src="http://pagead2.googlesyndication.com/pagead/show_ads.js">
Dolor sit amet, consetetur sadipscing elitr, seddiam nonumy eirmod tempor. invidunt ut labore et dolore magna aliquyam erat, sed diam voluptua. Lorem ipsum dolor sit amet, consetetur sadip- scing elitr, sed diam nonumy eirmod tempor invidunt ut labore et dolore magna aliquyam erat, sed diam voluptua. Lorem ipsum dolor sit amet, consetetur sadipscing elitr, sed diam nonumy eirmod tempor invidunt ut labore et dolore magna aliquyam erat, sed diam voluptua. Lorem ipsum dolor sit amet, consetetur.
Financial science drives industry product development, but not necessarily toward the best interests of individuals
Summary: Personal financial decisions seem to have become very complicated. To add to the confusion, the financial services industry develops an unending array of supposedly innovative new products. However, a large part of the complexity that individuals face results from the proliferation of repetitive financial products in a myriad of flavors with different features and different financial trade-offs. What is "best" and "right" for individuals easily gets lost in the ensuing confusion.
Well-educated specialists in the financial services industry have been the primary non-academic consumers of academic research in finance. Creative "sell-side" professionals select from this research to develop sometimes innovative, but most often simply repetitive financial and investment products for sale to "buy-side" institutions and to individuals. The institutional "buy-side" of the financial industry tends to be more knowledgeable and discerning consumers of these innovations, when compared to individuals. However, in turn, the institutional "buy-side" of the industry also develops innovative and/or repetitive financial products and services, and then offers them to individuals either directly or through the financial advisor network.
Along this chain, objective academic knowledge of what is "best" and "right" for individuals tends to morph into product development and sales strategies that appeal to people's personal insecurity, greed, and ignorance. Sales messages pander to people's frustrations and need for simplification of what the industry itself has turned into a highly complex subject. In addition, along this chain of financial product development, many offerings to individuals tend to pick up extremely undesirable characteristics, in particular, high risk and high costs. Furthermore, products and indexes may be developed to exploit erroneous investor beliefs, such as trend extrapolation related to superior historical performance.
The Skilled Investor believes that much of the financial product complexity that individuals face is unnecessary and can be dispensed with through use of scientifically based product screening criteria. Much of the complexity that individuals face results from the proliferation of repetitive financial products in a myriad of flavors with different features and different financial trade-offs. In an often highly arbitrary sales process, industry agents attempt to sell this vast array of financial products to consumers. Without doing highly personalized and sophisticated needs analysis, a thin veneer of ersatz financial planning is offered. This faux financial planning is followed rapidly by a "consultative" sales process that usually pushes excessively risky and costly products.
In their pursuit of sales compensation, it does not really matter to many sales agents that your particular financial needs are square-shaped or octagonal-shaped. You are the sales prospect at hand. If you are susceptible to the sales pitch du jour, your real financial needs may get hammered into the round hole that that a particular sales person has a personal financial incentive to fill. What is "best," "right," or even appropriate to an individual's needs and circumstances may take a back seat to making the sale.
After intelligent individuals wade through the intricate tradeoffs between financial alternatives, decision fatigue is highly likely. It is no wonder that many people just want someone to trust who will give them a simple answer to this largely industry induced complexity problem.
Because the preceding paragraphs might seem to have a cynical tone, it may be necessary to remind you that there are many, many thousands of good and ethical financial advisors in the profession. Furthermore, scientific studies of the practices of individual investors who lack good advisors have demonstrated that many individual investors are sorely in need of competent help. (See: What is the cost to individual investors of sub-optimal portfolio diversification?) With that in mind, however, you should be very careful about your advisor selection process. Unfortunately, some financial advisors really do fit the description of the previous paragraphs.
You might like to read a recent and very enlightening study that touches on some of the problems discussed above. After reading this study, you might change your mutual fund buying habits and save yourself substantial sums of money for the rest of your life. In this Harvard Business School finance working paper, "Assessing the costs and benefits of brokers in the mutual fund industry," Professors Bergstresser, Chalmers, and Tufano analyze the value-added of the broker sales channel for mutual funds.1 In their conclusion, they state that "We begin with a positive hypothesis: the prominence of funds sold through brokers implies that brokers provide consumers with valued services. Our study has identified few, if any, of these benefits."
This is a rather stark conclusion, when you consider that the great majority of mutual funds are sold through brokers and other financial advisors. In buying mutual funds through brokers and advisors rather than purchasing them directly from fund companies, individuals incur very substantial front-end or back-end sales load charges, and they pay substantially higher ongoing fund management and marketing expenses. Individual investors unnecessarily waste billions of dollars every year by purchasing mutual funds through brokers and advisors rather than buying directly.
Read more
Well-educated specialists in the financial services industry have been the primary non-academic consumers of academic research in finance. Creative "sell-side" professionals select from this research to develop sometimes innovative, but most often simply repetitive financial and investment products for sale to "buy-side" institutions and to individuals. The institutional "buy-side" of the financial industry tends to be more knowledgeable and discerning consumers of these innovations, when compared to individuals. However, in turn, the institutional "buy-side" of the industry also develops innovative and/or repetitive financial products and services, and then offers them to individuals either directly or through the financial advisor network.
Along this chain, objective academic knowledge of what is "best" and "right" for individuals tends to morph into product development and sales strategies that appeal to people's personal insecurity, greed, and ignorance. Sales messages pander to people's frustrations and need for simplification of what the industry itself has turned into a highly complex subject. In addition, along this chain of financial product development, many offerings to individuals tend to pick up extremely undesirable characteristics, in particular, high risk and high costs. Furthermore, products and indexes may be developed to exploit erroneous investor beliefs, such as trend extrapolation related to superior historical performance.
The Skilled Investor believes that much of the financial product complexity that individuals face is unnecessary and can be dispensed with through use of scientifically based product screening criteria. Much of the complexity that individuals face results from the proliferation of repetitive financial products in a myriad of flavors with different features and different financial trade-offs. In an often highly arbitrary sales process, industry agents attempt to sell this vast array of financial products to consumers. Without doing highly personalized and sophisticated needs analysis, a thin veneer of ersatz financial planning is offered. This faux financial planning is followed rapidly by a "consultative" sales process that usually pushes excessively risky and costly products.
In their pursuit of sales compensation, it does not really matter to many sales agents that your particular financial needs are square-shaped or octagonal-shaped. You are the sales prospect at hand. If you are susceptible to the sales pitch du jour, your real financial needs may get hammered into the round hole that that a particular sales person has a personal financial incentive to fill. What is "best," "right," or even appropriate to an individual's needs and circumstances may take a back seat to making the sale.
After intelligent individuals wade through the intricate tradeoffs between financial alternatives, decision fatigue is highly likely. It is no wonder that many people just want someone to trust who will give them a simple answer to this largely industry induced complexity problem.
Because the preceding paragraphs might seem to have a cynical tone, it may be necessary to remind you that there are many, many thousands of good and ethical financial advisors in the profession. Furthermore, scientific studies of the practices of individual investors who lack good advisors have demonstrated that many individual investors are sorely in need of competent help. (See: What is the cost to individual investors of sub-optimal portfolio diversification?) With that in mind, however, you should be very careful about your advisor selection process. Unfortunately, some financial advisors really do fit the description of the previous paragraphs.
You might like to read a recent and very enlightening study that touches on some of the problems discussed above. After reading this study, you might change your mutual fund buying habits and save yourself substantial sums of money for the rest of your life. In this Harvard Business School finance working paper, "Assessing the costs and benefits of brokers in the mutual fund industry," Professors Bergstresser, Chalmers, and Tufano analyze the value-added of the broker sales channel for mutual funds.1 In their conclusion, they state that "We begin with a positive hypothesis: the prominence of funds sold through brokers implies that brokers provide consumers with valued services. Our study has identified few, if any, of these benefits."
This is a rather stark conclusion, when you consider that the great majority of mutual funds are sold through brokers and other financial advisors. In buying mutual funds through brokers and advisors rather than purchasing them directly from fund companies, individuals incur very substantial front-end or back-end sales load charges, and they pay substantially higher ongoing fund management and marketing expenses. Individual investors unnecessarily waste billions of dollars every year by purchasing mutual funds through brokers and advisors rather than buying directly.
The global financial crisis, brewing for a while, really started to show its effects in the middle of 2007 and into 2008. Around the world stock markets have fallen, large financial institutions have collapsed or been bought out, and governments in even the wealthiest nations have had to come up with rescue packages to bail out their financial systems.
On the one hand many people are concerned that those responsible for the financial problems are the ones being bailed out, while on the other hand, a global financial meltdown will affect the livelihoods of almost everyone in an increasingly inter-connected world. The problem could have been avoided, if ideologues supporting the current economics models weren’t so vocal, influential and inconsiderate of others’ viewpoints and concerns.
This article provides an overview of the crisis with links for further, more detailed, coverage at the end.
If you’re like many Americans, you face a variety of challenges every day. Most parents and some
grandparents find themselves fighting a battle on two fronts: saving for retirement and college at the
same time. This can be a tricky problem. Saving more money in one of the plans invariably leads to
saving less in the other. Obviously you want to have enough savings to retire comfortably, but at the same
time, to put your kids or grandkids through a quality college.
A College Planning Quandary
Withdrawing savings from an IRA is one option to
pay for college tuition. But is it a good idea?
If you’re like many Americans, you face a variety of challenges every day. Most parents and some
grandparents find themselves fighting a battle on two fronts: saving for retirement and college at the
same time. This can be a tricky problem. Saving more money in one of the plans invariably leads to
saving less in the other. Obviously you want to have enough savings to retire comfortably, but at the same
time, to put your kids or grandkids through a quality college.
So where do you draw the line between taking from one to give to the other?
And how do you plan successfully to find a proper balance that benefits both
you and your children? That problem is highlighted by the question of whether
or not you should withdraw from an IRA to help pay for college tuition. The
general consensus seems to be: not if you can help it.
Generally you want to have a successful enough college savings program that
you don’t have to worry about finding alternative sources of money for tuition.
But with sky-rocketing credit hour prices and housing costs on the rise, it’s a
more difficult proposition than it was even a decade ago.
But while prices have been increasing, so have opportunities to save. 529
Savings Accounts, Prepaid Savings Accounts, and Coverdell Accounts are
just a few of the easy ways to save for college.
One advantage of an IRA withdrawal is that the money can be used for any
qualifying educational expense. But, the disadvantages are obvious. You’re
taking away from future retirement savings and you’re reducing the amount of
earning power you previously held. You’re also faced with the fact that IRA
annual contribution limits ($4,000 for 2007 and $5,000 for 2008) can make
it hard to restore your previous savings level.
But that doesn’t mean there aren’t ways to catch up. Currently, for people over
50, the law allows you to make extra contributions of up to $1,000 a year. While
this isn’t much, it can at least help restore some of your withdrawal. However,
just as college savings opportunities have increased, so have retirement
savings opportunities. Part of a comprehensive retirement plan includes
investing in various types of retirement plans, including 401(k)s and private
savings. In addition, your entire retirement shouldn’t be too heavily anchored in
one savings vehicle, IRA or otherwise.
No matter what you do, it’s usually wise to seek input from a financial professional. Withdrawing from an
IRA to pay for college has a lot of unseen consequences that can harm your retirement plan and make
your golden years a bit leaner. One of your best bets is to plan carefully for college as soon as possible
for your children or grandchildren so you’re not forced to decide between retirement or college.
Read more
grandparents find themselves fighting a battle on two fronts: saving for retirement and college at the
same time. This can be a tricky problem. Saving more money in one of the plans invariably leads to
saving less in the other. Obviously you want to have enough savings to retire comfortably, but at the same
time, to put your kids or grandkids through a quality college.
A College Planning Quandary
Withdrawing savings from an IRA is one option to
pay for college tuition. But is it a good idea?
If you’re like many Americans, you face a variety of challenges every day. Most parents and some
grandparents find themselves fighting a battle on two fronts: saving for retirement and college at the
same time. This can be a tricky problem. Saving more money in one of the plans invariably leads to
saving less in the other. Obviously you want to have enough savings to retire comfortably, but at the same
time, to put your kids or grandkids through a quality college.
So where do you draw the line between taking from one to give to the other?
And how do you plan successfully to find a proper balance that benefits both
you and your children? That problem is highlighted by the question of whether
or not you should withdraw from an IRA to help pay for college tuition. The
general consensus seems to be: not if you can help it.
Generally you want to have a successful enough college savings program that
you don’t have to worry about finding alternative sources of money for tuition.
But with sky-rocketing credit hour prices and housing costs on the rise, it’s a
more difficult proposition than it was even a decade ago.
But while prices have been increasing, so have opportunities to save. 529
Savings Accounts, Prepaid Savings Accounts, and Coverdell Accounts are
just a few of the easy ways to save for college.
One advantage of an IRA withdrawal is that the money can be used for any
qualifying educational expense. But, the disadvantages are obvious. You’re
taking away from future retirement savings and you’re reducing the amount of
earning power you previously held. You’re also faced with the fact that IRA
annual contribution limits ($4,000 for 2007 and $5,000 for 2008) can make
it hard to restore your previous savings level.
But that doesn’t mean there aren’t ways to catch up. Currently, for people over
50, the law allows you to make extra contributions of up to $1,000 a year. While
this isn’t much, it can at least help restore some of your withdrawal. However,
just as college savings opportunities have increased, so have retirement
savings opportunities. Part of a comprehensive retirement plan includes
investing in various types of retirement plans, including 401(k)s and private
savings. In addition, your entire retirement shouldn’t be too heavily anchored in
one savings vehicle, IRA or otherwise.
No matter what you do, it’s usually wise to seek input from a financial professional. Withdrawing from an
IRA to pay for college has a lot of unseen consequences that can harm your retirement plan and make
your golden years a bit leaner. One of your best bets is to plan carefully for college as soon as possible
for your children or grandchildren so you’re not forced to decide between retirement or college.
The extent of the problems has been so severe that some of the world’s largest financial institutions have collapsed. Others have been bought out by their competition at low prices and in other cases, the governments of the wealthiest nations in the world have resorted to extensive bail-out and rescue packages for the remaining large banks and financial institutions.
The total amounts that governments have spent on bailouts have skyrocketed. From a world credit loss of $2.8 trillion in October 2009, US taxpayers alone will spend some $9.7 trillion in bailout packages and plans, according to Bloomberg. $14.5 trillion, or 33%, of the value of the world’s companies has been wiped out by this crisis. The UK and other European countries have also spent some $2 trillion on rescues and bailout packages. More is expected.
The effect of this, the United Nation’s Conference on Trade and Development says in its Trade and Development Report 2008 is, as summarized by the Third World Network, that
Read more
The total amounts that governments have spent on bailouts have skyrocketed. From a world credit loss of $2.8 trillion in October 2009, US taxpayers alone will spend some $9.7 trillion in bailout packages and plans, according to Bloomberg. $14.5 trillion, or 33%, of the value of the world’s companies has been wiped out by this crisis. The UK and other European countries have also spent some $2 trillion on rescues and bailout packages. More is expected.
The effect of this, the United Nation’s Conference on Trade and Development says in its Trade and Development Report 2008 is, as summarized by the Third World Network, that
