We Care How You Care

Many years ago, my late mother became a resident of a long-term care facility.  While it was hours away from where I lived, over three years I still spent dozens of hours visiting her.

More recently, my wife's parents have also been, let's say, voluntarily relegated to a similar long-term care facility.  This time, it's quite near where I live, and in a short time I've already spent many hours there.

These care facility visits have made me, in my own mind, enough of an expert to know a few things that work and don't work -- not for the residents, but for the loved ones who visit them.

First, we want to have enough caretakers there to help.  Finding employees to work at these facilities wasn't easy before the COVID-19 pandemic, and it's even harder now.  But figure it out -- no resident should have to wait too long for help the basic activities of daily living.

Next, we want everyone to show kindness.  Of course, there will be days that workers there are stressed, and short of time, and basically don't want to be there.  Let's just keep that to a minimum, and be as pleasant as possible to those who have no choice but to be there.

Finally, an overlooked on one for a financial-focused person like me -- let's have staff that understands the health care provider / insurance administrative labyrinth.  By this I mean a staff that can understand and explain it, and doesn't allow it (or them) to make obscene profits off of the elderly.

I have more knowledge about how medical providers and insurers operate than most, and I still struggle to understand the rules and costs.  The residents of care facilities are already losing their independence, let's not let them unnecessarily lose their money.

Fiduciary Rules!

Within the next few months, the U.S. Department of Labor is expected to release final rules that will impose a fiduciary standard of care on financial advisors (including insurance agents) working with qualified retirement employer-sponsored plans and individual retirement accounts.  While I'm generally against more regulations, this happens to be of the best and most overdue pieces of federal rule-making ever.

First, let’s clarify the two different rules under which financial advisors currently operate.

Suitability Standard of Care
Most financial advisors, including financial company representatives and insurance salespersons, operate under the suitability standard of care.  Generally speaking, the suitability standard simply requires the advisor to 1) know the client and their financial situation, and 2) recommend products that are suitable for their situation.

Fiduciary Standard of Care
Some financial advisors, including Certified Financial Planner® professionals, must operate under the fiduciary standard of care.  Under this standard, advisors must 1) put the client's best interest first; 2) act with prudence, meaning with the skill, diligence and good judgment of a professional; 3) provide full and fair disclosure of all important facts; 4) avoid conflicts of interest; and 5) fully disclose and fairly manage, in the client's favor, unavoidable conflicts.

While the general public often assumes financial advisors are working in the client’s best interests, in fact, most are not bound to do so.  The new Labor Department rules would change that, making the fiduciary standard the actual standard in financial advising.  It boils down to every advisor following the highest standard of care regarding investment advice and retirement planning.

Seems like a slam-dunk, right?  In truth, large financial institutions (particularly insurers) are spending millions in a lobbying effort to stop the rules from being codified.  There is only one viable reason for this:  Greed.

Big financial institutions use the fecklessness of the suitability rule to sell lots of useless financial products to trusting people who don't need them, thereby capturing huge commissions and other fees.  This is great for the company, while simultaneously terrible for everyone else.  In short, those companies value profits over people.

Let's just hope this fiduciary rule regulation is made final, and comes with the enforcement it deserves.

Insurance = Bad Investment, Redux

I've covered this before:  Generally speaking, insurance is a bad investment.

Last week, I got into a prolonged, disagreeable phone conversation about a mutual client with what I consider to be the lowest form of 'financial advisor' on the planet:  A career life insurance agent.  Here's my open letter to him:

What gives you the right to call yourself a financial advisor?  You have one strategy -- convince everyone that their financial situation can be helped with some type of life insurance product, including (and especially) variable and indexed annuities.  Isn't it interesting that these these products generate big commission payments to you?  Never mind that your client pays well over 2% and probably closer to 3% of their 'invested' money every year in expenses to help pay those commissions, a fact you don't audibly disclose.  Never mind that you have little or no expertise in retirement, investment, or tax planning.  Never mind that you don't live by a fiduciary standard, you live by making your insurance company quotas.  You either don't know, or don't care, that not everybody needs life insurance.  In fact, you want people to believe that it's perfectly normal to buy enough life insurance to cover all the income they might make in the future -- a 'future value' approach that makes absolutely no sense, and profits nobody except you and your company.  You are a self-serving loser, and you suck.

This letter doesn't apply to every career insurance agent, just most of them.  As a certified financial planner, I do everything in my power not to be closely associated with them.  Actually, that's a financial strategy that would help everyone!

I (Religiously) Object

Last week, there were a couple of Supreme Court rulings of major interest.  The most interesting, and polarizing, one was Burwell v. Hobby Lobby.

In brief (pun intended), the court struck down the contraceptive coverage mandate under the Affordable Care Act (ACA).  It further ruled that closely held for-profit corporations could be exempt from a law they religiously object to if there is a less restrictive means of furthering the law's interest.

As expected, this ruling sent progressives into a tizzy.  The basic themes were 1) corporations are not people, and 2) now every employer will be able exempt itself from federal laws by saying they have a religious objection.

Anyone who looks back at this blog knows that I generally side with the socially liberal viewpoint.  I even posted an entry about the self-righteousness of some groups opposing the mandate.  And yes, it does seem crazy that 5 Catholic males on a court could make far-reaching decisions that affect only women.  (On second thought, not only does that seem crazy, it IS crazy.)

However, anyone who looks back at this blog will also know that I generally side with fiscally conservative capitalism.  While there's nothing specifically fiscally conservative about this ruling, generally speaking, I don't believe that employers should be federally mandated to provide medical coverage of any kind.

So, I'm having a hard time getting worked up about the Burwell ruling.  While I disagree with it, I also think the one absolute problem with the ACA is the employer mandate.  While everything else about the ACA may turn out just fine, including the individual mandate, the employer mandate is dumb.

Regardless of whether it's the 'job-killer' conservatives want to believe it is, employers (and other related third-parties) should not be in the health care business.  The ACA should mandate that employers NOT provide coverage, instead of the other way around.  Employers will then have to compete for quality employees solely on the basis of pay.  (I've just solved the minimum wage issue, too!)

Let the people be responsible for getting their own coverage, as with other forms of insurance.  If that sounds like it discriminates against the poor, that's why we have Medicaid.  (I know, I know, this attitude means taxpayers like me might be paying for more indigent medical care.  But on balance, I think it would still be no worse, and probably better, than it is now.)

Suffice it to say, I think the Burwell ruling is illogical, and anti-female, but I don't think it's the end of the republic.  Corporations surely aren't people, but even corporations should have some protections from the law, e.g. tort reform.  Too bad Hobby Lobby didn't focus on that.

The Taxpayer Warrior Strikes Again

On July 2nd, The Des Moines Register smartly published another letter to the editor I sent them.  It went like this:

So Polk County supervisors are going to start paying part of their health insurance for the first time ever, effective July 1? It sounds like a great victory for taxpayers – until you consider it’s expected to save less than $3,000 annually.

In fact, those affected will only being paying between $15 and $25 per month for insurance premiums. While that’s more than zero, it’s hundreds of dollars less per month than most private sector employees pay.

Regardless, Supervisors Chairwoman Angela Connolly crowed, “We all have to pay our fair share in terms of insurance costs.” This is just another example of how far out of touch elected officials are with their constituents, and with the economy.

This took me all of 15 minutes to write and email to them, but I can confirm that I got a lot more than 15 minutes of enjoyment out of embarrassing a bunch of wasteful politicians!

Insurance = Bad Investment

From time-to-time, I get asked about the biggest or most common investing mistakes. Somewhere at the top of my list is this - insurance is a bad investment.

Don't get me wrong, insurance is absolutely necessary for asset protection. But many people go well beyond that, drinking the insurance agent Kool-Aid that it should also be used as an investment. Of course, the insurance agent makes a much larger commission then, but pay no attention to the man behind the curtain!

A primary example of unnecessary insurance is a variable annuity. (I could also pick on universal / cash value life insurance, maybe another day.) Variable annuities are insurance contracts that claim to offer a ‘guarantee’ that investors will earn something like 5% or more annually, regardless of market performance. In theory, even if the market value of the account drops, you will still be ‘earning’ 5%. Sounds great, right? With a closer look, most people won’t think so.

First off, the ‘guaranteed’ return is actually based on a hypothetical (not actual) account balance. This hypothetical balance is the minimum basis for a small annual amount that may be accessed prior to death. But to take full advantage of this ‘guarantee’ you have to keep your money tied up for a very long time – in many cases for 10+ years – and you lose the ‘guarantee’ altogether if you make excess withdrawals prior to then.

During this entire period, you are paying dearly for that ‘guaranteed’ return. The additional charges can be 1%-2% or more every year on top of the annual fee, regardless of whether you ever use the benefit. That’s in addition to the 1%-1.5% per year charge for administrative fees. And that’s in addition to the management fees of 1%-2% paid to the people running the actual investment sub-accounts. All in all, you could be facing annual fees of 3%-5% per year or more! That’s a real reduction in invested funds, as compared to the hypothetical ‘guaranteed’ return.

Finally, there is a low probability of needing the ‘guarantee’ in a variable annuity. Insurance companies know history, and historically, these products benefit the insurer. If a person desires a guaranteed lifetime income stream, this can be done far more efficiently and inexpensively through a basic fixed annuity.

So why are variable annuities sold? Because insurance companies make huge profits on these products, and in turn pay high commissions to the brokers who sell them. And while they are very complicated products – many people who market them don’t even know how they work – they are easy to sell to unsuspecting investors. Insurers and their salesmen know that in the current economic environment, people are scared, making them easy prey to purchase anything that looks like a guarantee.

Don’t let pricey gimmicks distract you. The expense of a variable annuity will produce a significant drag on performance each and every year. Your funds will be much better off in a low-cost, properly managed investment account. It may not be flashy, but it works, while allowing you to maintain control and flexibility over your money.

It's Not Wellmark, Chester, It's You

Many Iowans are up in arms over a proposed health insurance increase from the dominant insurer in the state, Wellmark Blue Cross and Blue Shield. The average 18 percent increase in premiums would affect roughly 80,000 Iowans with individual policies.

One thing we've learned over the past 3 years is that when bad news comes knocking at Iowa's door, Governor Chester Chet Culver is going to lurch (not leap) into action. In this case he sent a letter to Insurance Commissioner Susan Voss, expressing concern about the increase, and asked Voss to hire an independent actuary to review Wellmark's proposed increase. Wellmark has agreed to delay the increase for 30 days. Yea.

Let me interpret: We are going to spend tax dollars on a study to do work that we already spend tax dollars for within the department of insurance. Genius! Is it no wonder that when he was introduced to the crowd at the boys state basketball tournament game I attended last week, he was lustily booed.

To be sure, there is plenty of bipartisan brow-furrowing at Wellmark, including by republican Senator Chuck 'Don't Turn Off the Switch on Grandma' Grassley, who accepts plenty of insurance PAC money. It's all an act, and no study or hissy fit it going to help. They know that health care is basically a zero sum game that doesn't work out for most people. 20% of insureds are going to soak up 80% of the costs, which means 80% of the insureds are paying premiums to subsidize the other 20%.

However, there are some things that politicians could do to lower costs, like pass tort reform. An even better one is setting an example by living a healthy lifestyle, eating right and exercising..... which brings me back to Iowa's overweight governor, not to mention its cigarette-smoking first lady.

Dear Mr. & Mrs. Culver: If you want to improve health care costs and make Iowa a better state, how about you living a healthier lifestyle and being an exemplar for the state? That will do far more good than wasting our tax dollars on reactionary politics for a study that is going to do no good whatsoever. If you want to see why health care costs are rising, you need a mirror, not a study.

Traditional Investing Is A Sure Loser

The following is an excerpt of a white paper about the secrets that traditional investment shops don't want people to know:

Let’s start by revealing how the traditional approach to investing almost inevitably results in worse outcomes. First, it must be understood that most investment advisors have learned their investment philosophy from the firms by which they are employed. What makes one financial advisor choose Mutual Fund A and another choose Mutual Fund B is largely determined by which of those respective fund companies has cut a better revenue sharing deal with the investment firm. Proof of this is readily available in firm annual reports.

It is a generally accepted business practice that clients will then own what funds or fund families a broker/dealer has the best revenue sharing agreements. This “pay to play” business model is disclosed to clients in the bowels of an annual report and little light is shed on this fine print. Herein lays the first of many identifiable conflicts of interest issues inherent inside the financial services industries.

The traditional investment approach used by most financial advisors is also an ‘active’ approach. In the mutual fund world where most investments are made, this means the industry is trying to own the ‘right’ mutual fund at the ‘right’ time.

Active investing, or picking the ‘best’ securities or funds, is in fact centered around the concept that advisors can beat the market by accurately predicting the future. This traditional approach wants you to ignore the fact that the aggregate market is a zero-sum game – and therefore ignore the mathematical certainty that any one individual’s gains must be matched by equal losses by other players.

This zero-sum game conclusion is even worse than it sounds. Factoring in the marketing, administrative, and other fees charged by most mutual funds (estimated to be more than $100 billion annually for just domestic equity mutual funds) investing actually becomes a negative-sum game. In other words, the very act of buying and selling of securities reduces the size of the pie that is destined to be divided equally among the various players. And the more frequent the buying and selling, the smaller the pie gets.

The traditional investing approach not only wants you to ignore the zero/negative-sum game fact, it also wants you to ignore the overwhelming academic research proving that few fund managers beat their long-term respective benchmarks. Here again, that fact is actually even worse than it sounds; statistically speaking, fewer managers beat their long-term benchmarks than would be expected to simply by chance. (In other words, they aren’t even good coin-flippers!)

So what's the alternative? The answer is an independent and passive investing approach, which is a blog topic for another day.

A Dirty Little Secret About Insurance

When it comes to buying goods, almost everyone would agree that you get more bang for your buck if you buy wholesale instead of retail. Basically you're buying direct; you're cutting out another layer from which a third-party would seek to profit from your purchase.

Simple concept, right? Then why do people still buy insurance from agents rather than buying direct?

Here's the deal: Insurance companies will sell you most types of coverage direct from them. But they prefer you not go about it that way. Why? Because they'd rather you buy through their retailing agent, who is more likely to bring them bunches of other business. Oh sure, it costs you more, but insurers don't want you to know that, because it's more profitable for them to keep their agents happy and bringing them more business.

That's the dirty little secret that you'll never hear. Instead the insurer will tell you that it's important to have a local agent to help you with the purchase, and with claims service, blah blah blah. It's bullshit. Insurance agents don't want to spend time giving you service, they're on to the next sale, that's how they make money. Your claims issues can and will be handled by somebody else in their office, or perhaps a nameless, faceless person at claims headquarters.

Unless the insurer uses a direct-to-consumer model (the most famous is probably Geico), no insurer is going to tell you they'll sell to you direct. But they will, and it will save you a lot of premium dollars to do so - money that might otherwise be paid to the agent for no good reason. And no worries if you have a claim, you'll just end up dealing with the same cliams people you would if you used an agent.

So caveat emptor! If you need to buy insurance for your auto or property, or maybe even medical insurance, do some research and go direct. Your local agent will survive - by selling insurance to the vast majority of people who don't know how this scam really works.

Health Care Reform and Sheep

To put it nicely, people are showing a lot of passion at these congressional 'town hall meetings' on health care reform. I think it's funny for two reasons:

First, when politicians schedule these things, they think they're going to draw a few mostly friendly folks to chat, just so they can say they met with their constituents, maybe even pickup a campaign contribution or two. You're going to see a lot fewer town hall meetings in the future.

Second, and this is more sad than funny, I'll bet if you asked any of these angry folks against health care reform, you'll find that almost none of them understand how their existing health plan works. Outside of the premiums they pay, they have no clue what a deductible is, or how coinsurance works, or ultimately how much they'll have to pay for a hospital stay. So how can they possibly know if change will be more expensive?

That's right, they don't know. It's just that someone else told them it was that way, either in person or on TV or the internet, so they believe it. (See my first post, lather and rinse.) We are a country of sheep, and there are currently more wolves than any shepherd can handle.