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Economic Turmoil - Is it Time to Panic?

By Paul D. Axberg, CPA, CFP and Orion K. Willis, ChFC, CLU

Now, they are names that incite disillusionment, trepidation, and a general distaste for investing. How hard has it been on your portfolio? Perhaps more importantly, how hard has it been on your peace of mind? During the week of September 15th of this year, on the heels of more bad news regarding these companies and economic instability, the markets endured two of the biggest one-day losses ever, and then a subsequent rebound, all in five days. This type of rollercoaster in the markets is not for the queasy or faint of heart — especially for retirees and conservative investors looking to preserve their wealth and maintain a stable income level during their retirement.

What caused it?

To understand why this happened, we must look back at the series of events that led our economy to take a turn for the worse. There are two decisions made by the federal government in the 1990s that may have paved the way for the decline. And now, it has come full circle back to our federal government, which is now shoring up the funds to bail some of these conglomerates out of dire straits. The first event to take place was in the mid-1990s. In an effort to entice people to become homeowners, the government put downward pressure on the major lending institutions and banks to loosen their criteria and help increase overall homeownership among Americans. This became quite a profitable venture for the banks, and over the ensuing decade it resulted in lending to a large contingency of unqualified buyers during the housing boom that occurred a couple years ago. In order to comfortably do this, mortgage companies sold the debts to insurers who packaged the debts as Mortgage-Backed Securities on the open market. So once these loans that were backing a large percentage of the securities industry began to default, that sector of the economy went south with them.
Now in decades past, if a sector of the economy failed enough to shake the markets, recovery often could be swift, as it could ride on the back of a stronger sector. Take the crash that occurred on Black Monday on October 19th, 1987. Even though it was the single biggest one-day drop in history, the markets recovered in less than a year. Now, things are a little different. Our decline has been relatively gradual. And the odds are our recovery will be gradual as well. One of the contributing factors was the 1999 repealing of the Glass-Steagall Act of 1933. The Glass-Steagall Act of 1933 stated that banks could only offer banking services, insurance companies could only offer insurance services, financial companies could only offer financial services, etc. However, when the Act was repealed in 1999 in an effort to bolster a free-market capitalistic society, large companies began to offer all products and services, thus straying away from their core competencies and leaving them exposed to the potential failures of an individual sector. So before, if one particular sector failed and dragged the markets down, other sectors could potentially be strong enough to bring them back. Not so anymore, since they are all intertwined — they all struggle to recover together. Now these are not the only reasons for our current economic woes, but they are most certainly contributing factors.

So, is it time to panic?

Oftentimes, when the economy is shaky as it is now, people begin to panic. Are you one of these people? Know this — even though it is a little different this time, we have been through this before, and we’ll probably go through it again. The worst thing anyone can do in a situation like this is panic. Panic leads to emotional decisions based on short-term events. This is hardly the appropriate reaction when retirees should be considering their long-term investment plans. The reason for panic might always be different, but the patterns associated with it, and the path it eventually takes, has historically been the same. In the past, decisions made based on emotions have not often turned out so well, so panic should be avoided at all costs. Remember, your investments are designed to meet your long-term investment goals. You will find it very difficult to meet them if you react to short-term events.

We've seen this before.

On October 14th, 1974, the cover of Time Magazine had a caricature of President Gerald Ford rolling up his sleeve, and the caption said, "Trying to Fight Back: Inflation, Recession, Oil". That’s from 34 years ago, yet it sounds eerily familiar to some of the headlines today, doesn’t it? On June 23, 2002, USA Today printed an article entitled "Stocks Continue to Sink, with No Bottom in Sight". Again, that is an article from six years ago that sounds much like some of the headlines today. Just a couple months ago on Thursday, September 18, 2008, The Wall Street Journal ran an article entitled "Worst Crisis Since 1930s, with No End in Sight". Are you sensing a pattern here? As you can see, these are market conditions we have endured before, and we eventually overcame. There is no reason to believe we will not once again recover, and therefore no reason to push that panic button. This too shall pass — we just need to stay the course and position ourselves appropriately.

Ok, so now you understand that panic has the drawback of being an inappropriate reaction. And you know that long-term investors tend to stay the course to increase their odds of successfully meeting their goals. You also know the dangers of reacting emotionally. However, you could potentially still be in danger of outliving your retirement income if you have not, or do not, plan appropriately. You live in the Sun Cities area, one of the largest retirement communities in the United States. You have undoubtedly noticed that a plethora of financial advisors and insurance agents have flocked to your community to make money by becoming your financial planners. Some of the more unscrupulous ones were even exposed on Dateline NBC earlier this year for fraudulent practices.

Today, you will learn how to do your homework. Today, we are giving you the key to our industry — you will be armed with the knowledge of what to look for in a financial advisor, and more importantly what to be aware of before you sign paperwork with anyone. For many years now, we have been educating our clients and the retirees of the Northwest Valley with this information, and many of our competitors in the area are not exactly happy about it. So if you want to preserve your wealth and sustain your legacy, read the following very carefully — this information could potentially help you avoid some very costly mistakes. More importantly, it will arm you with the information you will need so that you can make an informed decision. 

Beware of advisors who only sell their company’s proprietary products. There are some great products offered by great companies out there, but that does not necessarily make them the best products for you. This often happens with advisors on the captive agent channel, when they work for big firms. Often, the advisors are compensated more if they sell their company’s own products. If you want someone to truly find the best product for you, work with someone who is not bound to a large firm and their incentive-laden products. Rather, favor independent financial advisors who are more likely to find products that are consistent with your investment philosophies, risk tolerance, and long-term goals, without being bound to any particular product type or product line.

Avoid financial advisors who already have a product recommendation before conducting an interview.

Have you ever been to a ‘free dinner’ seminar and known what the advisor was selling within 5 minutes? No one should make blanket recommendations before finding out about your needs, goals, risk tolerance and time horizon. As you undoubtedly know, the ‘free dinner’ seminar is quite commonplace in our community. And truthfully, aside from referrals, it is the number one method for advisors to gain new business. So go ahead, attend the seminars and enjoy a free meal. But before you decide to meet with any of these advisors, be wary of the information being presented. You should seek to meet with those who do not try to sell you any products or push a ‘hard sell’ on you. Rather, favor advisors whose presentations are purely educational. Once you make a decision to meet with an advisor, be wary of anyone who tries to sell you a product in the first meeting. To make the right recommendations it takes time — a good advisor should get to know everything about your situation and your goals before making a recommendation, and this often takes two, three, or sometimes even four meetings.

Do your homework on your advisor's credentials.

This is one of the most important things you need to know — and unfortunately it is one of the topics the general public knows least about. Many self-proclaimed "financial advisors" are not even securities licensed! Oftentimes, they are insurance agents trying to sell you Life Insurance or an Equity-Indexed Annuity. Why would you work with someone who does not have the credentials or licenses to put together a comprehensive financial plan for you? It simply doesn’t make sense. Ask your advisor or someone who may be trying to get your business what credentials they hold. Do they have a securities license? Look at the notations on the bottom of their business card, and on their marketing literature. If it does not say "Securities offered through…", then they are an insurance agent. To take it a step further, if they are securities licensed, make sure your advisor holds what is known as a Series 7 securities license. This is also commonly known as a General Securities license, and allows your advisor to legally advise you on virtually any security. If they only have a Series 6, they can only sell you third-party managed assets — so no stocks, bonds, etc. If you have stocks and see an advisor with a Series 6, he will likely recommend liquidation of those assets, since he cannot legally advise you on them. This is a common example of a license dictating a recommendation.

Look out for potentially misleading designations.

Again, this is an extremely important topic. With so many individuals trying to get your business here in the Sun Cities area, you need to know what qualifies one over the other. There are many designations out there that were created for the sole purpose of adding credibility to a person’s professional image. They were designed as marketing tools, and for all intents and purposes were purchased. States all around the country are now cracking down on financial industry designations that do not require true courses of study and comprehensive testing and ethical requirements. In fact, the Financial Industry Regulatory Authority (FINRA), which is the main regulatory body that oversees the financial industry, released the following in a notice issued on May 20, 2008: "Regulatory Notice 07.43…states that firms that allow the use of any title or designation that conveys an expertise in senior investments or retirement planning where such expertise does not exist may violate NASD Rules 2110 and 2210, Incorporated NYSE Rule 472, and, possibly, the antifraud provisions of the federal securities laws. This concern applies to the misuse of any title or designation in a manner that exaggerates the representative’s expertise or implies expertise where none exists. In addition, some states prohibit or restrict the use of certain senior designations."

Many of the aforementioned insurance agents will use these designations to enhance their image as financial professionals, when the reality may be that they paid $1500 to a marketing company, sat through a workshop for 3 days at a hotel somewhere, and then got to add a few letters to their name after a short exam.

Here are some of the most common credentials used that may sound official, but have come under review by some states: Certified Senior Advisor (CSA), Certified Estate Planner (CEP), Master Certified Estate Planner (MCEP), Certified Senior Consultant (CSC), Certified Senior Specialist (CSS), and Chartered Senior Financial Planner (CSFP). CSA is a designation not even necessarily designed for the financial industry — in fact, many people that work in other senior-related industries such as funeral homes, hospices, and hospitals also become CSAs to enhance their professional image. Some states are cracking down on them for misleading the public as to the expertise of an advisor. Remember, a designation is not the end-all and be-all of an advisor’s ability to be good at his job. But knowing what types of designations your advisor holds and advertises will give you insight as to whether he has put effort into furthering his education or just enhancing his professional image.

Know what the good designations are.

So you’re wondering, if those are the potentially misleading designations, what are the good ones to look for? There are a handful of designations that require years of coursework, ethics training and comprehensive exams in several modules before an advisor can attain them. Another requirement is that the advisor stays current by meeting annual continuing education requirements. Some of these are veritable equivalents to Master’s degrees. One of the most recognized and respected designations that a financial advisor can hold is Certified Financial Planner (CFP). It can require years of study, culminating in a rigorous 2-day exam. One of the toughest credentials to acquire, if not the toughest, is Chartered Financial Analyst (CFA). The CFA is a designation often held by mutual fund or hedge fund managers, and can also potentially take years to attain. It is done in three separate modules with three separate full-day exams. Each module takes more than 250 hours of study; in fact, approximately two-thirds of candidates fail the first module on the first try. The financial industry is moving toward a fee-based environment as opposed to commission-based, so any firm that has a CFA on their staff is extremely well-equipped to manage their clients’ assets. However, very few financial practices have a CFA on staff — currently only a handful of firms in the Phoenix area are lucky enough to have one. Other highly regarded designations included Chartered Life Underwriter (CLU) and Chartered Financial Consultant (ChFC), both of which are issued after years of rigorous study and exams through The American College. Finally, an advisor that is a Certified Public Accountant (CPA) or has a Master’s Degree in Business Administration (MBA) has also undergone comprehensive educational training and testing. 

Work with advisors who have a network of qualified professionals
at their disposal.

A good financial advisor recognizes that the wealth of knowledge and expertise required to provide all the services necessary to their clients is impossible to have on their own as an individual. For this reason, they form strategic alliances or hire people that have expertise and core competencies in key areas. Work with an advisor who shares an office with an Estate Planning Attorney and a CPA. Work with a financial team that is comprised of individuals who have a diverse range of expertise covering all the key areas of insurance, taxes, finance and estate planning. All of these people should work together with you to create the foundation for your financial and estate plans.

The financial industry is an intimidating one. Just know that you have many resources available to you, and with a little homework and some due diligence you can help protect yourself and your legacy. Know who you are working with, know what you are looking for, and know the pertinent questions to ask. Hopefully now you are better prepared to select your financial professionals.

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