Quote of the month:
“Hedge Funds don’t know what they buy, Index Funds don’t care what they buy.”

"It ain't Heavy, it's Just My Future"

As we have observed on these pages, in past issues, the trend in the financial services industry (insurance, brokerage, banking, etc.) is to place more and more risk on the consumer.  For example, at one time there was only “whole life” insurance with cash values providing the guarantee that the life insurance would last for the insured’s “whole life”.  No increase in premium.  No reduction in death benefit. 

Then along came Universal Life where the death benefit and future cash values were based on varying interest rates.  This concept came about during the 70’s when interest rates were high and the insurance company gave the consumer the opportunity to pay a variable premium and get (temporarily) higher interest, thus letting the insured pay less for the universal life policy during high interest rate times.

"Didn’t We Love it!"

Then came an era of declining interest rates in the 80’s and 90’s.  It meant the consumer had to pony up more premium to keep the policy in force (the lower the interest rate, the higher the varying premium became.)  So now that lower interest rates also initiated the largest Bull Market of the 20th Century, what was to come next?

Well, it was obvious: “Let’s put stock fund accounts into our Universal Life Policies rather than low interest rate accounts”.  Variable Life Insurance was introduced.  So when the market tanks, your life insurance also is in jeopardy!

So you see the bulk of the protection game is now being played by the consumer.  That’s why many are relying on 20 and 25 year term life insurance rather than cash value type.  At least, in most cases, the cost is locked in for a long period of time.  However, with increased longevity, term insurance becomes quite expensive.  If coverage is needed in those later years, different plans must be made.

"One-Eight-Hundred - No Help"

Ditto stock and mutual fund purchases.  At one time these all came through the brokerage firm.  Then came modern communication facilities (toll free telephone, internet, etc.) and suddenly people could go direct to the funds (Janus, Vanguard, et al) and to the Discount Brokers (E-Trade, Schwab).  As you can plainly see the “decision risk” was transferred from the brokerage firm to the investor.

Then came the explosion of the tech bubble and many saw their life insurance policies go down in value and up in cost, not to mention the stock and mutual fund accounts of these “do-it-yourself” investors.  And Defined Benefit Pension Plans? Deep sixed.  Corporations hit financial bumps in the road and most of these plans are either under funded or broke.  The answer?  401(k) plans where the employee gets to act as his own investment advisor and make his own contribution.  Talk about paradigm shifts!

"Gotta' Have Help!"

Now the demand for investment advisors has grown as many people have come to realize that they are better off letting professionals do the investing for them.  And the growth has not just come from the large wire houses, but has blossomed through so called, “Financial Planners” and Independent Broker/Dealers such as Omega Securities.

"But Mr. and Mrs. Boomer, You Better get with it and Start Saving!"

There is no doubt about it, our people must prepare for retirement.  Ten years from now, more than $190,000 is the amount that will be needed to provide just medical care, not counting retirement benefits.  Today we know that normal, regular IRA contributions are down.  And Americans saved just 1% of their disposable income last year (U.S. Dept. Commerce).  We’ve come to the conclusion that saving must be encouraged by our government.  Tax breaks, and cooperation with the private sector is a must. 

"Pass it Please. And Sign it, Mr. President"

There is a bill before the House of Representatives today which would not tax capital gain distributions on a mutual fund until that fund is liquidated.  Basically, this is a deferral of capital gains taxes which means better growth and more encouragement for people to save.  So, rather than having to sell mutual fund shares to pay taxes, shareholders can take advantage of the uniqueness of mutual fund investing which has to do with the long term thinking and allow the investor the same long term view that, hopefully, money managers have.  And a recent study shows that deferring the capital gains distributions will actually increase the tax revenues to the government down the line.

"If Congress won’t do it, maybe the Free Market will."

While we at Omega have only used variable annuity contracts in areas where they fit; perhaps, one answer would be the lowering of the expense factors of these vehicles by doing away with any backend penalties if an individual needs to liquidate early.  In order to reduce these expenses, the high first year acquisition costs (commissions) would need to be cut.  Lowering the expenses would be another reason, (along with tax deferred growth) for the legitimate securities industry to be attracted to this insurance product.

Incidentally, there are some companies that have these benefits in their annuities today. 

OUR OPINION - Immigration: revisited

It seems that the Washington Post, a fairly liberal newspaper, has picked up on a great concept concerning the future lack of workers providing goods and services to the parade of Baby Boomers coming into our midst by 2010.  A Post editorial in May of 2005 applauds immigration legislation introduced by Sens. John McCain (R-ARIZ) and Edward M. Kennedy (D-Mass.)  While it doesn’t directly address the future workers problem, this legislation is not the first and probably won’t be the last attempt to bring about a realistic comprehensive national immigration policy, which would provide workers not only to pay Social Security taxes and replace the Baby Boomers who are retiring, but also provide able workers to produce the goods needed by future generations.  And among other things, the bill would allow illegal immigrants already here to regularize their status, but not easily.  They would have to apply for citizenship and after paying a hefty fine they’d have to stay employed for a prescribed period and pay back taxes. 

In our opinion, this is probably something that would not pass since it would require recognition of wrong doing.  According to the Post editorial, there are 10 million illegals in our country today.  That situation must be rectified. 

This bill resembles the policy that President Bush outlined more than a year ago, which should attract his support.  Also, politicians in Border States are demanding a change.  According to the editorial, smuggling and trafficking have contributed to lawlessness and a real sense of crisis along the border.

The Post editorial continues by saying, “There are legitimate concerns about the long term impact of a law such as this on American workers.  However, experience has shown that immigration creates jobs and growth over time, and countries with low immigration such as Japan aren’t exactly an advertisement for their policies.”

Legal workers are much easier to assimilate than illegals and the proposed bill requires would-be citizens to know English and civics.  The Post ends by saying, “This is a case where common sense and hard nose security concerns point in the same direction, and this bill could lead the way.”

One of our partners pointed out that finally the Washington Post has caught up with our Opinions and Facts and is applauding sensible change in immigration policies! 

Next thing you know the New York Times will agree with the Wall Street Journal!  Social Security and a National Health Policy is important, but on that third front burner sits mmigration Reform.

That’s our take… yours is welcome.