Two Investment Guarantees Investors Can Take To The Bank

Having worked in the financial services industry, there was one word we were forbidden to use. Now that I’m an investor coach, I’m still very conscious of the implications, consequences and effect this one word conveys in my conversations, blogs, articles, webinars and seminars. However, times change and I’m ready to put this one word back into my vocabulary. What is this one word? Guarantee.

To understand why this word is forbidden in the financial services industry and why I’m cautious as to how and when I use it, we must first look at the definition: Guarantee; Provide a formal assurance or promise that certain conditions shall be fulfilled relating to a product, service, or transaction.

‘Providing a formal promise that certain conditions shall be fulfilled’ leads some to interpret the word as legally binding. That thought of legally binding scares the financial services industry in a big way as it provides investors potential legal recourse and that is exactly what the industry does not want investors to have. Hence why the word guarantee is never to be used in the course of conversation with investors.

I’m cautious in using this word for a different reason. As an educator, it’s my responsibility to set a proper level of expectation for those person(s) learning to invest on their own based on my guidance. I know with 100% certainty that I can not guarantee future market directions, returns on investments and which stocks, mutual fund and/or fund managers will be winners/losers tomorrow.

I’ve come to the conclusion that it’s time I put the word ‘guarantee’ back into my vocabulary and start using it due to the following two reasons:

  • The regulations that will have to be implemented due to Dodd-Frank Financial Reform Act on the financial services industry.
  • The annual deficits that will raise our national debt to approximately $25 Trillion by 2020.

Based on the above pending regulations and projected national debt, I’m confident in making the following two investment guarantees:

  1. Investment Fees will increase; to cover additional expenses incurred by the financial service industry and financial firms due to the Dodd-Frank Act. These additional expenses will be passed directly on to investors in the form of more and higher investment fees at all levels.
  2. Taxes will increase; to minimize our annual deficits, to pay down our national debt and to cover mandatory entitlement programs. These tax increases might be in the form of personal income, business, capital gains, estate, 401k withdraws, etc.

So what do these guarantees mean to investors?

  • Because investment fees have a direct negative correlation to investor returns, investors will realize a lesser return percentage on their investments. Today on average, investors pay a total of approximately 2.5% – 4.0% of the value of their investments on an annual basis in fees. What’s truly sad about this fact is most investors are totally unaware of it as these fees are skimmed directly off the top of an investor’s earned returns before reported on an investor’s statement. The new regulations are estimated to push these fees to 3.5% – 5.0%. To get a better understanding of the impact of these fees, consider the following; On an investment of $10,000, fees will confiscate up to $500 per year regardless if the investments make or lose money!. On a $100,000 investment, those fees will confiscate up to $5,000 per year and if your fortunate enough to have saved $1,000,000 these fees will confiscate up to $ 50,000 per year! Multiply these annual costs by 10, 20 or 30 years and include losing the power of compounding over these years and it’s easy to understand why investors loss approximately 70% of their lifetime wealth potential due to investment fees…70%!
  • Tax increases are painful as they too confiscate money from employees, employers, consumers, investors, savers and retirees. Investors investing with an advisor in short-term speculative investment strategies generate short-term capital gains that are taxed as personal income which will be subject to higher tax rates. In the case of retirees, withdraws from their 401k plans will be exposed to higher personal income tax rates thus reducing purchasing power and exposing retirees to the possibility of running out of money.

My intent is not to instill fear with investors but to help them recognize the very real possibility we’re facing and what ‘seeds of change’ can be planted today to protect investments from future fees and taxes.

Here are several ‘seeds of change’ investors should plant today to ensure an abundant harvest later in their life:

  • Learn to become your own most-trusted financial advisor by enriching your knowledge so you’re in complete control of your investments and understand what you’re invested in
  • Invest in a strategy based on simplicity and with clearly defined entry and exit triggers.
  • Invest in low-cost funds and eliminate advisor fees immediately. Reducing fees have a direct positive correlation to investment returns. For every 1% of fees reduced, returns are directly increased by the same amount.
  • Invest in passively managed funds to eliminate capital gain tax consequences,
  • Leverage the power of compounding over the long-term to build wealth for yourself.
  • Choose the Roth or Roth/401k option if you’re starting out in an employer-sponsored retirement plan,. These plans require taxes to be paid now while you’re in a lower tax bracket and provide distributions that are totally tax-free when you retire.

Investors that choose to plant the above ‘seeds of change’ today will have a distinct competitive advantage in building, protecting and preserving their wealth for their future.

Small Business Cheap Health Insurance

As a small business owner, you know the importance of being able to offer your employees health insurance. You also know the expense associated with it. What do small business owners do? How can they afford it? Well, depending on which state your business resides, there may be government help.

For instance, in the state of New York, Governor Pataki has proposed and Legislature has approved and enacted a program called Healthy NY. This program assists small business owners in providing health insurance for their employees.

Similarly, the state of Ohio, allows Group Purchasing Arrangements (GPA’s). This is where small and large employers may band together to purchase insurance plans and reap the benefit of lower premiums. Some are formed as a result of state legislation/regulation and others GPA’s a re formed by associations.

Kansas has the Kansas Health Partners Benefit Association. Their mission is to help reduce the number of uninsured in their state by helping small business so that they may be able to offer affordable health insurance to their employees.

A bill introduced on to the House of Representatives by Georgia Democratic Representative John Barrow. The purpose of the bill, H.R. 2073: Small Business Health Insurance Promotion Act of 2005 is to “…to provide tax subsidies to encourage small employers to offer affordable health coverage to their employees through qualified health pooling arrangements…”

This is a proposal before Congress. It would have to be passed by both the House and Senate and signed by the President before it is law. Get involved, contact your representative. Tell them to vote in favor of this proposal. After all, we elected them to do our bidding.

Bottom line, if you’re a small business, visit your state’s web site to see what legislation has been passed in your state. Additionally, check to see if there are program in existence that offer you help in providing health insurance for your employees.