REPOST: Structured products are more available, but awfully confusing

Structured notes with principal protection is one of the finance industries’ most complicated service combinations. This Wall Street Journal article discusses these financial products and how their various forms, risks, and potential benefits can influence the stability of investors’ financial standing.

High yield plus protection of principal can be a hard combination to find. Increased access to so-called structured products gives independent investment advisers another place to look. But they need to take a close look.

he name tells you one thing advisers and investors need to know about these investments: They can be hard to understand.

Structured notes with principal protection, for example, may have complicated payout structures, and some investors may be surprised to find they don’t offer complete downside protection.

“These structured products, used appropriately, are fine,” says Zvi Bodie, a professor at Boston University School of Management who specializes in investments. “It’s just that, in general, ordinary people have a hard time understanding the risks that they’re exposed to.”

Wider Access

Structured products can take various forms, but generally they are packages of investments, put together by investment banks, to suit various risk/reward profiles.

They often include debt securities linked to indexes or to derivatives such as options, futures or swaps. They may offer higher returns than fixed-income alternatives and some principal protection if held to maturity, but they can also be costly and may present credit and illiquidity risks.

Long popular in Europe, structured products were once used only by institutions and the very wealthy in the U.S.

Their popularity suffered when the financial-markets crisis that started in 2007 shook some investors’ confidence in their issuers, but sales bounced back in 2010, before slipping in the past two years. (However, the number of products launched has risen.)

Now, investment banks are working to sell them to a wider market, and not just to their own clients or through other investment banks and large brokerage firms.

In February, for example, structured products from Goldman Sachs Group Inc. were made available to independent registered investment advisers on the CAIS online alternative-investment exchange.

Steve Foldes, chief executive of Foldes Financial Management, a Miami-based registered investment adviser managing $530 million, likes structured products called buffered notes, which put a cap on gains but offer protection against a market decline by using options.

The biggest challenge is communicating what they are to clients, he says.

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‘Too Good to be True’

His clients’ first reaction often is, “That sounds too good to be true,” he says. So he explains that these products have some of the same drawbacks as traditional bonds: They involve credit risk and don’t pay dividends.

Mr. Foldes typically gets banks to customize the product to meet a specific investment profile and to compete on pricing with alternative investments, he says.

He also uses several different note providers to hedge the risk that a bank may run into financial trouble and not be able to meet its obligations.

Some are Risky

J. Scott Miller, chief investment officer at Blue Bell Private Wealth Management LLC, a registered investment adviser based in Blue Bell, Pa., that manages more than $200 million, has been using buffered-return enhanced notes linked to the Standard & Poor’s 500-stock index for about 10 years.

As market volatility has declined in recent weeks, the notes being offered are less attractive and he is using them slightly less, he says.

But he stays away from some structured products regardless of market conditions. Some are “very, very difficult for anyone to model and value,” he says. “We don’t get involved in the exotic products.”

Mr. Foldes also doesn’t like some structured products, such as reverse convertible securities, which he says are being sold with “huge commissions” that eat into investors’ returns. They also carry substantial market risk.

Reverse convertible securities generally are short-term, high-yield instruments linked to a stock, stock index or basket of indexes.

They pay a fixed interest rate at maturity, but the amount of principal the investor gets back depends on what happens to the price of the underlying stock or stocks.

If an underlying stock, for instance, is trading at a certain level below the purchase price at maturity, investors don’t get their principal back in cash—they receive a reduced amount of principal in the form of shares of the stock.

“If things go the wrong way, you can lose a fortune,” says Mr. Foldes.

A leading financial consultancy in New York, JSK Associates, Inc. dispenses advice on estate planning, asset management, retirement, financial products, and proactive trading, among others. Visit its official website for more information.

The trouble with investment crowdfunding

Crowdfunding involves a large number of people who are fundraising for a venture. This works by attracting a “crowd” of people to contribute to an online funding target by taking a small share in the business venture. In investment, this refers to crowdfunding equity stock purchases for business startups.

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When President Obama signed the JOBS (Jumpstart Our Business) Act on April 2012, equity crowdfunding provided a way for people to participate in stock market investments without the need for a big capital. Fast forward to 2013, however, and the problems that shareholders face in crowdfunding are gradually being recognized. Two of these problems include:

• Fraud.Crowdsourcing investments are typically established on the Internet, which is also the breeding ground of many fraud cases. The Wall Street Journal writes that since the JOBS Act was signed, thousands of crowdfunding sites have been appearing online. A handful of these websites are investigated for “allegedly exploiting online fundraising to commit fraud,” while others are used by companies that only buy and sell Internet addresses.

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• Gambling on unproven companies because of a lack of investment know-how. Crowdfunding attracts ordinary Americans to invest in business ventures, but many of these people may not have enough knowledge on investing. As a result, they buy a share from untested companies and eventually lose their money. “Crowdfunding will at best be good only for the entrepreneurs and middlemen, paid for by unwitting consumers who simply cannot know enough about the highly risky ventures or the highly complex venture investing process to make informed investment decisions,” writes Daniel Isenberg of the Harvard Business Review.

Equity crowdfunding may present a fantastic opportunity for small businesses and ordinary shareholders. However, the complexity of the investment process may cause individuals to lose money. Knowledge of investment and careful strategizing are therefore required for those who want to participate in equity crowdfunding.

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The financial advisors of JSK Associates can help ordinary people in their investment concerns. Read more about asset management here.

Who is the executor?

The concept of an “unfinished business” is common in the horror genre, where the ghost of the dead still lingers on earth to accomplish a task left undone. Outside horror movies and books, the dead need not fret over any unfinished business. This responsibility falls on the executor.

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The executor is a person tasked with ensuring that a deceased individual’s wishes—stated in the last will and testament—are fulfilled. The executor is expressly named in the will to handle all the responsibilities required by the post. If the executor is unable to perform these duties, he or she may be held liable. As such, the individual is given the liberty to accept or relinquish the position.

A large part of the executor’s task involves making sure that the deceased’s estate is apportioned as stated in the will. This may involve locating and disbursing the property. In particular instances, the executor also oversees the liquidation of property.

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The executor temporarily acts as the steward of the deceased’s estate. For this reason, he or she manages the property, and is responsible for ensuring that debts and taxes are paid. This is usually accomplished through a bank account in the name of the estate. The executor is tasked to perform this duty until the estate is distributed to their beneficiaries.

Moreover, the executor pays for the funeral mainly by using the deceased’s estate. The funeral home typically provides the executor with the death certificate necessary for various purposes.

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Identifying the executor is a key step in creating a good estate plan. Needless to say, this position must be occupied only by somebody who can be trusted, and who possesses the qualities necessary to perform the required responsibilities.

JSK Associates creates comprehensive estate plans tailored after the needs of the clients. This website offers more information on how a properly crafted estate plan can help you.

Why does the 401(k) fail?

Everyone looks forward to retirement lived in comfort and relative abundance after several decades of working. Ideally, 401(k) savings are supposed to help individuals attain this end. However, this is not what usually happens in reality, according to this Forbes article.

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401(k) offers a convenient way for many workers to create and maintain a savings account for the future. Generally, an average worker’s 401(k) savings amount from only $25,000 to around $75,000. Needless to say, these figures are hardly adequate for any retiree to maintain a lifestyle far from want. In the end, not a few retirees end up living in forced frugality, sometimes with debts to spare.

Many believe that the deficit occurs due to people’s tendency to purchase unnecessary items beyond the acceptable limits of their finances. Conversely, the article from Forbes proved this assumption false.

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The article stated that nearly three-fourths of workers are forced to dip into their retirement savings to pay for short-term and often unforeseen expenses, like medical and car bills. The same is also true for individuals raising children or sending kids to college. Furthermore, the article revealed that people with lower income are more likely to tap into their retirement savings prematurely.

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To avoid using up one’s retirement fund early on, the article suggested that employers can help by allocating funds for emergency savings, which their employees can tap into in times of sudden need. In the long run, this would prevent them from dipping into their 401(k) savings, giving them more opportunities to utilize the funds for a more comfortable retirement.

JSK Associates helps retirees manage their retirement finances. Visit this website to learn more.

The Economist: Cuts on the sly

Everybody wants to cut costs nowadays, but some do it at the expense of others.  In this article, The Economist explains how cost-cutting is often achieved in pension benefits, at the disadvantage of retirees, of course.

 

TO THOSE on fixed incomes, including many retirees, inflation is the enemy. Workers can generally expect their wages to rise with inflation (if not in one-for-one lockstep). But after retirement income is set, and erodes in real terms as prices increase. Some retirees are protected; their pension benefits increase with inflation each year. That protection may now be vulnerable. A smaller cost-of-living increase is a sneaky, and sometimes only barely legal, way to cut benefits when a pension is under-funded.

Indexing benefits to inflation is expensive, but it’s not always appreciated. The value of inflation indexation is less apparent early in retirement, particularly when inflation is dormant, as has been the case since the mid-1980s. That may help explain a new enthusiasm for fiddling with indexation as a means to address funding shortfalls in a financially-strapped post-crisis world. Dutch defined-benefit plans only offer conditional indexation; benefits will in some cases go up by 100%, 50% or even 0% of inflation, depending on the health of the particular pension fund. State defined-benefit pension plans in America are increasingly considering tinkering with their indexation rates. The hope is this will provide a loophole for states to cut benefits. That’s because pension benefits, at least in nominal terms, are often guaranteed by state constitution.

Lowering inflation indexation is also in vogue for national pensions. Pension benefits are still fully indexed, but Britain recently moved to a different measure of inflation which increases at a lower rate. A similar move was recently under consideration in America: indexing Social Security to chained-CPI, which would also lead to smaller cost-of-living adjustments. That would mean smaller real benefits in turn for retirees whose spending is often weighted toward health care, for which prices typically rise faster than normal inflation. No surprise: chained-CPI isn’t a popular idea and has been tabled for now.

Benefit cuts are unfortunate but inevitable. Moving to a chained-CPI is not adequate to put Social Security on firm financial footing. It only delays trust fund exhaustion by a few years. A reduction in nominal benefits would be better than smaller cost-of-living increases. It’s more transparent and easier to plan around. Lowering indexation not only lowers real benefits but also introduces another source of risk to retirees. Unfortunately, it seems that straightforward benefit cuts aren’t politically viable; smaller cost-of-living increases, though bad for retirees, may be the only realistic option for bringing spending closer in line with available funds.

What more inflation risk will mean for future retirees is uncertain. Perhaps there will be more demand for inflation-indexed annuities or other inflation-linked assets. I expect retirees will be more aware of inflation, and perhaps more vocally opposed to expansionary monetary policy. Future policymakers may be tempted to increase inflation to erode their nominal debt. When that happens retirees, who have lots of political clout, will feel the pinch. In that case there may not be much space for a high-inflation future.

Learn from the stars: Lessons on estate planning from famous people

Estate planning is a way to protect your properties in your absence or death, and makes sure that they are accorded or distributed according to your wishes. An estate plan must be accomplished properly and with the guidance of the right people to avoid tripping legal technicalities. Below are examples of celebrities whose estate planning efforts went wrong:

Heath Ledger

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Ledger left his properties to his parents and sister but forgot to alter his will upon the birth of his daughter. This resulted to family fights that were readily feasted on by the media.

To avoid cases like this, you must remember to update your will every time an important event, such as death, divorce, birth of family members, and adoption, occurs.

 

Sonny Bono

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Bono did not write a will before his death, leading to much confusion about the allocation of his properties.

This proves that creating a will is important and should not be delayed. Death can come unexpectedly, and while it may sound scary, you must prepare for it and be practical to prevent unnecessary conflict among family members who have claims to your estate.

Princess Diana

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Before her untimely death, the Princess of Wales left a letter to her executors that expressed her wish to leave valuable personal possessions to her sons and her future grandchildren. The letter, however, turned out to be null due to legal technicalities.

When leaving property to your loved ones, make sure that your wishes are stated in a properly written will. This is to ensure that they will be carried out by your executors.

Every endeavor needs careful planning in order to be executed successfully. In a world guided by law, estate planning adds legitimacy to your wishes, and puts you in a better position to have them granted even in your absence.

JSK Associates helps its clients create estate plans. More information about estate planning is available in this website.

Yahoo Finance: 401(k) and IRA Changes Coming in 2013

The coming of a new year also means the coming of changes in IRA and 401(k).  Emily Brandon expounds through her article posted in Yahoo Finance.

 

Workers will be able to defer taxes on an additional $500 in their 401(k) and IRA plans in 2013. Retirement accounts will also be tweaked in a few other important ways. Here’s a look at the retirement account changes you can expect to see next year.

 

Larger 401(k) contribution limit.

The contribution limit for 401(k) plans, 403(b) plans, and the federal government’s Thrift Savings Plan will increase from $17,000 in 2012 to $17,500 in 2013. However, the catch-up contribution limit for employees age 50 and older will remain unchanged at $5,500. “One of the best ways to take advantage of the increased limits is to perform a year-end checkup of your 401(k) and make sure that you are contributing the maximum allowable by law,” says Garth Scrivner, a certified financial planner and senior investment counselor for StanCorp Investment Advisers in Albuquerque, N.M. “One strategy to avoid the pain of increased savings is to consider giving your 401(k) contribution a raise at the same time your annual pay raise occurs.”

 

Higher IRA contribution limit.

The IRA contribution limit for workers who meet the income requirements will increase from $5,000 in 2012 to $5,500 in 2013. The catch-up contribution limit for older workers is still $1,000, which is unchanged from 2012. “The enhanced limits have the additional benefit of increasing current tax deductions (assuming pre-tax salary deferrals) or increasing the amount of client’s tax-free investments (assuming Roth salary deferrals),” says Matthew Davis, a certified financial planner for Davis Financial Management in Leawood, Kan.

 

New 401(k) fee information.

Next year is the first full year that 401(k) participants will receive quarterly and annual 401(k) statements listing the fees charged to their accounts and showing returns compared to a benchmark, due to new Labor Department regulations that went into effect in 2012. “Next year, the biggest changes will be a continuation of the new disclosure rules regarding fees that are just hitting participant statements now,” says Rick Meigs, president of 401khelpcenter.com. “You are going to get an annual notice and you are going to start seeing more disclosure of fees and costs on your quarterly statements.” These statements can be used to evaluate whether the funds you are investing in are worth the fees you are paying.

 

Increased IRA income limits.

The tax deduction for people who have a retirement plan at work and make traditional IRA contributions is phased out for singles and heads of household who have a modified adjusted gross income between $59,000 and $69,000 in 2013, up from $58,000 and $68,000 in 2012. “Many of the pension plan limitations will change for 2013 because the increase in the cost-of-living index met the statutory thresholds that trigger their adjustment,” according to the IRS announcement. For couples in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is between $95,000 and $115,000 in 2013, up $3,000 from 2012. For IRA contributors who don’t have access to a workplace retirement plan, but are married to someone who is covered, the deduction is phased out if the couple’s income is between $178,000 and $188,000, $5,000 more than in 2012.

 

Roth IRA limits grow.

Single people and heads of household can contribute to a Roth IRA until they earn between $112,000 to $127,000 in 2013, $2,000 more than in 2012. For couples, the modified adjusted gross income phase-out range for making contributions to a Roth IRA is $178,000 to $188,000, up from $173,000 to $183,000 in 2012. However, people who earn above these limits may still be able to contribute to a Roth IRA by converting some of their traditional IRA assets to a Roth. “For many clients who are not eligible to fund Roth IRAs due to income limitations, the increased limits provide an opportunity to add to their tax-free investment buckets through Roth IRA conversions,” says Davis.

 

Higher saver’s credit income limits.

Couples can earn up to $1,500 more next year and still claim the saver’s credit, a tax credit for retirement savers worth up to $1,000 for individuals and $2,000 for couples. The modified adjusted gross income limit for couples is $59,000 in 2013, up from $57,500 in 2012. For singles, the limit will jump from $28,750 in 2012 to $29,500 in 2013. And heads of household can claim the credit until they earn $44,250, $1,125 more than in 2012.

Growing money with investments and reaping cash

“Money makes the world go round,” so the saying goes. Many will probably say otherwise, but there is no use denying the significance of money to almost any member of human society today. Over the years, people have used a variety of approaches—both legal and illegal—to maximize profit and to make their money grow. Of the legal ones, investing has enjoyed increasing popularity during the past few years, and with the perks it offers, has become known as one of the best ways to grow money and reap cash.

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Investing is, of course, not void of drawbacks. Many argue that it is too risky, while others maintain that it is an activity for the few who can afford it. For the sake of argument, what makes investing risky is its dependence on market and economic movements—factors that can change so dramatically in a snap. But with adequate knowledge about the dynamics of the economy, it is possible to mitigate or route the risks and instead, use them as opportunities for growth.

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Over the years, investing has also become an increasingly diverse activity appropriate for a large variety of sectors. There are many types of investing, and some, like mutual funds, are so cheap that even people with not much capital can afford them. This has also allowed investors to incorporate a wide range of strategies to better take advantage of investing’s perks.

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Investing has adapted with the times. Currently, a number of brokers offer their clients online access to their accounts, allowing investors to keep track of their portfolios anywhere and anytime. With this level of flexibility, there is little doubt that investing will continue to evolve and stay as a truly effective source of profit.

Learn about JSK Associates’ investing model by visiting its official website.

The nature of forward-looking statements: Which one can you trust?

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Any good investor would know to dial in during quarterly stockholders’ meetings.  Most meetings are done via conference call, and may be very informative for people with the acumen to predict market movements-based figures culled during the quarter of the fiscal year.

Early into the call, one of the speakers, usually the operator, reads a statement better known in the business as the safe harbor statement.  United States laws require it to be said before any stockholders’ meeting, hence its other name: forward-looking statements.  Forward-looking statements are statements that may appear predictive toward favorable or unfavorable ends.  The operator or speaker warns against depending on them to make actual business decisions.

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Thus, it can be said that forward-looking statements are not completely accurate.  The statements are merely reports of how the books are during that particular part of the business cycle, and reliance on them for actual results should be limited to the figures released during the calls.

There is an allowed part in the conference call where stakeholders could raise concerns.  Callers in the conference calls, sometimes, belong to financial institutions that made investments in the company and have critical questions relating to numbers and the business environment.  Rarely are safe-harbor statements made as bases for the questions, and when they are, executives are quick to correct any misconceptions arising from safe-harbor statements.

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In this regard, the common investor should focus on the actual figures presented, and would only take note of safe-harbor statements as guideposts.  The foundation of decisions should still remain with real-world market conditions.

JSK Associates is a global investment adviser firm specializing in asset planning. For more information, visit www.investtowin.com.

Understanding insurance and planning for the best outcomes

 

For JSK Associates, an independent company which creates customized financial strategies for its member clients, a good financial strategy involves a review and a deeper understanding of the details involved in a professional’s life insurance package.

The reasons for offering and having life insurance are simple. On the part of service providers, they are: recognizing that the life of a person has value, and acknowledging the need for compensation for the loss of a life. On the other end of things, individuals purchase life insurance because they want to ensure the financial security and comfort of their loved ones in case an event that may render them incapable of providing for them occurs.

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Financial advisors, meanwhile, maintain that there is a need to review one’s insurance coverage periodically as several factors may have changed from the time of the application.

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Insurance review and planning can help the owner determine if the costs paid for the service are in line with the protection provided and if the coverage is enough. A review can also reveal areas in employer plans that can be modified and coordinated with personal insurance to further guarantee the financial stability of one’s loved ones in case of an accident.

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There are many forms of insurance available today. There’s nursing home insurance details, income continuation insurance, buy and sell agreement insurance for self-employed individuals, umbrella liability insurance, and many more. It is important to note here that, while these are only a few of the adequate plans currently available on the market, insurance plan owners can still find ways to make their coverage more comprehensive–with adequate coverage, protection for valuables, and competitive premiums– all for the benefit of those that might be left behind.