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Millennium Prediction: Financial Planning Mistakes Will Blossom
here are many changes in store for the financial services industry in the New Millennium. Some of these changes will be good, and some of them bad, for investors.
The Gramm-Leach Biley Act of 1999 officially terminated the Glass Steagall Act (which had separated commercial banking from securities underwriting for more than 65 years). As the New Millennium unfolds, we will continue to see a blurring of roles in the once familiar roles of securities firms, banks and insurance companies. The "one stop shop" is the marketing marching order, and consolidation is the perceived road to riches for the providers.
In addition, we will see commissions charged for securities transactions continue to decrease, if not decrease all the way to zero. But brokerage firms will not go out of business. In fact, for year 2000, analysts are predicting another good year for the brokerage industry as a whole. According to the industry publication, On Wall Street, the consensus of earnings estimates is for aggregate earnings to grow 18% over 1999. Underlying fundamentals are favorable, even though there are concerns about the costs of adding on-line trading and about the potential for weakness in the fixed income markets. In fact, many firms are hiring more stockbrokers - such as Merrill Lynch, which is on track to meet its goal of 3% to 4% growth.
What is fueling the fire? First, brokerage firms are charging fees to buy and sell securities, based upon the level of assets in an investor's account, either in conjunction with or in lieu of discounted commissions. But the real fuel for the fire is that brokerage firms have converted "stockbrokers" to "financial consultants". As such, these individuals now seek to advise investors on all aspects of financial planning, not just investing, for example:
Insurance needs (and sell insurance for a commission);
Estate planning needs (and sell or give an estate plan with life insurance);
Mortgage needs (and sell a mortgage for a commission);
Business needs (and make a commercial loan with interest);
Retirement planning (and earn fees as the plan provider and product sponsor);
Banking, credit and bill paying needs (and earn fees as banker and interest as credit card company) and
Anything else financially related for which a fee, commission or interest can be charged.
Viewed in this light and over time, one can see that reduced commissions on securities trades will be a non-event. However, in this rush to be all things to everyone, mistakes will be made.
Investors must be alert to guard themselves. First and foremost, investors need to be alert to the credentials of those individuals formerly known as stockbrokers. Unfortunately, a host of easy to obtain credentialing has appeared to fill this void. Nonetheless, investors should understand that the most respected credential is the CFP designation, or Certified Financial Planner. Individuals earning the CFP have studied and passed a difficult, comprehensive examination covering the areas of investments, insurance, retirement planning, estate planning and taxation. Continuing education and a strong ethics commitment also are required.
Second, investors especially should be alert in three areas where we foresee a great deal of financial planning malpractice. These areas are:
IRA Mistakes;
Tax Planning (Tax Avoidance) Mistakes; and
Estate Planning Mistakes.
In prior articles, we have discussed the traps for the unwary in owning IRAs and/or in inheriting IRAs, and the significant financial consequences that can result.
Tax planning (tax avoidance) historically has been a problem area - whether owing to simple incompetence or to outright scams - and it promises to be a problem area in the New Millennium. At the close of 1999, we saw what was the tip of an iceberg with respect to Charitable Split Dollar Life Insurance. After insurance companies wrote billions of dollars of policies to thousands of wealthy taxpayers seeking to avoid taxes (according to the Wall Street Journal), regulators and federal lawmakers outlawed the tax deductions. The IRS has promised to "go to the mat" to challenge these insurance policies, calling them "tax shelters on steroids". Investors must beware of tax shelters.
Finally, estate planning. For years brokerage firms have lost accounts to bank trust companies when the wealth of one generation passes to another. Anticipating the much-hyped, multi-trillion dollar wealth transfer due to occur over the next 20 years, brokerage firms are bulking up their own, in-house, estate planning departments. According to Crain's Investment News, brokerage firms Merrill Lynch, Salomon Smith Barney, and Prudential Securities are training in house personnel as estate planning specialists. Merrill Lynch even has its own trust company as well as its own captive insurance group (to write life insurance policies to fund the trusts). Only one firm contacted, Paine Webber, plans to maintain the traditional referral network of outside, independent estate planning lawyers. Investors must be cautious as to the qualifications of a brokerage firm that prepares sophisticated legal documents such as estate plans, and its (self) interest is in promoting them.
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Sponsored by James J. Eccleston. This Web site contains material of general interest. It is neither intended to, nor constitutes, either legal advice or investment advice.
Always consult an attorney and/or investment adviser when building and protecting your wealth.
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