduction Roundup

David J. Stertzer, FLMI

As CEO of AALU, and top staff officer for more than 20 years, David has provided continuity, leadership and strategic vision to AALU’s Board of Directors and has worked directly with nearly half of AALU’s 50 Presidents.

Our country is arguably at a cross- roads—one with difficult choices and daunting challenges in all di- rections. Congress just wrapped up months of haggling over an agree- ment to raise the U.S. debt limit while at the same time making a down payment on our long-term debt dilemma. What some may not realize is that this is only one check- point in a long debate over the future of our fis- cal and tax policies. As time goes by, and in more ways than one, the life insurance industry and its products could be at risk—and the cost of watching from the sidelines is steep.

Where Do we Stand?

This past summer, and for the second time in 18 months (and the 11th time in the past decade), the U.S. hit its debt limit. In February 2010, Congress agreed to raise the debt ceiling on the condition that President Obama task a group of current and former lawmakers and budget experts to evaluate our fiscal problems and construct a comprehensive solution that could be considered by Congress. As a result, the National Commission on Fiscal Re- sponsibility and Reform—or the so-called “Bowles- Simpson Commission,” named after its co-chairs Erskine Bowles and Alan Simpson—was born. The Commission’s December 2010 report, entitled “The Moment of Truth,” contained a series of il- lustrative proposals aimed at reducing our national debt by more than $4 trillion through 2020. Why is this so compelling for life insurance agents? Well, one proposal sought to modify or eliminate all tax expenditures, which are deviations from normal in- come and corporate income tax treatment. Among the hundreds of tax expenditures recognized by the Congressional Joint Committee on Taxation (JCT) is the tax-deferred growth of life insurance inside build-up and the tax-free death benefits provided by these policies. The JCT projects that nearly $150 billion could be raised over five years by eliminat- ing these specific tax provisions from the Internal Revenue Code. This means that, at least from a revenue perspective, the tax treatment of life in- surance products is one of the most appealing tax expenditures on the books for fiscal hawks seek- ing to reduce our soaring debts. And the Bowles- Simpson proposal is just one of dozens that have been floated in Washington containing vague and imprecise changes to tax expenditures. The bottom line is straightforward—the preservation of these provisions for the benefit of the 75 million Ameri- can families that rely on life insurance for financial protection and retirement savings will require wide- spread and proactive political engagement from all of the industry’s stakeholders.

What Now?

Congress never faced their “moment of truth” fol- lowing the release of the “Bowles-Simpson” re- port. Despite a majority agreement among the 18 Commission members, no vote was taken in either chamber. This past summer, as we reached our $14.3 trillion debt limit, Congressional leaders and the White House negotiated through fits and starts in an effort to avoid facing the prospect of default and the economic and market-based ramifications that were expected to fol- low.

In the end, an agreement to raise the debt ceiling was reached and approved by Congress in an overwhelmingly bipartisan manner. However, don’t let the bipartisan support fool you—while the Budget Control Act of 2011 will save $1.2 trillion through discretionary budget caps, much of the deficit reduction was left up to a Super Committee of Congress to decide, which means there will continue to be partisan gridlock on the best approach towards controlling our long-term structural debt.
While the August 2, 2011, debt ceiling deadline came and went without a domestic debt crisis, the mechanics of the Budget Control Act will ensure that addressing our fiscal problems will remain the top priority in Washington for the remainder of 2011 and well into 2012. The biggest question over the next several months will be, “What will the Super Committee do?” Despite continued calls for the implementation of pro-growth tax and fiscal policies amid a worsening economic landscape and volatile financial markets, ongoing political divides coupled with the strict timeline on which the Committee will be working makes enacting any big-ticket reforms (comprehensive tax or entitlement reform) very unlikely. That said, the pressure on this Committee will be great, and the January 15 trigger—$1.2 trillion in domestic discretion- ary and defense department cuts—will be something that both parties will aim to avoid. In any event, what we know is that momentum for tax reform is building. Whether the Super Committee takes up the task or Congress waits until 2013 to do so, the life insurance industry must be prepared when the day does come. This is where the direct advocacy has proven to be so effective.

Putting Our Model to Work

This summer’s debt showdown is only one step in the contentious process of establishing fiscal stability. The byproduct is and will continue to be a fluid and unpredictable environment that mandates active, diligent engagement by practitioners and the industry to guard against any possible tax threat. These would include not only the aforementioned threat to inside build-up and death benefits, but also possible threats to business uses of life insurance products. Additionally, it is worth noting that while much of the rhetoric around the Budget Control Act trended away from imposing higher taxes or eliminating certain tax preferences, over the long-run—and particularly in the context of comprehensive tax reform—significant changes to the tax code, especially in the area of tax expenditures, are likely to be much more palatable for members of both parties. The environment may seem slightly muddled, but that we are facing an indefinite and dynamic tax challenge is clear.
The insurance industry’s tax threats will not soon disappear. Any debt re- duction agreement reached in the coming weeks and months will only be a down payment towards effectively reversing current unsustainable fiscal trends, and a broad tax reform effort may also be in our future. Put simply, as long as revenues are in demand, changing the tax treatment of life insurance products will always be on the table. Standing on the sidelines is really not an option.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Edward Woods

Virginia E. Webb

Virginia E. Webb Managing the Knowledge Center at The American College, Virginia does research for faculty, students and graduates, as well as administers the technical services department of the Vane B. Lucas Memorial Library.

Andrew Carnegie once said: “Team- work is the ability to work together toward a common vision. The ability to direct individual accom- plishment toward organizational objectives. It is the fuel that allows common people to obtain uncom- mon results.” Edward Woods, as one of our College’s founding fa- thers, brought to the table his vast life underwriting and industry success, a passion for the art of salesmanship and love of country. He saw life insurance as being essential for those in old age, widows, for education of chil- dren, protection of home, philanthropy, payment of debt and as an estate-planning tool.
Woods stressed that “salesmanship is not the same as selling,” and pointed to many fields where professionals were trained without salesmanship being included. He presented many of his research findings at the NALU annual meetings and served on the NALU Committee on Scientific Salesman- ship for many years. Traits Woods felt essential for a salesman included: appearance and manner; school- ing or education; system; health; industry; convinc- ingness; knowledge; character; thrift and initiative. He felt it was his patriotic duty to educate and train successful insurance agents.
He wrote books including: Life Underwriting as a Career (1923), America’s Human Wealth: The Money Value of a Human Life (1927) and The Sociology of Life Insurance (published posthumously by Dr. Huebner in 1928).
He served as president of NALU (now NAIFA) from 1915-1916, addressing 23 associations, travel- ing 26,679 miles and making 48 addresses during the course of his presidency.
He began the Carnegie Bureau of Salesmanship Research in 1916 and helped to create the Carnegie
School of Life Insurance Salesmanship in 1919 (known today as University of Pittsburgh). This marked the first formal insurance education train- ing and preceded the formation of
The American College. Edward Woods was born in
1865 in Pittsburgh. He attended school but left at age 15 to go into the life insurance business with his father at the Equitable Life Assurance Company (now known as AXA Equitable). When his father retired in 1890, Woods became a general agent. Later he established his own agency,
The Edward A. Woods Company. For some 20 years his insurance agency was the
largest life insurance agency in the world. Woods was also active in the Pittsburgh area and gave back to his community with his time and treasure.
On March 25, 1927, Woods was elected the first president of The American College and served on the Board of Directors. He died on November 30 that same year. The College established the Edward Woods Foundation, the school’s first endowment fund. When announced at the 1928 NALU Con- vention, the response was immediate and generous. More than $50,000 was pledged. Some of those funds later helped to finance The College’s first headquarters building in Philadelphia. Woods’s es- tate included insurance on members of his family as well as those in his company. He even included a policy to provide a $100 Christmas present for his wife each year.
The American College awarded its highest honor (The Huebner Gold Medal) posthumously to Ed- ward Woods in 1978. We owe him a debt of grati- tude for his energy, foresight and service.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

TAC Knows Retirement Planning!

Allen McLellan, CLU®, ChFC®, CASL®, CFP®, LUTCF

Allen is the Associate Dean and Assistant Professor of Insurance at The American College. allen.mclellan@TheAmericanCollege. edu

Understating it, we live in extremely uncertain times! That uncertainty is transparently manifested in planning for retirement. Your clients are, or will be, concerned about it—and they will approach you for advice. How do we account for a long retirement, perhaps 30 years or more, in making assumptions about investment markets, inflation and stability of income? How do we address the most pressing concerns of retirees, such as outliving their income, healthcare, long-term care and lifestyle? The stakes are high, and there is no redo on the client’s retired years—get it right or face a devastating financial future. Complex issues demand in-depth knowledge and sharpened skills for anyone holding out to be a financial advisor, and The American College meets today’s challenge of preparing financial advisors to excel in the retirement planning arena.
The competencies required in a retirement planner are broad and deep. Just a partial list includes:
•  Investment planning (accumulation for retirement).
•  Decumulation (lifetime withdrawals from retirement assets).
•  Social Security (when to take it).
•  Healthcare (especially Medicare for seniors).
•  Long-term care (the biggest threat to security for most retirees).
This list does not include the soft skills so important to advisors such as communication, active listening and interviewing techniques. Clearly, there is much to learn for the retirement planner, and there are no shortcuts to learning the material and mastering the skills. Enter The American College.

For decades, The American College has been the leader in financial services education. We are particularly strong in our retirement planning curricula, as evidenced by Matthew Wade, LUTCF, a financial services representative in Ocala, Fla., who said, “That module, specifically, crystallized my decision to pursue the retiree market as my primary market. As a result, I am now on pace for Presidents’ Conference in my second full year in the business.”

The American College has developed content from some of the nation’s best thought leaders who have experience as financial planners, served on the faculty, published their work in scholarly journals and have been interviewed by our staff. The College also listens to our students and incorporates their feedback into frequent revisions of our courses. The following are five of our most popular courses in our Financial Advisor series and are tremendously valuable to advisors who focus on the retirement population.
• FA 261-Foundations of Retirement Planning. The course addresses all steps in the retirement planning process, fact- finding, analysis and financial assumptions, Social Security, Medicare, Medicaid, tax policies and suitability of investment vehicles such as stocks, bonds, mutual funds and annuities. Alicia Coleman, CPA, a financial advisor with Metlife Financial Group of the Southwest, said, “FA261 was a very helpful course for me. My best clients have been pre- retirees. I feel very comfortable talking with them because of the knowledge gained in the course. I really liked the format and the content was great.”
• FA 262-Foundations of Financial Planning: An Overview. Delves deeply into the components of a comprehensive financial plan, including retirement planning, risk management, income tax planning and estate planning.
• FA 263-Foundations of Financial Planning: The Process. Guides the advisor through identifying markets and prospects, communication skills with clients, developing and presenting a comprehensive financial plan, and providing superior service. Includes in-depth coverage of time- value-of money, financial risk tolerance and asset allocations.
• FA 255-Essentials of Long-Term Care Insurance. Long-term care insurance is all about asset protection, usually throughout the retirement period. This course explains the need, describes coverage provided by long-term care insurance and describes how to tailor an LTC insurance policy to a client’s needs. A focused education in long-term care issues.
•  FA 256-Essentials of Annuities. Studies show that more retirees fear outliving their assets than fear death. Financial scholars are increasingly recommending annuities as a means of providing guaranteed lifetime income for clients. This course presents the characteristics of fixed, indexed and variable deferred annuities for accumulation of wealth on a tax-favored basis, and it discusses immediate annuities to provide income security for retirees.

The true success of The American College retirement planning courses is measured in the success of the individuals who have taken them, such as Colin Edding- ton, LUTCF, a financial advisor in Houston. He said, “The knowledge I gained helped me grow my practice by many multiples and taught me details about retirement planning that I did not get from any of my college classes. I recommend it to anyone who is serious about their career as an agent, and who wants to have a foundation to build a successful practice.”
Jason King, LUTCF, agency sales director for Creative Financial Solutions, agreed, saying the program’s “focus on both the process of fact finding and on the activities that are essential in this business contributed greatly to my early success. In my current role as sales director for our New Orleans office, I see our newest advisors benefiting from the LUTC program, as the assignments and course materials align with and complement our agency’s training and development programs.”
Upon completing American College retirement planning courses such as FA261, professionals also take with them practical tools they can use in the course of their everyday business. “Using a questionnaire form from the course, I was able to finally land a nice size annuity, which I had been trying to get for a year,” said Marco Giglio, a financial services representative with Tampa Bay Financial.
“The questionnaire further uncovered two other needs I had not been pursuing with the same client,” he added. “While we are still working to get the other two pieces in place, I did find it to be a helpful tool and one I will continue to utilize going forward.”
In closing, the retirement planning courses mentioned here and other courses offered by The American College can lead to the Life Underwriter Training Council Fellow (LUTCF) and Financial Services Specialist (FSS) designations—both worthy goals. In addition, the knowledge, skills and confidence derived from successful completion of these courses will change and lift your professional careers in many ways. More satisfied clients, more referrals, more income and more recognition from your peers will surely result. Armed with the knowledge from these courses, you can easily write your value proposition and explain why clients should call on you rather than the other guy.
“It is not an understatement to say that the LUTC curriculum should be required learning for any advisor coming into this business,” said King.
For more information, check out our website at or call our Professional Education counselors at (888) 263-7265. Good luck in your career!

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Mastering the Science of Financial Services

Glenn Boseman, DBA, CLU®, CLF®

Glen serves at the Dean of the Irwin Graduate School and Roger Hull-James S. Bingay Chair of Leadership at The American College. glenn.boseman@ TheAmericanCollege. edu

The American College’s Master of Science in Financial Services (MSFS) degree provides the in-depth knowledge and skills that allow a financial services professional to serve the public more effectively. The curriculum emphasizes analysis, planning and implementation of strategies for individuals, families and businesses to protect, conserve and distribute financial assets. The program further emphasizes the role of the financial services professional in developing a synthesis of financial resources, needs, objectives and appropriate alternative plans for achieving the economic ends desired by today’s clients. Graduates and students active in the program enhance their professionalism while gaining skill and confidence in implementing complex strategies resulting in increased value to their clients.
“The impact of my Masters degree is immeasurable,” said current MSFS student Leasha West. “The MSFS has allowed me to gain entry to advanced markets, acquire corporate clients and obtain much larger cases. The applied knowledge from this program has catapulted my bottom line.”
The MSFS degree requires a total of 36 credits or 12 courses to complete the program, and the student has five years to complete the program requirements from the time of admission. Eight of the 12 courses are required of everyone, followed by two elective courses for individuals who wish to specialize in a specific area. Finally, students will take two courses in a required on-campus, four-day residency program. As part of the MSFS, each student is required to complete a Case Study Project towards the end of the program to demonstrate an understanding of and the ability to apply the major concepts learned throughout the MSFS. Individuals who have earned the ChFC® or the CFP® designation may request permission to challenge or test out of any two of the required or elective courses. Eligible student must request the challenge within 90 days of being admitted into the program.
The College began teaching many of the MSFS courses live online in 2010. Each course is taught for two hours (usually in the evenings) for a period of 10 weeks, and concludes with the traditional multiple-choice test administered by Pearson Vue or, in some cases, the professor will test using either a short-answer essay exam or project. Student enrollment in each of these courses is limited to allow professors to have significant interaction with the students and to facilitate student interact on a peer basis. Student feedback on the online courses has been outstanding.
The College offers the online webinar courses in open enrollment, meaning anyone in the MSFS program may enroll in the webinar, except when webinars are presented for a specific company with only individuals from that company participating.
In November 2011 we will publish the online teaching schedule for all MSFS courses for 2012. The schedule will be developed in such a way that a student may schedule the complete program through online classes, excepting, of course, the residency courses.
The MSFS program is demanding and challenging, as it presents financial concepts, skills and education at the highest level in the financial services industry, but the benefits derived from the MSFS far outweigh the time and expense associated with obtaining it.
Jim Peterson, a recent MSFS graduate, said, “Be- cause I train and coach a lot of advisors, the MSFS has allowed me to grow professionally and provide the kind of information that my advisors need, particularly the ones who have been around for a long time and are looking for different ways to approach the business.”
Visit The College’s website at and see how easy it is to get started in the program.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

The Ethics of Dealing with Older Clients

James A. Mitchell, CLU®, ChFC®

James is the retired Chairman and CEO of the IDS Life Insurance Company, a subsidiary of American Express, and chair of the Advisory Board for the Center for Ethics in Financial Services at The American College.

The American College offers the designation of Chartered Advisor for Senior Living (CASL®). The CASL® curriculum is the most robust course of study available in this specialized field. In addition to dealing with the technical aspects of retirement decisions, estate planning, health and long-term care insurance and investments, one course in the CASL® curriculum deals specifically with understanding the older client. This course, HS350, appropriately named “Understanding the Older Client,” focuses on the important changes clients face as they age to enable financial advisors to better serve clients’ needs. It deals with the biological and psychological aspects of aging, as well as with family relationships and other social support systems. Additionally, the course teaches advisors how to communicate effectively with seniors.
All who earn The American College’s designations are required to adhere to the school’s Code of Ethics, including its Professional Pledge: “In all my professional relationships, I pledge myself to the following rule of ethical conduct: I shall, in light of all conditions surrounding those I serve, which I shall make every conscientious effort to ascertain and understand, render that service which, in the same circumstances, I would apply to myself.”
Conducting yourself in accordance with the Professional Pledge is important in dealing with all your clients, especially so in dealing with senior clients. You want all your clients to understand why they are buying what they are buying. That way, they will feel good about the advice you have rendered them, they will keep their products in force and they will recommend you to others. With seniors, this is even more important. Some senior clients suffer from diminished mental capacity or a shortened attention span. You may be recommending exactly the right thing for them, but if they do not understand, they may resist your recommendations or feel bad about a purchase afterward. If you have concerns about your senior client fully understanding, one ethical thing to do is involve a son or daughter or other person the senior client trusts. In fact, both you and the client would be well served to ascertain early in the process if there is such a person in the senior’s life and involve them from the start.
You will want to be careful about recommending products to seniors that carry heavy surrender charges or are otherwise illiquid. Many seniors ike the peace of mind of knowing that they can have ready access to their money. When a product does carry surrender charges, you will want to explain them carefully so the client and his family understand fully. Some years ago I was doing an annuity seminar where I took care to describe the product’s seven-year surrender charge. Afterward one man came up to me and said, “The 7 percent surrender charge is to give me incentive to leave my money with you for at least seven years, is that right?” When I told him that his understanding was correct, he wrote us a check for $250,000 on the spot.
One of the great benefits that financial advisors can give all their clients is confidence in knowing that they have a sound financial plan that helps them achieve their objectives, and that they are implementing the plan with appropriate products. With senior clients, the benefit of that peace of mind can be even greater. Knowing that his or her financial affairs are in good order can be the greatest gift you can give to a senior client. Making “every conscientious effort” to understand the needs of your senior clients and to “render that service” that is appropriate for them in their circumstances, being sure they understand fully why they are taking the actions they are, is well worth your while. You will be doing the right things, and your senior clients will appreciate the effort and recommend you to others.
The American College Center for Ethics also has a Continuing Education course, CE 110, “Ethical Issues in Dealing with Elderly Clients.” This enlightening course, presented by Julie Ragatz, Director of the Center for Ethics, is webcast periodically. To learn more, including whether the course is approved for CE credit in your state, please go to the center’s website at center-for-ethics.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Doing More with Less

Adam C. Pozek, RHU®, REBC®

Adam is a Partner with DWC ERISA Consultants, LLC in New England. He is a frequent author and lecturer and publishes a blog at PozekOnPension. com. adam.pozek@

On a recent flight from Boston to Minneapolis, I got a laugh when I noticed that six of the eight people seated in the first two rows of business class had their iPads out as soon as the “It is safe to use portable electronic devices” announcement came. The blazing speed at which technology moves ever onward is nothing new; however, the fact that gad- gets and downloads are now useful in business is somewhat of a novelty, especially in the financial services world. Fortunately, we no longer have to break the bank to take advantage of the myriad tools that are developed every day.
Dropbox ( is one of a number of web-based (a.k.a. cloud) storage, sharing and backup services. When you create a free account and download the free application, Dropbox creates a folder on your computer. Anything you save or copy to that folder is automatically synced to your online Dropbox folder, and it is all done securely so that your data is protected. Install Dropbox on your laptop, and you’re automatically synchronized. Install the free app for your iPad, iPhone, Blackberry or Android, and all your files are instantly accessible. If you make a change on any one of those devices, the updated version is immediately be synced to all the others.
Dropbox also provides a se- cure method of sharing files with others. If you need to share a single file, just right-click the file name and the pop-up menu allows you to create a secure link you can e-mail to anyone. You can also share entire folders with anyone else who has a Dropbox account. Set up an account for your entire office and allow your team members to safely and securely share files with each other and collaborate on the go. Accounts are free up to 2 GB of data and go up to $19.99 per month for up to 100 GB of data.
No matter how organized you are, it is too easy to accumulate notes from your many meetings and conferences on multiple notebooks. Then, there is the challenge of trying to decipher your own personal shorthand when you get back to the office. The Audiotorium app for iPad ( um-notes-text-audio/id362787978?mt=8) takes care of these issues for only $4.99. Just launch the application, and you are greeted by an interface that looks like a yellow le- gal pad. It allows you to type meeting notes and record the audio at the same time from within the same app. Concerned that you will now have to organize notes and recordings? No problem. Audiotorium allows you to tag all your entries with keywords that could include client name, location, date, etc.
If you have a Dropbox account, Audiotorium will instantly save your notes and recordings to the cloud. You can e-mail a link to other meeting attendees before you even leave the parking lot, or automatically sync the files with your assistant’s computer, so he/she can review and draft a follow-up e-mail with action items for your review be- fore you even get back to the office.
Prefer handwriting to typing? Well, the next update to the app promises to allow you to write notes directly on screen using your finger or a stylus.
GoodReader ( er.html) allows you to read and mark up PDF files directly from your iPad. It also al- lows you to open and read many other common files such as those from Word, Power- Point and Excel. As the app integrates with Dropbox and other cloud storage services, you can access your files anywhere you can get an Internet connection, and all of your changes are automatically synced to your other devices. If you need to work offline, simply download your files in advance and the synchronization will occur the next time you are connected. When you have finished your review and mark up, you can e-mail files directly from within the app to anyone with an e-mail address. GoodReader is only $4.99.
Yes, technology moves ever onward, but for less than the annual cost of that daily cup of coffee there are tools that allow you to make the most of your time so you can do more of what you enjoy—serving your clients.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Evolving to Fee-Based Compensation in the Retirement Plan Business

Ken Cochrane

As co-founder and managing director of Pulse Logic, Ken also works with companies to help them grow by identifying and implementing their brand strategy, as well as developing and executing sales plans and management practices

Retirement plan advisors are moving away from commission to fee-based compensation models at a rapid rate. While widely recognized within the advisor-served marketplace, this pace of change is note worthy. Our studies show that two years ago, 34 percent of plan advisors reported having service agreements in place with all of their clients. These documents not only state the services ad- visors provide, but also outline their fees, the source of payment and the timing of the payment. Today, more than 65 percent of advisors report having service agreements in place with all of their clients. We also found that 35 percent of advisors reported all of their retirement plan business was commission based in 2009, while today just 17 percent report they are solely reliant on commissions in the retirement plan space.
Why this dramatic change? The retirement plan field is a dynamic marketplace with multiple exogenous forces pushing its evolution. Increased regulations, scrutiny and risk awareness have moved plan sponsors to demand more from their retirement plan advisor. Plan sponsors are not just looking to advisors to do more, but also share in their fiduciary responsibilities. As a result, Pulse Logic has found plan sponsors are looking to their advisor to not only be more involved, but to be an expert who can guide or make critical decisions. In addition, they want the advisor’s roles and responsibilities to be clearly defined, leading to greater accountability and the assurance that many of the crucial fiduciary functions will be performed.
Retirement plan advisors have responded by providing service agreements to their clients. These
contracts not only decouple themselves from product and service providers, but also allow advisors to sell their services on their own merit. Even amid these transformational changes, we have found plan advisors remain optimistic. More than 80 percent report they see their retirement plan business growing and becoming a larger source of revenue or predict it will become their primary business. They also believe the field will require greater advisor expertise. More than 75 percent see a move toward specialization, resulting in the plan-centric advisor thriving while the incidental plan advisor may struggle in the future.
During this transition to fee-based compensation models, the marketplace is beginning to reveal inefficiencies. So often the case in changing markets, advisors are testing the market to find the right service offerings and fee structures.
For the past 30 months, Pulse Logic has been actively studying the retirement plan advisor market space. Having conducted more than 14 studies, we have amassed data from upwards of 1,300 retirement plan-centric advisors. During this period the demographics of plan advisors have remained consistent. More than 50 percent of plan advisors have at least 20 years of experience, and 75 percent have at least 15 years in the financial services field. Our data also indicates that 55 percent of these advisors have at least 15 plans under management, and 60 percent indicate they have at least $25 million of qualified plan assets under management. Year over year, about half sell one to three plans, while 25 percent sell from four to six plans. Twenty-five percent indicate this is their primary business, while 70 percent report it is one of no more than three core business lines.

As the fee-based compensation model develops, we’re beginning to see threads of consistency. Similar to commission models, 88 percent of fee-based advisors report their compensation is a function of plan assets. Half of those advisors report using tiered schedules where basis point charges decline as assets increase. Flat fees, while rarely used on their own, are being used to some degree as a hybrid model with asset based fees. As you can see in Chart A, flat fees alone, or as a hybrid model, are most frequently used in the plans when there are insufficient assets to cover the advisor’s fees or when asset-based fees may exceed the commensurate services provided.
While the basis of fees show some consistency, the similarities begin to break down when determining fee levels. A recent study revealed 49 percent of advisors report they base their fees on market rates, 22 percent use perceived client thresh- olds, 17 percent use a cost plus method and only 12 percent rely on an outside source. All told, 61 percent admit assigned fees still come down to client negotiations.
When asked what influencers change their fees, the most frequently cited reason was the required level of client attention (78 percent). This was followed by the complexity of the plan (49 percent). Other significant reasons included the influence of their client on other potential business (29 percent) and provider service issues (27 percent).
When asked if advisors offset their fees with commissions or allowances received, nearly half stated that offsetting fees with commissions did not apply to their business. Among those still receiving commissions, two-thirds stated they do not offset fees with commissions received. Often overlooked but an important part of the fee-based model is the source of the funds and who pays the advisor. Seventy-six percent of advisors report they are either paid directly by the plan sponsor or their fees are a deduction from plan assets, while the balance report they are paid from the plan’s ERISA account. Advisors report that nearly 40 percent receive payment from either the investment platform provider or directly from the plan sponsor, depending on each plan’s structure. Twenty-seven percent of advisors report they are paid by the investment provider on all of their plans, while an additional 27 percent report they are paid directly by the plan
sponsor on all of their plans.
Quarterly proves to be the most popular frequency of payment (70 percent), while nearly the balance (27 percent) report they are paid monthly. Sixty-five per- cent report being paid in arrears and 35 percent are paid in advance. Those basing their fees on assets most frequently (43 percent) use the value of plan assets at the end of the period to calculate their fees. 30 percent use the beginning of the period while 26 percent rely on a third party pay or to determine the method of calculating fees.
Contrary to standard practices among consulting firms, our studies report that 75 percent of advisors do not bill their clients for expenses incurred such as travel, printing or shipping.
Pulse Logic studies have also shown the fee-based model has proven successful. Plan advisors embracing fee-based, models tend to have more qualified plan assets under management, as you can see in Chart B.

Only 22 percent of commission-based advisors report having qualified plan assets under management exceeding $25 mil- lion vs. 70 percent for fee-based advisors. In fact, 36 percent of fee-based advisors report their new sales in the last three years have accounted for at least $10 million of new plan assets under management each year. While the fee-based approach lends itself to larger plans, those who have taken the added steps to position themselves as a specialist have enjoyed even greater success.

Chart C indicates that 58 percent of advisors who position themselves as ERISA/fiduciary specialists have exceeded $10 million of new plan assets under management in each of the last three years. Among those positioning them- selves as investment experts, 45 percent exceeded $10 million of new business in the last three consecutive years.
While the fee-based model proliferates within the advisor- served retirement plan space, best practices and benchmarks are still in the process of being established. But its success is clearly established. Advisors whose practice is dependent on their retirement plan business are best served to establish a fee- based solution to meet the evolving needs of plan sponsors, and to develop a specific expertise to increase their competitive position in the marketplace.

Women Need to Think Beyond Today

Karen Wimbish

Karen is the Director of Retail Retirement, a part of Wells Fargo Retirement, where she leads a department of more than 200 team members who are focused on increasing Wells Fargo’s ability to help retail customers plan for and live a comfortable retirement. karen.wimbish@

Because women are statistically more likely to live longer and to leave the job market and re- enter it years later, they are less likely to have enough saved for retirement. That’s definitely a double whammy.
How do we know this? Wells Fargo enlisted Harris Interactive Inc. to conduct a survey on our behalf, including 1,756 telephone interviews of middle class Americans in their 20s, 30s, 40s, 50s and 60s. The inter- views, conducted between September 9, 2010, and October 7, 2010, surveyed attitudes and behaviors around planning, saving and investing for retirement. To target the middle class, the survey included only respondents who fell within specified income and wealth brackets. Those aged 25 to 29 had household income of $25,000 to $99,999 or investable assets of $25,000 to $99,999. Those aged 30 to 69 had household income of $40,000 to $99,999 or investable assets of $25,000 to $99,999. The lower income limit for 20-somethings was used to reflect the early stage of their careers. For the 20s age group, only respondents aged 25 to 29 were included in order to focus on workers.
The results from our Wells Fargo Retirement Survey told us much about the attitudes of women across five decades. For example, it showed that only 54 percent of all women were confident they will have enough saved to live the life they desire in retirement. Women were also less likely to have a pension plan (40 percent) or 401(k) through an employer (71 percent) as compared with men. When it came to Social Security, women were less likely
than men to believe it would be available to them.
Digging deeper into women’s savings activity and attitudes, we found that women have set their sights lower for what they need for retirement and—on top of that—have saved less than men. Women set a median of $200,000 as the amount to support them in retirement and have saved a median of $20,000; men set a median of $400,000 for their retirement and have saved a median of $25,000.
According to our survey, nearly 30 percent of middle- aged women are also unclear about how much they would need to withdraw from retirement savings annually. About 32 percent of women in their 40s and 50s estimate they will withdraw 11 percent to 30 percent, or more, from their savings each year. Most financial experts would say that 4 to 6 percent
should be the maximum for withdrawing annually. When it comes to making financial decisions, 35 percent of women identified themselves as the primary financial decision maker, compared with 55 percent of men. In marriage, 83 percent of women said they were the joint financial decision maker, while 58 percent of men considered themselves a joint decision maker. We view this 25 percent point gap in responses as a communication gap that signals the need for couples to truly have those long- range financial discussions, no matter how uncomfortable they may be. Women in our survey were candid about being
wary about putting money in the stock market, possibly reflecting the most recent market turmoil.
Only 27 percent considered the stock market a safe place to invest and grow their retirement dollars. We asked both men and women what they would do if we gave them $5,000 to put away for retirement. Forty percent of the women would buy bank CDs with the money instead of putting it in the stock market, compared with 30 percent of men who would purchase CDs. Investing too much money in CDs for long periods of time may cause them to not keep up with inflation rates.

Age changes attitudes
With this survey spanning five decades of women, it was fascinating to see how different attitudes are from one generation to another. Based on our research, women in their 20s tend to be too conservative with investments in stocks. We think it is likely that they watched many lose so much in the 2008- 2009 market downturn. Instead, this age group may need to consider being more aggressive in investing because they have time to absorb some setbacks they might face through the years. Of course, as each investor’s situation is unique, you need to review your specific investment objectives, risk tolerance and liquidity needs before a suitable investment strategy can be selected.*
Young women should also think about setting aside money in an employer-sponsored retirement plan right away—with that first job—and contribute a consistent percentage. Then, if they get a promotion in their 30s, for example, any increase in salary should correlate to an increase in savings put into the 401(k). The key is to get into the discipline of setting aside money right away so it won’t be missed.
Women in their 40s tend to be the most stressed, financially and otherwise. Many are sending children off to college and facing rising tuition costs, while also contemplating how to care for aging parents who may be accumulating pricey medical bills. Despite the pressures, we encourage these women to keep contributing to their 401(k) plan at the percentage that maximizes the company match. The long-term shouldn’t be sacrificed for the present day, no matter how tempting it is.
According to our research, once women are in their 50s, they become the least concerned of the age groups and al- most giddy with the prospect of retirement. Perhaps they’re oblivious of the financial needs of the retirement to come and retirement is far enough in the distance to not worry them on a daily basis.
When the 60s come, however, women go back to feeling stressed. Retirement is now imminent. They face hard choices.
How long will they need to keep working before drawing from their retirement savings? Will they need to continue working at least part-time after retiring from their full-time job? Will they be compelled to move to a cheaper part of the country— or world—to stretch their pool of money?
These final two groups of women often reflect generations who have left and then re-entered the workforce. That translates into smaller contributions into the employer-sponsored plan and potentially a lower salary from which to draw contributions. It also might lead to the looser connection to those long-range financial discussions with a spouse, reflected in the varied survey responses from women and men about joint financial decision making.
As we look at our survey results and other research about attitudes and actions around retirement savings, we believe there is a real opportunity to take control and adopt a more proactive stance about their financial future. We want to help women of all generations to find ways to keep them from feeling resigned to a less-than-desirable future.
So, how do we begin to get at the solution? We have to educate ourselves.
We’ve found that many women feel intimidated about what they don’t know and assume financial planning is going to be too complex to understand. Knowing also that women like to learn from other women and prefer social networking to lectures, we launched our Beyond TodaySM website (wells- earlier this year. The website, geared specifically for women, features planning tools and checklists, articles addressing common concerns and blog posts about topics including budgeting, examining shopping habits and developing a network of trusted people to tap for advice and help.
We also have to just start taking steps—saving money now for the future that lies beyond our today.

* Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Will Your Client’s Public Defined Benefit Pension Plan Disappear?

Karen Eilers Lahey, Ph.D.

Karen is Professor of Finance at the University of Akron, a Charles Herberich Professor of Real Estate, a Fitzgerald Institute Fellow in Entrepreneurship and a member of The American College’s Board of Trustees.

Attendees at a meeting of retirement experts and financial services industry practitioners at The New York Life Center for Retirement Income earlier this year discussed a definition for retirement income planning and pointed out the difficulties of switching from the accumulation process to the decumulation process. Added to that difficulty is the risk facing both individual government workers and state and local governments in financing and paying benefits for workers who retire with a defined benefit (DB) plan. How can a financial planner help a client plan for the possibility that once retired their benefits will be reduced or stopped altogether?
The answer to this question is, as always, that it depends on the individual circumstances of the client and his/her spouse or partner. Recent statistics from the U.S. Census Bureau report that in 2010, 56 percent of individuals 65 or older were married. This age group accounts for 13 percent of the U.S. population and their median income in 2009 was $31,354 vs. $49,777 for all households, indicating that projected retirement income may be lower than current income. A total of 42 percent of employed individuals who are 65 or older are working in management, professional and related occupations, and that may provide an opportunity for your client to work longer. However, only 16 percent of people in this age group were in the labor force in 2009.
There were 74 men in this age group for every 100 women, and for those 85 or older the number of men dropped to 46 for every 100 women. It is reasonable to assume that the female spouse will on average live longer than her husband and may have even more reduced income when that occurs.
For a hypothetical example, let’s assume that you are providing retirement income planning for a couple who is turning 65 this year and at least one of the spouses is a government worker who has earned the right to a DB pension plan based on 30 years of service. How will the decumulation planning change if there is a risk that the DB plan will stop paying benefits or will re- duce the benefits during the remaining lives of the clients? First, the couple must understand the risks they face with their planned retirement in- come and the additional risk of potential reduction or loss of DB plan benefits.
Joseph Jordon, Dan Weinberger and Joel Franks at MetLife recently published a pamphlet, “Engaging Clients in a New Way,” for financial professionals focused on the behavioral finance aspects of retirement income planning. They suggest that it is important to not only provide retirement income planning but to also involve the client in the decisions on income and expenditures. In addition, knowledge about the risks they face in retirement should be provided as well as listening carefully to their attitudes and feelings about the remainder of their lives.
Modern portfolio theory is the theoretical basis of the accumulation phase of retirement planning and relies on concepts such as diversification through asset allocation and minimizing taxes and fees throughout the working years by making rational decisions about investing. Behavioral finance suggests that investing decisions are made based on feelings and perceptions, which may be irrational at times, such as buying high and selling low or preferring less return for more risk. How does the financial professional bring both of these concepts to the table in helping our hypothetical clients with retirement income planning? By recognizing the need to involve both the clients’ feelings and attitudes as well as providing analytical back- ground to the choices that are presented.
The conversation should start with an ex- planation of the general
risks that the couple will face in retirement. These risks include:
• Market risk
– sequence of returns early in retirement.
• Longevity risk – living longer than retirement income.
• Inflation risk –costs of goods and services increasing over time while income does not.
• Liquidity risk – not having flexibility when unexpected events occur.
• Health risk – funds needed for long-term care. • Legacy risk – not being able to leave a financial legacy.
Once conversations have ensured an understanding of these general risks, as well as the DB pension risk, the couple needs to determine the importance of each of these risks for their retirement income. The couple needs to also understand the potential sources of retirement income. The logical place to start is a determination of potential Social Security (one or both may have benefits that can be affected by the age at which they are drawn down and if both spouses do so at the same time). Calculators are available on the Social Security site ( to analyze alternative age and income choices.
In nine of the 50 states, government workers with DB plans that do not pay into Social Security will receive a very reduced benefit or none at all (windfall provision). After Social Security benefits are analyzed, attention should then be directed to DB pension benefits available to the government worker spouse. Choices will include a lump sum withdrawal, and a variety of options that can include 100 percent joint and survivor benefits, one-half to beneficiary, one-third to beneficiary and a single life benefit. The problem in deciding which choice to accept lies in the fact that, unlike corporate DB plans, public DB pensions are not guaranteed by the Pension Benefit Guaranty Corporation (PBGC), and there is no regulation of public DB pensions by the federal government.
If the public plan defaults on its promised benefits there is no guarantee of benefits. The planner must recognize the pro- visions for the state in which the client earns the DB benefit because each state has its own regulations. In addition, each state has a different degree of default risk as measured by the unfunded ratio of the plan, which changes each year based on the following:
• Employer contributions
• Employee contributions
• Number of retirees to active members
•  Salaries
• Age of pension plan members
• Return on investment portfolio
• Discount rate for the assets in the portfolio
If the financial professional believes there is a reasonable chance that the benefits will be reduced or eliminated, this risk should be presented to the client and potential solutions suggested after other sources of income beyond Social Security are determined.
What other sources of retirement income are available for the client? Let’s assume that they have Social Security benefits that will provide a foundation for the retirement income and that the DB public pension plan will initially provide a fixed income that is equal to the Social Security benefit. They have both paid into Medicare and are now eligible for these medical benefits. They have a total portfolio of investments equaling $1.1 million, the basis for withdrawals for future income, which is invested 50 percent in equities, 40 percent in debt securities and 10 percent in cash equivalents. They want to keep these proportions the same in retirement. Before taking recommendations on how their portfolio should be invested, the couple must decide on their expenditures in retirement, including both fixed monthly expenses and discretionary expenses such as travel, gifts and charitable donations.
The couple still has a mortgage of $100,000 on their second home and they own their primary residence free and clear. They have two children and six grandchildren that they would like to leave a legacy, and they would also like to leave a legacy to their colleges.
While they mull over their desired retirement lifestyle, you must come up with a plan that provides retirement income that will last as long as they live and still have resources left for the desired legacy.
Relying on just their portfolio income for an expected life for at least one of them of 30 years may be too risky a strategy in addition to the chance that the DB pension fund may not pay benefits in the future. There are a number of choices for retirement income beyond the systematic withdrawal strategy, including the following:
• Lifetime income annuities
• Deferred life annuities
• Deferred annuities with lifetime guaranteed benefit provisions
• Long-term care insurance
• Life insurance
Issues that should be discussed include whether to save or spend the DB pension payment, when to pay off the mortgage on their second home and how much of a legacy they want to leave. Which products are selected by the financial profession- al and approved by the couple will be based on their under- standing of the risks confronting their retirement income and their willingness to transfer some of the risk to third parties.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Five Ways Advisors Can Use Wholesalers to Get to Their Own Retirement

Robert Shore

Rob is the CEO of shorespeak, LLC and Wholesaler He coaches financial services distribution professionals and publishes I Carry The Bag...the official magazine of wholesaling.

This past July, SunAmerica, in collaboration with Age Wave, released a study entitled Retirement Re- set that looked at the views of Americans and their retirement post-recession. The following statement appeared on the official Retirement Reset website (
“Americans have emerged from the economic re- cession with a new set of expectations around the purpose, timing and funding of their retirement. Not only is retirement being postponed, but it no longer means an end to working—retirement is now a new chapter in life.”
Among the study findings: • Almost two-thirds of those surveyed say they
would ideally like to remain productive and include work in retirement.
• 85 percent say they now appreciate the importance of quality relationships with their friends and family even more after the recession.
• Financial peace of mind is now six times more important than accumulating wealth; 82 percent name it their key financial goal.
So, are the retirement expectations of the practitioners in the financial services community any different than those of the clients they serve? How can advisors use the services of product partners and their wholesalers to navigate their own journey through retirement, however they choose to define it?
Here are five ways to ensure that your retirement vision becomes your reality by using the resources of your product partners, and their wholesalers, most effectively:

Form meaningful partnerships
Wholesalers, like advisors, are charged with running a profitable business. This means they need to keep a keen eye on the time they commit and the dollars they spend vs. the assets that they raise. When advisors make requests that involve wholesaler time or budget money, the numbers need to add up.
For example, if you are using the Foonman Small Cap Africa Utility Fund and have pledged your sup- port to the Foonman wholesaler, the natural question becomes how much money can you ever raise in a niche product such as this—perhaps 1 percent to 2 percent of your overall allocation? Conversely, if you have committed your support to the Foonman wholesaler for the Foonman Mega Cap 100, a fund that might get 10+ percent of your flows, you should expect a more meaningful level of support.
Choose a finite number of product providers (subject to periodic performance review) and pledge your support. In return you’ll receive access to the financial, intellectual and marketing resources of those firms.

Understand the wholesaler’s unique value One of our clients is a client acquisition specialist. He prides himself on his ability to meet jointly with advisors and clients to close sales. Another client is a practice management expert who features her ability to help advisors convert their books of business from commission to fees. Still another client has a burning passion for assisting advisors with portfolio construction and, as a CFA and former portfolio manager, is well qualified to have those discussions.
What is the unique value that your wholesaler brings to your practice? Are you leveraging that ability to your firm’s greatest benefit?

Cooperatively plan business
We coach our wholesaler clients to have significantly meaningful business planning sessions with their top tier of advisors at least annually. For those sessions to be most productive the financial advisor needs to transparently share his or her annual business plan. Doing so allows for a detailed discussion about the advisor’s plans for, and the wholesalers support of, the following:
• New business development activities
• Marketing programs
• Existing client events
• Educational opportunities
These discussions must include production objectives that the advisor has set for his or her practice. Without the knowledge of the empirical opportunity, the wholesaler has no base- line to gauge the ongoing health of the partnership.

Conduct quarterly checkpoint sessions
If you have any employees in your practice, you know the importance of checkpoint meetings. These are the quarterly, per- haps semi-annual, occasions where employees have a sit down with their boss and review the goals that were outlined in the last annual review. These meetings provide an opportunity, in a less formal setting, to discuss what’s going right and where improvements can be made.
Do you have these checkpoint meetings with your wholesalers? These discussions should cover, at a minimum, these six issues:
•  Contact frequency – Are the wholesaler and their internal partner offering too much or too little contact with you and your team members?
•  Product selection – How are the products that you’re using from the wholesaler’s firm working so far? Are there changes that they’d recommend based on performance or upcoming product changes?
•  Event planning – What progress are you making with the client events that you jointly discussed in the annual business plan? Is there a cost update or renegotiation that needs to happen?
•  Referrals – Advisors love referrals, and so do wholesalers. This is a great setting for the wholesaler to ask for recommendations of like-minded advisors who would be interested in the business consulting and product solutions that the wholesaler offers.
•  Threats – Are you being tempted by another suitor (a.k.a. another wholesaler)? This meeting presents a great time, in the spirit of partnership, to discuss what’s tempting you.
•  Production – Checkpoint meetings provide the right opportunity for the wholesaler to review where you stand in production versus the commitments made at the beginning of the year.

Ask for what you want
Among the many superpowers wholesalers possess, mind reading is not one. As a result, you should be clear about what their expectations of wholesaling partners are.
If you don’t like internal wholesalers to call and thank you for your business, let them know. If you have an aversion to wholesalers dropping in to leave sales ideas, let them know. If you prefer your wholesaler visit you every third Thursday of a quarter, let them know.
As with any relationship in our lives, communication is critical—and wholesalers are working overtime to form a great relationship with you.
Whether your plan for retirement from the business of offering financial guidance to clients has more traditional trappings (such as selling the practice and sailing off into the sunset) or you are committed to the longest of long hauls, understanding the best ways to utilize the services of your professional product wholesaler will make that path to a profitable retirement a more rewarding journey.

Leadership Development – Why Take the Time?

This is the first in a series of management/leadership articles. We will be addressing the issues, questions and solutions facing both traditional field leaders who hire and train sales people, and insurance/financial services professionals whose success depends on a strong sup- port staff.
Management and leadership both encompass getting things done through others. Managers and leaders are not measured on what they, as individuals, produce. They are measured and rewarded (or penalized) for their team’s results. Leaders can’t do it alone. Leadership vision, mission, strategies, objectives, change initiatives—these all require interaction with people who will ultimately help the leader make it happen.
Leadership and management are linked but consist of distinct skills. Leadership is concerned with creating and communicating vision and mission, and driving the culture of an organization. Management is focused on effective execution of tasks. Management has somehow become a dirty word. Nobody seems to aspire to excellence in management. However, Peter Drucker, one of the pioneers of the field, said that excellence in management is a necessary precursor to excellence in leadership. Without great managers, or at least management skills, organizations will get nothing done. A final yet critically important distinction is that manager is a job title given to someone by an organization and leader is a concept only awarded by willing followers. If someone looks over his or her shoulder and no one is there, that person is not a leader. Some of the most influential leaders are often in
the middle of an organization, not necessarily at the top. For the sake of simplicity, for the rest of the article, I will use the term leadership instead of switching back and forth.
Most of us received training for specific job skills when we began our careers—computer, sales, customer service, etc. When we become leaders, at the point where we begin to affect more than just our own results, development opportunities often become scarce. Why is leadership development so important? Leadership consultant Dr. Gordon Curphy created a simple exercise highlighting the critical reasons for leadership development.
1. List all of your previous managers.
2. Place a checkmark next to the names of the managers for whom you would willingly go back to work.
3. Calculate the percentages.
The average person would willingly go back to work for about 35 percent of previous managers. The problem is that more than 85 percent of man- agers think they are above average. That means that 50 percent of managers are wrong about their ability. In which group are you? The purpose of development is to help more managers and leaders into the top group and to shorten the learning curve.
Leadership skill can be developed. Top leaders make an intentional study of leadership. They look for learning in all of their experiences, and they are always looking for opportunities to learn. Leaders who are looking for opportunities to learn are not sitting back and saying, “We have always done it like this—it works!” Learning leaders are willing to put them- selves in positions of uncertainty, to take chances.
The top 35 percent of leaders for whom people would willingly go back to work are not pushovers. When asked about their characteristics, people often describe the leader as some- one who pushed them to reach their highest potential, not someone who took it easy on them. Future articles in this series will explore the traits and skills of these high-performing leaders.
There is a simple way to determine how you are doing as a leader. We call it an informal 360. Ask your boss, two peers and several followers to answer the following questions as they relate to the productivity of the business unit:
•  What should I continue doing?
•  What should I start doing?
•  What should I stop doing?
The rules are simple. First, the responses must be gathered verbally; face-to-face is best, but the phone will work as well. E-mailed responses are essentially worthless for this exercise. Second, Vegas rules apply; there can be no retaliation for any comments. Tell the respondents this rule up front. Finally, do not defend yourself during the conversation — just listen and prompt further comments. If you jump in and explain why you do something it will shut down the conversation. The purpose of this exercise is two-fold: The feedback can be very beneficial, and, more important, it will let you know if you are the kind of manager people feel comfortable telling the truth. If you can’t get respondents, especially followers, to give you corrective feedback, they are afraid of your reaction. Honest lines of communication are critically important to the long-term success of leaders. I have instructed and de- briefed more than 300 managers on this exercise over the last two years, and the revelations are often astounding. Try it and feel free to share your experience with me. Many man- agers do this exercise quarterly or semi-annually (rotating respondents) to ensure open lines of communication.
The first step in excellence in management is self-management. Once you become a manager it is not just about you getting your own job done. Your behavior, attitudes and
moods affect your whole team. One of my students told the class about his first, very moody sales manager. The sales man- ager’s assistant would put a green or red sticky note on the top of her computer monitor to indicate the manager’s mood. The sales team learned to limit interaction on red days. Do you want your team to monitor and limit communication with you because they fear how you might react on any given day? Or are all of your days red days? Do you know yourself as a leader?
Daniel Goleman is considered to be the authority on emotional intelligence, having written several books on the subject. Emotional intelligence is a combination of self-awareness and the awareness of our effect on others — and the ability to consciously control both. Before we can effectively manage others, we must be able to manage ourselves. The challenge for many leaders is that introspection takes time and courage. When we peel back the layers, we may not like what we find. Leaders who are willing to take a hard look at themselves, and then do something about what needs to be fixed, are less likely to be derailed.

The Dr. Gordy test is from, Leadership: Enhancing the Lessons of Success, 6th edition.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Is That Your (Unintentional) Retirement Advice?

Michael Kitces, MSFS, CLU®, ChFC®, CASL®, CFP®, RHU®, REBC®

Michael is the Director of Research for Pinnacle Advisory Group, a private wealth management firm located in Columbia, Md.

If there’s one thing that has remained certain in this decade of difficulty, it’s the gold standard advice for retirement planning: Save a healthy amount of your income, start young, invest steadily, and you’ll be able to retire when you want to and enjoy the standard of living for which you hoped and dreamed. Yet the reality is this model of retirement planning advice is actually far more speculative than we have ever acknowledged, and might be better summed up as: Save for decades, build a base, and then in the last few years quickly double your wealth with investment growth and retire happily. We’d never say that to our clients, but that’s really exactly what we’ve been recommending all along!
In principle, the answer to “How much should I save to retire?” is one of the easiest and most basic math problems in financial planning. A 20-some- thing-year-old client comes in and says that she’d like to retire in 40 years with $1 million, and wants to know how to save and invest. The advice is simple; we pull out the financial calculator, enter a modest growth rate (perhaps 8 percent for a balanced portfolio), a 40-year time horizon, a future value of $1 million, and press the payment button to solve for the amount of annual savings required. The screen tells us the solution is to save about $3,600 per year, or $300 per month. Armed with this guidance, the young client goes on her merry way to a safe and successful path to retirement, comfortable in the knowledge that 40 years of diligently saving and
investing $300 per month in a balanced portfolio will get her to her goal.
What we’ve actually done is guide the client to- ward a slow, steady accumulation path for the first few decades of her working career, building an in- vestment base that she must quickly double up in the last few years to have any hope of achieving her $1 million retirement savings goal on time. To understand why this is the case, here is a simple chart showing the client’s accumulation over the 40-year time horizon using the basic assumptions previously mentioned:
Compounding growth is a pretty amazing thing and, as financial planners, we often extol the power of compounding over long periods of time. Yet we also forget just how powerful compounding can be—or is assumed to be—over short periods of time as well.

For example, as the chart reveals, while the client has in- deed accumulated $1 million by the end of the 40-year time horizon, it’s notable that after 30 years, the client still has less than $450,000. And, of course, at that point the impact of a marginal $300 per month of savings is fairly negligible; the client will only succeed in closing the gap to her $1 million goal in the final decade because of the investment returns. With an assumption of just 8 percent in growth, the classic rule of 72 means the client will double her wealth in nine years. Accordingly, what this traditional savings approach re- ally says is that the best way to have $1 million in 40 years is to have $500,000 in 31 years, and then quickly double your money in the last nine years and retire happily. There’s just one problem; this directly contradicts the reality that while markets may deliver average returns over a very long time horizon, it is highly uncertain that they will deliver a precise expected 8 percent growth rate on a balanced portfolio over any specific nine-year time period.
This is the challenging reality that many clients have been living out for the past decade; no wonder so many retirees are looking at their portfolios today and wondering how they’ll ever be able to retire! Our advice to a client who planned to retire some- time around 2010 was to accumulate $400,000 to $500,000 over the first 30 years of their lives, and then use the 2000-2010 decade to quickly double that wealth to their $1 million retirement goal. What happened instead? The markets delivered virtually flat returns over the decade, and although the balanced portfolio generated very modest positive returns, it was still nothing close to the return necessary to double an entire portfolio in nine years. Unfortunately, dutiful, ongoing savings in the final decade of $300 per month did little to make up that half-million-dollar investment return shortfall.
What does this tell us? We are probably far too reliant on compounding to work, and we rely on the biggest part of the compounding curve to hit exactly when we need it—if we don’t actually get that last doubling of 8 percent per year for the final nine years, the retirement plan can be dramatically off track. In response, that means some clients might wish to save more, while others more will at least need to acknowledge how remarkably uncertain their actual retirement date will be when committing to a saving/accumulation plan of this nature. In point of fact, this may actually help to translate the impact of statistical volatility into a much more tangible result for clients. Aiming for higher returns and allowing for more volatility may give you an earlier retirement date on average, but it makes the exact retirement year highly uncertain due to the increased risk. For many, the simple conclusion may be that saving more and aiming for a lower return, is a more desirable path.
So what do you think? Should we be communicating accumulation planning differently to clients given how much our projections actually rely on tremendous accumulations from compounding in a very limited number of years at the end of a long accumulation/financial planning projection? Have you been unintentionally giving your clients iffy retirement advice?

Grow Your Retirement and Business with Executive Benefits

Albert J. “Bud” Schiff, CLU®, CAP®

Bud is the Chief Consulting Officer and Former CEO of NYL Executive Benefits (NYLEX Benefits), a subsidiary of New York Life Insurance Company. budschiff@

You are a successful financial advisor. You have strong relationships with your clients, and they look to you to help with their challenges and opportunities. You can enhance your practice and demonstrate the value you bring to clients by adding executive benefits as a retirement and/or business-planning tool.

Win-win executive benefits
Growing your practice with executive benefits planning can be a win for you and for your client:
•  Outstanding service to your client.
•  Substantial initial and recurring commissions from plan funding vehicles such as company-owned life insurance (COLI).
•  And the best part—program participants creating an inventory of warm prospects for additional personal planning services and product sales.

Client challenges are your opportunities
One major challenge facing your business clients is how to attract and retain key people. Executive benefits are consistently viewed as critical to success in the management talent marketplace. In fact, a 2009 survey, “Executive Benefits—A Sur- vey of Current Trends” by Clark Consulting, examining trends in Fortune 1000 companies found that 85 percent of responding companies had implemented nonqualified deferred compensation (NQDC) plans and 67 percent reported having supplemental executive retirement plans (SERPs). In addition, many companies are exploring pay- for-performance incentives to drive productivity and growth. Executive benefit plans often include performance measures.
At the same time, one of the primary challenges facing executives in retirement is having adequate income to maintain their pre-retirement lifestyle despite participating in the broad based employee benefit plans offered by most employers. Income and benefit caps in Social Security and employer- sponsored qualified retirement and savings plans discriminate against highly compensated individuals, limiting the percentage of retirement replacement income from these sources.
To help close the retirement income gap, individuals need other income sources such as:
•  Personal savings;
•  Earned income from working beyond retirement; and
•  Employer-sponsored pension, deferral and savings plans (qualified and non-qualified).

The retirement income gap
There is a huge opportunity now for advisors to help clients develop and implement smart retirement strategies. Income replacement ratio analyses are often used to project the percentage of pre-retirement income an individual needs in retirement to maintain a de- sired standard of living. By using these ratios as a benchmark, employers can measure the sufficiency of their own supplemental programs when combined with Social Security benefits and qualified benefits such as 401(k) plans. As Chart 1 demonstrates, the higher the individual’s pre-retirement compensation level, the more severe the retirement income gap can be.

Closing the gap with executive benefit plans
Supplemental executive programs may be the solution your clients are seeking. Chart 2 provides an overview of current nonqualified plan options that can help employers address their challenges and help highly compensated employees close the retirement income gap:

Financing benefit programs with coli
Non-qualified benefit liabilities by law must be unfunded company obligations. Companies often seek to accumulate dedicated assets to meet those obligations and to help offset the impact of those obligations on the company’s balance sheet and earnings statement. The most common approaches

in these situations are taxable investments (for example, mutual funds or equities) or a COLI arrangement.
When taxable in- vestments are used, the company, as the owner of the investment, is taxed each year on dividends and capital gain distributions, as well as on gains reported from sales of the investments them- selves. Additionally, depending on the company’s accounting method, growth in the value of the investments may not be recognizable on the company’s financial statements until the investments are liquidated. Thus, the value of the assets recorded may be out of balance with the liability to employees, even if the company purchases the investment in an effort to closely match that liability.
In a COLI arrangement, an employer purchases and owns a policy or policies on one or more of its employees. When the insured dies, the employer uses the death benefits to offset the costs of employee benefit programs. Potential earnings (the inside build-up of cash values) are allowed to grow and can offset the employee benefit li- abilities on a company’s balance sheet. COLI is geared to the long-term nature of benefit plans and can provide some assurance to employees and investors that the company is making promises it can afford to keep.
For these reasons, many companies choose COLI arrangements to finance their unfunded obligations. Potential growth within a COLI arrangement is tax deferred. Companies can generally access the cash value income tax free through withdrawals up to the owner’s basis in the policy and policy loans. (Note: Withdrawals and loans reduce the cash value and death benefit. Loans accrue interest.) Proceeds received upon the death of the insured are also income tax free to the company. In addition, the company will recognize tax-free earnings in its financial statements each year equal to the increase in the COLI cash surrender value or death proceeds received, net of premiums paid.
The possibility of the higher net after-tax return together with the ability of the company to recognize currently for financial statement purposes any investment earnings, demonstrate the potential tax and accounting advantages of choosing COLI as a financing vehicle for a company’s unfunded benefit programs. This also ex- plains why, based upon the Clark Consulting survey, approximately 72 percent of companies who funded their nonqualified deferred compensation and supplemental executive retirement plans reported that their plans were financed with COLI.

Driving practice growth with executive benefits
You can drive growth and success for your practice with executive benefits planning. In today’s challenging business environment, executive benefit plans offer an effective and efficient way to help your clients attract executive talent and keep their teams productive.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Perfection and the 7 Iron

Charles C. Jones, MSFS, CLU®, ChFC®, CAP®, CASL®, AEP

Chuck is a member of The American College Board of Trustees, and the American College Foundation Board.

Success in our profession requires more than good luck, perseverance and hard work. Success requires pursuing perfection.

A reminder of that pursuit sits in my office—a 7-iron golf club that is jointed two-thirds of the way down the shaft. If not swung perfectly, the club head snaps to the side and a golf ball cannot be struck. As it happens, that is a great analogy for financial services, an experience that revolves around the application of stocks, bonds, insurance and annuities designed to satisfy the desires and needs of a client.

Many potential clients want to know what you can do for them. Rather than you trying to explain the litany of services and products available, I suggest you answer that question only after an in-depth interview. Do not be surprised if the client’s main concern is retirement and the accumulation of funds necessary to allow a comfortable lifestyle. Accumulation of liquid as- sets and our current economic condition appears to have changed our personal goals from accumulating things to accumulating money. My personal experience confirms that, regardless of the wealth or cash availability, everyone is concerned about not having enough money to maintain the standard of living with which they have become accustomed.

Financial service goes beyond an individual product sale. It requires extensive knowledge about the client and the financial product environment. Your client’s stewardship is in your hands. Like the perfect golf swing, which is dependent on technical knowledge, practice and passion, the financial product environment must be completely resourced and well understood prior to implementation of the instruments available.

True stewardship would suggest the provider be licensed in all aspects of securities and advisory services. Perfection requires knowledge of the subject. Commitment and perseverance are virtues fueled by the quest for success. For the true steward, personal and business success is measured beyond the commission or fee earned. It is measured by client satisfaction; that is the ultimate quest. Achieve that and financial rewards follow.

Golf requires an understanding of the course, the ball, the grass, the field of play—but without a proficient swing, it is just about whacking the ball. Without true understanding of service to each client, financial services becomes merely a numbers game.

Financial service practitioners identify themselves by many names depending on the company they represent or the firm with which they become licensed. Some people create client fulfillment with the limitation of only mutual funds or stock brokerage accounts. Some utilize only life insurance and life insurance company products, such as an annuity and its many varieties. For the producer, success is measured in terms of the income or commissions earned, the products sold, the volume of life insurance placed into the market or cash value amount of annuities sold in a given year.

These measurements of income and sales ability further the industry quest. The industry and most clients’ quest is growing money under management. Your quest must go beyond that. Your obligation is one step beyond determining how much money you place into a given product; it is serving the needs of the client.

Financial service means understanding the client. It is your complete understanding of the clients’ needs—their dreams, their legacy, their capabilities, their economic and family circumstance and educational awareness of the financial world in which we practice. Only then can we render the financial service completely. My practice indicates that it may take two or three years working with the client before we can achieve that synergy.

Just as the golf swing starts with a humble beginning, so may a client relationship. That humble beginning may start with the satisfaction of a client’s request of a product or fulfillment of a specific need. A key life insurance placement in a
company or the funding of a buy-sell is similar to placing the golf ball into the cup on the green. One stroke can determine the outcome of the whole game, or open the door to a more complete resolve. The putt requires a technique much different from the full swing. However, knowledge of the putting stroke, the green and successful application of the single stroke can lead to a more well-rounded golf game. That pursuit of a well-rounded knowledge of your client is required to assure product placement and client satisfaction. Retirement planning is more than the actuarial equivalent of present value cash in order to retire. It used to be $1,640 for each $10 of monthly income. I point out to clients that a monthly Social Security income of $1,000 is equal to a cash account of $240,000 earning 5 percent per year—a good place to start a building block to understanding.

The complexity of the financial services industry, and the detail of specific client needs, often requires a practitioner to become an expert in several financial services. In my experience, pension plan design, implementation and management require extreme discipline, dedication to client needs and knowledge of the financial products necessary to fulfill those needs. Government rules and regulations may require working with other specifically trained individuals to deliver the best to your client, which works in much the way playing golf with another experienced golfer can raise your game.

Legacy planning and retirement planning may require the service of attorneys to prepare legal documentation and accountants to prepare the tax forms. I always remind the client that the only person at the table concerned about their financial well-being is me, the financial services person. I have had council in the past suggest that the client has enough cash to pay the cost of transfer, but I am there to remind them that life insurance is a 10-cent dollar and the dollar return is tax-free and always available, even at an unknown point in time, which is a concept the client and their bank seem to understand.

Perfection is achieved when your client requests that you never leave them and you have reached your personal goals. As they say in the game, “Hit it straight.”

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Ensuring Beneficiaries Receive Intended Assets

Constance J. Fontaine, JD, CLU®, ChFC®

Constance is an Associate Professor of Taxation at The American College, as well as the holder of the Larry R. Pike Chair in Insurance and Investments established by Union Central Life Insurance Company/ UNIFI.

Most individuals, including those of modest means, think about who should receive their property items when they are gone. Some will go so far as to tell the future recipient that a particular item will, in time, belong to them. “Niece, I want you to know that someday my valuable coin collection will be yours;” or, “son, you have always shown an interest in my priceless antique armoire and I’d like you to have it when I pass.” Unfortunately, the mere telling does not necessarily fulfill the wish. Did the owner write the intentions down or formalize wishes in any way? Frequently, the niece is the only one around when her uncle tells her the coin collection is to be hers. Then, at the uncle’s death, she dutifully steps forward to announce, “Uncle told me he wanted me to have his coin col- lection.” The problem is that she may have to get in line with other family members who also come forward to acquire the same asset, perhaps making the same claim or clamoring for the asset to be part of the general residuary estate passing to others more closely related to the deceased. What about the son’s siblings who also covet their father’s armoire? What if the siblings do not get along? What if a blended family is involved? Will they take their brother’s word concerning their father’s wishes for the armoire on faith? Or will the armoire be the subject of family conflict? Leaving a legacy of family discord is undoubtedly not what the uncle or father had in mind.
The best way to make sure intended beneficiaries receive assets is for an individual to give it to them outright during the individual’s lifetime. It is quite difficult, if not impossible, for displeased beneficiaries to sideline outright gifts, especially if they were made years ago. Of course, this does not mean that some may not continue to begrudge the transfer. In addition to having assets possessed by those you want to have them, gifts made during one’s lifetime can provide estate tax savings. Any future appreciation generated by the gifted item is not going to be valued with the donor’s taxable estate because the value has been shifted to the recipient. If any gift taxes actually have to be paid because transfers exceed the $1 million lifetime gift exemption amount and the $13,000 annual exclusion, those tax amounts generally are also removed from the original owner’s taxable estate. State death taxes imposed on property owned at death are saved, too.
A donor may, however, be reluctant to make an outright gift for a number of reasons. Perhaps the uncle still enjoys collecting coins or is not sure his niece is mature enough to have the collection. May- be the father still uses the armoire and is not ready to part with it yet. An owner may worry that he or she could need the asset for its value later in life.
One way to continue owning a possession while simultaneously ensuring the object’s eventual reclause in the will identifying one or more assets or money amounts and specifically naming the per- son who is to inherit said assets. A will can contain multiple specific bequests to multiple beneficiaries. This thought, however, is somewhat thwarted by the fact that, according to a survey conducted by AARP in 2000, only 40 percent of Americans 50 years old or older have a will. Again, as with an outright gift, specific bequests may prompt hurt feelings, resentment or bickering. Another issue concerning property passing under a will is the possibility that a will contest could be brought by one or more irritated beneficiaries. While only about five per- cent of will contests are successful, the time, expense and emotional strain occasioned by such efforts should not be ignored.
Choosing the appropriate executor also helps to ensure intended beneficiaries receive specific property. The testator (person establishing the will) needs to think about who would be willing to serve and whether he or she is capable of managing the estate settlement process. There is often more to the task than meets the eye. An executor should understand that estate matters are not always smooth sailing. For example, sup- pose someone selects one of their children to act as executor. Even if the child lives nearby while their other children do not, or is clearly more capable of handling financial matters, naming one child could be interpreted as favoritism by the other children. Adding salt to the wound, if the executor takes a fee for what may be very time-consuming efforts on behalf of the estate, the level of discontent among the non-executor children may rise consider- ably. Some siblings could perceive taking an execuor’s fee as a selfish depletion of inheritance monies instead of as compensation earned for fiduciary du- ties and responsibilities.
Another way to alleviate a decedent’s concerns about the passage of assets is by establishing a trust. Revocable trusts are vehicles frequently employed to dispose of assets at death. A revocable or living trust is one in which trust provisions may be amended, if necessary. By having a revocable trust, the property owner can remain in control of the property via the trust terms and may, in certain in- stances, also be the trustee. If the own- er is trustee, there must be a named successor trustee to manage the trust property in case the
owner-trustee becomes incapacitated and to take over the trust at the owner-trustee’s death. Although a revocable trust does not provide any tax savings, the value in the trust avoids pro- bate and, therefore, is not subject to the fees associated with probate. Prior to creating a trust, state laws concerning property, taxation and creditor’s rights should be reviewed. Broadly speaking, the cost of having an uncomplicated, basic, living trust drafted by an attorney is currently within the range of $1,000 to $2,000. The following are likely to affect the cost of having a trust drafted:
• Size and value of the estate
• Types of assets involved
• Complexity of trust provisions
• Geographic location
In addition, there may be on-going fees for maintaining the trust. Keep in mind that even if a person establishes a living trust, it is advisable to have a will in place for the distribution of any overlooked property. A trust is much less likely to be contested than a will.
Utilizing beneficiary designations for specific assets also proves to be an effective, inexpensive way to reinforce final wishes. Most people are familiar with naming a beneficiary for insurance policy and retirement account proceeds. In addition beneficiaries can be named for other assets such as bank accounts, certificates of deposit and U.S. Treasury bills, to name a few. This type of arrangement may be referred to as a Pay on Death (POD) account or Totten Trust. The beneficiary does not have access to the account until an ac- count contributor’s death. Structuring accounts with beneficiary designations is simple, as doing so requires only providing beneficiary information and sometimes obtaining a guaranteed signature or medallion stamp from the institution holding the assets.

Will Contract
Another way to protect testamentary distribution schemes is by creating a Contract to Make a Will. In the majority of cases such contracts involve the security of children’s inheritances that come up in divorce situations where one spouse or the court has concerns that children of the marriage may lose their inheritances should one or both divorcing parents enter into a new marriage. Contracts, however, may also be a common objective for happily married couples striving to ensure passage of their marital value to the children of their union. These agreements can be broad or narrow. They typically state what a surviving spouse cannot do with marital property within their possession after the death of the other spouse. For example, the contract could stipulate that a surviving spouse may not title assets in joint tenancy with a later spouse. As always, state law must be referenced prior to entering into such an agreement to make certain the state’s requirements for a valid contract have been met. A few states have statutes governing contracts to make a will.
Having assets pass to the objects of one’s bounty is a common desire of most property owners. While there are numerous ways to do so, each method should be weighed and investigated carefully by the gifting party to determine which device is best suited to his or her personal circumstances.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Succession Planning for the Advisor

Al Depman, CLU®, ChFC®

Al is the author of How To Build Your Financial Advisory Business And Sell It At A Profit and the creator of The Practice Management Assessment diagnostic tool.

“The shoemaker’s children are often shoeless.” Or so goes the old proverb. Most financial services professionals have “retirement planning” as a line item in their brochure or on their web page. Yet how many have done their own retirement planning? In addition to the standard triad of government programs, company pensions and personal savings and investments, how will you, the financial professional, tap into a fourth asset: the value of the practice you’ve been building all these years? More than ever before, an aging population of advisors is seeking an answer to that question. In the past couple of years I’ve been drawn into a number of these succession situations and have gleaned a set of five critical criteria that need consideration when embarking on this project. To that end, I present a case study of one successful succession to illustrate these five concepts.
Mike, our family’s financial advisor, decided it was time to retire. He’d celebrated his 40th year in the financial services business and, while he enjoyed interacting with his top tier clientele, at 65 years of age he was ready to break away from the daily grind. Over time, his practice had grown from a legacy life insurance model, evolving through changes in the financial markets, and ultimately settling into three main pools: 120 financial planning clients, 225 single need clients, 75 small group and 300 individual health clients.
Mike had entertained some discussions with would-be buyers over the past few years but hadn’t found a serious contender. Until he met Brad.
Brad Pratt, CLU®, 54, has been expanding his 30-year practice by selectively buying out other advisors. What particularly attracted Mike was the fact that Brad’s son, Bryan Pratt, CFP®, 29, was an integral part of the team, had an ownership interest and would provide a next generation of care for his best clients and their families.

The negotiations and buyout took place over a year and provide us with an excellent case study of best practices in Mike’s ownership transition to Brad and Bryan. There are five broad topics to cover in preparing for a successful succession, each with risk and reward implications:
• Values match
• Transition participation
• Systems compatibility
• Financial considerations
• Readiness for client transfer.
Let’s look at each.

Values Match
During the discussions to determine if he’s going to purchase a practice, Brad seeks the answer to a deceptively simple question: “Is it about the clients or about the money?” Is the seller more interested in getting his price than in the care and servicing of his clientele? The question cuts right to the fundamental philosophy of Mike’s approach to his practice: Is he relationship-based or transactional? The answer will drive the rest of the negotiations. As mentioned, Mike developed three pools of clients during the course of his business, reflecting different emphases as he experimented with various marketing concepts over the years.
In examining Mike’s book, Brad found that the 120 financial planning clients were Mike’s strongest relationships and most compatible with his own values. These planning clients were mostly in later, pre-retirement growth phases, anywhere from early distribution to 10 years away from accessing the nest eggs. Mike had groomed them for “not outliving their income stream.” However, Mike knew he was slipping when it came to investment nuances, keeping up with the tax and estate laws, technological changes and the latest generation of hybrid products combining annuity, long-term care and life insurance concepts. He spoke extensively with Brad and Bryan who demonstrated a strong grasp of all these concepts, as well as a clear manner of communicating them to clients. Mike’s over- riding concern with these planning clients was to ensure the continuity and completion of what they had started together.
Mike felt differently about the 225 single need and 375 group and individual health clients. While some were friends and long-time clients, as a whole they were more transactional and required maintenance but had little potential that Mike could discern. Brad’s practice was growth oriented. He had no desire to be caretaker of near-dormant accounts. Additionally, he was not interested in the world of health insurance as it enters an era of upheaval.
In the end, Mike found two different buyers for these two pools of clients. A colleague who did embrace the healthcare business took those 375 clients and a younger, fourth-year agent from his primary carrier arranged to take on the 225 others. Both of the buyers passed Mike’s core values test but, admittedly, the sales were more about the money than the clients.

Not so the planning clients. There are many values-based red flags that Brad watches for while engaging a seller. Among them:
• Has the seller been consistent with the annual reviews of his clients?
• Did the seller get to know the next generation of the top clients and begin introducing legacy planning ideas?
• Has the selling advisor done his own financial planning? Is this sale the sole means of support, or have other retirement income streams been established?
• Did the seller have his own contingency plan in place for disability or death? This would indicate a strong client orientation.
• Are there any compliance issues in the seller’s history? Are there any lurking in the future?

Transition Participation
In entertaining the decision to buy the 120 planning clients, Brad next looked to what Mike would be willing to do to ensure that most—if not all—would agree to the switch. One of the biggest dangers in a practice sale is key clients who are uncomfortable with the buyer choosing to either follow Mike or find another advisor. As Mike is retiring from the business and is willing to sign a non-compete agreement, the former concern is moot.
However, the latter danger of finding another advisor was alive and well. Mike has a strong personality and a proven willingness to go to the mat with the home office to fight for a client’s rights. This tenacity has been a hallmark of his practice, and clients have been vocal in their appreciation of this trait. One of the core elements of Mike’s good will factor is his client activism. Brad knew he would have to sell his own version of this doggedness to win over Mike’s clients.
Mike dug in and interviewed Brad’s team members for examples of how they handled routine and exceptional service requests. If they weren’t satisfied with the results of an inter- action with a home office person, how did they proceed? In short, did they keep the client’s best interests in mind? He was satisfied that his high standards would be upheld with Brad’s team. With this in mind, Mike agreed to sit in on each face- to-face client meeting with Brad to:
• Personally hand over the case files;
• Give his blessing to the deal;
• Answer questions;
• Review the specific client’s planning strategies that had been set in motion; and
• Help with the initial transfer paperwork.

This would be a year-long process and would help immensely in making the transition a smooth one. In addition, Mike’s long-time assistant, Laura, would be available for six months after the sale’s completion for additional questions and research, as needed.

Compatibility of Systems
At the heart of preparing a practice for eventual transition are the eight business systems. These are extensively explored in The American College’s MSFS program’s “Building and Man- aging a Financial Advisory Practice” GS840 course (see side- bar, previous page) The eight business systems are:
• Client Acquisition
• Client Management
• Sales Process
• Case Development
• Time Management
• Communication and Operations
• Education
• Financial Management

Each of these eight business systems can be scored by a practice assessment taken by the seller (and, optionally, with the buyer) and a third-party consultant. The cumulative score of the assessment is on a 1,000-point scale, with 600 being the breakpoint for minimum transferability of a practice. The higher, the better. Mike and Laura took the assessment two years before the final sale to Brad (who wasn’t in the picture at the time) and scored a 791, which indicated a sophisticated practice with highly transferable systems. This result had major implications in the next step.

Financial Considerations
Assuring the continuity of Mike’s clients’ welfare answers Brad’s initial question, “Is it about the clients or is it about the money?” Having established a values match, systems compatibility and agreeing on a hands-on transition period, Mike and Brad got serious about the sale’s price. Here are the biggest determinants in what was to become the final contract:
• Multiple of recurring income stream. At the core was determining a two-year recurring revenue flow from the 120 planning clients. Mike’s assessment score of 791 gave him latitude to ask for a multiple of 2.0 to that base amount (an 800+ score would have allowed a 2.5 multiple). This constitutes the good will factor.
• A determination of what new business was identified and set in motion by Mike’s client management system that would come to fruition in Brad’s tenure.
• Examining the mix of products and investments to identify potential repositioning or replacement of assets.
• Other items to be included in the sale, such as furniture, equipment, fixtures or software.
• Mike’s needs in terms of structuring of the payout as income. This is the arena for accountants, but both parties agreed that treating the income as capital gains was the best strategy.
• Mike also agreed to a scale-back provision. This protects Brad in case a pre-determined percentage of the 120 clients decide to defect.

Readiness For Transfer
The final stage of succession consideration is preparing the buyer’s team for an influx of client re-papering. This can be a huge undertaking. Think about it from a practical standpoint: Would your practice be ready to take on 120 new clients in the next year while continuing to process new business plus communicate with and service current clients? After having done a number of these takeovers, Brad’s team is structured to execute the vast array of paperwork and integrate information, both hard and soft, into their customer relationship management (CRM) system. Temporary help will be required that might result in additional hires once the dust settles.
In my consultations over the years, it is not unusual to see an advisor who is inheriting a book of business (either unexpectedly or by naiveté) of more than a hundred clients to be tossed out of production for a year and into total disarray. The road to recovery from there is often a rocky one.
Forewarned is forearmed. Going into a succession plan with eyes wide open is the purpose of taking the five steps discussed in sequence.
As a satisfied client of Mike’s and now Brad’s, I can attest to this approach. And with my practice management consultant’s hat on, it’s a stellar example of a win-win-win practice trifecta for Mike, Brad and me—the client.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Farm Transition Planning and Retirement Planning

Donald G. Schreiber, JD, CLU®, ChFC®

Donald is Director of Advanced Sales at Nationwide Insurance. schreid1@nationwide. com

Of the 2.13 million farms in the United States, 98 percent of them are family owned. Statistically, the farm operator is getting older with the median age being 57 (U.S. Department of Agriculture). Farm transition planning for the farming community is a growing concern for the industry. At first blush one might suspect that farm transition planning and retirement planning are miles apart, disconnected and unrelated. This, actually, is far from the truth.
A number of factors go into a successful farm transition from one generation to the next. Some of these factors relate, directly or indirectly, to the ability of the farm operator to achieve financial independence through a retirement plan that includes self-sufficiency independent of the farm operation. We will look at two important factors: economic viability and mentorship and farm transfer before death.
In addition, we will look at two retirement strategies that are being used within the farm transition plan framework.
• Combining defined benefit (DB) plans with buy/sell arrangements during lifetime
• Using Charitable Remainder Trusts (CRTs) and conservation easements when no children are taking over the farm operation

Economic Viability
To successfully transition to the next generation, a farm operation needs to be economically viable. The farm operation must be able to not only support the farm operator, but enable that farm operator to set money aside for his retirement. Why? If the farm income is insufficient to allow for an excess, it may be uninviting to the next generation as a career choice. Why work hard for so little?
The inability to fund a retirement program from the farm operation is one potential red flag for lack of economic viability. Without economic viability, the likelihood of success in transition is significantly reduced. Conversely, the ability to generate retirement assets within the financial structure of the farm operation is one sign of economic viability.
As a farmer develops a farm transition plan, one goal should be to build in retirement funding as an objective within that plan.

Mentorship and Farm Transfer Before Death
Another very important transition planning factor related to retirement planning is the issue of the farmer turning over the control of the farm operation to the younger generation. People run the farm operation. While the older generation farm operator has demonstrated over time that he or she can successfully operate the farm and survive, the next generation must also learn how to successfully run the operation. The farm operator, the one who grows the crops and raises the livestock, needs to nurture, grow and raise up a successor farm operator from the children (if there are any) currently involved in the farming operation. This means allowing them to take on more and more responsibility and decision- making over time, ultimately turning the farm over to them when the farmer retires.
A source of funding separate from the farm allows the older farmer the psychological and financial ability to systematically turn over responsibilities of the operation to the younger farm operator.
To successfully transition to the younger generation, the next leader of the farm needs to develop the necessary skills and experience. This means the current farm operator needs a mentorship plan as part of the overall farm transition plan.
Ultimately, people make the farm transition plan successful. That specifically and critically means the next generation of farmers must be capable operators. Integrated into the mentorship program part of the farm transition plan is a retirement funding element that makes it financially easier to allow the current farm operator to more aggressively mentor the next operator and turn the operation over to them with the assurance that they won’t be financially compromised as the new operator takes over.
A farm is a business, so traditional IRA, Roth IRA, and an assortment of defined contributions and defined benefit plans may be acceptable as retirement funding options, depending on the farm’s individual facts and circumstances. Let’s take a quick look at two strategies where retirement planning has been integrated into the transition plan.
Defined Benefit Plan and Buy/Sell Arrangement
A farm operator is in his 50s. He has a child who is active in the operation and two children who are not involved and work elsewhere. The active child has spent a number of years helping the operator grow the farm.
A business/farm owner often begins as a key operator and takes years of hard work to build a solid and profitable operation. Usually this means that the retirement funding objective has been a secondary concern, and the owner is behind the goal later in life.
Once the business matures and the children become independent adults, the business owner is now in a position to try to catch up on his/her retirement funding objective. In this example we will assume that the farm operation has a healthy cash reserve.
The farm operator has a number of objectives:
• He wants to catch up on his retirement funding and reach some level of financial independence apart from the farm operation
• He wants to start the process of turning the farm over to the active child to groom him to become the next operator. In so doing, he wants to recognize that child’s contribution to the farm over the years that child has worked the land. This means giving the farm to the active child in a manner that helps him be successful and for less than the highest asking price for the operation
The active child also has an objective. He has helped increase the value of the farm, but by his effort is generating more value into the potential inheritance of the non- active children. For every dollar he helps build in farm value, two thirds of that value goes to the other non-active children. He needs to know that he will receive the farm intact without fractionalizing the ownership into a position where he gets a minority interest. The farm is his livelihood, and he does not want to work hard only to see majority ownership go to his nonactive siblings. However, if he tries to buy out the farm from his parents by using farm income to do it, he is in a tax quandary. The buyout would call for him to own the farm and pay his father and mother for the purchase price of the farm. He would earn the money from the farm, pay the after tax purchase payment, and pay tax on the income at the highest tax bracket that he finds himself in that year. The principle amount of the buyout is not tax deductible to him.
To accomplish the goals for both the current farm owner and his active child, the transition planner recommends that the farm value be assessed using the most conservative but IRS defensible valuation formulae that can be used. The farm operation then installs a defined benefit plan to significantly eschew the cash reserves of the farm into the older farm operator’s account to catch up on retirement funding. He may name the beneficiaries of that retirement plan ultimately to be the nonworking children as part of their portion of the inheritance.
In this example we are able to start the process of making the farm operator financially independent apart from the farm operation. He now feels more comfortable to start more aggressively turning over the farm operation to his active child. He is building retirement funds more quickly for himself and his spouse by using the defined benefit plan as the way to accelerate the funding.
In return for this arrangement the active son gets a reduced value for the purchase of the farm by the decision to use the most conservative, but IRS defensible valuation formulae for the buyout.
In essence, the active child will now get a deduction for part of the buy out by being able to deduct the contribution to the defined benefit plan that is being used as a component part of the transition plan.
Both the operator and his active son achieve progress to- ward their specific goals and objectives.

The CRT and Conservation Easement Technique
In a second example, a farmer finds that none of his children wish to continue the farm operation. The farmer and his spouse very much want this land to continue to be used as farmland into the future. The farmer has not been able to find a suitable successor but is able to locate a younger farmer to cash rent the land when he has to give up farming because of health concerns.
To set up the farmer’s retirement a series of actions are taken. First, a Charitable Remainder Trust (CRT) is established and the farmer transfers his stored crop and all equipment into the CRT. Selling grain or crops outright would likely generate pure taxable income to the farmer, incurring significant in- come tax liabilities in the year of sale. Equipment is subject to depreciation, so a sale of the equipment that has been significantly depreciated could have significant tax liabilities to the exiting farm operator. There is little cost basis in this property but considerable value. The CRT sells the stored crop and equipment to fund the CRT with cash that is invested to provide a stream of income to the farm couple. The farmland is set up with cash rent arrangements resulting in another source of income in addition to the CRT income.
In addition, purchase of agricultural conservation easement (PACE) programs can be an important tool for local planners who wish to manage sprawl while also addressing environmental degradation. The 2002 federal farm bill greatly increased interest in PACE by committing nearly $1 billion in 50 percent matching funds for these programs over the next 10 years. PACE is a program that is designed, in part, to lock in farmland for farmland use by compensating landowners for permanently limiting nonagricultural use of their land. If the easement meets the criteria of IRC Section 170(h), the transfer may be treated as a charitable gift giving some tax benefits to the farm operator.
Like many farm owners, this farm operator is adamant about limiting nonagricultural use of his land. This might be an aid to achieving both his land use goal and his retirement income goals.
With two sources of retirement income in hand—CRT and cash rent of farmland—the farm operator can establish yet another source of retirement funding using a conservation easement.
In this case, significant income taxation may be avoided on the sale of crops and equipment by using the CRT technique. Furthermore, the ultimate goal of keeping the land as farm- land is preserved and results in additional money for retirement.

Farm transition planning is becoming a major area of need for the United States farm community. To give oneself the best chance for a successful transition, a number of areas need to be handled, including retirement planning.

Federal tax laws are complex and subject to change. Neither Nationwide nor its representatives give legal or tax advice. Please talk with an attorney or tax advisor for answers to specific questions.
CIRCULAR 230 DISCLOSURE: To comply with U.S. Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax advice as contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, by any person other than Nationwide and its affiliates, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing or recommending to another party any transaction, arrangement or other matter.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

How to Make Asset-Based LTC Insurance Part of Your Practice

Bruce Moon, CLU®, ChFC®, CASL®

Bruce is Vice President of The State Life Insurance Company, a OneAmerica Company bruce.moon@

In June, LIMRA research data showed that new premium sales for asset-based long- term care (LTC) insurance products grew by 62 percent in 2010, a strong follow-up to the double-digit growth for these products in 2009. In fact, 2010 sales surpassed $1 billion. While products in this genre have been available for more than 20 years, they are now showing real momentum. If you are unfamiliar with the term “asset-based LTC products,” some- times known as “combination” or “hybrid” LTC insurance products, these options combine other types of insurance, such as life insurance and annuities, with LTC coverage.
Why the increased interest and sales growth? One reason is that these products typically have substantial guarantees (fixed interest rate, benefits that don’t decrease, premiums that don’t increase), which appeal to the needs of today’s clients. Additionally, the rest of the LTC insurance (LTCI) industry continues to struggle with well-documented pricing issues, and some long-time insurers have actually stopped issuing new policies.
Those of us who have been involved in the financial services business and taken insurance course- work through The American College understand the importance of providing clients with protection from the expenses associated with LTC. The best retirement planning cannot be considered complete if it does not cover the area of extended care expense—those not covered by Medicare or other health insurance.

Starting A Better Conversation
Originally, some producers were disinclined to investigate the asset-based LTC route because the thinking was these products weren’t as good as health-based LTCI. Asset-based LTCI is not health- based LTCI, and it is not sold like it. Asset-based products use the chassis of life insurance and annuities. This means that benefits are available in the form of death benefits and cash values should LTC never be needed. They are commonly funded with a single premium that clients reallocate from existing sources, like other annuities, CDs, rainy day funds, even qualified money—allowing clients to avoid ongoing, annual premiums. A conversation starter along the lines of “If you had LTC expenses tomorrow, where would the money come from to pay for it?” can be a good way to identify these assets.
Life insurance and annuity-based LTCI products differ in their approaches. Life-based products provide immediate leverage in the form of a death benefit that can be accessed for qualifying LTC expenses. These products are triple-tax advantaged: tax-deferred growth of the cash, tax-free LTC benefits (if the contract meets federal rules for tax-qualified LTCI) and, of course, at death, any unused benefits pass as income tax-free life insurance proceeds.

Here’s an example of how the life-based LTC approach can work:
Ray and Maggie Marsh are both age 65 and have a CD that is maturing soon worth $100,000. They have been retired for three years and all of their income needs have been met. If they reallocate that $100,000 into a single premium life/LTC product, that amount could purchase $207,500 in guaranteed death benefits, all of which can be used for qualifying long- term care expenses at $4,150 per month.
Because this is a joint life contract, they both have access to the long-term care benefit balance, equal to their death benefit. They have a full return of premium provision avail- able should they walk away, but their cash value is earning 4 percent (before cost of insurance charges). Purchasing this protection did not negatively impact the Marshes’ retirement income; however, they are in much better position to cover long-term care expenses—with any unused benefits passing income tax-free to their heirs, church and/or favorite charity.
Annuity-based LTCI products have grown as a consequence of the Pension Protection Act. Withdrawals from the annuity can be income tax-free for qualifying LTC expenses. Annuity- based products accumulate value for future LTC expenses over time. Clients with existing annuities not needed for income may be attracted to these solutions. Annuity-based products extend LTC benefits beyond the cash value by providing an additional LTC fund, and some companies offer this extension with lifetime benefits and guaranteed premiums.
For an example of how the annuity/LTC approach can work, let’s look at Herman (age 75) and Lucille (age 73) Birch. They have an old annuity, now worth $150,000, that is out of surrender charges. The Birches see friends and neighbors beginning to slow down, and contemplate why they haven’t bought protection against long-term care expenses. After agreeing that their annuity would never be used for income, they choose a new annuity/LTC combination where they can utilize their cash value to purchase a total LTC benefit of $332,000—their cash plus an additional LTC fund provided by the insurance company of more than $180,000. This creates a monthly benefit of almost $5,000 that either or both can use.
You will also notice different approaches to these asset- based LTCI products. For example, life insurance options include both whole life and universal life (UL). While UL can sometimes offer slightly higher benefits, whole life-based products typically offer more guarantees. On the annuity side,
fixed deferred annuities or variable deferred annuities can be used as vehicles. Again, one offers more guarantees than the other. You can discuss the pros and cons with your clients.

Understanding the market
Many sales of asset-based solutions are of the single premium variety, but not all. Over the history of asset-based LTCI solutions, which dates back to the late 1980s, purchasers are people in their 60s, 70s and even 80s, with liquid assets of $300,000 to well over $1 million. This is a market where the most interested shoppers are in retirement and have a good feel for their assets and expenses. Health does matter, as these products are medically underwritten.
Because your clients have worked hard for what they’ve ac- cumulated, they expect their dollars to provide more value and tax advantages—exactly what asset-based LTCI products are designed to do.

Present the options to your clients
With many options available, policies can be maximized for benefits at death or benefits for LTC. Benefit periods can be as short as two years to, with some companies, lifetime coverage. Some companies allow spouses to purchase a joint coverage under a single contract.
While the flexibility provided by asset-based products is significant, it is best to listen to the client, identify the asset best used for premium and then make a recommendation based on what you have heard.

Live, quit or die
When it comes time to close, remember to focus on the key aspects of asset-based LTCI. Most clients don’t envision ever needing the long-term care value of the policy, so emphasize the value that will be received if care is not needed. Several options offer a full return of premium at time of surrender (for single premium sales). That familiar “live, quit or die” close works especially well with these products.

There has never been a better time
The diversity of asset-based products available to clients has never been greater. In addition, federal tax law makes these combinations of coverage attractive. It is easy to see why asset- based LTCI is an expanding market. Evaluate the companies in the market, look at their track record and explore the options they offer—you and your clients will be glad you did.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Retirement Security

Robert D. Shapiro, CLU®

Bob is President of The Shapiro Network, Inc., which he formed in 1987. He has been a management consultant and investment banker to the insurance industry since 1965. shapironetwork@

The retirement security environment and the related battlefield for financial services organizations continue to change substantially. The ongoing financial crisis has accelerated this evolution. In recent years, as consumer awareness and concerns have increased, the competitive retirement marketplace has been disrupted, and agents, regulators and rating agencies are feeling pressure as the basic nature of retirement changes. Factors driving all of this include:
• Continued employer de-risking of their retirement programs. For example, employers continue to switch from defined benefit to defined contribution programs and require higher employer contributions.
• Persistent, low fixed-income returns.
• Persistent stock market volatility.
• Increasing recognition by the press (and public) of the difference between single-premium deferred annuities and immediate annuities, and the importance of considering not only asset accumulation but also, as one approaches retirement, life income management.
• The current inadequacies in advice and related financial management tools as baby boomers transform from their asset accumulation phase to their retirement phase (often partial at first).
• The new nature of retirement. More and more, individuals are phasing their retirements. Part of this is in response to financial pressures to accumulate more retirement funds, but increasingly it is a reflection of the individuals’ life design strategy, as they look at the real possibility that they will live into their 90s (or beyond).

New Principles

What does this mean for financial services organizations that seek to serve seniors who are retired or nearing retirement? Efforts of financial services companies wishing to serve future retirees must:

1. Begin with a retirement strategy customized for the individual. Most advisors seek to fit the retirement strategy to the wants and needs of the senior (and the senior’s family), as well as the individual’s assets and earning power. This customized retirement design generally reflects not only existing assets, health and future earning capacity, but also the individual’s legacy objectives, taxes and desired standard of living.
However, this process is much more difficult and complex today than it has been in the past. More and more the responsibility for retirement has shifted from the employer to the individual. The financial crisis has established a new normal (lower) for expected future returns. Great uncertainties and risks exist in the future of healthcare and entitlement programs. The relative future roles of retirees, employers and government are not clear.

2. Address holistically all retirement risks. These risks include living too long, getting sick, becoming incapacitated, future inflation and variable return on asset sequence possibilities.

3. Focus on optimizing retirement security. This demands clearly articulated goals and priorities, effective sequencing of various accumulated asset categories (e.g., tax sheltered vs. other funds) and the use of guarantees to assure that the senior has maximum confidence that any of the contingencies that might arise would be reasonably covered. The proper balance is to be sure that the senior does not outlive his/
her income, while at the same time not forcing the senior to live less comfortably than he/she need to. Uncertainty should be minimized as much as possible.

4. Monitor continually and adjust the retirement plan as experience evolves. When conditions change unexpectedly (and they always do), the plan should be appropriately adjusted. There needs to be a continual balancing of return versus investment risk and, during the decumulation stage, return vs. longevity risk.

The Opportunities

If life insurance companies play their cards right, they should have a dominant role in the future retirement security market. Life insurance companies are the only financial organizations that can ensure that an individual will not outlive his or her income. The industry needs to continue to look for platforms that enable it to provide and communicate the powerful longevity protection benefits it can deliver.
For years the industry has promoted providing family protection upon the early death of the breadwinner, albeit often in a linear way with many copycat products and approaches. In recent years more annuities have been sold, but the great majority of these sales are designed for asset accumulation (e.g., SPDAs) vs. longevity protection (e.g., IAs). The industry model for meeting retirement needs to shift from this tax-sheltered accumulation framework to one that protects a senior from running out of money later in life. The industry must get as effective in selling (and supporting) products and services that protect individuals from the financial consequences of living long as they have in selling life insurance to protect agains tearly death. This won’t be easy, but it is critical if the industry is to preserve its strength and reputation in the future.
So, what might we see in the future? A handful of life insurance companies are already doing creative things to address the life income needs described earlier. Several companies market a deferred life annuity that efficiently protects against living a long time. This product provides a guaranteed life in- come at an advanced age (say age 85) that can be paid for in a single premium or a sequence of annual premiums in one’s 50s or 60s. The resulting annual retirement benefit per dollar of premium paid can be five or 10 times the amount paid in an immediate annuity that starts when the money is given to the insurer.
A number of other products serving particular segments of the retiring or retired market have also been introduced by life insurers ranging from a product that provides enhanced benefits for impaired health seniors to an annuity that is funded out of a laddering of CD investments.
The industry must do a better job of dealing with the transition from working to partially retired to retired. Currently, there is a significant drain of life insurance industry assets to other institutions (like Fidelity, Vanguard and Schwab) when an individual retires and starts to take income. The industry could be helped by future government support (e.g., requiring a portion of retirement funds in a life annuity). Other countries have done such things.
Seniors at all level of wealth are clamoring for help in their transition from their working/asset accumulation life to their retiring/decumulation life. We in the life insurance industry have a tremendous opportunity to meet their needs because of our unique ability to protect against longevity risks. In the process, we can move our industry and ourselves to an even stronger level.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Does Your Portfolio Need a Shock Absorber?

Kevin Hogan

Kevin is the executive director of the Investment Program Association, where he helps set strategic direction for the organization, manages operations and oversees the IPA’s membership driven committee structure.

The financial meltdown that began in 2008 has produced an encyclopedia of lessons for just about everyone. For investors, few lessons were more iportant or more painful than this: Asset allocation didn’t work nearly as well as it was supposed to. In fact, it didn’t work very well at all.
In the steepest stock market decline since the Great Depression, the diversification provided by stocks and bonds turned out not to be diverse enough. There is an old phrase: “The only thing that goes up in a down market is correlation,” and, boy, was that phrase accurate during the financial crisis! The problem was the dominant asset classes— stocks (including international and domestic, large, mid and small, growth and value) and bonds—were closely correlated. Responding to the same financial forces in virtually the same way, they plunged dramatically and simultaneously. Bonds that were supposed to hedge stock market risk mirrored it instead, amplifying the resulting damage to portfolios rather than mitigating it.
The concept of correlation in the investment arena needs some explanation. To say that assets are correlated doesn’t mean that they will produce identical returns. It means they will move in the same direction. Think of closely correlated as- sets stacked like puppets on a string. A strong tug from the top will pull all of them up in tandem; a strong pull from the bottom will pull all of them down.
Alternative or direct investments, which are generally not correlated to the equity market, are attached to a separate string. They respond to tugs up or down on their string, but tugs on the equity string won’t affect them. If the correlation is negative, these assets may rise in response to forces that make equities fall, and vice versa. (There are many types of direct investments, but for the purposes of this article, I’m referring only to non-traded real estate investment trusts and managed futures, because industry-recognized yardsticks measure their performance.)
Chart 1 compares the relative correlations of direct investments to other asset classes. Real estate has no correlation to government bonds and a minimal correlation to the Standard & Poor’s 500 Index. International stocks, by contrast, are highly correlated to the S&P 500 and more correlated than real estate to long-term bonds, as well.

Trisha Miller, national sales manager for Carey Financial, an affiliate of W.P. Carey & Co., LLC, said direct investments in a portfolio play the role of shock absorbers in a car, easing the passage over bumps and creating a smoother ride. “Driving from San Francisco to Washington D.C. in a car without shock absorbers would be very uncomfortable,” she explained. “So uncomfortable, you’ll probably abandon the trip long before you reach your destination—somewhere in Kansas, if you get that far. That’s what investing in the stock market could be like without direct investments in your portfolio.”
Direct investments, similarly, reduce the portfolio shocks caused by sudden, rapid increases and steep downturns in the stock market. Chart 2 compares the correlations of several different asset classes, and Chart 3 illustrates the impact direct investments have on portfolio returns and volatility.
Using these correlations and 20 years of historical return data as benchmarks, a portfolio with a traditional allocation of stocks, bonds and cash produced a return of 8.45 percent with a standard deviation (the way analysts measure volatility) of 11.9 percent. Allocating 5 percent of a portfolio to real estate and 5 percent to managed futures reduces the expected return by only .06 percent while reducing expected volatility by .8 percent. Further increasing allocations of each to 10 percent reduced the expected return a little more but reduced expected volatility a lot—standard deviation fell to 10.4 percent, a 150 basis point reduction in risk, which is significant in reducing volatility.
Institutional investors are well aware of these benefits. Callan Associates’ 2010 Alternative Investment Survey found that foundations and endowment funds allocated an average of 35 percent of their portfolios to alternative investments (other than equities, bonds and cash), up from 16 percent in 2005.
Direct investments, such as real estate and managed futures, are also showing up more frequently in the portfolios of high- net-worth investors, averaging about 10 percent of their assets in 2009, according to the “World Wealth Report” produced by Capgemini and Merrill Lynch.
Despite the demonstrated ability of direct investments to diversify portfolios and reduce their volatility, they have not been embraced as widely as one might expect for two reasons: liquidity concerns and the belief that direct investments are appropriate only for sophisticated investors with a high tolerance for risk. Most direct investments do, in fact, have limited liquidity—a factor advisors should consider carefully in determining suitability for their clients. However, the limited liquidity inherent in these investments also has potential benefits for investors and for the markets, because it encourages a long- term perspective and discourages knee-jerk reactions that can magnify losses in individual portfolios and asset classes. The key to successfully integrating direct investments in an asset al- location strategy is to ensure that liquidity needs are addressed elsewhere in the portfolio, for example, by increasing the al- location for Treasury bills.
The assumption that direct investments are not appropriate for conservative investors is widely shared—and completely backward. Based on investment theory, the more conservative the investor, the greater the allocation to direct investments should be to reduce the volatility generated by the stock market. The shock-absorber feature of direct investments makes them ideally suited for conservative investors who prefer the gentle, predictable up-and-down of a carousel to the steep climbs and heart-stopping plunges of a roller coaster.
It would be difficult to find investors more conservative than the nonprofit foundations and college endowments that have been steadily adding direct investments to their portfolios. Ac- cording to the National Association of College and University Business Officers “2010 Endowment Study,” allocations for alternative strategies ranged from 24 percent for funds with assets between $51 million and $100 million to 60 percent for those with assets of more than $1 billion.
Direct investments don’t offer the promise of soaring re- turns, but they may reduce the damage caused by financial shocks. They don’t guarantee a portfolio’s returns, but they make the returns more consistent over time. They don’t eliminate bumps in the investment road, but they cushion the impact, increasing the likelihood that investors will reach their destinations comfortably, building solid returns while incur- ring minimal bruising along the way.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

The Cost of a Good Night’s Sleep

Craig Lemoine, CFP®

Craig is an Assistant Professor of Financial Planning at The American College and holds the Jarrett Davis Distinguished Professorship in Finance and Accounting.

When accumulating assets, lower-cost, equity-based port- folio models tend to build more terminal wealth than their high- er-cost counterparts (Pang and Warschawsky, 2009; Vernon, 2009). In most financial planning applications, lowering net investment costs raises net in- vestment returns. When saving for retirement, consumers have some flexibility in determining how long to continue working and how much to add to their personal retirement savings. Building wealth is mathematically straightforward; any time value of money equation for future value ties growth to net return.
growing a nest egg – future value formula A future value for any long-term goal can be manipulated by increasing the number of periods in which savings will occur, raising payments towards a goal or raising the net return associated with the goal. Translated to a retirement planning model, a larger nest egg can be reached by:
• Delaying retirement (increasing n) • Increasing monthly retirement savings
(higher contributions)
• Achieving a higher net return through either a higher gross return and/or lower investment costs
All three options help build a larger nest egg, but raising gross return is often limited by risk tolerance preferences. Clients are not able to achieve higher, prudent, long-term gross return if they are risk averse or if they dial down equity and aggressive bond holdings in their portfolio as they approach retirement. With a potential limit to the reach of gross returns, manipulating costs may be the only method of raising the net return and maximizing a nest egg at retirement.
More about costs

Planning for retirement requires consumers to build a nest egg. This nest egg is theoretically enhanced by lowering direct and indirect investment costs. However, consumers may benefit from paying some investment costs if they increase gross return by working with a mutual fund manager who exceeds his or her peers at a constant level of risk, or paying an investment adviser an annual fee to review asset allocations in multiple retirement accounts. Higher cost portfolios with guaranteed components may find higher retirement success rates than their lower cost, nonguaranteed counterparts (Lemoine et. Al, 2010; Milevsky & Young, 2007; Horneff et. Al, 2008).
A recent study intended to show the incremental cost of retirement portfolio success. Five popular retirement savings strategies were modeled to compare client annual portfolio costs and retirement success.

They included investing in:
• Mutual funds for the do-it-yourself (DIY) investor
• Mutual funds working with a financial services provider (FSP)
• Variable annuity contract
• Immediate annuity
• Fifty percent mutual funds, 50 percent immediate annuity
mutual funds – fsp
This trial assumed 1.21 percent in mutual fund costs and an additional 50 basis points to model revenue paid to an FSP. Administrative fees of 0.05 percent were included, raising total costs to 1.76 percent.

Variable annuity
This trial assumed subaccount fees equal to those in a mutual fund (1.21 percent) with an additional 85 basis points for mortality and expense charges (0.85 percent) and 65 basis points (0.65 percent) for a guaranteed income rider, which provided a base of 5 percent of the highest annual account value regardless of portfolio value. Annuity costs were based on the average of two major insurers’ deferred variable annuity products in the spring of 2011. Total costs of the annuity model were 2.71 percent.
To test retirement goals, an initial sum of $1 million was credited to a 65-year-old client. This portfolio was subjected to client income needs, defined as an inflation-adjusted 4.0 percent annual withdrawal rate, common to other retirement modeling scenarios (Milevsky, et al., 2006). Monte Carlo analysis was applied to each strategy and 1,000 trials were run. Life expectancy was randomized by the software tool used. Any trial that had money remaining at death was considered a success, and trials that reach a portfolio value of $0 during retirement or a year where cash flows did not meet required needs were considered a failure. The Financeware Monte Carlo tool was used to model all trials.

Client asset allocations followed one of two approaches: The DIY client utilized a simple 20 percent large cap stock, 70 percent bonds and 10 percent cash allocation. Fixed-income returns were modeled on the previous 10 years of CRSP Bond Data; domestic equities were modeled using the Russell 1,000; international equities using the previous decade of the MSCI EAFE index; and cash was modeled using a T-Bill proxy.
Clients working with a financial adviser, in both mutual fund and variable annuity trials, employed a more sophisticated asset allocation than a DIY client. Advisor-assisted al- locations were comprised of 60 percent bonds, 25 percent domestic equities (20 percent large cap and 5 percent small cap), 10 percent international equities and 5 percent cash. This al- location utilized a more developed diversification to reflect potential value or detriment of working with a financial adviser.

Mutual funds – DIY allocation
This client experienced average mutual fund costs (1.21 per- cent) and administrative fees (0.05) without any additional fees associated with working with a financial advisor. Total costs were 1.26 percent.

Mutual funds – FSP
This trial assumed 1.21 percent in mutual fund costs and an additional 50 basis points to model revenue paid to an FSP. Administrative fees of 0.05 percent were included, raising total costs to 1.76 percent.

Variable annuity
This trial assumed subaccount fees equal to those in a mutual fund (1.21 percent) with an additional 85 basis points for mortality and expense charges (0.85 percent) and 65 basis points (0.65 percent) for a guaranteed income rider, which provided a base of 5 percent of the highest annual account value regardless of portfolio value. Annuity costs were based on the average of two major insurers’ deferred variable annuity products in the spring of 2011. Total costs of the annuity model were 2.71 percent. Variable annuity trials were split into two groups: trials that were successful without accessing a guaranteed income benefit and those that failed. Failed trials were then reviewed to determine if guaranteed income benefits would have altered client success. Variable annuity trials that failed the second trial continued to provide a fraction of retirement needs.

Immediate annuity
Any allocations utilizing an immediate annuity considered the purchase price of such a contract in July 2011. For a 65-year- old male, $100,000 purchased an annual benefit of about $6,800 with a highly rated insurance company. These benefits did not adjust for inflation and did not include any survivor payments.

The direct cost of an annuity to a client was the premium cost. However, stating this cost was misleading. The client received a cash-flow stream in return for his or her premium. The true cost of a contract could only be determined once the cash flows had stopped at the death of the client.Immediate annuity costs were to be deter- mined retroactively at death, subtracting the present value of benefits from the initial premium amount ($1 million). A risk-free rate of 3.0 percent was applied when discounting annuity costs. The aggregate contract cost could then be annualized over the period of time a client received payments.

Blended approaches
A blended approach of mutual funds and an immediate annuity account were considered. Fifty percent of the portfolio was placed in actively managed mutual funds and the remaining 50 percent went toward the purchase of an immediate annuity. This strategy allowed consumers to maintain liquidity in mutual funds but lock in the guarantee of an immediate annuity purchase.

All model success rates were between 83 percent and 98 percent, mirroring similar literature using Monte Carlo techniques on retirement planning distributions (Lemoine, et. al., 2010). Initial client spending of $40,000 was inflated at 3.0 percent annually. Client life expectancies varied from 66 to 113.
• 100 percent mutual funds—DIY client: 827 trials succeeded and 173 failed, for an 82.7 percent success rate. First-year costs associated with this strategy on a $1 million portfolio were $12,600.
• 100 percent mutual funds with FSP: 844 trials succeeded and 153 failed, for an 84.4 percent success rate. First-year costs including asset management fees were $17,600.
• 100 percent variable annuity with guaranteed income option: 767 trials succeeded and 233 failed, for a 76.7 percent success rate. The failed trials were modeled using the stated 5 percent of premium guaranteed retirement income rider, and of the 233 failed trials 36.5 percent reverted to passing. In all, 852 trials succeeded and 148 failed, for an 85.2 percent success rate. First-year contract costs were $27,100.
• 100 percent immediate annuity: 928 trials succeeded and 72 failed. Failure tended to occur when clients lived past age 95.

Fifteen percent of trials resulted in death at or before client age 74; 25 percent at or before age 78; 50 percent of trials resulted in death at or before age 84; and 75 percent of all trials incorporated death by age 92. All trials showed death no later than age 113. The longer a client lived, the lower the effective cost of an annuity purchase was to the client. After a client lived past 85, the indirect annuity cost to the client dropped to $0.

In modeling a $1 million immediate annuity for a 65-year-old, optimal life expectancy was between 85 and 95. During this decade, the client realized an indirect, cost-free annuity contract and did not exhaust resources. While 49.6 percent of clients lived to age 85, only 13.9 percent made it to age 95. Approximately
35 percent of trials had death during this optimal life expectancy.
• Fifty percent mutual funds, 50 percent immediate annuity: 972 trials succeeded and 38 failed, for a 97.2 percent success rate. Annual costs were $8,800 for mutual fund and adviser fees, and ranged based on age of client death for the immediate annuity from $30,433 to $0.

When considering annuity distribution strategies, costs stand independent of success rates. While working with a financial professional costs more than going it alone, retirement income guarantees and appropriate allocations can be well worth the extra expense.
Ideally, clients would not continue drawing 4 percent out of a portfolio if their retirement assets decreased at a rate higher than projected. Reducing withdrawal rates would raise success percentage across all four savings tools. Clients may also choose to change asset allocations in retirement, which might positively or negatively influence results. Current federal and state taxation and potential tax reform actions were not addressed here, but could certainly influence success rates.
Both annuity options had failures, but the failures were not catastrophic. Using 100 percent variable annuities, the client would receive a stagnant cash flow of $50,000 annually over their lifetime, and for every $100,000 annuitized the client would receive $6,800 annually over their lifetime. These cash flows might not sustain 100 percent of retirement spending, but offer more than mutual fund failures, which would result in 0 percent ongoing cash flows.
While the immediate annuity option had the highest percentage of success of any single product offering, clients must maintain liquid emergency funds outside of an immediate contract. An immediate annuity does not offer a bequest motive at death; the contract modeled would pass $0 assets to a surviving spouse or children. Combining strategies was valuable to help clients achieve a bigger bang for their buck. A basic combination of 50 percent mutual funds and 50 percent immediate annuity contract addressed the issue of liquidity and provided a much higher success rate than either strategy alone.
The accumulation of assets is driven by maximizing return, for a given level of risk, considering payments and time to save towards a goal. These principles are not consistent when discussing retirement distributions. The DIY portfolio had the lowest first-year costs of $12,600, but also experienced the lowest success rate. True retirement income success comes from blending diversification, guarantees and withdrawals into a plan that can help your clients sleep at night.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Sense and nonsense Regarding Distribution Portfolios

Walt Woerheide, ChFC®, CFP®, Ph.D.

Walt is the Frank M. Engle Distinguished Chair in Economic Security Research, Vice President of Academic Affairs and Dean of The American College. walt.woerheide@

We classify most personal portfolios as being for accumulation or distribution. In an accumulation portfolio, the client is accruing wealth toward a particular objective, such as retirement. In a distribution portfolio, the client is withdrawing cash on a consistent basis. A key task of the financial planner is to make sure that the riskiness of either type of portfolio is consistent with both the client’s risk tolerance and risk capacity. There are no hard and fast rules. Much data exists on how to do this with accumulation portfolios. We are still in the early stages of deciding how a client’s risk tolerance and risk capacity would affect the design and implementation of a distribution portfolio. What follows is a discussion of the central issues for planners making decisions about the optimal risk-return choices for distribution portfolios.

Definition of Terms
The annual return for an accumulation portfolio is usually the sum of investment income and the change in the portfolio’s value divided by the portfolio’s value at the start of that period, with adjustments for cash additions and withdrawals. We normally measure the risk of an accumulation portfolio using the standard deviation of returns. However, measures of return and risk when analyzing distribution portfolios differ. Return for a distribution portfolio is usually measured as the cash withdrawn from the portfolio, and risk as either the probability of the portfolio failing to last a specific number of years (usually 30) or a portfolio dying before the investor does.

The most common error in terminology regarding distribution portfolios concerns the withdrawal rate, which should more properly be labeled initial withdrawal rate (IWR). We mea- sure the IWR as the amount of money withdrawn during the first year of retirement, divided by the value of the portfolio on the date of retirement. After the first year, we adjust the withdrawals based on a withdrawal strategy; one being that each withdrawal is the same dollar amount. We refer to this as the fixed annuity strategy. Another is that the amount withdrawn each year increases by the inflation rate of the prior year. We call this an inflation-adjusted annuity strategy. A third option is to apply the IWR each year to the value of the portfolio at the start of each year. We refer to this as a performance-based annuity strategy, as each year’s withdrawals will go up or down by the rate of return on the port- folio the prior year. This is the only strategy in which we can apply the term “withdrawal rate” to both the initial withdrawal and all subsequent withdrawals. It is also the only strategy that assures the client will not dissipate the portfolio, although withdrawals may drop to unacceptable levels. Finally, there are combination inflation-adjusted, performance-based strategies in which an inflation adjustment is made, but only if the portfolio achieves certain performance targets.

The key parameters for a distribution portfolio are asset allocation, the IWR, the withdrawal strategy and “the number,” which is the value of the distribution portfolio on the date of retirement. Discussions about the rate and the number will sometimes suggest criteria about the minimum acceptable probability of portfolio success or maximum probability of portfolio failure, which are complements. Portfolio failure, again, is either the portfolio dying before the client dies or the portfolio dying before a specified number of years.

Asset allocation is the easy choice
Most, but not all, research about distribution portfolios has consistently supported an optimal asset allocation of no less than 50 percent equities and no more than 75 percent equities. With less in equities, substantial risk exists that inflation adjustments will overwhelm the portfolio and wipe it out pre- maturely. With more in equities, there is substantial risk that a prolonged bear market will likewise deplete the portfolio. A traditional rule of thumb for asset allocation for older clients is the percentage in equities equals something like 100 minus one’s age. Little research has looked at the impact of such a rule on the probability of portfolio failure, but the 50 percent to 75 percent range would likely dominate an age-adjustment asset allocation rule.

Need and risk tolerance
As the most commonly suggested withdrawal strategy is the inflation-adjusted annuity, let us focus on this strategy. Clearly, the lower the IWR, the larger the number has to be to generate a specified amount of income in the first year. Thus, an annual initial withdrawal of $60,000 can be made with an IWR of 3 percent and a $2 million portfolio, a 4 percent IWR and a $1.5 million portfolio, or a 5 percent IWR and a $1.2 million portfolio. A larger IWR provides more annual income for a client (return), but increases the probability of portfolio failure (risk). The key point is that a planner can not make a recommendation as to “the number” without knowing the IWR, and cannot recommend an IWR without due consideration of the client’s need for return, the mix of required and optional expenses, and the client’s risk tolerance and risk capacity.

Let us assume for illustrative purposes that Client A projects $80,000 in mandatory expenses (such as housing) and $20,000 in optional expenses the client would like to incur (such as vacations), but are not essential to daily living. Assume, also, that the client would like to leave a substantial estate to beneficiaries. Suppose the client has $75,000 in non- portfolio income, such as Social Security, pensions and annuities. If the client has a $500,000 portfolio and plans a 5 percent withdrawal rate, then this combination will produce the $100,000 desired income and allows the client to accept an aggressive investment exposure to try to generate a larger estate. Simply put, because of the amount of fixed income relative to mandatory expenses, the client could afford to take on the lower probability of success associated with the 5 percent rate and a more aggressive asset allocation to have a greater chance of a larger estate. In other words, this client has substantial risk capacity, and may have a high tolerance for risk with the estate wishes.
Client A may not have a strong desire for a large estate, but may well care to spend more on optional activities than the $20,000 initially identified. With a high-risk tolerance, this client could con- sider a withdrawal rate larger than 5 percent. If Client A opts for this higher rate and things do not go well, the client has the capacity to reduce the withdrawal rate before putting at risk the income necessary to meet required expenses.
Now, assume Client B also projects a need to spend $100,000 per year, with $80,000 of that required and the remaining $20,000 desired but optional. The difference is that Client B has only $25,000 of annual non-portfolio income but has a portfolio worth $1.5 million. With a 5 percent withdrawal rate, the client can still generate the desired $100,000 income. However, because the portfolio withdrawals are the primary source of the client’s mandatory expenses, a substantial drop in the portfolio’s value would be catastrophic. This client has no risk capacity, and may well have little tolerance for risk. This client would do well to consider a reduction in the withdrawal rate, even though this would mean, a lower standard of living than what he or she would desire, at least initially.

Simply stated, talking about the number and the rate as if all clients have the same risk capacity, risk tolerance and mix of mandatory and optional expenses is inappropriate. As these two simple examples illustrate, risk capacity and tolerance are situational and should be assessed by a financial advisor competent in retirement planning.

Other issues affecting the rate and the number

Ample documentation proves that there is a difference be- tween the young-old and the old-old. At some point, retirees become more sedentary. We all know people in their 90s who remain active and people in their 60s who are nearly incapacitated. Nonetheless, on average, most people tend to become less active around their mid-70s. This lower activity usually means a lower need for income. However, little research incorporates the implications of this fact into distribution portfolios. Thus, for a client who is 65, the likelihood of a less active, less expensive lifestyle in 10 years or so would mean the client could take on more risk initially than would otherwise be considered appropriate. This greater risk could take the form of a larger IWR and/or a lower number in developing a retirement income plan.
A second and rarely discussed issue is the near sacredness of income stability in retirement. A reduction in income is sad for anyone, whether it happens to a married breadwinner with small children, a person at the peak of the income-earning years or someone in retirement. The breadwinner losing his or her job likely means the family will reduce their standard of living. Everyone would understand. Research on retirement income typically assumes that once a person selects a withdrawal strategy such as an inflation-adjusted annuity, the per- son will stick with that strategy regardless of what happens to the portfolio. Thus, if there is a serious market collapse in the first few years of retirement, the assumption is that the individual will continue to make inflation-adjusted withdrawals. I suggest that just as the breadwinner has to give up certain things because of losing a job, a retiree may also have to cut expenses if the market tanks in a manner that puts the retirement portfolio at risk. Retirees understand this point; note how much is written in a recession for retirees about ways to save money.
Naturally, one can argue that starting with a higher number and/or a lower withdrawal rate will reduce the risk of giving up a dream retirement. However, when a person reaches his or her desired retirement age, the number is a reality, no longer a goal. A lower IWR than is reasonable to build in more certainty of income only means the client is giving up some income in the early years of retirement to reduce the risk of a larger reduction later. Whether all retirees would want to make this choice is unclear.
Although the most commonly researched withdrawal strategy is the inflation-adjusted annuity, there is a lack of research showing whether this is what all or most clients really want
or need. Considering that for some a large portion of their retirement expenses are fixed, some clients can substitute less expensive purchases for more expensive ones, and that most people will see a reduction in living expenses during retirement, the client may not always need an inflation-adjusted income stream.

Logical Next Steps

Suggesting there is an optimal withdrawal rate, an optimal portfolio value, or even a minimum acceptable probability of portfolio success or a maximum acceptable probability of portfolio failure, is simplistic. These variables interact, and they are dependent on a client’s risk tolerance and risk capacity. Just as there are many good questionnaires for determining risk tolerance for clients with accumulation portfolios, the planning profession needs to develop good instruments for identifying risk tolerance and risk capacity for clients with distribution portfolios. A major area of research would be to determine how the scores on these instruments would relate to the parameters for distribution portfolios.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Retirement Funds: 0 Life Expectancy: Beyond My income

Art Kraus, CLU®, ChFC®

Chairman of Capital Intelligence Associates in Los Angeles, Art also served as the CEO of the National Association of Insurance and Financial Advisors from 1999-2002. He serves on the AALU Financial Literacy Task Force and Charitable Giving Committee.

In the olden days people prepared for retirement with pension plans. Those plans promised a life- time of income for the retiree and, sometimes, their spouse. But pension plans became expensive for employers and most were discarded for retirement savings plans. These savings plans allowed employers, employees and oftentimes both to save money in the plan on a tax-deductible basis until the funds were withdrawn.
The objective of these savings plans is to accumulate as much money as possible and to withdraw a modest amount at retirement so that the income will last as long as the retiree and spouse live.
In theory these plans have made sense. In practice they haven’t worked out so well. In 2008, many retirees and Baby Boomers found that in a depressed investment market, their capital shrunk. Their reduced savings was further eroded by the income that was required for their lifestyles. The situation left many retirees holding a little cash and a lot of insecurity. Many even tried to go back to work to augment the loss of income security.
How did this happen, and how do we know that it is probable this scenario will repeat itself in the
future? To make a quick analysis of the problem one only needs to look at the history of the investment markets and have a cursory understanding of the law that might give impetus to putting retirement on a slippery slope.
Historically, retirement funds have been invested in either equities, fixed income securities, or a combination of both. The focus of investment advisors with retirement plans has been on accumulation and not distribution. So we have all been aware of the need to put money aside for retirement. In fact, accumulation has been almost exclusively the conversational focus regarding retirement.
The fact of the matter is that accumulation is important, but measured by itself it misleads the future or current retiree. Fluctuating markets during periods of withdrawal during retirement may have a severe effect on the retiree’s financial security.
2008 was an unusual year, but not the only time the investment markets have had severe downturns. The market dropped precipitously and the worth of many accounts was cut substantially. Concurrently, interest rates began dropping to very low returns.

The effects on retirees and baby boomers were profound:
•  One of the common beliefs about retirement was that you could safely withdraw 5 percent to 6 percent of your retirement fund balance annually and feel fairly safe as market returns measured by some indexes averaged higher than that. Often forgotten was that the investments contained fixed income securities that did not mirror the averages. So, after accumulation was complete, the problem that retirees faced was how much they could withdraw. Low fixed
income rates and a weak stock market made it nearly impossible to withdraw such percentages without reducing principal. Distributions from the accounts became the paramount issue.
•  With no further contributions being made to the plan (or just a few years of contributions to be made), the possibility of a quick recovery to former accumulation levels became improbable.
Markets go up and down, and falling markets during the retirement years are very dangerous. It is comparable to “reverse dollar-cost-averaging.” When the market goes down, that is of obvious concern. But when one has to sell additional shares at a lower market price to achieve the income that is required, the combination of a reduced accumulation and the sale of more shares can destroy one’s retirement plan.
This is further exacerbated by the law. The law says that at age 70 1⁄2 a retiree must take required minimum distributions from his retirement plan. The percentage is set by law and each year during retirement the percentages increase. So, by law, the retiree must take ever-increasing distributions even though the market may be underperforming. That is a formula for financial disaster!
Add to that the success that medical science has achieved. We are living much longer than the generations that preceded us. Our need for income grows greater not only due to our longer life, but the cost of the medical attention that keeps us living and vital.
In summary, the problem is that the probability of a down market during an extended period of retirement will have severely negative effects on our future financial security. How have retirees dealt with this kind of problem? In the past they have done it one of two ways: • People have just hoped that reasonable withdrawals  and good returns over time would solve the problem. Sometimes they will and sometimes they won’t. Increasing mandated withdrawals (RMDs) may not allow for a conservative investment strategy to work. Today one would be hard pressed to find an economist who paints a rosy economic picture. Many economists have suggested that the investment and interest returns in the future won’t be as favorable as we have seen pre-2008. Low returns and high withdrawals are a dangerous formula for retirement plan survival.
•  Some people have purchased “lifetime income” through annuities with all or part of their retirement balances in an attempt to guarantee income for retirement. The primary advantage is the promise of an income for their retirement. The disadvantages are that, absent any further guarantees, at the death of the retiree the balance of the funds used to purchase the annuity disappears. Nothing is left for beneficiaries. Additionally, the payouts for annuities are fixed and may not provide adequate income for an inflationary future.
There is an alter- native to the his- toric choices between hope and immediate an- nuities. It is to provide income from your retirement savings with an insured guarantee that your income will continue for your retirement and your
spouse’s, too. Taking steps to assure income for retirement I think is criti-
cal in your planning. As accumulation was important during the working years, distribution planning is important at pre- retirement and at retirement.
These options have the effect of changing all or part of your savings plan into an income plan. It has the best of both worlds in that you can keep your plan invested yet create re- tirement income. This insured benefit has several features that should be important to most retirees.
           •  It continues the advantage of the retirement savings plan that you can choose how to invest your account among a choice of several objectives. As an example, you may choose among aggressive investments, growth, blended and conservative investments. Some companies offer even more choices. So, philosophically, there is little difference between what you are currently doing and what is available.
           •  The insurance company will make several guarantees. The first is that your income will be based upon a percentage of the funds that are invested. That percentage will never go down. Additionally, there are further guarantees that may be important for your retirement income.
                           – Your income will never go down despite poor investment results. For example, if you invest $100,000 and your rate of return is 5 percent, you will never get less than $5,000 per year, even if your account runs out of money! That is the income insurance you are purchasing.
                           – If your account increases, your income will increase, too. If in the above example your account balance became $150,000, your income would increase to $7,500 per year. That income would remain at $7,500 unless the value of the account increased again. The insurance is that your income can only go up, cannot go down and cannot cease until the death of the beneficiaries.
                           – Unlike an immediate annuity, at death any balance in the account will go to your named beneficiary.

These guarantees are made by an insurance company. It is important that you select a company that is sound and that has a long history of standing behind its guarantees. I suggest reviewing the company’s financial ratings and getting a good understanding of the terms of the contract. A good planner can help you with that.
Of course, there are costs involved. The basic investment contract for the retirement funds is a variable annuity. Variable annuities have underlying costs, as do mutual funds, managed accounts and any investment you might make. As in any in- vestment, one should consider if the expenses are reasonable. The cost of the guarantee is on top of the investment costs. Investing in a variable annuity with qualified plan money does not provide any additional tax benefits to the retirement plan. But with the benefits of the underlying guarantees, it provides a reasonable expectation of a lifetime of income that a stand- alone retirement plan cannot provide.
What does that guarantee buy? Income for retirement in- stead of the uncertainty of what fluctuating investments with increasing withdrawals might provide, the opportunity to have an increased income and to never have a decreased in- come, and the elimination of the fear of running out of money before you run out of life.
You might consider that it is not a cost you are adding but a value.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
Variable annuities are long-term, tax-deferred investment vehicles designed for retirement purposes and contain both an investment and insurance component. They are sold only by prospectus. Guarantees are based on claims paying ability of the issuer. Withdrawals made prior to age 59 1⁄2 are subject to 10 percent IRS penalty tax and surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available subaccount portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value.
Riders are additional guarantee options that are available to an annuity or life insurance contract holder. While some riders are part of an existing contract, many others may carry additional fees, charges and restrictions, and the policyholder should review their contract carefully before purchasing. Guarantees are based on the claims paying ability of the issuing insurance company.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

ESOP Company Retirement Income

Dickson C. Buxton, CLU®, ChFC®

Dickson is a Chartered Financial Consultant and Senior Managing Director at Private Capital Corporation. dbuxton@

A recent poll showed that in this long economic downturn college graduates can’t find well-paying jobs. When they do find work, unless they have specialized skills and education in certain fields, they will not have retirement plans that are funded by the employer. Other hardships deterring the un- employed and underemployed include:
• Employer 401(k) plan matches that supplement employee contributions have been sharply reduced or eliminated as companies downsize to survive and their health insurance costs increase, and employees are paying a larger share of the premium. This, in turn, reduces take-home pay, making saving for retirement even more difficult.
• Defined benefit pension plans are usually only offered by public agencies and these are now being reduced, and many employees are being laying off in the budget crisis.
• Future Social Security income for younger people will have to be sharply reduced, and contributions will increase as the system is underfunded.
• Most young people do not have the experience and/or capital to go start their own business, or the sales experience to get jobs selling products or services on commission.

But all is Not Lost
Employment opportunities do exist with many of the more than 11,000 employee stock ownership plan (ESOP) companies in the nation with 10 milion plan participants. That’s more than the number of public service union employees. Many will hire recent college graduates if they have an entrepreneurial attitude and are willing to be compensated with a more modest salary, bonus income for exceptional performance and a share of the ownership of the company.
Upon retirement ESOP and 401(k) accounts can be rolled over to an IRA to supplement what will be a more modest Social Security income in the future.
The old paternalistic attitudes of providing long- term employment and expecting long-term loyalty from subordinates no longer builds enduring relationships.
Layoffs are now more frequent as companies react to national and international competition by downsizing staff and restructuring. Banks also have different lending policies and less latitude in financing. A loss year causes major financial problems for the thinly capitalized company. This ripple effect causes most people to become more concerned about their own security.
The challenge is to reward and motivate those who stay with a company and cause those who may be thinking about leaving to carefully assess the financial loss involved in that decision.

A company is built over time by a CEO-entrepreneur who is able to bring together a close-knit management team ingrained with the necessary discipline to recruit, train and motivate employees to produce a quality product or service. Those CEOs who retire and then watch the company they built continue to grow and prosper have exemplified the ability to delegate authority, responsibility, risk and reward out to their associates, not down. They help people learn how to think for themselves and become independent members of a group of like-minded individuals engaged in a common cause—building a company dedicated to rewarding everyone involved:

• The client or customer with consistent high quality services or products and

• Their employees, who feel like partners and who earn above average current income

These associates also build future value through beneficial stock ownership, which helps solidify the value of stock ownership in the company for all the shareholders.
The enlightened CEO also recognizes that two kinds of equity are essential in building a company: dollars and sweat. Those who feel that only capital is necessary will have to sell their company before its prime, as highly intelligent, motivated people will normally not stay with an organization that has as its creed: “From each according to one’s ability, and to the founders and their family according to their need.” Only those family companies with a large number of relatives will build an enduring company that can be perpetuated
over the years.
Employee owners, on the other hand, have a different attitude about their company; their job and responsibilities that make them work more effectively as an ownership team.
Recent studies have examined the stabilizing effect on a company caused by employee ownership plans. The survival rate of ESOP companies is markedly higher than for comparison companies. They outperform their competitors in terms of return on assets and shareholder returns.
Most people want to have more control over their own des- tiny. Joining a shared ownership company is a good way to do this.

Women and Retirement

Mary Quist-Newins, CLU®, ChFC®, CFP®

As the State Farm Chair in Women & Financial Services at The American College, Mary is also the author of Women and Money: Matters of Trust.

It has been said that failure to plan amounts to planning to fail. Nowhere is this more evident than in he relationship between American women and planning for a financially secure retirement. While the great majority of American women are justifiably anxious about their finances, a fractional few have developed retirement plans that adequately address their future income, wealth and risk management needs.
A wide range of academic and industry studies underscore this retirement planning disconnect. To illustrate, Oppenheimer Funds found that in 2005, 93 percent of Baby Boomer women said saving for retirement was their primary goal. Yet, less than one in three women over age 50 had even attempted to calculate how much they needed to save for retirement, according to a 2006 survey by the University of Michigan. The Michigan study further revealed that less than one in five respondents, just 17 per- cent, had successfully developed a retirement plan.
Absent a well-developed plan of action, it comes as no surprise that many women share deep apprehension about their financial security in their gold- en years. Given that females represent three in four Americans over 65 living in poverty, there is good reason to be concerned and even more reason to engage in planning to ward off a financially challenged future.
In light of the stakes involved, it is important for financial professionals to connect the dots between specific retirement opportunities/challenges that many women face and creating a well-conceived
plan of action. By doing so, the benefits can be significant—both for female clients and for those that advise them.

Wealth Management
On the positive side of the retirement planning equation is the tremendous growth of women- owned capital. It is widely estimated that females now possess roughly half of the nation’s privately held investment assets. Further, the IRS reports that in 2004 (the most recent year for which data is available) women represented 43 percent of the nation’s most prosperous individuals. By 2030, the Boston Consulting Group projects that two-thirds of U.S. investment wealth will be in the hands of women as a result of cumulative increases in education, employment, earnings and intergenerational wealth transfer. These trends point to an emergent market of affluent females that expect sophisticated strategies for managing retirement wealth, including strategic asset allocation, retirement income distribution, tax management, charitable giving and estate preservation.

Risk Management
While the rising prosperity of American women has been broadly reported in recent years, far less well acknowledged are significant and pervasive financial risks that threaten many. Because these perils are most acute later in life, it is essential that advisors incorporate them in discussions with and retirement plans for their female clients. When compared with men, there are five heightened risk areas that most women share:

1. Longevity
Life expectancy for women exceeds that for men by 5.3 years, according to the National Center for Health Statistics. Greater longevity increases the need for reliable sources of lifetime in- come, along with higher probabilities of singlehood and disabling illnesses.
Advisors who quantify the economic impact of a decades- long retirement can make a lasting, positive difference for female clients. To help prospects and clients better understand their longevity potential, a useful website is The site’s life expectancy calculator incorporates medical and scientific data in a series of 40 questions related to health and family history. Once retirement income requirements are calculated, financial professionals can then design income distribution strategies to meet them.

2. Lower lifetime earnings
The Bureau of Labor Statistics (BLS) reports that females in the U.S. generally earn about 80 cents on the dollar when compared to males. In addition, as women on average take 12 years out of their working lives to care for children and/or parents, many have lifetime earnings that are far lower than one might expect. An astonishing example of this dynamic is the gender analysis of long-term earnings con- ducted by Institute for Women’s Policy Research (IWPR). Having studied 15 years of data from the U.S. Government Accountability Office, the IWPR study revealed that female workers average lifetime earnings were just 38 percent of those for men.
Predictably, lower earned income translates to reduced Social Security Income (SSI) benefits, lesser retirement savings and pensions for women than for men. The U.S. Census Bureau reports that in 2009, the mean for total retirement in- come for American females was $22,625 vs. men’s $38,754— a 40 percent disparity. In addition, earnings constraints force greater reliance on SSI as the mainstay of retirement income. This is affirmed by 2008 Social Security Administration (SSA)
data showing that for women over 65, SSI provides more than two-thirds of their income, compared with about half of retirement income for men.
Calculating alternative scenarios on retirement inception, lifestyle and when to claim spousal and/or worker benefits from both Social Security and qualified plans are among the most critical planning steps financial professionals can take. For most, this means going beyond looking at the annual SSA statement of estimated benefits. With its multiple benefit calculators, answers to frequently asked questions and detailed, downloadable handbook, the SSA website ( is an excellent resource for running alternate income permutations and better understanding their impact.

3. Singlehood
Women are more than twice as likely as men to be alone in their later years. The absence of a second income earner/asset owner carries obvious financial risks. The SSA reports that in 2007, more than one in four (28 percent) single women over age 65 were classified as “poor” or “near poor.”
Tragically, widowhood significantly increases the risk of a woman becoming impoverished. Three in five women over age 75 are widowed. According to SSA statistics, while four percent of married elderly females live in poverty, the number of impoverished widows over age 65 jumps to a whopping 17 per- cent—more than four times the number for married women. The SSA also reveals that more than 40 percent of widows of pensioners reported no pension income after their husband’s deaths. Perhaps the most troubling statistic comes from the U.S. Census Bureau, which found in 2007 that 80 percent of widows living in poverty were not poor when their husbands were alive. This sad fact should give pause to those who believe that life insurance is not needed in retirement.
Financial professionals must both understand and analyze the impact of survivor benefits from Social Security and pensions. Further, advisors need to engage both spouses—not the husband or wife individually—when planning for retirement to ensure adequate survivor income is in place. Younger women need to take into account the high probability of single- hood, living alone and the importance of having an independent source of income from pensions or other assets.

4. Double jeopardy of long-term care
Women are doubly exposed to the devastating financial risks of long-term care because they are significantly more likely than men to be both the caregiver and receiver. As long-term care receivers, they rack up more than twice the average cost for care rendered to men and represent more than two in three unpaid caregivers.
The exorbitant costs associated with needing long-term care assistance are generally well known. The financial toll that caregiving exacts is perhaps even greater. According to a 2011
report by the MetLife Mature Market Institute, the economic costs—between lost wages, reductions in Social Security and pension benefits—is estimated to be $324,044 for the average female caregiver. The consequences of caregiving can implode even the best-laid retirement plan. As evidence, caregivers are
five times more likely to depend exclusively on Social Security and more than twice as likely to end up in poverty according to the Older Women’s League.
Asking female prospects and clients about their potential for becoming a caregiver can open the door to a larger conversation about long-term care. Women need assistance in this area as affirmed in a 2008 study by Securian that found the overwhelming majority (84 percent) of female caregivers said no plans were made—until care was actually needed.
Advisors can also help their female clients analyze their potential for needing care, its costs and impact on retirement security. A particularly useful resource is the long-term care planning tool on the U.S. Medicare site ( This calculator asks for inputs on age, gender, earnings, health, location of potential care services and family histories. Beyond providing a wealth of unbiased information, the calculation gives an individualized projection of care costs and probabilities.

5. Financial literacy
Industry and academic studies consistently affirm that financial illiteracy in the U.S. is appallingly widespread, and that women lag behind men on virtually every measure. A 2007 survey by the Jump$tart Coalition for Personal Financial Literacy found that one in four adults failed a quiz on money basics (e.g., inflation, interest rates, debt, savings vehicles, etc.). The same research revealed that females were almost three times more likely to fail the quiz than males.

Perhaps even more striking is the lack of familiarity many women have with the very financial products that can help them achieve a more secure financial future. Research con- ducted by Prudential Financial in 2006 found that just rough- ly half of all female respondents did not understand annui- ties, mutual funds and long-term care insurance well or at all. Because lack of understanding leads to inaction and there is a direct correlation between financial illiteracy and poverty, this important risk factor should be addressed when advising clients.
Advisors need to take time to assess their female clients’ financial readiness and, where necessary, provide education on retirement risks, planning approaches and recommend- ed product alternatives. In doing so, however, professionals should avoid talking down to women, as this is a common complaint revealed in research.
On more positive notes, most women are eager to learn and the rewards for advisors can be significant. According to a 2008 study by Allianz entitled “Women and Power,” one half of women prefer to learn about financial products from financial professionals. Oppenheimer’s 2006 “Women and In- vesting” report further revealed that women are less likely to enjoy making investment decisions themselves and almost two in three women (64 percent) feel more knowledgeable about money when they are working with a financial professional.

The Retirment Planning Connection
Taken together, these wealth and risk management opportuniies and challenges call for developing a comprehensive retirement plan. A transactional sales approach or single-issue focus will fall far short of what is required to adequately address the retirement challenges presented by many female clients. In addition, industry research consistently affirms that women are looking for holistic solutions to their financial needs and may take more action than men do when a comprehensive plan is in place. The chart above reflects findings from a 2008 study by the Financial Planning Association (FPA) and Ameriprise that shows significantly higher product ownership rates among females with comprehensive plans relative to their male cohorts.
Beyond impelling needed action, females also gain significant psychological benefit through a holistic approach, ac- cording to the FPA/Ameriprise survey. Specifically, more than four in ten (42 percent) of those with multiple-issue plans said they felt “very/extremely” prepared for retirement. Their rate of confidence was more than twice of those women with an advisor who had not developed a comprehensive plan (20 per- cent), and roughly three times the rate of self-directed female respondents (14 percent).
Comprehensive retirement plans enable financial professionals to better meet the complex financial and psychological needs of their female clients. By doing so, advisors benefit by gaining deeper trust, higher rates of product implementation and satisfied clients eager to refer.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Running Out of Money

Tom Hegna CLU®, ChFC®, CASL®

Tom is the President of and the author of the book Paychecks and Playchecks. He is a former Senior Executive Officer of a Fortune 100 Company and has spoken main platform at Top of the Table, MDRT, SFSP and NAIFA.

The Wall Street Journal dated April 4, 2011, had a fascinating article titled “Feds Low Interest Rates Crack Retirees’ Nest Eggs.” The article described the dilemma facing 91-year-old Forrest Yeager; a resident of Port Charlotte, Fla. Forrest was down to his last $45,000, which he had invested in a CD paying less than 1 percent per year. He was receiving about $300 per year in income, which obviously was inadequate, so he was forced to withdraw principal each year from his CD.

“It hurts,” said Yeager, who estimated his bank savings would be depleted in about six years at his current rate of withdrawal. “I don’t even want to think about it.” The story went on to say that Yeager was just one of many who now find them- selves on the wrong end of the Federal Reserve’s attempt to rescue the economy with low interest rates, and the article struck me to the core. I wanted to know why Yeager didn’t simply walk into any life insurance company in America and buy an immediate annuity. At age 91, he would be guaranteed more than 20 percent per year from any major life insurance company in this country. A recent quote from showed that a 90-year-old purchasing a $45,000 Life Only Immediate Annuity would receive $754 per month, or $9,048 per year. Moreover, this payout would be guaranteed for the rest of his life. He would never be concerned about running out of money.

The Wall Street Journal article also highlighted 70-year-old John Lehman, who took a different approach. He said he’s keeping about 80 percent of his investments in stocks despite the shock he suffered during the financial crisis. “That’s why most of us are in the stock market,” he said, “because there’s no place else to go.” The problem with this approach is that people in their 70s lose their peace of mind. They end up spending their retirement watching CNBC rather than actually enjoying themselves. The volatility of the stock market causes significant stress and increases the risk that they will indeed run out of money.
The solution is a simple two-step process that says; first, a retiree should cover their basic expenses with guaranteed lifetime income. What counts as guaranteed lifetime income? Social Security counts. Pensions count. So, when working with clients, simply ask them how much money they need to live their normal retirement lifestyle. Take the level of income needed to cover basic expenses, subtract what they are receiving in Social Security and pension benefits, and the remaining shortfall should be covered with a single premium immediate annuity (SPIA).

Second, optimize the remaining portfolio with a special eye on inflation. Why the attention on inflation? Well, what are the risks to today’s retiree? One of the risks is deflation. If you think about it, we’ve already taken care of that risk with a lifetime income annuity. In a deflationary environment guaranteed lifetime income is a big winner. The paycheck stays the same while expenses decrease, allowing the client to have increased real cash flow year after year. Longevity risk and withdrawal rate risk, otherwise known as sequencing or the order of returns, have been taken care of by the guaranteed lifetime income, as well. So inflation is the main remaining risk to the client.

Even a very conservative client needs to optimize his/her portfolio with exposure to commodities, stocks, TIPs and other inflation-sensitive investments. If inflation starts to increase, these investments should also increase in value. As they do, the client takes some profits and buys more guaranteed lifetime income. A retiree also could buy inflation protection in their lifetime income annuity, but my experience is that laddering lifetime income annuities gives the client more flexibility throughout retirement. It also gives them a sense of control and ties up fewer assets initially in an immediate annuity.
If a client follows this simple strategy, whether we have inflation, hyperinflation, deflation or another Great Depression, the client will have income guaranteed for life that increases with inflation, stays the same with deflation and allows them to never run out of money. That’s incredible peace of mind.

What are some of the objections you will encounter using this strategy? The usual suspects include:
• Lack of liquidity;
• Giving up control;
• Low interest rate environment;
• A dislike of giving money to the insurance company; and
• Believe that they can do better on their own.
For those who fear giving up control of their money and not having the liquidity they may need in the future, the research is clear. The people who run out of money are exactly the people who wanted to be in control and have all of their money liquid. Remember, liquidity is not a one-time event. It is a lifetime event. By covering your basic expenses with guar- anteed income, you increase your liquidity over your lifetime. Giving up control of some of your money actually means you do have liquidity of your other funds. Too many people have a false sense of liquidity—they have their money in bonds or CDs and use the interest for income. At the same time, they count that money as liquid. Yet, if they liquidate the money, they lose their income. This common double counting of as- sets is a myth that puts many seniors at risk of running out of money.

“Why would I want to lock in interest rates that are at 40- year lows for the rest of my life?” First of all, this assumes that interest rates are going to rise significantly in the next 20 years, and I could give volumes of reasons why that may not happen. Regardless, if this is your client’s position, encourage them to study the payouts of lifetime income annuities. Remember, every paycheck is composed of three parts—principal, interest and mortality credits. The older a person is, the less interest rates even matter. For example, if Forrest Yeager bought that lifetime income annuity, interest rates could double or triple and it would barely have an impact on his payout rate. Conversely, if you were working with a 55-year-old, the objection may be valid and that client might be better off with some type of variable annuity or variable immediate annuity.

I am often asked this question: “I know my payout rate is good, but what is my actual interest rate?” Remember, the insurance company does not set the interest rate; the client does—by how long they live. You can’t even determine the interest rate until you know when the client is going to expire.

Those individuals who feel like they don’t want to give their money to an insurance company, or they can do better on their own, again, in my experience are the people in danger of running out of money. Just like some people don’t believe in life insurance, some people don’t believe in lifetime income annuities. I am sorry about that, but there is nothing I can do other than present the facts. Laddered bonds can’t do what I have recommended. Withdrawals from a diversified portfolio can’t do it either.
The Financial Research Corporation of Boston said, “Our analysis shows that no other investment vehicle can rival the income annuity for retirement security. There is no other vehicle in the marketplace that can convert assets into income as efficiently as the income annuity.”
I couldn’t have said it better myself.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Healthcare Reform’s Effect on Medicare

Arthur Tacchino, JD

On March 23, 2010, the Afford- able Care Act (ACA) was signed into law and, since then, has dra- matically changed the landscape of the healthcare industry. The chang- es initiated by healthcare reform have and will continue to have far- reaching implications. Provisions of the law will affect hospitals, car- riers, consumers, doctors, states, plan sponsors, employers and even government programs, including Medicare. Medi- care is the world’s largest federally funded health program in the world. Each year the program as- sists millions of elderly citizens in meeting the cost of their healthcare, and it plays a major role in the financial and retirement planning process. This ar- ticle examines a number of the significant changes that have been made or are coming to Medicare under the Affordable Care Act. These changes will be important to consider during the financial and retirement planning process.

ACA Creates the Independent Payment Advisory Board                                                                                                                                                                                                                                                                                                                                                                                                                       Currently, Congress is responsible for establishing policies affecting all aspects of the Medicare pro- gram. The Centers for Medicare & Medicaid Ser- vices (CMS) implement policy changes through regulations and manage day-to-day program opera- tions. Under our current system, the Medicare Pay- ment Advisory Commission (MedPAC) submits annual recommendations to Congress on a broad range of Medicare issues. Note that MedPAC is not required to achieve budgetary targets, has no independent decision-making authority, and Con- gress has no obligation to follow MedPAC’s rec- ommendations. Under the Affordable Care Act, the Independent Payment Advisory Board will be established. In some ways this board will act in a similar fashion to MedPAC, however they will re- main separate entities and MedPAC will continue in its own functional capacity. The Independent Payment Advisory Board will recommend proposals to reduce Medicare spending if projected per capita Medicare spending exceeds certain target growth rates. The Board represents the first time that the Medicare program will be subject to spending lim- its, with statutory requirements to achieve savings targets, which is generally how the board differs from MedPAC.                                                                                                                                                                                                                The board will be comprised of 15 full-time members that are appointed by the President and confirmed by the Senate. It is important to be clear that the board is prohibited from submitting pro- posals that would ration care, increase taxes, change Medicare benefits or eligibility, increase beneficiary premiums and cost-sharing requirements, or reduce low-income subsidies under Part D. The recom- mendations made by the board will have a binding effect on Congress if they fail to implement cost- saving measures of their own once per capita Medi- care spending rates exceed projected target growth rates.                                                                                                                                                                                                                                                                                                                                                                                                                                    Professionals will need to track and understand the changes and proposed recommendations this board makes in the future. Proposed spending cuts may have a negative impact on your clients who rely on ac- cess to Medicare, and will play an important role in the long- term financial planning process. While the board is strictly prohibited from making recommendations that ration care or increase beneficiary cost-sharing, reduced spending could potentially mean limitations to accessing care as well as in- creased spending requirements on the part of the consumer. It will be important to take this into consideration during the financial and retirement planning process.

Payments to Medicare Advantage Plans Will be Reduced Over Time                                                                                                                                                                                                                                                                                                                                                                                                Many retirees find that their medical needs are better met with Medicare Advantage (MA) plans, also known as Medi- care Part C. However, changes to Medicare Advantage in the Affordable Care Act may make seniors and financial planners alike reconsider their options. MA plans are contracted with private insurance companies. These plans must at least offer the benefits that are provided through traditional Medicare. The reason an eligible Medicare beneficiary might enroll in one of these plans is that if MA plans save money compared to traditional Medicare, they can use the money to offer enrollees benefits that are not usually of- fered through traditional Medi- care, such as vision and dental, or to lower the beneficiaries’ out-of-pocket costs. To save the money to do so, MA plans are usually contracted with Managed Care Organizations. The is- sue with MA plans is that they are costing the federal govern- ment approximately 10 percent more per enrollee than tra- ditional Medicare. Taxpayers, as well as enrollees, pay these additional costs in traditional Medicare plans in the form of higher premiums.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 The Affordable Care Act will bring payments to MA plans down to the level of traditional Medicare. Between 2012 and 2013, the benchmarks used to make payment decisions will be gradually reduced to between 95 percent and 115 percent of each county’s traditional fee-for-service Medicare payments. According to the CMS, there will be bonus payments for plans that achieve at least three stars on a five-star scale that rates quality measures such as clinical outcomes and contract per- formance. However, the bonuses will tend to be significantly smaller than the decreases in benchmarks.                                                                                                                                                                                                                                                                                                                                                                                                                                       As a result, professionals should be aware that some medical needs may no longer be covered by MA plans and that MA plan premiums may rise. The bright side to these reductions is that premiums for enrollees of traditional Medicare will de- crease, as they are no longer subsidizing the higher payments to Medicare Advantage plans. This, too, will be an important factor to take into account during the financial and retirement planning process.

ACA Extends the Life of Special Needs Plans                                                                                                                                                                                                                                                                                                                                                                                                                                 “Dual eligibles” are people who are eligible for both Medicare and Medicaid. This demographic tends to be the least healthy of all Medicare beneficiaries, so it is important they find the plan that best suits their complex needs. Many dual eligibles find it most beneficial to join a Special Needs Plan (SNP). These plans were set to expire on December 31, 2010, but the Affordable Care Act extends their authorization through 2014. Therefore, seniors who are on these plans can expect them to continue at least into the near future. Depending on how benefits pan out for other MA plans, dual eligibles who were formerly on MA plans may even find that their medical needs are now better met using an SNP. Professionals need to be aware that these plans found new life through the Afford- able Care Act, and should always consider these plans when dealing with dual eligible or special needs clients.

ACA Reduces the Coverage Gap                                                                                                                                                                                                                                                                                                                                                                                                                                                         Medicare Part D was designed to provide seniors with prescription drug coverage. Unfortunately, prior to healthcare reform, many Part D beneficiaries suffered great financial hardship when the cost of their prescription drugs reached the initial coverage limit but before they reached catastrophic coverage, in a coverage gap known as the “doughnut hole.” The size of this coverage gap exposes Medicare enrollees to increased financial risk and leaves financial planners search- ing for possible solutions. The Affordable Care Act increases benefits to seniors in the doughnut hole with the intention of making prescription drugs more affordable. As a result, effectively planning for prescription drug needs in retirement or old age over the next decade will require more knowledge and analysis than in years past. The process of phasing out the doughnut hole began in 2010 when enrollees received $250 tax-free rebates upon reaching the coverage gap. Every year thereafter, benefits to enrollees in the coverage gap will increase until 2020, when full benefits are in place and cost participation of beneficiaries should be on par with rates prior to reaching the coverage gap of 25 percent.                                                                                                                                                                                                                                                                                                                                                   In preparing for reduced cost participation in retirement, it is important to note that brand name and generic drugs will be phased in differently. In 2011, participating pharmaceutical manufacturers started providing a 50 percent discount for the cost of brand-name drugs for Part D enrollees. Begin- ning in 2013, Medicare will provide additional progressively larger subsidies for the cost of brand-name drugs until 2020 when the subsidy hits 25 percent. Receiving more favorable treatment by the federal government, the cost of generic drugs will not be discounted by pharmaceutical companies. Instead, Medicare started providing subsidies of 7 percent in 2011, and will continue to provide larger and larger subsidies every year by intervals of 7 percent until 2020, when the subsidy will increase from 2019’s amount by 12 percent to 75 percent. By 2020, both types of drugs will have only 25 percent coinsurance rates for beneficiaries, which is the same rate paid on prescription drug costs before the coverage gap is met. Catastrophic coverage will remain the same for Part D enrollees both in terms of coinsurance rates and the total cost of drugs that must be met before catastrophic coverage begins; out-of- pocket costs are not considered.                                                                                                                                                                                                                                                               The increased benefits and decreased cost sharing will likely result in higher premiums for Part D participants. In a sense, beneficiaries will be trading the risk of massive financial loss for more certainty but higher monthly expenses. Professionals must take this risk evaluation into account during the finan- cial and retirement planning process.                                                                                                                                                                                                                                                                                                                                                                                                              Professionals must also be aware that higher income benefi- ciaries will deal with premium hikes that started in 2010. Pre- miums are increasing for individuals with annual incomes of $85,000 or more, and for couples with incomes of $170,000 or more. The increased revenue associated with these premium increases will go to help pay for the phased-out doughnut hole and may reasonably be expected to rise again in the future.

ACA Eliminates the Retired Drug Subsidy                                                                                                                                                                                                                                                                                                                                                                                                                                                 Many Medicare eligible retirees rely on employment-based prescription drug coverage. Such beneficiaries should be aware of the changes the Affordable Care Act is making to Retired Drug Subsidies (RDS). Prior to healthcare reform, the pro- gram would provide a tax-free subsidy to employers equal to 28 percent of the benefits they pay out for retirees’ prescrip- tion drugs. These retirement benefits paid were already tax exempt, so if a company paid $50 million in benefits, they would receive $14 million in subsidies and the actual cost of benefits would be $36 million, but they would be tax exempt for $50 million. This extra tax exemption was repealed by the Affordable Care Act, so retiree drug subsidies are now subject to taxes. These changes will prove to be exceedingly costly for many firms. Therefore, in the coming years, many retirees can expect some reductions in their employment-based retiree pre- scription drug coverage. This will be an important factor to consider during the financial and retirement planning process.                                                                                                                                                                                                                                                                                                                                        

Going Forward                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          The significant changes to the Medicare program through the Affordable Care Act discussed here will impact the interaction between professionals in the financial planning and health- care industry and their clients. Awareness and consideration of these changes are necessary and vital during the financial and retirement planning process, as these changes could, in some cases, have a dramatic effect on the clients that they advise.                                                                                                                                 

What Everyone Should Know Before Claiming Social Security Benefits

David A. Littell, JD, ChFC®, CFP®

David Littell®, is the Joseph E. Boettner Chair in Research and Co-Director of the New York Life Center for Retirement Income at The American College.

Kenn B. Tacchino, JD, LLM

Kenn is Professor of Taxation and Financial Planning at Widener University and Co- Director of the New York Life Center for Retirement Income at The American College. kenn.tacchino@ TheAmericanCollege. edu

Bruce D. Schobel, CLU®

Bruce is Vice President & Actuary at the New York Life Insurance Company. bruce_schobel@

Because nearly two-thirds of retir- ees receive more than half of their income from Social Security, there can be no doubt that the choice of when to claim benefits is one of the most important financial plan- ning decisions a client can make. Yet there is clearly a disconnect between what clients are doing and what clients should be doing. Much of the recent research in this area has focused on one of three reasons why deferring benefits may be beneficial: 1) a cost efficient-way to generate more guaranteed income; 2) a way to address the risks of inflation and longevity; and 3) a strategy for leaving potential widow(er)s in better finan- cial shape. Unfortunately, according to Henry J. Aaron and Jean Marie Callan of the Center for Retirement Research at Boston College, in their research report working paper “Who Retires Ear- ly,” beneficiary claiming behavior doesn’t seem to have caught up with the research, as a vast ma- jority of beneficiaries claim Social Security ben- efits prior to full retirement age (more than half claim at age 62), and only 1.5 percent wait until age 70 to begin benefits. One probable reason for this is a lack of understanding by clients of their benefit options and the implications of their claiming decisions.

To help retirees make better decisions, here are 10 key points that everyone should know.

1. Replace Pre-Retirement Income
With most Americans struggling to afford retire- ment, deferring Social Security benefits can be the simplest and most effective way to improve retirement security. A retirement income plan revolves around replacing lost earnings, and the longer Social Security benefits are deferred (at least up to age 70), the higher the percentage of pre-retirement earnings replaced by Social Secu- rity benefits. Take, for example, a married couple. Both are currently age 61 and each earns $60,000 a year. Using Social Security’s Quick Calculator (, if they both begin work- er’s benefits at age 62, Social Security replaces 23 percent of the couple’s $120,000 income, 32 per- cent at 66 and 45 percent at age 70, assuming that they continue to work until benefits begin. (Note that if the individual stopped working ear- lier, for example age 62, and defers benefits until later, the replacement rate at 66 and 70 will generally be somewhat smaller, because average earnings are likely to be lower.) The same result would occur with a single person earning $60,000. The replacement rates (at all claiming ages) are higher for married couples with a single wage earner because of the additional spousal benefit paid on the same earnings. At the very least, before making a claiming decision, be sure to con- vert estimated monthly benefit amounts at different claiming ages into replacement rates. When estimating benefits, it is im- portant to consider accurate assumptions about whether one plans to stop working prior to receiving benefits or will continue to work until benefits begin, and the IRS has several online calculators for estimating benefits. Even better, make a comprehensive retirement income plan first, and then make the claiming decision in the context of that comprehensive plan.

2. Lock In a Way to Pay for Basic Expenses
In retirement, everyone (regardless of income) will have to plan to meet basic expenses for an entire lifetime, and these expenses will increase with inflation. Social Security provides an inflation-adjusted annuity guaranteed by the government, and payable for life. Cost-of-living adjustments (COLAs) are applied to an individual’s monthly benefit. COLAs are tied to the consumer price index for urban wage earners and clerical workers (CPI-W). COLAs are effective with monthly benefits for December, which are normally paid in January.
With fewer retirees eligible for guaranteed income from company pensions today, Social Security is often the only available source of guaranteed lifetime income. Deferring So- cial Security means a higher guaranteed benefit and a higher proportion of retirement income receiving cost-of-living in- creases. Additional annuity income can be purchased, but commercial annuities will either provide no inflation protec- tion or limited protection for a significant additional price. Note that commercial annuities with inflation protection tied to CPI increases will generally cap annual inflation increases to limit the risk to the insurance company. Other products offer a stated increase (such as 3 percent) each year and are not tied to the CPI. Also note that research has shown retirees with greater amounts of guaranteed income show more satisfaction, worry less and show fewer signs of depression, according to W. Canstantijn and A. Panis in their “Pension Research Coun- cil Working Paper (2003-19).” Increasing guaranteed income through deferring Social Security may be good for your health!

3. Get the Most From the System
Everyone wants to get the most bang for their buck from Social Security. Some believe that the best bet is to take early because they won’t get their money’s worth unless they live a long life. Essentially, this is betting on dying young—a bad gamble—as losing means living a long life with too little income. For those who are worried about making ends meet in retirement, a bet- ter way to frame the question is: “What is the least expensive way to increase guaranteed lifetime income?” Given the high cost of a commercial annuity that offers inflation and survi- vor protection, deferring Social Security may very well be the lowest-cost way to accomplish this goal. There will be some wealthier individuals well funded for retirement who will fo- cus more on the expected present value of lifetime benefits assuming different benefit start dates. Even though the Social Security system is designed so that individuals will receive ap- proximately the same expected present value for retirement between ages 62 and 70, there is a major exception to this rule. Because of the widow(er) benefit, married men living the average life expectancy who retire and begin benefits early will receive a smaller present value than if they defer, according to “When Should Married Men Claim Social Security Benefits?” by Sass, Sun and Webb of the Center for Retirement Research at Boston College (Issue Brief #8-4, March 2008). A break- even analysis does underscore an important point: A person in bad health at retirement with a short life expectancy should probably claim early. However, caution is advised because a married person taking early may leave the widow(er) with a permanently reduced benefit. Break-even analysis also would suggest that a longer-than-average life expectancy weighs in favor of deferring, and those with more education and income have longer life expectancies than average, according to the Congressional Budget Office in “Growing Disparities in Life Expectancies,” (Economic and Budget Issue Brief, April 17, 2008).

4. Consider Future Changes in Social Security                                                                                                                                                                                                                                                                                                                                                                                                                             Future changes in Social Security are appropriate to consider in a claiming decision, but don’t think that be-cause Social Security anticipates future financing problems that claim- ing early is always the best choice. There will be changes, but benefits are not likely to be modified for cur- rent retirees and those close to re- tirement. Social Security is just too important to the retirement security of seniors, and its financial problems are solvable with reasonable modifications to the program.

5. Understand Benefits
It’s important to understand the im- pact of claiming benefits at different retirement ages for both the worker’s and spousal benefit.
• Worker’s benefit: Workers who claim benefits at full retirement age (which is currently age 66 and rises gradually to age 67 for those born after 1959) receive a benefit that is 100 percent of what is called the primary insurance amount (PIA). Benefits can begin as early as age 62, but beginning before full retirement means a permanent reduction based on the number of months that benefits begin prior to full retirement age. (Note: The early retirement reduction is 5/9 of one percent for each month up to 36 months and 5/12 of one percent for each additional month that benefits begin prior to full retirement age.) At 62, for example, a person with a full retirement age of 66 receives a benefit of 75 percent of PIA. On the other hand, claiming after full retirement age results in an 8 percent increase for each full year retirement is delayed, up to age 70. With a full retirement age of 66, an individual waiting until age 70 to claim earns 132 percent of the PIA. Because the delayed-retirement increase stops
at age 70, there is no advantage to further delaying benefits beyond age 70.
• Spouse’s benefit: Once a worker has claimed benefits, a lower-earning spouse is entitled to a spousal retirement benefit at full retirement age of 50 percent of the worker’s PIA. The spousal benefit is also available as early as age 62, but again will be subject to an early-retirement reduction. The reduction is tied to the spouse’s (and not the worker’s) age when benefits begin. Spousal benefits cannot begin until the worker has claimed benefits, but workers are allowed to claim and then suspend once they have attained full retirement age (without receiving any benefits)
to trigger eligibility for spousal benefits. It’s also important to know that spousal benefits are not eligible for a delayed-retirement increase if benefits begin after full retirement age, meaning that there is no reason to defer spousal benefits beyond full retirement age (currently, age 66).

6. Be Prepared for Benefits After the Death of a Spouse                                                                                                                                                                                                                                                                                                                                                                                                               With a retired married couple both receiving benefits, the rules that apply after one spouse dies are complex, but the concept is simple. After the first death, the amount the surviv- ing spouse receives is the larger of the two retirement benefits that the couple was receiving. The first implication of this rule is that total benefits received by the household are reduced, which needs to be factored into the retirement income plan. The second implication is that the claiming age of the higher wage earner has an impact on the benefit payable to the sur- viving spouse. In other words, the spouse inherits the higher wage earner’s decision to take early or late. For example, Joe, the higher wage earner, is 62, and his wife, Sally, is 58. If Joe claims at 62 he receives a benefit of 75 percent of PIA. Because his wife is younger and women generally live longer, Sally may be saddled with the reduced benefit for many years, endanger- ing her financial health. On the other hand, if Joe deferred to age 70, he would receive 132 percent of his PIA and Sally would inherit the much higher benefit.

7. Know How Earnings Affect the Worker’s Benefit                                                                                                                                                                                                                                                                                                                                                                                                                          Social Security benefits are based on the average of the high- est 35 years of earnings capped at the taxable wage base each year ($106,800 in 2011). Earnings before age 60 are indexed for inflation, so older earnings reflect real earnings today. An individual with fewer than 35 years of covered earnings will generally benefit the most by working more, as those addi- tional years of earnings would replace zeroes in the average. Also, note that employment earnings from continuing to work increase the calculation of average earnings and therefore increase benefits, even if benefits have already begun. The SSA automatically recomputes the PIA every year for beneficiaries with reported earnings. The benefit amount is adjusted if the new earnings increase the benefit by at least a dollar. However, note that a person receiving benefits prior to full retirement age with earnings from employment may have a forced sus- pension of benefits (under the earnings test discussed later).

8. Be Aware of Divorced Spouse’s Benefits
Divorced spouses whose marriages lasted for at least 10 years may be eligible for both spousal retirement benefits and widow(er) benefits based on the former marriage. Divorced spousal retirement benefits can begin as early as age 62, even if the former spouse has not claimed benefits (something a cur- rent spouse cannot do), as long as the worker is eligible for re- tirement benefits and the couple has been divorced for at least 2 years. Similarly, divorced spouses age 60 or older (or age 50 if disabled) are eligible for widow(er) benefits. The divorced spousal benefits do not count against other benefits paid to the worker and current family. Spousal retirement benefits for divorced spouses are paid to unmarried individuals only, so an individual remarried at the time benefits are payable will be disqualified. The widow(er)’s benefit is a bit different as remar- riage after age 60 does not disqualify the former spouse from eligibility for the widow(er) benefit from the former spouse.

9. Take Advantage of Eligibility for Multiple Benefits                                                                                                                                                                                                                                                                                                                                                                                                               Beneficiaries eligible to receive more than one benefit may, in some cases, be able to benefit from deferring the more valuable benefit, but still taking a different benefit at a younger age. Here are several examples:
• Spousal benefits taken first. At or after full retirement age, a married (or divorced) spouse may have the option to claim the spousal benefit and claim the worker’s benefit later—at age 70—to maximize the worker’s benefit. (Remember: A currently married spouse can begin a spousal benefit only if the worker has claimed benefits. However, the worker can claim and suspend to trigger eligibility for the spouse.) An eligible divorced spouse can take advantage of the same rule. This option is not available if benefits are claimed before full retirement age, because under the deemed- filing rule an individual filing before full retirement age is treated as claiming both benefits, if eligible.
• Worker’s benefits taken first. The spouse with a small worker’s benefit may consider claiming benefits from his or her own earnings history at 62, and once the higher-earning spouse retires, receive the higher spouse’s benefit. The deemed-filing rule is not an impediment here since the spouse is not entitled to the spousal benefit until the worker claims retirement benefits.
• Widow(er)s benefit options. A widow eligible for both widow’s benefits and worker’s benefits can choose one benefit and later choose the other. For example, a widow could take a reduced widow’s benefit at age 60 or 62 and then switch to her maximum retirement benefit when she reaches age 70.

10. understand the earnings test and voluntary benefit suspensions                                                                                                                                                                                                                                                                                                                                                                                                   An individual who has claimed early and is under age 70 may still have an opportunity to suspend benefits to maximize fu- ture benefits. There is mandatory suspension under the earn- ings test prior to full retirement age and voluntary suspen- sion after. If an individual begins to receive benefits prior to full retirement age and earns more than the current threshold (generally $14,160), benefits are reduced under the earnings test. Most see this as a complete loss of benefits, but it’s actu- ally a forced suspension. At full retirement age, benefits are automatically recalculated, assuming a later retirement age based on the number of months that benefits were suspended. For example, if under the earnings test an individual loses six months of payments, at full retirement age benefits are recal- culated based on a retirement age that is six months later than under the initial calculation. After full retirement age, an in- dividual can elect to voluntarily suspend, which again allows a future increase in benefits. These rules have the most signifi- cance for those that are involuntarily terminated and need to begin benefits early. If they are lucky enough to get another job, they can suspend benefits, hopefully to age 70.

Choosing when to claim Social Security benefits is a decision that can affect long-term financial security. Deferring benefits can improve the financial situation for many, and is an excel- lent way to finance basic retirement expenses for everyone— as Social Security is an inflation-adjusted annuity payable for life. Married men, in particular, should consider deferring to improve their wives’ financial situation after they die. Unfor- tunately, many people are making decisions without all the information. With a better understanding of the rules and the financial impact of the claiming decision, retirees can better protect themselves and their retirement security.

Originally published in the Fall 2011 issue of The Wealth Channel Magazine, Retirement won’t go away: Strategies you and your clients can’t ignore.

Doing Well by Doing Good

Art Kraus, CLU®, ChFC®

Chairman of Capital Intelligence Associates in Los Angeles, Art also served as the CEO of the National Association of Insurance and Financial Advisors from 1999-2002. He serves on the AALU Financial Literacy Task Force and Charitable Giving Committee.

Frankly, I just didn’t understand why Bill and Sallie Wallace created a Chair in Philanthropy at The American College. Like you, for years Rini and I had donated to almost every cause from which we were asked for help. We prided ourselves in rarely turning down anyone. Because most people I knew were charitable, the funding of the Chair seemed redundant and useless to me.

A series of disparate events last year caused me to rethink my arrogance. AALU asked me to serve on their Charitable Planning Committee. I balked at first as I knew there were real experts in the association and I wasn’t one of them. The staff there thought I could add something, so I relinquished and joined. The ensuing monthly meetings piqued my interest as I began to learn what others were doing and how deeply involved they were.

The tipping point came when a large non-profit asked me if I would participate in a fundraising campaign for them. Their asking made me feel inadequate so I felt that I had to take the CAP Chartered Advisor in Philanthropy (CAP) course from The College. Talking a good game was not a substitute for having a deep understanding of the game.

You should know that I have only completed one of the three courses to date. You also should know that it has changed my outlook dramatically in several areas. I realized how wise Bill and Sallie were when they funded the chair.

I thought I was doing estate planning with wealthy clients. In fact, I was doing tax reduction and funding planning. The client, the attorney and I never had deep conversations about their significance or legacy. We talked about trusts and insurance, family limited partnerships and taxes.

What we didn’t discuss was, “How much is enough for your children? Would you like to leave a legacy that might help change and improve your community, the country, the world?” It should come as no surprise that my previous estate planning methods left a void of satisfaction when we completed our work. No, the clients didn’t tell me that in so many words. Actually, most of them thanked me. But it was an unfulfilling experience for them, verified by my returning to them later and having conversations as I have just related.

Another eye-opener was the increase in the number of referrals that clients wanted to give me. In most cases, ashamedly, I didn’t even ask. The meaningfulness of the conversation and the implementation of the legacy plans became exciting to clients. Keep in mind that successful people only recommend other successful people. I’m sure you would agree that working with those kinds of referrals is rewarding in itself.

Inter-familial relationship building has been a powerful motivator—particularly for allowing children of wealthy parents to discover their own worlds. Warren Buffett’s wise comment regarding inheritance was that one should leave their children “enough money so that they would feel they could do anything, but not so much that they could do nothing.” That phrase has opened so many meaningful discussions!

I guess an old dog can learn new tricks. In June I celebrated my 50th year in the insurance business and this new learning experience has reinvigorated me— and many of my clients. This is a new frontier in my practice that benefits the client, their families and the objects of their largesse. The families can become closer and better functioning and the world gets a little better each time a deserving charity gets sustained. And we get paid well for doing good.

As a final note, we have all attended meetings or read articles where we promised ourselves we would improve our businesses by implementing what we just learned. If you think you would like to adopt my experience in your own way, you know what you need to do. Best wishes for a lifetime of challenges.


Originally published in the Fall 2010 issue of The Wealth Channel Magazine, Finding Opportunity Achieving Success in a Diverse Marketplace.