Ric had another show with a wide range of topics. They probed how to find out what all the costs of investment advice is and buying a foreign IPO. He also cover designating beneficiaries for an IRA, positioning your funds for retirement distributions, and need for life insurance. Perhaps the best call was from an elderly couple that may have been making a big mistake to save some paper work. Other topics were using ETFs to save costs, should I put all my money in T-bills, and reverse mortgages. The Mutual fund scandal of the week segment consisted of a list of some of the firms involved in the illegal market timing scandal of the past few years. The detailed list is in his book “The Lies About Money”. As always should you have any questions you are invited to Call Ric and his team during the week at 1-888-752-6742. Ric has a series of seminars coming up at various locations around the country from more info go to this link. http://www.ricedelman.com/cs/home
Caller recently retired and received a lump sum of $300,000 and is apprehensive about some of the advice she is getting on how and where to invest. Among her biggest concerns are fees and sketchy information on expected rates of return. She was told the person was paid by the company. Edelman took the opportunity to say this is very common when dealing with stock brokers or insurance agents that sell loaded funds often with 12b-1 fees. Ric acknowledged every investment advisor makes a living providing investment advice. Ric said “Wall Street is known for many things but none of them are charity”. All fees or compensation are ultimately paid by the client. The best way to get answers in writing is to ask for form ADV. This discloses all the cost of that account and what services are provided. Every financial advisor is required to give to every client on a yearly basis form ADV. If an advisor doesn’t have an AVD it means they are not an advisor, it means they work on a commission as a stock broker or insurance agent. When dealing with an advisor you pay two expenses, the first is the advisor fees. This is either a commission on each transaction or a percentage of assets under management, or an even hourly rate AKA fee only. The second portion is the cost of the investments themselves. This includes expense ratios and SAI (Statements of Additional Information). The next step in the process is to look at the investments to see if you are getting proper diversification to fill your own unique objectives, time horizon, and risk tolerance.
Caller would like to invest in a foreign company stock that is going public in January on the London Stock Exchange. This would require an ADR in the U.S. Ric says it is highly unlikely and IPO would issue an ADR. Furthermore Ric said that is not something you would want to do. The majority of IPOs go down in value. There are a limited number of shares and if they are anything worth owning institutional investors get it all. If they don’t want it then neither should you. Upon further questioning the caller was thinking of investing 20% of his investment capital in this venture. I am sure you can guess what Ric’s reaction was.
Caller is looking to name beneficiaries for his IRA. He was thinking of using a trust and his children could set up a beneficiary IRA later. Edelman said no, once it goes into the trust, it owns the asset. The trust then distributes the assets per trust rules. If you use a trust as beneficiary you give up all flexibility. The ideal method would be to have an IRA account for each child and each IRA having one beneficiary.
Caller is looking to retire in 3-5 years and has a TIAA-CREF account. The deposits have been equally split between TIAA traditional and CREF stock fund for 24 years. She is thinking of starting to pull money out of the TIAA portion and move it to CREF. With TIAA you can only pull out 10% a year, they won’t allow lump sum distributions. Ric likes the idea of staring to withdraw it from TIAA now. CREF now is offering a bond fund in addition to the stock fund to help with allocation positioning. Ric advises everyone to get your money out of a TIAA account and move it into CREF since TIAA is not liquid and pays a terribly low rate of return.
Caller is 30 years old with no spouse or children and wonders if he needs life insurance. He has a $10,000 policy his parents bought for him as a child. He has since added another $10,000. It has about $1,000 cash value. Ric advised him to cash it out and pay off a credit card debt. He don’t need life insurance. Instead of wasting money on these types of policies parents should buy a small rider on their life insurance to cover funeral cost if needed.
Caller has been converting to index mutual funds and now to ETFs to save on expenses and avoid style drift and achieve lower turn over. The question is if you dollar cost average in new money to the equity portion how does this affect rebalancing. Edelman said the big advantages of a diverse portfolio is you aren’t reducing your returns nearly as much as you will reduce your risks. Ric explained the difference between the money already invested and the new money you are about to invest. When Dollar Cost Averaging the most effective way is to put it all into stock funds. Then periodically rebalance as needed.
Caller is trying to buy a put option in his IRA and the brokerage won’t permit it. Ric says he can’t because it isn’t allowed to invest in an IRA with borrowed money. To trade options requires a margin account and by definition a margin account uses borrowed money.
Caller is seeking an opinion on a reverse mortgage. The house is valued at $250,000 and has a mortgage of $100,000. They can’t be used if you have a current mortgage. Citigroup got involved in the reverse mortgage business earlier this year and Edelman is hopeful in the future he can recommend them but it is too early to tell. For now reverse mortgages are not consumer friendly due to lack of competition. Some problems are; money sent out monthly is limited, for most people the amount is not meaningful. The fees are exorbitant often around a 12% sign up fees along with high interest rates. Ric suggested refinance the mortgage, cash out that mortgage and pay himself a monthly income or even sell the home and move.
Couple in early 80s each has a revocable living trust. They own a combined 50 different stocks and mutual funds and are thinking of selling them and put the proceeds into index annuities. Ric said why? He wants to avoid paper work. Ric Edelman jokingly said he could give all the money away and have no paper work. They do have children they want to leave the money to after they are gone. Ric said the annuity idea was not a good one. Ric said he and other advisors can do the paper work for clients. The annuity is only going to offer a portion of the return the stock market will due to the fees. Plus don’t forget the surrender period of in some cases 7-10 years. A couple in their 80s could very well need large amounts of money for long term care or other things before the surrender period is finished.
Caller is worried about the recent volatility and thinking of putting all his money in treasury bills, it is currently in money markets after pulling it all out of the stock market. Any pitfalls in this strategy? Yes, there is a big risk is you might be wrong and decide to get back into equities when prices are much higher. Better to stick with a broadly diversified portfolio keeping in mind goals, time horizon, and risk tolerance.
No comments:
Post a Comment