Today we're getting back our roots so to speak and delving into some of the more interesting financial news stories that we've uncovered from the last few weeks. After a run of episodes where we essentially tackled one topic/issue at a time, we decided to revisit our original format this week. Hope you enjoy!
Can Genworth Serve Two Masters?
According to a story from early December 2013, Genworth's president Tom McInerney made some rather bold statements on a conference call with shareholders and securities analysts. Mr. McInerney seemed intent to sell them on the idea that Genworth's commitment to the long term care insurance (LTCi) was a viable strategy.
There has been much speculation over the last couple of years as to how toxic the LTCi business is for the insurance industry because of increase life expectancy, a greater need for care and how much the LTCi industry had under-priced those risks when issuing policies years ago.
McInerney said, “We have determined that long-term care insurance is a business that we believe can be managed successfully.” This of course comes on the heals of Genworth having a new “policy design design strategy and prices to reduce exposure to risk”. In other words, we're going to charge more premium for less benefit.
Genworth is also intent on lobbying various state regulators on the idea that the way forward for LTCi insurers is to have steady, regular rate increases as McInerney said, “In hindsight, I think the industry would have been much better off if they managed the business more like a health insurance business versus life and sought regular increases of more modest amounts that are easier for regulators to approve and more comfortable for consumers.”
Sounds good but from what we've seen there are a fair number of state insurance commissioners who aren't really buying it. Just because an insurance company isn't making as much money as they'd hoped does not a rate increase justification make. Insurance regulators are concerned with solvency and your ability to pay claims, not your profitability.
None of this is really earth shattering stuff, you'd expect a company's leader to say this sort of thing on an investor conference call. However, in reading the transcript of the call there was a completely ludicrous statement made from the Genworth president:
In the real world, no LTCi company can predict interest rates, lapse rates, morbidity rates and mortality for the 30 years a typical LTCi policy might be in force.
It seems to me that's sort of your whole business? There's this little thing known as actuarial science that's pretty damn good at all of those things. If we've somehow shifted into an alternate universe where scads of compiled and math don't work, than I'd suggest we're all in a world o'hurt.
So which is it Genworth, is it a fundamentally flawed business or is it a great business for the future? Evidently, it depends on who you're talking to.
Roth IRA Conversions Boom
Back in 2010 Congress changed a rule that has caused a swell of wealthy investors to convert their traditional IRA's over to Roth IRA's. Previous to 2010, to be eligible to convert your IRA to a Roth IRA you needed to have an income less than $100,000. In 2010, that cap was lifted and caused a rush of money to be converted.
In fact, and almost ten fold increase–in 2009 the conversions totaled $6.8 billion and rose to over $64 billion in 2010 according to data released by the IRS.
What happens when a person converts their traditional IRA to a Roth IRA?
Well, all of the income taxes on the traditional IRA are due in the year that the conversion takes place, however, now that the taxes have been paid and the money is in a Roth IRA, no further income taxes will be due. You can immediately see why this might be attractive to many people who believe tax rates are destined to move upward from here.
Interestingly it seems that in the last few years money come into Roth's as conversion has exceeded money come in as annual contributions. In fact, conversions from those with incomes in excess of $1 million has become very common. According to the IRS, more than 10% of those with incomes exceeding $1 million per year have opted to convert their IRAs over to Roths.
Of course Congress likes this because it increase treasury revenue in the short term but what will it mean for tax revenues in the long term? Ahh who cares about that, I'm not running for re-election ten years from now, I'm running this year 😉
FINRA's Backdoor Fiduciary Standard
Recently the Financial Industry Regulatory Authority (FINRA) warned its member firms that they “should not recommend that a client who is leaving a company transfer money from the company's 401k plan into an IRA if it's better for the client to leave the money in the company plan, or transfer it to his or her new employer's plan.”
That sounds reasonable…right? Yea maybe if you could actually determine that with any degree of objectivity. Alas it is a highly subjective process and there's no one way to determine which plan/account/investment is best for a client.
This sort of guidance just proves to us that attorneys are paid by the word.
FINRA goes on to say, “Firms should emphasize that performance of the suitability responsibilities of a broker-dealer or registered representatives should never be compromised by their financial interest in recommending an IRA rollover or another action.”
Hmmm…sounds strangely similar to an implied fiduciary standard doesn't it? If you're selling this product/account to your client, you can't concern yourself with the compensation, you should just do what's best for your client.
Ummm…yea that's all true and I agree 100% with that. But you can't make people do the “right thing” and there will always be those who act in their own interest over everyone else. Even with a fiduciary standard, there's financial self interest. If I'm a fee only financial planner, I don't get my fee unless the client signs a contract and pays me, so I have to position my services in such a way that they think I'm better than my competition.
I believe there can be a compromise of values and that both parties (the advisor/agent/broker/planner and the client) can win. Guess that's just crazy talk?
Bitcoin Is the New Gold?
We have ignored Bitcoin effectively over the past year. Was that a mistake?
Hard to say at this point if avoiding the crypto-currency was big mistake or not. We're quite sure the whole craze has been fueled by a substantial amount of speculation. Not unlike that of housing market in the mid 2000's, the internet bubble of the late 90's, or the most recent hyper-speculation of the gold market.