Dodd-Frank Wall Street Reform May Significantly Impact Insurers
On July 21, 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which effects comprehensive changes to the regulation of financial services in the United States and subjects the insurance industry to substantial additional federal regulation. Dodd-Frank directs existing and newly-created government agencies and bodies to promulgate regulations implementing the law, a process anticipated to occur over the next few years following enactment of the legislation. While no one can cannot predict with any certainty the requirements of the regulations ultimately adopted, or how Dodd-Frank and such regulations will affect the financial markets generally, key aspects of Dodd-Frank’s potential impact on the insurance industry include:
Insurers will become subject, as savings and loan holding companies, to regulation by the Board of Governors of the Federal Reserve System (“FRB”), which will have authority, among other powers, to impose capital requirements on insurers and their subsidiaries. The FRB has authority to set capital regulations and exercise general supervisory authority the insurance industry.
Insurers designated by the newly established Financial Stability Oversight Council (“Council”) as “systemically significant companies,” will become subject to unspecified stricter prudential standards, including stricter requirements and limitations relating to risk-based capital, leverage, liquidity and credit exposure, as well as overall risk management requirements, management interlock prohibitions and a requirement to maintain a plan for rapid and orderly dissolution in the event of severe financial distress. Failure to meet defined measures of financial condition could result in substantial restrictions on their businesses.
Insurers will become subject, as savings and loan holding companies (and particularly if designated as a “systemically significant company”) to stress tests to be promulgated by the FRB which could cause them to alter their business practices or affect the perceptions of regulators, rating agencies, customers, counterparties or investors of their financial strength.
As a savings and loan holding company, an insurer (and its subsidiaries) will become subject to the “Volcker Rule” provisions of Dodd-Frank prohibiting, subject to the rule’s exceptions, “proprietary trading” and the sponsorship of, and investment in, funds (referred to in Dodd-Frank as hedge funds or private equity funds) that rely on certain exemptions from the Investment Company Act of 1940, as amended (collectively, “covered funds”). It is possible that regulations could require insurers and their subsidiaries to dispose of covered fund investments, significantly alter their business practices in these operations and/or diminish the attractiveness of their covered fund products to clients. In addition, actions taken by other financial entities in response to the Volcker Rule could potentially negatively affect the market for, returns from or liquidity of their investments in covered funds affiliated with such other financial entities.
Dodd-Frank creates a new framework for regulation of the over-the-counter (“OTC”) derivatives markets which could impact various activities of insurers and insurance affiliates which use derivatives for various purposes (including hedging interest rate, foreign currency and equity market exposures). Final regulations adopted could substantially increase the cost of hedging and related operations, affect the profitability of various products or their attractiveness to the insurers’ clients, or cause them to alter their hedging strategies or implementation thereof.
Dodd-Frank establishes a Federal Insurance Office within the Department of the Treasury which will perform various functions with respect to insurance and will conduct a study on how to modernize and improve the system of insurance regulation in the United States, including by increased national uniformity through either a federal charter or effective action by the states.
Rachael Ray Talks About Estate Planning
I don’t enjoy Rachael Ray’s talk show as much as I like to watch her do-bop around the kitchen (and I bet you do too!), but I came across an interesting little segment on a website of a couple of lawyers (married) selling a book they wrote called “Trial and Heirs: Famous Fortune Fights.” The segment starts off discussing nothing new about Michael Jackson and Anna Nicole Smith’s estate wrangling, but the guest authors relate those estate battles to practical reasons why people need to get their estate planning done. Surprisingly good advice in a very short amount of time. It’s a good video clip to have your clients watch, because a) they get to see Rachael Ray; b) they get to hear celebrity gossip; and c) they actually hear some pretty convincing reasons for getting their affairs in order, which would obviously include estate planning and insurance. So check out the video, and forward your clients to Trial and Heirs so they too can hear more advice about why they need to take action and soon as possible.
Wall Street Journal Article Regarding Online Wills and Ethical Dilemma
My friend in the insurance business sent me last week an article from the Wall Street Journal which generally came out favorably towards online Will preparation systems. Usually I would have gone on a rant as to the ignorance of people who believe they can get an estate plan done over the internet for $15, but at that particular moment I instead found myself in an ethical dilemma.
The reason is that by and large will and trust preparation is simply not a good profit center in my practice for couples in the $100,000 – $300,000 income bracket, and with assets less than than a few million dollars (including the house and 401(k)’s). This is because those folks, generally couples in their 30′s to 50′s, simply are not going to (by and large) pay $3,500 or more (depending on complexity) to have their Wills, Trusts, and Advanced Directives drafted. But I know from experience that such a couple is going to come into my office for a first interview and talk to me for an hour or more about their assets and issues and ask a ton of questions; and then I’ll draft their documents, and the couple will want to come in again and review and ask more questions and make changes, and then I’ll have to draft the documents over again; perhaps another telephone conversation, and another draft of the corrected documents, and then the execution ceremony, where things perhaps need to get changed again. In short, a couple in the middle income market really does need sound legal advice with respect to setting up their affairs, but I cannot spend the time to do this and make a profit for myself at the price point these clients are willing to pay. I also have rent to pay and a family to support. I just can’t do it. If I rush the job and give out documents which are poorly worded and filled with typographical errors (and have the corrections made in pen and ink before execution, which looks ugly), and give the clients short and abrupt answers to their questions and give the impression that I want them to leave as quickly as possible (which I am), they just will not be satisfied clients. I’ve done this long enough to know this for sure. For better or worse, people often cannot distinguish between “price” and “value.” Sure, many couples do understand ‘you get what you pay for,’ and understand the importance for their families of getting their affairs in order properly, and genuinely understand and are agreeable when I explain my pricing structure. I enjoy working with these clients, because not only am I certain to make a profit for myself, but more importantly I can now focus on them and their needs and spend the time to do the work properly and professionally. This is how I want to run my profession, and these couples will absolutely be satisfied customers and come back to me over the years time and time again. But a lot of people want a fixed price based on what they believe a few dozen pages of typewritten paper should cost. I understand that; I want to know up front too how much a painter is going to charge to paint my apartment. If the guy told me “it depends on how long it takes,” no way in the world would I agree to that. So I understand why couples are reluctant to engage an attorney before knowing upfront how much it’s going to cost. Fair enough.
But from my standpoint, since I’m probably not going to make a profit anyway, I’m not really so put-off that people want to do their estate planning using LegalZoom or Suze Orman or LegacyWriter or Build A Will. Those clients are just not a good fit for my practice, and vice-versa. I provide legal advice and counsel, not pre-printed forms which are ‘fill in the blanks.’ And the harsh and honest truth is that when it is discovered, almost always when it’s too late, that either the documents are defective (because New York is quite strict on adhering to the formalities of Will executions), or the documents don’t meet the clients’ needs (because there was no attorney to have an in-depth conversation to flush out those needs in the first place), or significant tax and probate issues were created, or usually ‘all of the above’ . . . the honest truth is that I profit much, much more by straightening out someone’s affairs after death or incapacity. And at that point, there’s no negotiation involved: the family pays my full hourly rate with a minimum billing increment of two-tenths of an hour. Legal fees and taxes and probate costs and accounting costs can skyrocket, and the family suffers because mom and dad chose the wrong place to be penny wise and pound foolish, or were led astray by television personalities who where either ignorant themselves, or worse, intentionally mislead people to line their own pockets. It’s a really sad state of affairs.
But the bottom line is that I am always honest with people, in person and here on my blog, and I am honest with your referrals as well when you guys send clients over to me. You get what you pay for; that’s a truism in life that most people understand. Yes every now and then you can find a ‘steal’ on a 42″ Sony AQUOS, or the like, but generally if you pay $7 for a haircut on 14th Street, you come out with a $7 haircut. That’s just the way it is. So my ethical dilemma involves telling people the truth as to being mislead and wrong as to being able to get their wills done over the internet for a few dollars, or not saying anything and waiting to scoop up the profits by cleaning up the mess afterwards. But, I don’t live my life that way, so I’ll tell you please, help me help your clients understand that estate planning is just not the area where they want to bargain shop.
Financial Planning Association of NY Invites Allied Professionals to Network
FOLLOWUP: THE UPSTAIRS BAR WAS PACKED AND EVERYONE HAD A BLAST!! UNCLEAR HOW MAY FPA MEMBERS VERSUS ALLIED PROFESSIONALS SHOWED UP; NEVERTHELESS THANK YOU ALL FOR COMING!!
The New York chapter of the Financial Planning Association of New York (FPANY) is hosting an event on November 10, 2009 at the Public House, 140 East 41st Street (just East off of Lexington Avenue) from 6:00 to 8:00 PM where professionals in various service industries can network with each other and members of the financial planning community. The event is being organized by the Allied Professionals Committee of FPANY (of which I am a member), and the goal is to bring together financial planners and accountants and lawyers and investment advisors and bankers and in generally really any other profession where the client may be better served by coordinating the actions of the client’s various advisors, versus having each advisor working independently and without seeing whether if what they’re recommending is in line with all of the client’s other goals and objectives. The client is always best served when all of their advisors are on the same page, obviously.
In any event, see if you can come to this event on 11/10/09, which is next Tuesday. The Public House is a pretty cool place, and the event is free if you’re not going to drink. Open bar is a good deal too. Check it out.
Here's the Event's Flyer
Prudential HD Lifetime 7 Plus Variable Annuity
Thanks to Prudential for inviting me to a presentation (and dinner!) by Prudential Regional Vice-President Gary Woodward on Prudential’s HD (Highest Daily) Lifetime 7 Plus Variable Annuity product. As you well know, the primary purpose of a variable annuity is as a mechanism to save money during a person’s working years which can then be used to draw upon as an income stream during retirement. It’s not available as a lump sum, obviously. The “highest daily 7″ qualifier to this particular variable annuity refers to the product’s feature wherein a fixed 7% interest rate is applied to the highest value that an account reaches before the investor actually starts withdrawing money. The effect of this feature is to protect the investor’s downside risk. Here’s a snip from the product brochure which may help you understand what’s going on:
How It Works
You can read more about this particular product here:
HD Lifetime 7.
The upshot of using this variable annuity (either inside an IRA wrapper, or as a supplement to a current IRA or 401(k)) is that the investor is protected from severe market downturns and volatility. For the most part. Like all annuities, there are various withdrawal options available, and one of the key features of this product is that annuitization is not required in order to begin taking an income stream based on the 7% projected value in the account.
Obviously, when something is ‘too good to be true,’ it usually is, and like all annuities, there are lots of “gotcha’s” in this product which detract from the beautiful graphics in the marketing materials. The folks at Prudential are not stupid; it’s not a non-profit organization, and they’re not in business to give away guarantees for free. All of the fees and charges and “gotcha’s” are buried in the prospectus, which I think for this product exceeds 500 pages, so gets read by exactly no one. Which is the primary reason the advisor-client relationship of trust and confidence is so much more important than the actual nuts and bolts of the contracts. All of the large insurers have great annuity products which have similar features to Pru’s HD Lifetime 7 variable annuity. And all are ‘no-brainers’, in my opinion, as far as being an investment vehicle which is suitable for the overwhelming majority of Americans, whose 401(k)’s are now 101(k)’s. Is Pru’s product better than MetLife’s or John Hancock’s or Mass Mutual’s or AXA/Equitable’s variable annuity? I don’t know, because that’s an investor-specific question. They all have different features and costs; which one is right for your client is why you really, really need to do your homework and ask hard questions of your annuity wholesalers.
Nevertheless, as an advisor you need to checkout Prudential’s HD Lifetime 7 variable annuity product and consider it carefully as you’re advising your clients on their retirement planning.
Also, you want to talk to your client about the various beneficiary selections available when they purchase the contract. In other words, annuities are unbeatable investments while people are alive and during retirement. At death, they can be taxed pretty heavily. The tax treatment of annuities at death is a pretty complex topic, partially because of the available of the product inside and outside of an IRA, and because of the various living benefit features; whether the contract owner has or has not started to take withdrawals at death; whether the contract is the ‘spousal’ variable annuity product; whether the named beneficiary has predeceased the owner, and so now the annuity becomes part of the decedent’s probate estate. What type of post-mortem planning is available when the contract owner dies? Are there different options available depending on whether the decedent had a will, or died intestate? Are there Private Letter Rulings which may be applicable to answer these questions? The answer is ‘yes.’ All reasons why as a financial planner you should call in an experienced estate planning lawyer to help develop the client’s financial and estate plan.
Thanks again to Prudential and Regional VP Gary Woodward.
Financial Wellness Coaching Takes Hold
A couple of months ago my friend Lora Sasiela was explaining some aspects of modern psychology and psychiatry and Sigmund Freud’s theories; much of which went over my head, but fascinating nonetheless. Lora is a licensed psychotherapist, and much of her work in the last ten years has been helping people understand the psychological causes of overeating and related health and well-being issues. Recently, Lora and others have discovered that many of the psychological issues behind overeating are the same or similar to the reasons why people spend beyond their means, and are otherwise unable to achieve financial health and well-being. Over eating and over spending are different reactions to the same psychological roadblocks.
Lora and others practicing in this field have demonstrated that the same counseling techniques which help people overcome eating issues can be transferred to help people with financial management issues. Lora’s work has nothing to do with life insurance or annuities or mutual funds, but financial planners know that an awareness of budgeting and the emotional aspects of saving and investing are more important than effective yields on investments. Here’s Lora’s press release from her Financial Wellness Coaching website. I think it’s a great and non-competitive seminar to refer your clients to, and I’ll be there as an added bonus!
FOR IMMEDIATE RELEASE
PRLog (Press Release) – Apr 09, 2009 – WHAT: An innovative financial wellness seminar for those looking to learn powerful tools to eliminate current money anxieties in addition to developing effective strategies to manage one’s own “personal economy” during these turbulent economic times.WHY: 80% of Americans are reported to be stressed out about money right now. The key techniques given by Lora Sasiela can break the cycle and create a powerful financial transformation.
WHERE: 1133 Broadway, at 26th Street
New York City, New York
Pre-Registration Required: http://www.financialwellnesscoaching.com/WHEN: Saturday, April 25th
10am-12 noonHOW: In this comprehensive two hour seminar attendees receive the following: Easy-to-use techniques for making peace with money, freedom from the isolation surrounding money struggles, 5 daily disciplines to prevent money anxiety, an understanding of the importance of money being “just money,” simply a tool, identification of unique limiting money beliefs and how to get rid of them, how to cultivate an attitude of gratitude – which will attract more abundance into your life, a take-home booklet of beneficial tools to continue developing ease in your relationship with money.
WHO: Lora Sasiela, founder of Financial Wellness Coaching, is a psychotherapist and money coach, guiding clients in the powerful transformation of limiting money beliefs that prevent them from enjoying full and rich lives. She has trained at the Financial Recovery Institute and the Women’s Earning Institute.
Financial Wellness Coaching
80 East 11th Street
New York, NY 10003
917.673.3867
Website and Event Registration: http://www.financialwellnesscoaching.com/
Financial Advisor and Quarterback Sacked for Loss of Yards
Most of my estate planning engagements come from insurance advisors and CFPs, because among estate planning lawyers I recognize the benefits of life insurance and annuities where many attorneys just can’t get passed the ‘exhorbitant’ commissions being earned by the sales rep despite the value of the product to the client. For that reason, I have a pretty good sense of how all of the client’s advisors work together to put the client’s plan in place correctly and effectively and efficiently. That’s how I run my business and profession. The financial advisor is almost always the “quarterback” of the client’s financial plan; providing the broad outlines of how a client’s goals might be achieved. Unfortunately, I lost a big estate planning engagement recently which was in the works for months, and a potentially long term relationship with an advisor, because (in my opinion, obviously) the advisor didn’t actually understand the role of a quarterback.
The financial advisor (somewhat new to the business, but very successful in a short period of time) was aggressive during the client meetings regarding her role: “I am the quarterback,” came out of her month every ten minutes. Unfortunately, to me at least, she didn’t actually understand an important aspect of that position. Which is (at least it used to be before headsets), to setup the offensive formation and assign the routes for the wide receivers and backs, and watch the defense setup and call an audible where necessary. And then the ball is snapped and the quarterback’s plan is set in motion. The point now though is once the quarterback hands the ball off to the running back, the back gets to carry the ball according to how he does his job; cut left or right and juke and sidestep; whatever. Once the quarterback hands the ball off, it’s no longer his job to follow the back down the field and direct where he goes to gain yardage. The QB steps back and watches the play unfold, unless he’s blocking, of course.
Similarly, once I am handed the role of advising and drafting on the proper construction of a Grantor Retained Annuity Trust, for example, the financial advisor no longer has a role in watching over my shoulder to opine on the clauses I decide to use and how I word various provisions of the document. This advisor simply couldn’t understand that trust construction can be accomplished in a variety of ways, and that I was not going to let her nitpick and comment and have me explain the use and available alternatives of every sentence in my documents. Despite the fact that it was her client and her relationship, the financial advisor just couldn’t get over her need to control those aspects of the game plan which properly fell under my purview as the attorney on the team. Unfortunate; one meeting ended acrimoniously and I doubt the clients are going forward with their estate plan, or with the purchase of the insurance and annuities which were on the table. Most unfortunately, I had about $7,000.00 of billable time on this case, and I’m certain that’s money lost, along with a potentially good client relationship, and a relationship with the financial advisor. Fortunately, I was able to discuss what happened with the advisor’s managing partner, whom I’ve known for a long time, and who was aware of the advisor’s controlling nature. So at least referrals will still be coming from that agency, if not from that particular advisor. Oh well; we’ve all got to live and learn.
New York Life’s Mark Pfaff Promoted to Executive Vice President
One of the class acts in the New York insurance industry is New York Life’s Mark Pfaff, and the National Underwriter is reporting that Mark was just promoted to Executive Vice President of the US Life and Agency division of the Company. I met Mark for only about twenty minutes or so many years ago when I was interviewing around, and I’m certain he doesn’t remember me. Nevertheless, I recall being surprised at the way Mark brought to the table the qualities of sincerity, candor, warmness, and a no-nonsense business style, but without being brusque. Too many agency managers can only lead their agencies through scare tactics and intimidation; Mark leads his sales force via the true qualities of leadership: personal confidence in himself, knowledge of his company, their products, and competitors’ companies and products; treating his people as individuals and recognizing and distinguishing hard working agents who need support and guidance, from those who are blowing smoke or sell unethically.
Here’s a clip from a 2005 New York Life press release announcing Mark’s promotion to Senior Vice President:
NEW YORK, N.Y., December 14, 2005 — New York Life Insurance Company announced today that Mark W. Pfaff has been named senior vice president in charge of the Agency Department. Mr. Pfaff, who is currently senior vice president of the company’s agency field force in the Northeast Zone, will lead the Agency Department in the Manhattan-based Home Office, replacing Paul B. Morris who will be retiring in January.
Mr. Pfaff joined New York Life in 1985 as an agent. In 1988 he became a sales manager and in 1994 was promoted to managing partner for the Vermont General Office. In 1997 Mr. Pfaff transferred as managing partner to the Park Avenue General Office; later that year he was promoted to agency vice president of Northeastern Agencies. In 1999, he became the zone vice president of Northeastern Agencies, and in the fall was asked to take over the Manhattan General Office as managing partner. In April 2004, he was named senior vice president of Northeastern Agencies overseeing the recruitment, training and development of managing partners and partners, and made responsible for the sales production and overall supervision of the zone office and general offices within the Northeastern Zone. He won the prestigious President’s Trophy and scored a perfect 4.0 rating on the Company’s GPA system.
Mr. Pfaff holds a bachelor’s degree from Manhattan College and an associate’s degree from Westchester Community College. A native of Pearl River, N.Y., Mr. Pfaff and his wife, Claudia, reside in Charlotte, Vermont with their three children.
So here’s a guy who started as a sales rep, like most of the readers of this blog, and 24 years later is in the inner circle of one of America’s most prominent and well respected corporations. Congratulations Mark!
IRS Offers Criminal Amnesty to Offshore Account Holders
The IRS announced the other day that they were willing to forgo criminal prosecution of US taxpayers who held (and failed to report and pay tax on) accounts held offshore.
As reported by Thomson Reuters/IRS,
IRS Commissioner Doug Shulman has announced what is in effect a settlement offer for those that voluntarily and timely disclose unreported offshore income. Those meeting the terms of the offer will have to pay back-taxes and interest for six years, and pay either an accuracy or delinquency penalty on all six years. They will also pay a penalty of 20% of the amount in the foreign bank accounts in the year with the highest aggregate account or asset value. In other words, 20% of the highest asset value of an account anytime in the past six years. However, those who come forward on a timely basis will not face criminal prosecution.
Penalties and interest will be painful, no question about it. However it seems like a prudent move insofar as the Service has (or is in the process of) receiving data from foreign banks and financial institutions on US citizens which had been protected under foreign government secrecy laws.
Medicare Hospice Benefits
Here’s a pamphlet (at the bottom) from the Centers for Medicare & Medicaid Services which explains the benefits of the Medicaid program for people who are terminally ill. The program is is known as Medicare Hospice Benefits, and unfortunately is one of the most underutilized of all the Medicare programs, especially in New York. If you’re not familiar with the term, here’s how several authors writing for The New York Academy of Medicine define Hospice:
Hospice is a program of care for persons in the last phases of an incurable disease and their families or caregivers. Eligibility for this benefit is predicated on a physician’s estimate of prognosis of 6 months or less and the presence of one or more progressive illnesses. The goal of hospice is to manage the physical, psychological, spiritual, social, and practical issues that present as a result of the dying process and continue for the family in the yearlong bereavement period that follows death. Hospice is provided in both home and facility-based settings by an interdisciplinary team of professionals—physicians, nurses, medical social workers, therapists, counselors, and volunteers—who coordinate an individualized plan of care for each patient and family.