by L.A.S.
In 2008, to no one's surprise, investors, suddenly shifted funds into plain old boring fixed annuities. How many investors did this? Just to quote some startling stats that came out earlier this year, sales of fixed annuities in 2008 jumped to $107 billion, up nearly 60 percent over 2007.
We are talking about the most snore-inducing sector of the financial investment field, the fixed or fixed index annuity here. Perhaps the only item that qualifies as duller is the savings bond. Now normally, we are told to have a portion of our investments in safe instruments such as bonds or insurance, vehicles like that. And some of us actually do that.
But traditional diversification did not work for most of us in 2008. So that explains the rush to the safety of the fixed annuity. It is very simple to understand: you just toss a lump sum into the kitty and draw upon it to suit your needs. There are variations in how long a waiting period before you begin drawing on the annuity, and there are also some that allow you to deposit small sums during your working life in order to draw upon it in your retirement, just like an IRA or 401K.
But the deferred accounts are nice because the interest they accrue is tax free. The longer the deferred period, the better, of course, so that they can swell into very nice nest eggs indeed. The downside has always been that you had to accept a rather low rate of return in exchange for this level of boring safety. The other downside is a rather steep penalty for dipping into your fund in case of emergency.
Deferred annuities generally produce a 5 percent rate of return, while immediate annuities may give only about 3.5 percent. And because you are locking into just one company, you want to know for sure that the company is very strong. Everyone thought that AIG was too big to fail, to coin a phrase, but we found out differently.
There are several reputable insurance companies that have avoided the flash and the sizzle, and as a result are in very good financial shape today, even after the stock market bloodbath. Northwestern Mutual Life, headquartered in Milwaukee, is one. (I am not an agent of NML nor am I reimbursed in any way for mentioning them; but I am rather proud that they are based in my birthplace.)
Friday, June 19, 2009
Another Scandal Looming for Big Banks, Financial Houses
by L.A.S.
Yet another scandal and heavy fines loom for the big banks and investment houses, this time due to investigations of tax cheating. The IRS has been bearing down on advisors who have helped the wealthy shelter money in offshore accounts. This is not breaking news but little attention has been paid to the financial consequences of the heavy IRS fines in such cases.
A recent case in which a former banker at UBS, the the Swiss bank, pleaded guilty last year to helping a client hide $200 million in an offshore account. The banker turned whistleblower and revealed that the bank holds billions of dollars for American customers in those secret Swiss bank accounts.
According to one source, there are roughly 52,000 suspected accounts; that is just the UBS accounts and there could be many thousands more with other banks such as Credit Suisse, HSBC, and others. It is difficult to imagine how the IRS might seek out so many cheats but their strategy is to offer amnesty to the depositors.
Depositors will still have to pay back taxes, otherwise they could eventually face five years in jail and fines of $100,000 or half of the amount in the foreign account (whichever is more).
Now, supposing the investment house failed to keep on file a form that properly advised the client (the depositor) that they have to file this account with the IRS. In that case, the investment house (or the advisor) faces being dragged into court and face similar jail time and fines for tax fraud.
How many such accounts are out there with American firms or at least American offices? How many of their American staffers stand in danger of being dragged into court and probably losing their licenses as financial advisors? And what will Wall Street make of those companies when the you-know-what finally hits the fan? It could get ugly out there.
The fact that even foreign stock exchanges are now highly correlated with the fortunes of the American stock exchanges is changing the axiom that there is safety in diversifying one's stock among domestic and foreign companies. You may have stock in some foreign banking interests without realizing it, just because you bought into global mutual funds, perhaps. The world markets and financial linkages are now so pervasive that nothing is isolated from general trends in the U.S. as it once was.
It is a difficult time to correctly evaluate the relative risks of mutual funds or any other foreign investments, so perhaps the right kind of diversification is between betting on the rising market and betting on the sinking market. People still have not quite recovered their confidence that times are getting better, in spite of a partial recovery of the Dow Jones.
Yet another scandal and heavy fines loom for the big banks and investment houses, this time due to investigations of tax cheating. The IRS has been bearing down on advisors who have helped the wealthy shelter money in offshore accounts. This is not breaking news but little attention has been paid to the financial consequences of the heavy IRS fines in such cases.
A recent case in which a former banker at UBS, the the Swiss bank, pleaded guilty last year to helping a client hide $200 million in an offshore account. The banker turned whistleblower and revealed that the bank holds billions of dollars for American customers in those secret Swiss bank accounts.
According to one source, there are roughly 52,000 suspected accounts; that is just the UBS accounts and there could be many thousands more with other banks such as Credit Suisse, HSBC, and others. It is difficult to imagine how the IRS might seek out so many cheats but their strategy is to offer amnesty to the depositors.
Depositors will still have to pay back taxes, otherwise they could eventually face five years in jail and fines of $100,000 or half of the amount in the foreign account (whichever is more).
Now, supposing the investment house failed to keep on file a form that properly advised the client (the depositor) that they have to file this account with the IRS. In that case, the investment house (or the advisor) faces being dragged into court and face similar jail time and fines for tax fraud.
How many such accounts are out there with American firms or at least American offices? How many of their American staffers stand in danger of being dragged into court and probably losing their licenses as financial advisors? And what will Wall Street make of those companies when the you-know-what finally hits the fan? It could get ugly out there.
The fact that even foreign stock exchanges are now highly correlated with the fortunes of the American stock exchanges is changing the axiom that there is safety in diversifying one's stock among domestic and foreign companies. You may have stock in some foreign banking interests without realizing it, just because you bought into global mutual funds, perhaps. The world markets and financial linkages are now so pervasive that nothing is isolated from general trends in the U.S. as it once was.
It is a difficult time to correctly evaluate the relative risks of mutual funds or any other foreign investments, so perhaps the right kind of diversification is between betting on the rising market and betting on the sinking market. People still have not quite recovered their confidence that times are getting better, in spite of a partial recovery of the Dow Jones.
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