Safety of Principal + Modest Return = The New Normal

Fresh on the heels of last week’s newsletter which featured the insights of Laura Tarbox, one of the nation’s most respected and honored Certified Financial Planners and principal of the wealth management firm The Tarbox Group in Newport Beach (CA), I thought it helpful to share with you another article from the April, 2009 edition of Financial Advisor magazine that suggests other CFPs around the country recognize the value of fixed annuities as well.

In his article “Steady Eddy Annuity Bets,” author Eric Rassmussen identifies a number of CFPs who have come full circle in their views of the annuities they once shunned. Among the comments and observations of the author and the financial planners interviewed:

• According to Beacon Research, sales of fixed annuities increased 60% over 2008;
• ” . . . annuities have become the new black as people try to keep their kitties safe;”
• People are “no longer seeking outsized returns” but instead “have gotten religion and decided that a certain righteous austerity is in order – safety of principal with modest return;”
• One financial planner has increased clients’ positions in fixed annuities and then uses the income streams to dollar-cost average back into the market (NOTE: This is an excellent strategy to employ with a structured settlement BTW!);
• One planner believes fixed annuities help clients achieve their number one goal: To not lose money!

While this particular article also discusses indexed annuities, a product our firm has yet to embrace for a variety of reasons, the comments specific to fixed annuities are ones we enthusiastically agree with. Since most of our clients are making decisions about funds stemming from the settlement of a personal, physical or nonphysical injury claim, safety and security are of prime importance. They cannot risk losing money.

Other noteworthy statistics about the market in this article that highlight how quickly fortunes can change. And how hard it can be to recover from the loss:

FACT: In 1930, the DJIA declined 51% (sounds a lot like 2008-2009 doesn’t it?). It didn’t rebound to its previous high until 1954 (24 years);

FACT: In 2000, the NASDAQ dropped from about 5,100 to 1,750 in a year’s time. Today it’s in the 2,400s and many believe it may never eclipse 5,100 for generations, if ever.

The long and the short of it is this: Great potential reward is not possible in the market without great risk. A careful analysis of risk tolerance is essential in designing any financial plan, including those using proceeds from a personal injury settlement. The Finn Financial Group is eager to assist those for whom safety and long term financial security are of utmost importance.

CLHIGA Limits for Structured Settlements Increased to $250,000

In a move long overdue in the eyes of many, Gov. Arnold Schwarzenegger signed Senate Bill No. 1408 into California Law last weekend. The bill was sent to the Secretary of State on Monday, September 27, 2010.

This is welcome news for recipients of structured settlement benefits and those contemplating annuity purchases!

The move, an effort by the legislature to modernize existing insurance law to more closely align with the National Association of Insurance Commissioners (NAIC) Model Law, was introduced last February and has been moving through the legislative process since then without a lot of fanfare and with overwhelming support of elected officials from both parties.

Among the highlights, this bill:

• Increases the coverage limit for annuities and structured settlements from $100,000 to $250,000;
• Clarifies and extends the coverage of structured settlements for California residents, even if the owner of the structured settlement annuity is resident of another state.

In its background summary, the bill’s authors observed that:

“In the current economic environment, the relative importance of annuities for those who own them has increased in importance.”

“Annuities are the only financial instruments available today, other than Social Security and pensions, that offer a guaranteed lifetime stream of income during retirement. Along with giving retirees the peace of mind that comes from knowing that they will not outlive their assets, annuities provide another important benefit, a way to increase current income.”

“This ability of annuities to provide a guaranteed stream of income makes their strength, and reliability, highly important in this period when many other investments have suffered serious declines in value and other setbacks.”

A copy of the Legislative Counsel’s Digest can be found HERE.

This move by California is similar to efforts by other states to bring their Guarantee Funds up to date.

The Finn Financial Group, whose mission is to help people achieve financial stability in their lives, is pleased to be able to report this positive development to you. The life insurers we represent average 119 years in business and we believe that’s a pretty good track record. But just to give people added comfort, we view this move by the California legislature as good for consumers and commend its authors and sponsors for their efforts.

A Conversation with: Laura Tarbox, CFP
Top American Financial Planner Discusses Her Views on Structured Settlements and Fixed Annuities

For more than 30 years, Laura Tarbox has distinguished herself as the kind of financial planner many other financial planners aspire to be like. Regularly ranked among the “Best Financial Advisors” in the country by Worth magazine and earning similar plaudits from other respected publications, Laura heads The Tarbox Group, a prominent wealth management firm in Newport Beach, California.

Highly regarded for her client-centric practice which purposely limits the number of clients it services and employing a holistic, personalized team approach to client advising, she and her team of fee-only financial advisors commit themselves to helping their clients achieve optimum financial success.

We sat down with Laura recently to discuss her views on fixed annuities in general and structured settlements in particular.

DAN FINN: Many financial planning professionals fail within just a few years of starting in business. What’s been the key to your tremendous longevity and success?

LAURA TARBOX: From the very start, I made a commitment to focus 100% of my energy on servicing the clients I had, not spending time soliciting clients I didn’t have. This, along with the addition of some highly talented team members who share this focus, has resulted in an amazingly high client retention level.

DAN FINN: I’m assuming your clients run the gamut in terms of risk tolerance. Where do fixed term annuities fit into your practice?

LAURA TARBOX: Besides the obvious situation where a client simply prefers guaranteed lifetime income from a highly secure life insurance company, we serve as trustees for some fairly substantial estates. Some of those clients develop estate plans calling for children, grandchildren, spouses, partners, nieces, nephews, etc. to receive a fixed cash flow each year upon the death of the grantor. In these instances, it’s generally more cost-effective to the client to arrange for the purchase of an annuity to meet this goal. Plus it’s pretty easy! Absent the annuity, we’d need to constantly monitor and manage assets in a smaller sub-account or trust, which can be very inefficient.

DAN FINN: But couldn’t you make more money if you did manage the sub-account?

LAURA TARBOX: Perhaps. But if the annuity is a better choice, then it’s a better choice. It’s all about doing what’s right for the client and helping them accomplish their financial goals.

DAN FINN: This speaks volumes since, as a fee-only financial planner, you might recommend annuities even though you don’t make any money when annuities are purchased?

LAURA TARBOX: That’s correct! We are paid by our clients and ONLY by our clients to provide objective financial advice. When we recommend annuities, it’s because the annuity makes the most sense in that particular situation.

DAN FINN: Switching to Structured Settlement annuities for a moment, what would you say to anyone presented with an opportunity to enter into one of these arrangements?

LAURA TARBOX: Naturally it would depend on the situation and the unique goals of each person but generally speaking, structured settlements are an excellent opportunity for those who qualify. It’s hard to beat guaranteed income that is 100% income tax-free. Especially when coupled with the security of a highly-rated life insurance company the Risk/Reward Ratio is very attractive.

DAN FINN: We hear this less frequently since the “Great Recession” began but historically people might reject a structured settlement offer because they viewed themselves as being “very sophisticated about money” and felt they “could do better” on their own. What’s your reaction to comments like these?

LAURA TARBOX: Regardless of one’s level of financial sophistication, it’s extremely rare to find anyone who can’t benefit from some form of guaranteed income. Even if for no other reason than diversification. At our firm, we manage accounts for some very high net worth clients who view themselves as extremely sophisticated about money. Yet most would jump at the chance to receive guaranteed tax-free cash flow with tax equivalent yields on par with historical stock market yields. For people in the highest possible tax bracket every year, tax-free income becomes even more desirable. These clients likely wouldn’t structure all of their recovery. But for the secure portion of their portfolio, a structured settlement would seem a very sensible choice for most.

DAN FINN: So, depending on the client and the circumstances, you think structured settlements make sense?

LAURA TARBOX: They definitely make sense! I don’t think anybody wants to suffer a personal, physical injury just to qualify for tax-free income but for those who have been injured and are offered a structured settlement, they should think long and hard before passing on the opportunity.

DAN FINN: You’ve been an outspoken critic of variable annuities throughout your career. Do you still feel the same way?

LAURA TARBOX: I do. The merging of investment vehicles with an insurance product seems, in theory, like a sensible idea. But when you analyze most variable annuities, it becomes apparent there are better ways to accomplish the goals they purport to help clients achieve.

DAN FINN: How so?

LAURA TARBOX: Well, for starters they’re loaded with fees that seem to never end. Fees on fees on more fees! But to what end? That’s the question no one has ever been able to answer to my satisfaction. If one needs insurance, they should buy insurance. If one chooses to invest in the market, they should invest in the market.

DAN FINN: You’re not alone in your thinking among your peers on this subject apparently.

LAURA TARBOX: No. In fact, SmartMoney.com just published an article on this very subject entitled “What’s Wrong With Variable Annuities” that reinforces my position.

DAN FINN: So you’re not anti-annuity per se? Just anti-annuity that tries to be something more than a traditional annuity?

LAURA TARBOX: That’s right. Unfortunately, the bias against variable annuities has clouded people’s judgment about the fixed annuities we’re talking about.

DAN FINN: Any final thoughts?

LAURA TARBOX: Fixed annuities are an appropriate choice for many situations. Fixed Structured Settlement annuities are particularly attractive for a whole host of reasons. The tax advantage is good. They’re simple to understand. They’re secure. And because they contain no hidden management fees or expenses, they’re a good deal.

DAN FINN: A good note to end on. Thank you for your time, Laura. Best wishes for continued success!

LAURA TARBOX: Thanks, Dan. It’s been a pleasure.

For More Information:
To learn more about Laura and The Tarbox Group, visit her website at TarboxGroup.com. For additional information or for help with a structured settlement or fixed term annuity, please call to let me know how we can help.

Greetings Fellow Supporters of Justice!

Today’s featured video highlights comments of esteemed Civil Rights Leader, the Hon. John Lewis (D-GA), in his address before the National Structured Settlements Trade Association a few months ago.

Recipient of more than 50 honorary degrees and countless awards for his dedication to the Civil Rights Movement, Rep. Lewis personifies the term “living legend.”

Leader of the pivotal 1965 “Bloody Sunday” Selma to Montgomery March and the only living “Big Six” speaker from the March on Washington for Jobs and Freedom where Martin Luther King, Jr. delivered his famous “I Have a Dream” speech, Rep. Lewis has been a tireless advocate for social justice since he was a teenager.

In addition to expressing heartfelt appreciation for attorneys, this distinguished, humble role model shared two stories that support his belief that Structured Settlements can play a key role in helping advance social justice today.

Structured Settlements can help provide an “opportunity to fulfill the American Dream.” Rep. John Lewis

Congressman Lewis’ talk took on special meaning for me personally as my Structured Settlement practice evolves. Earlier this year, I wrote about helping two men structure their wrongful imprisonment civil suits following their exoneration after serving thirteen years in prison for crimes they did not commit. (See e-newsletter entitled: “Never Give Up” on our website)

Structured settlements help people!

For those emerging from incarceration, many of whom were arrested as young men and women, reasonable employment prospects are often dim since they have never been part of any civilian work force. For these deserving people who frequently encounter undeserved stigma, Structured Settlements can serve an even more vital role in helping them achieve the American Dream denied them.

Rep. John Lewis surely thinks so. And social justice in one thing Rep. Lewis surely has a perspective on.

Enjoy the video and, as always . . .

Bonds and Structured Settlements: No More Tears

For those who remain unconvinced that Structured Settlements are still “a good deal” in today’s economy, it’s worth noting how other financial professionals view bonds and bond-based instruments such as Structured Settlements.

First, a brief comment on how structured settlement companies arrive at their rates. And I do mean brief.

Bonds.

OK, that may be a bit of an oversimplification but suffice it to say the portfolios of life companies offering structured settlements generally include a significant percentage of quality bond holdings. That’s because life companies are strictly regulated by the states and must meet certain risk-based capital and other requirements in the interest of consumer safety.

For the past twenty years or so, state regulators have limited what life insurers (including those offering structured settlements) can invest in. Years ago, companies could get away with reaching for higher yields by investing in riskier instruments like junk bonds.

Thankfully those days are long gone.

Today, take a look at any company offering structured settlements and you will likely find a portfolio containing 80% or more of investment grade bonds. The balance in cash, short term investments and other “sensible” assets with minimal, if any, exposure to anything considered high risk makes for a very safe bet.

One small difference. Structured settlement rates of return usually exceed bond rates by quite a few (often fifty or more) basis points!

Which brings us back to the original topic. A recent article entitled “The Age of No More Tears Investing,” which appeared in a recent edition of Fortune magazine, quotes a number of financial experts who seem to think quite a bit of bonds these days.

Click HERE to read “The Age of No More Tears Investing”

Add it all together and you have a formula that goes something like this:

If Bonds = Safe, and
Structures = Backed Mostly By Bonds, and
Financial Experts = Touting Bonds as Good, and
Structure Rates > Bond Rates, Then

It stands to reason that:

Structures = Safe + Good 4 You!

OK, so maybe my theorem needs a little re-working but you get the gist. Good economy, bad economy. Whatever the case, structured settlements are a solid choice for those seeking safety and solid performance commensurate with the risk.

Naturally, it all depends on the numbers so please call if you’d like some comparison quotes or to let me know what I can do to help. Nothing beats an informed decision. Wishing you continued success and . . .

Press Release: National Structured Settlements Trade Association Elects Dan Finn Its Next President

I am proud and humbled to be writing to you today to announce that I recently was elected to serve as the incoming president of America’s premier advocacy group dedicated to protecting and preserving the tax benefits associated with structured settlements for personal, physical injury victims.

Click HERE to read the Press Release.

That my industry peers thought enough of me last year to elect me to our organization’s Board of Directors was gratifying enough. But when the elected Board members collectively drafted and elected me to lead the organization as its next president, the honor was magnified.

Although my term doesn’t officially begin until 2011, I am already fully engaged with a committed Board of Directors and Management Team that is working to ensure that structured settlements, and the tax advantages that accompany them, remain a viable settlement option for people anticipating settlements for personal, physical injury and wrongful death claims.

For 25 years, the National Structured Settlements Trade Association (NSSTA.com) has led the charge to engage the public on dialog necessary to ensure the continued success of structured settlements. I pledge to do my part to continue this fine tradition.

Through the collective efforts of ALL the professional stakeholders – accident victims themselves, attorneys, mediators, judges, insurance companies, members of Congress and my fellow structured settlement professionals – we can continue to help secure the futures of those who need it most.

I am committed to making sure clients continue to have this unique option for guaranteed future security available to them. Please feel free to contact me personally should you ever have a matter that you feel deserves greater emphasis in this important area.

You’ve seen the late night TV commercials. You can get “CASH” for your structured settlement payments NOW!

“Let us help you out of that burdensome, extremely attractive and secure guaranteed income tax-free cash flow you are receiving,” the paid spokesperson suggests. “We understand your problem and will give you the money YOU deserve such is our benevolence!”

In a perfect world, the spokesperson would, at this point, grow horns and start laughing maniacally. I imagine the scene from Planes, Trains and Automobiles where John Candy and Steve Martin get wedged between two semi-trucks while driving the wrong way down the highway.

But the world is imperfect and people aren’t always able to see the truth that often lurks behind a well-crafted advertisement that is, most would argue, designed to exploit.

In this rare weekend edition of our newsletter, I’m writing to praise financial columnist Jason Zweig for his article which appeared in today’s edition of The Wall Street Journal shedding necessary light on the emerging practice of selling factored structured settlements.

Click HERE to read “Another Can’t Miss Deal That Can Miss Spectacularly”

In an odd way, the fact that a secondary market has spawned from a secondary market speaks volumes about the attractiveness of the structured settlements in the first place.
It suggests, to me at least, that investors would love to be on the receiving end of an original structured settlement.

Trouble is, since structured settlements are only available to people settling a personal, physical injury claim, they are not available for purchase directly. That is unless they are purchased, after the fact and “at a deep discount” as the article points out, by companies wanting to capitalize on their original attractiveness.

Although the article steers clear of the ethical issues surrounding investors who make money off of people who have suffered physical trauma, it seems appropriate that the lone graphic used in the article shows a turkey vulture roosting on a yield sign.

For more perspective on this theme, clients may wish to revisit a few of the videos we have posted on our website under the “What They’re Saying” tab. Specifically, those of Sen. Richard Durbin and Rep. Joe Courtney (videos 5 and 6) of the United States Congress both of whom are former trial attorneys who strongly support structured settlements and are opposed to factoring.

A few days ago, an attorney client-friend I hadn’t spoken with in awhile called for some structured settlement proposals.

“Business must be terrible since rates are so bad, right?”

I acknowledged some cases recently where clients who were excellent candidates for guaranteed tax-free income desperately needed cash to stave off foreclosure, support a laid-off spouse, make up for lost savings, etc.

But he was surprised when I told him that our overall business activity is about on par with activity in the pre-Recession days before money seemed to evaporate overnight. After all, some people will always choose guaranteed, tax-advantaged income regardless of what the rest of the economy is doing. They’re just wired for safety and security.

“How can that be with interest rates so low?” he wondered. “Structured settlements can’t be paying more than, what, 1 or 2 percent?”

I smiled. This was not the first time I had heard this.

Oscar Wilde Was Right*

His client was a 55 year-old male whose marginal income bracket was still quite high because both spouses, fortunately, still worked. He planned to continue working to his normal retirement age of 65.

Furthermore, this person’s 401(k) had taken such a hit the past few years that he vowed never again to buy another stock. He was coming to that point in life where he needed to shift his risk tolerance anyway so had asked his attorney, a wise money-man himself, if he knew of anything “sensible” he could do with his settlement money.

I ran a quick quote that revealed his client could receive guaranteed lifetime income beginning at age 65 (a 10-year deferral) that resulted in a 4.35% tax-free rate of return based on full life expectancy. Factoring the client’s high estimated tax bracket into account, his tax-equivalent yield was over 7.50%.

It’s worth noting that the “real” (inflation-adjusted) rate of return for the S&P 500 from 1950-2009 is 7.0% according to data collected by Robert Shiller from Yale University for his book Irrational Exuberance.

Surprise!

The attorney was amazed! This was significantly better than he had been expecting. So much so, that he realized that maybe it was time for him to start thinking about resuming the structuring of his fees going forward.

I told him I was glad I could change his assumption and assured him I’d be here whenever he was ready to resume structuring his fees.

Thoughts From a Bond Guru

Clients may wish to heed the insights of “Bond Guru” Bill Gross, manager of the world’s largest bond mutual fund. In a recent Money magazine article, he talks about how people need to adjust to the “new normal,” which he defines as “an era of slow growth and lower returns on stocks, bonds and everything else.”

Click HERE to view the article “What the bond guru sees coming”

Gross essentially suggests that people cut their return expectations in half. Instead of expecting 10% returns on stocks, expect 5%. Expect 4% on bonds. Etc.

Final Comments

In the structured settlement business, we’re telling clients who will need money in the very short term they should NOT structure that portion of their settlement proceeds. (Exceptions: Some taxable settlements, attorney fees and Structured Sales).

But for those who seek long-term financial security, we have yet to find anything that compares to the benefits of a properly crafted structured settlement. The tax-advantage coupled with the uber-secure nature of structured settlements make for a terrific combination.

Tough as it is to get used to this “new normal,” those who adapt will surely survive and thrive. And we look forward to being here to help you through the transition.

Product Enhancement Announcement From: New York Life
Fixed Annuity Leader Now Accepting “Stand-Alone” Structured Attorney Fees!

Plaintiff attorneys in the know have been structuring their fees for many years. They have long valued the certainty, the security and the tax advantage that comes from deferring fees into a future year.

New York Life has always been a popular choice among the many excellent life markets offering structured attorney fees. But until this month (June, 2010) attorneys could only structure their fees with New York Life if their client structured part of their settlement proceeds.

I am extremely pleased to announce that this restriction has now been lifted.

Attorneys who wish to structure their fees with New York Life may now do so even if their clients choose to accept their settlement in cash provided the underlying claim qualifies under IRC 130 as a personal, physical injury case.

Why is This Worthy of Special Mention?

Four reasons:

1. This inclusion means that now, ALL Structured Settlement life markets now offer stand alone structured attorney fees. This further reinforces the viability of structuring fees from a tax perspective;
2. New York Life was the market leader in fixed annuity sales in the first quarter of 2010 according to the recently released Beacon Research Fixed Annuity Study. They topped the list with over $1.7 Billion in fixed annuity sales;
3. New York Life is one of the few companies that can boast top ratings from all four major rating agencies: A. M. Best, Moody’s, Standard & Poor’s and Fitch;
4. Ultra-conservative attorneys who regularly structure their fees like having an assortment of structured fees spread among several different life markets. Having New York Life now available when their clients “cash out” adds another option.

Practitioners seeking to secure their futures can gain a terrific financial advantage by structuring their fees. Because it’s vitally important to follow the established sequence of events in order to preserve the tax advantage, be sure to call me before your case settles to make sure everyone is in compliance. Certain underwriting limitations may apply and attorneys are naturally encouraged to seek their own independent tax advice.

To learn more about how valuable this strategy can be or to receive a structured attorney fee quote, call anytime. In these tumultuous financial times, who among us couldn’t use a little extra financial security?

Munis May Be Losing Some Luster

Long touted as the ultimate secure choice for investors seeking tax-free income, some municipal bonds may be creeping up the risk ladder according to an article which appeared online yesterday at money.cnn.com.

In his article, “Is there a muni bomb in your portfolio?,” staff writer David Ellis reports that a number of cities have had their credit ratings cut. As a result, especially when coupled with the current general economic malaise, some municipal bonds could end up “virtually worthless.”

Not good news for people who are counting on that money.

Even bazillionaire Warren Buffett (who knows a thing or two about money) is quoted as saying municipal debt woes could become a “terrible problem” in the future.

Click HERE to read “Is there a muni bomb in your portfolio?”

This article caught my eye since I can recall, over the years, many people who settled their personal, physical injury claims rejecting the income tax-free structured settlement option available to them in favor of cash so they could buy tax-free munis which they perceived as safer.

I will not argue against the wisdom of choosing something viewed as so historically safe but I hope this article provides some perspective for those who think munis are always a slam dunk. Structured settlements offer a sensible alternative.

Structured settlements remain an excellent choice for those who qualify and seek guaranteed, income tax-free cash flows! Please call anytime I can help you or anyone you know evaluate ALL the choices available before settling a personal, physical injury claim.