Annuities

Today at Ameriprise the main focus was on learning about Annuities. This is a financial product designed to pay out steady amount cash over time. It is used as a retirement vehicle to insure regular income in later years. It is a contract between the client and a financial institution, which agrees to pay a lump sum up from or monthly deposit. The financial institution agrees to pay money on a particular date and to continue over a fixed period, like 20 years or until the client or their spouse dies. These payments are called distributions. This type of retirement plan helps to put clients into a 5% tax bracket, which enables both themselves and their financial advisor to keep more money. Annuities can be either fixed or variable. A fixed rate can range around the 3% - 4% while a variable will depend on the economy.

            A fixed annuity offers you a very low-risk retirement; a client will receive a fixed amount of money every month for the rest of their life. However, the price for removing risk is missing out on growth opportunity. Should the financial markets enjoy bull market conditions during your retirement, the client will forgo additional gains on their annuity funds while variable annuities allow less risk-averse retirees prolonged exposure to the financial markets. 

           This type of retirement plan is classed as non-qualified as it can occur outside their IRA. If a client withdraws money before the fixed annuities period is up then they will have to pay surrender charges. If a client dies then their annuities can be inherited to their children. Their children will have three options in which to accept the money. They can receive a lump sum, which would involve paying taxed on the gains, which may be as much as 25% - 28%. The next option is receive the money in a stream of income enabling them to pay a smaller tax bracket and the final options allowed them to continue with the contract, receiving the money just as the original living client would have. The option best for the client would depend up which effect tax bracket was best. This is worked out via the formula = Tax paid divided by adjusted gross income.

            Annuities offer tax-sheltered growth, which can result in significant long-term returns for a client if they contribute to the annuity for a long period and wait to withdraw funds until retirement. Annuities are good for clients who wish to have a retirement fund which will give them peace of mind as they guarantee income stream, and the tax benefits of deferred annuities can amount to substantial savings. 

"Smiths" Personal Balance Sheet & Cash Flow Statement

I met with Mr Strand to discuss my progress on the financial planning portfolio for “The Smith family”. I based the income and expenses on the facts I was given from the original summary of the family. This enabled me to create a personal cash flow statement and break down Mr and Mrs Smiths income into the two salaries based on an annual, monthly and gross income percentage weighing. The Federal tax is based at 15%, while the State is at 5% so I was able to calculate the precise amount their take home pay would be. Once I sort out their investments I will be able to include interest income and dividends into their total income. I learn at Ameriprise Financial that tax on income from investments is only 15% so this will help to boast their net income.

            I categorized the living expenses into the following: Housing, food, clothing/personal care/ transportation, recreation, medical expenses, insurance and other expenses. I based these figures on my dorm parent’s expenditure, as her family is similar to that of “The Smiths”.  Once all the figures where in place I was able to see the percentage ratio of all living expenses compared to one another and the cash available for savings/investment. Once the expenses were calculated against the income the savings ratio could then be seen. This is the net savings of the total gross income.

           

            Their personal balance sheet can be broken up into assets and liabilities. Assets come in the form of monetary, taxable investments, retirement plan, personal property, real property and other tangible assets, while liabilities came from current and long term. This allowed for investment net worth and personal net worth to be worked out. I will look to work on the ratio analysis and asset allocation next. Mr Strand advised me to used Yahoo finance to start to build up a investment portfolio of equities and bonds, this will help to boast “The Smiths” gross income, as currently with their expenses they are only just breaking even.

            I like taking part in this project because so far I have been able to link what I learnt in the office at Fall River to my mock planning forecast. Its an awesome feeling to be able to see the bigger picture when creating my portfolio that those of the real life clients at Ameriprise in order to get a grasp of what the potential overview could look like. 

John Hancock Long-Term Insurance

I started the day at Ameriprise Financial with a videoconference with a client. This piece of technology enables advisors to have clients outside of travel distance areas from the office. Some clients prefer to be in the comfort of their own homes, which is especially appealing for the older clients to which travel is an issue for them. In Mr. Pippitts case video conferencing allows him to have a client base as far as Florida and California.  The client we were reviewing needed her account summary updated and various financial strategy options explained to her. On of these was the John Hancock Long Term Care Insurance. This is insurance is important as it provides coverage that gives valuable support and financial resources which help to cover the cost of long-term care if a client needs in the future in the event of an illness, accident, or through the normal effects of aging. LTC helps to protect their assets, and give them the choice and control over where they receive care, including in their home.

            The clients who we were reviewing only had funds to last her until her early 80s. For retirees who outlive their retirement funds, they have three options in which to save: Spend less/Save more, Work longer or part take in more risker markets. The last option tends to less appealing for elder clients as they worry about losing what savings they do have and jeopardizing funds being left over for inheritance. 

            We then had a meeting with a REIT seller who was explaining the new products on option for Mr Pippitts clients to invest in. These REIT’s took the form of offices and multifamily. His particular firm had three in Austin, three in Dallas, one in Salt Lake City and another in Tennessee. This market seemed to be a worthwhile investment as it was discussed that 10 million units were needed to satisfy the predicted jump in demand over the next five years to come.

            Mr Pippitt advised me to watch the PBS series on Frontline called “Money, Power and Wall Street” This four part documentary helps to explain the fundamentals behind the economic crisis beginning in 2008 and give me a taster of what to expect before my visit to the New York Stock Exchange on Wednesday. I’m super excited about my trip to New York, I will be sure to take lots of photos!

Generational marketing

At Coldwell Banker I took part in a webinar on niche marketing, which incorporated demographics by learning how to define the market. This enables agents to identify generations and build a relationship to then create appropriate niche marketing for each group. The following generation categories are as follows:

G.I. Generation 1901 – 1926

Silent Generation (Active retirees) 1927 - 1945

Boomers 1946 – 1964

Generation X 1965 – 76

Generation 1977 – 1994

Generation Z 1995

The GI and Silent generation grew up in a full service world where employees were hardworking and community orientated. This group is used to saving money as they lived through the great depression and WWII. They lack imagination as they have been through the Korean and Cold war making them conformists. Agents should tell these clients they will call them as this group has more free time so will expect actions to happen quickly. This group is also indecisive and cautions so information will have to be provided to them in great detail.

The Baby Boomers are ambitious, career orientated, competitive and materialists. This generation lived through the Vietnam War and the Cuban missile crisis. They were able to live in economics times where wealth making was easier by the opportunity to buy low and seller high. They could also invest in blue chip companies.  They like to focus on lifestyle over age and the younger generations of the baby boomers have been brought up being good at debt management and are happy to postpone marriage for a career. They like convenience and rate the reputation of their agents, including network of contacts and their credentials. This generation is able to find information and likes the idea of leading an active lifestyle.

The generation X tends to be speculative, independent, like isolation and carry entrepreneurial abilities. They value quality of family life over career. They lived through the Berlin wall, Chernobyl and the economic recession. They like to have access to everything and be able to negotiate on price and details.  They are risk takers and hold a sense of entitlement. They need the agents help but expect information to be free, with only one chance given.

The generation Y lived through September 11^th  (and many other terrorist attacks), the growth of the Internet, the gulf war and globalization. This generation has been shattered, sensitive to multicultural, over scheduled and good at multitasking. They are used to high tech, low touch services but hold empathy towards elders. This generation likes agents to have a quick response time, agents should use email to contact clients and be sure to update their website regularly as this will be judged.

The generation Z will be into online banking and have high use of the Internet. There services will mostly be done over the Internet as they lived through the digital revolution they will have no memory of the 20^th centaury for an agent to base tips off. This generation is yet to enter the housing market.

I personally thought this was a really neat way of linking a clients needs to what an agents should provide them from the past history of experiences.

House visits

            Today at Coldwell Banker we started our meeting talking about discrimination of race, age, religion, mental and physical disability. Later that day I completed a webinar which taught me more about niche marketing, which I will discuss later. This mornings meeting taught me some terminology about the real estate business:

·      Blockbusting is where real estate agents try to encourage white property owners to sell their houses at a loss, by implying that racial, ethnic, or religious minorities were moving into their previously racially segregated neighborhood, thus depressing real estate property values.

·      Redlining is the practice of denying, or increasing the cost of services by racially determining areas.

·      Real Estate agent can be found guilty of steering if they are seen to be channeling homeowners into certain areas.

·      The primary purpose of the Fair Housing Law of 1968 is to protect the buyer/renter of a dwelling from seller/landlord discrimination. Its primary prohibition makes it unlawful to refuse to sell, rent to, or negotiate with any person because of that person's inclusion in a protected class.

         We then went on two house visits in the price range of $599,000 in the areas of Marion (over route 6) and in Rochester. These were properties that were new to the market so the agent in charge was showing the other agents their new listing and why they estimated the value they did for the open house day coming up. The valuations are based upon the market comparison and then adjusted for any niches that particular property may have other a neighboring one, say with a pool. After the open house day the agent can then lower the price if they feel they were given a lack a interest from prospective buyers. Funny enough the second house we viewed had a lot of family photos dotted around, giving it a warm, homely feel to it. Some of the photos I thought looked like the background Tabor Academy campus, I later found out that the family living currently there had two daughters who attended Tabor, the youngest being a senior when my classmates were freshmen! 

Series 7 & RiverSource

        I felt I learnt a lot in the office today as well as being given some more responsibility. The day began with an explanation of the Series 7. This is an exam that allows a registered representative to be licensed to sell securities and have the legal power of an agent in the United States of America. To become a registered representative, you must be sponsored by a broker-dealer firm and pass the FINRA-administered Series 7 examination, which must be renewed every three years. Passing the Series 7 exams gives authorization to sell a large array of securities such as stocks, bonds, mutual funds and variable annuities. I think this is a really valuable qualification to have and if I was lucky enough to return to the United States for my working career I would defiantly hope to take this exam.

             The next nugget of information I learnt was the new insurance option that Mr Pippitt picked up at the RiverSource conference in Florida last week. RiverSource is an insurance company owned by Ameriprise Financial. The new product option was called the “Nine circles calculator” insurance strategy. This allows an advisor to put the clients following information in:

a)     IRA/401(K) – future value

b)    IRA/401(K) future value with insurance premium

c)     Life insurance death benefit – assumed tax rate: Federal tax at 15%, State tax at 5%

The calculator then produces three options:

1)    Current Strategy

2)    Family Strategy

3)    Family & Social Strategy

This allows the client to clearly show the amount he would pay in taxes, charitable contributions and tax home amount depending on what options they decide upon.

            The next part of my day was really exciting. I was given the responsibility to look through client’s portfolios that were to come in for a review meeting soon and see which investments should be kept and which should be changed. The software on the Ameriprise Financial database called investment view allowed me to do this. I checked to see how the fund compared with the index and how it performed in its classification rank, which went through 1,3,5,10 and 15 years. As I haven’t got my Series 7 qualification I could not change the funds myself but as I was able to put my suggestion on file to Mr Pippitt it gave me a fulfilling feeling of having some influence on the clients portfolio management.

Price of Culture

Today, I had my meeting rearranged with Mr. Strand so I went to my AP Economics class and read another chapter of my book. This chapter was titled “ The price of culture”. Having now lived in the United States; I found this chapter particularly interesting because of being able to compare European mentalities and attitudes to that of Americans. Since I’ve been here, there have been numerous occasions in which people have asked what the main difference between the two are, I have tried my best to explain the difference but never really felt my answer was exactly what I mean While reading this I found the perfect explanation to what I always try to describe.

            “ Europeans believe in the luck of the draw as a defining characteristics of life, and are skeptical of the proposition that the rich deserve their riches. They are unlikely to attribute success to effort – ascribing it instead to serendipity and external social conditions. Believers in the world’s unfairness, they prefer high taxes and aggressive income redistribution to impose justice on an unjust society.”

As negative as that may sound, its pretty much spot on, this may due to the roots of the feudal past when prosperity had nothing to do with effort and much to do with having the right parentage. The American society on the other hand can be best described.

            “Americans tend to believe crime doesn’t pay and honest, hard work is the key to prosperity for the American Dream is available to all. Ten times as many Americans say hard work will lead to a better life as believe success is a matter of luck and connections.”

            Another point of interest this chapter gave me was the topic of tipping. It is very rare is Europe and Asia to the point a waiter would chase after to you to return the change left on the table thinking you just forgot about it. In the United States a 15% tip is customary, making the waiters deploy friendliness to increase their rewards. This difference is due to labor markets. It the US waiter earn little as the minimum wage has risen to $7.25, for waiters it has been stuck at $2.13 since 1991, on the grounds that they can supplement it with tips. But the labor-market pricing differences are themselves rooted in different approaches to economic justice. Europeans believe such wages are unfair, and have thus imposed compulsory service charges to add to the bill instead. 

American Research and Management

Today I had a meeting with Mr. Eric Strand at American Research and Management to discuss the financial planning portfolio that I will be working on over the next few weeks. We came up with a made up family called the “Smiths”. I have been given some background on their ages, occupation and annual salary. We decided they had two children in which they hope to save some money aside for their college fund. The Smiths don’t currently have a will and the value of their home is $550,000 with a $150,000 mortgage. They have a risk tolerance of 70% equity/ 30% fixed income for investments, in which they currently have some Mutual funds between AAA and CCC. Their retirement plan comprises of a 401(k) in Mr. Smiths name that’s currently 80% vested with a 2% match for employees. His current 401(k) balance is $100,000 and earns 7% annually.  The Smiths would like to retire when they are 65 and feel they will need $2,000,000 to do so.  They anticipate living until they are 85 years old.  Both Lisa and Peter’s parents are still alive.  Lisa’s parents are in their early 80’s with no major health concerns.  Peter’s parents are in their late 70’s and in excellent health; Peter’s grandparents lived into their late 80’s and early 90’s.

My task is to create a portfolio, which incorporates all aspects of their children’s needs, estate, investments, retirement and everyday budgeting. I will try to put answers to these questions:

1.    Do they need Life Insurance, if so How much and what Kind?

2.    How do they save for their children’s educations?

3.    How do they save for retirement?

a.    IRA?

b.    401K

c.    How Much?

4.    What type of estate planning document do the Smiths need?

5.    How should they invest?

6.    Budgeting

7.    Should they refinance their mortgage?

 As the Smith’s are a made up family, I have somewhat flexibility in deciding how much to put aside for needs and change aspects to ensure they are in the green at the end of the financial year. The Smiths portfolio is really to give me a taster of what producing a real one would be like, while discovering new terminology such as a UTMA, 529 plan, health proxies and FILO scores.  The great things about creating this portfolio is it incorporates all aspects that I’ve learnt from my other two experiences at Ameriprise Financial and Coldwell Banker in terms of investments and mortgages.

An Agents Role

Today I have summarized what the key aspects are in an agent’s role when working with either the buyer or seller.

Working with a buyer as a representative

The agents should work closely with the client in a professional relationship to review their wants and needs continually throughout the process. The agent should provide the buyer with CMA (current market analysis), which should include property comparisons in the market, recently sold properties, market conditions and updated information of the inventory. The buyer should be informed to base the offer from the current interest rates. The buyer’s advisor should request a home warranty from the seller in order to discuss issues like who is going to pay for the closing costs. The agents should prepare the buyer for counter offers and multiple offers. In case of another buyer gives a higher offer to the sellers, the agent then should have a discussion with the buyer to the extent they are willing to compromise on their offer price. It is not just the price that can be negotiation; the deposit, closing and commitment date can all be adjusted. The original contingencies can also be negotiated if terms to the contract change.

Working with a seller as a representative

The agent must prepare the seller for multiple, or counter, offers. If a buyer puts in a low offer, communications should still be kept in order to increase the price at a later date as the buyer may have begun low to see how little they can get away with.

Sellers may have an emotional price tag to their property, like if they raised their family there or lived in the property for many years. It is the agent’s role to ensure the seller keeps forced on the market value of the property, as the market will only see the inventory as any other commodity. As a way of trying to avoid this, the agent should update them on the CMA of the property, the inventory levels, recently sold property and market trends like appraisals and mortgage rates. Seller needs to know their responsibility in terms of final inspection, appraisals, final utility reading, property conditions, final closing costs and procedures. The agent should discuss contingencies with the seller and inform them that if they can be flexible on price then the closing date can be sooner. The agent needs to let the seller know they can refuse an offer but at the risk of not getting another opportunity.

I wanted to include in todays blog a review of the time period between the beginning of the home search under property and obtaining a pre-approval for a mortgage under financing to the closing.

Property

10 days – Offer to purchase and inspections, like contingencies can be done

12 days – Purchase and Sales can be fully agreed

21 days – Mortgage commit

45 days – Confirmation on the loan

60 days – To closing, all contingencies should be finished.

Closed

Financing

10 days – Make formal applications

21 days – Receive mortgage commit

60 days – Clear conditions by final inspection

Final figures through attorney – Closed.