Quotes of the Times

“Therefore, I believe that I understand the importance of peace better than the politicians who speak but never had the experience that I had… but peace is a serious deed.”

Ariel Sharon

“Only the dead know the end of war.”

General Douglas McArthur
To Cadets at West Point 1953

“If it looks too good to be true… you know the chorus…”

Several months ago, a couple who was referred to us came into our office and after a lengthy conversation and explanation as to how we do business at Omega our visitors mentioned that they had recently purchased an investment product which they believed was a mutual fund. When I inquired as to the sponsor of those products, they gave me the name of an insurance company. Sure enough, this couple had just invested $500,000 into something called Equity Index Annuities. Ever hear of them? We’re sure you have, since so many of our clients are deluged with invitations to dinner seminars which feature “an investment that’s guaranteed which also can give you stock market returns”.

A couple of day’s later, reading the Banking and Finance edition of Fort Worth BusinessPress of December 2005, I discovered an article by Brie Horigan, a financial advisor with Raymond James and Associates here in Fort Worth. After Ms. Horigan and I had a lengthy conversation, I congratulated her for not only a well written article, but also her discovery of certain core truths that many of us have been unable to decipher.

In fact, I had in the past offered a check for $500 to anyone who had bought an Index Annuity if they could explain to me how the thing works!

Let me quote from Ms. Horigan’s article which should tell you a little about these “mystery investments”.

“Now Pay Attention!”

Ms. Horigan attempts to explain the intricate workings of EIAs where she mentions “participation rates” which would determine how much gain in the index will be credited to the annuity. She continues as she warns her readers that the insurance company can change these participation rates and margin fees either annually or at the start of the next contract term. And then she suggests that if you buy one, read your contract carefully to see if it allows the insurance company to change these features (reading the contract: now that’s a challenge!).

“Here’s the Smoke, Send in the Mirrors”

We might add that there are no real stock market returns since these Index Annuities do not include the reinvested dividends of the S&P 500 or the index used. They participate only in a small portion of the index’s gains. The 2005 return on the S&P 500 with dividends reinvested was 4.9%. The return with dividends not reinvested: 3%.

Index Annuities are designed to be a fixed annuity. EIAs are really illiquid fixed income substitutes. Some of these products pay to the agent as high as a 12% upfront commission. The question that Ms. Horigan asks is, “How can one receive stock market returns if the cost of the product is more than the historical average of the market?”

Well, we can go ahead and say it since we’ve been around a long time: If you’re thinking about buying an Indexed Annuity, don’t!

“Let’s send the U.N. on an arctic vacation.”

On the Op-Ed page in a recent addition of the Wall Street Journal, it was pointed out that an official from the U.N. had called Americans “stingy”.

Here are some numbers that showed up which repudiates that stupid statement. American citizens donated some $1.78 billion to the relief effort in Asia, dwarfing contributions of other developed nations for the benefit of the Tsunami victims.

We’ve contributed $78 million to assist the casualties of the Pakistan earthquake. According to an Indiana University authority, the total value of private donations in response to hurricanes Katrina and Rita has reached 3.12 billion dollars. The financial aid to the Gulf Coast is a little more than 1/100 th of what Americans donate to charities and churches every year. They give a quarter of a trillion dollars to the Red Cross, the Salvation Army, Catholic Charities, American Cancer Society and their local churches, and universities. It’s greater than the entire gross domestic product of most countries. And according to the Journal article, when you add this to the trillion dollars of taxes that Americans pay each year to support government income transfer in benefit programs, you find a generous nation. It’s clear when you begin to look at the stumbles that FEMA and other state and local government agencies made during the last hurricane season that Americans have become motivated to give for other reasons beside the pursuit of a tax deduction.

When it comes to private giving, American citizens give 3 to 4 times the amount of official U.S. foreign aid. And that’s a tribute to the generosity of all levels of income earners.

Interestingly enough, a large percentage of charitable gifts aren’t even itemized on tax forms. Over the past 50 years, Americans have averaged 2% of personal income as a giving habit.

It’s also interesting that American taxpayers are quite concerned that government aid has little positive effect. When one government gives to another, the actual productivity of the receiving government may be next to nothing. Think New Orleans.

“Kudos to our friends, Ed, Gloria, Todd, and Chuck at Happy Hill”.

Many of you have met and know Mr. Ed Shipman, who with his wife Gloria founded Happy Hill Farm. Recently, Ed came up with an interesting editorial for the Happy Hill Farm Friends and Family publication. Although I haven’t asked Ed’s permission, I’d like to pass the words of a wise man to you in this publication. His wisdom applies to fathers, mothers, and grandparents as well.

Ed was asked recently whether it was more difficult to raise children in 2006 than it was even 30 years ago. The answer that Ed gave was “Yes”!

To quote Ed:
“The emotional indulgence of parents today is depriving children the opportunity to learn through adversity. Most adolescents from affluent families have all the useful accessories – cell phones, credit cards, computers, and cars – but they have few of the responsibilities that build character. Under the intense pressure to be “perfect” and to achieve, boys and girls have little time to develop a quiet inner life.

“A culture that worships instant success makes it difficult for them to engage in the slow, careful building of the skills that enhance self esteem, spiritual sensitivity, and self sufficiency.

“Indulged children become susceptible to self-absorption, depression, anxiety, and lack of self control. Purchasing “things” for children is no replacement for parental involvement. There are parents who are afraid to set limits, who want to be their children’s friends rather than their authority figures, and who feel guilty about their social schedule and work possessed lives. God help these children and their parents. If this is where you find yourself, stop and begin to build meaningful relationships with your children that will lead to emotional maturity and a sense of self worth… In other words, moral and spiritual character.”

And, Ed, we say to you, Amen!

“Risk? Pass it on, please”

There’s an old adage that says “Don’t beat a Dead Horse”, There’s another one that says, “If you’re riding a Dead Horse, for goodness sakes, dismount”.

I hate to keep bringing up Dead Horse issues, but over the past several years, we’ve written about the trend of the financial service industry, insurance, brokerage, and banking, etc. to place more and more risk on the consumer.

We’ve tracked the movement of whole life cash value insurance, to universal life. Now, through variable life insurance, the underlying investments are equity mutual funds. Defined: If the market tanks so does your life insurance.

Then, as interest rates began to drop in the 80’s and 90’s and the stock market took off, individuals began to become their own investment advisors, buying no load funds directly from the fund. “Who needs a broker, all funds are alike! So why pay a fee?”

And now TV ads are proliferating urging more do-it-yourself investing, which is more of a myth than reality. As time has passed, you can plainly see that the “decision risk” is being transferred from the brokerage firm/advisor and the insurance company/agent to the investor/consumer. Encouraged by the media, the public now turns to television and print rather than rely on in-depth financial research performed by an educated professional.

OUR OPINION

Could we be entering into an era of financial entrepreneurship? In 1985, 89% of the Fortune 100 companies offered traditional pension or Defined Benefit plans but that number has fallen to 51% by 2004, according to a large international human resource consulting firm.

The bull market returns of the 90’s in pension fund portfolios of Defined Benefit plans were less expensive to run than the 401(k). (Market up, less contributions needed. Market down, higher cost.) Thus the Defined Benefit concept must assume there’ll always be a “Plan B” needed where the company must contribute more money to be sure there will be funding for the promises made. This money comes right off the corporation’s bottom line profit.

“Hang on. It’s Just Started”.

We think that this trend will carry over into health insurance benefits, and slowly but surely, our Social Security system will have to be changed. Congress after Congress has put its head in the sand when these changes are brought up. No longer the “third rail” of politics, Social Security will probably be the last visage of guaranteed pension plans that will be known in this country. Sooner or later President Bush’s idea of individual accounts to offset some of the obligations of Social Security will have to be considered. Politics or no; Senior Citizens or no Seniors. And as always, government is the last to recognize a trend.

“Now. Some Good News.”

With the increasing proof that lowering tax rates (15% dividends, 15% capital gains) add more revenue to the government than increasing the tax rates, we think that we will see more and more legislation that will encourage individuals to provide a higher and higher percentage of their own retirement income. With the movement of jobs overseas and across the country, no longer will a worker labor for a single company for 40 years, strap on his gold watch and go fishing for his lunch. The mobility of the American worker is evident every day and with that mobility, the era of the government and the corporation taking care of the worker from cradle to grave has come to an end. So who is there to help the person who is not a “do-it-yourselfer”? Not the journalists; and not the TV pitch guys or mail order “can’t miss” deals. It’s the professional investment advisors.

So, be ready Folks. This new paradigm will yield a higher standard of living, lower costs, lower taxes, and we believe, a booming economy based on productivity rather than leveraged assets. Unfortunately, the income spread between the economic classes is growing larger and education is the only answer. We must use every tool available to raise the level of education which includes vouchers, school choices, and improved classroom teachers. No longer can we afford to award a high school diploma to a young person who can’t balance a checkbook.

That’s our take, yours is welcome.

A REMINDER

You may be eligible for a regular ira; voluntary ira, or roth ira. There are certain rules to be followed. Call our office for information.

817-335-5739 / 800-999-5739

The Omega Financial Group
309 W. 7 th Street, Suite 900
Fort Worth , TX 76102

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