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The Outdated Beliefs of the Mutual Fund Industry

 

By Bob Brooks

July 27, 2015

 

More and more companies are taking advantage of the 401 K auto-enrollment.  This allows companies to increase the participating rate of their company 401 K plan.  The auto-enrollment will automatically sign new employees up for the 401 K Plan.  Of course, someone has to make the investment selection.  Don’t worry, the company takes care of that important detail.  They just select target date funds for the new employees.

Target date funds are becoming a staple in 401 K plans.  They are advertised as a way to manage for risk.  They encourage the investor to just invest, go on autopilot, and not pay attention.  The target date mutual fund manager invests the money in the fund based on your age.  The closer to retirement you are the less risk that the fund takes.  The further away you are from the more risk you to take.  The fund adjusts for risk as you age.

For example, if you turn 66 in 2040, you would invest in a Target date 2040 fund.  Since you are so far away from retirement, you would take a lot more risk.  This is an investment philosophy preached by the mutual fund industry.  The industry says you are crazy if you are young and you don’t take a lot of risk.  Obviously the more time you have the more risk you can afford to take.  Unfortunately, it is a flawed concept because it disregards a person’s individual risk profile which is more complex than just there age.  What if you are young, and you are conservative?

FinaMetrica, just released a study that shows the younger generation doesn’t have the risk tolerance that the industry claims.  The study also exposes the flaws in this practice of auto-enrolling into target date funds.   

Their study (consistent with other studies) suggests that the millennial generation (those who were born between 1980 and 2000) hoard cash and are very risk averse.  In the U.S., the average risk tolerance score for this generation was 52.3 out of 100.  Said another way, the younger generation is more comfortable having 43 percent to 63 percent of their portfolios in equities and not 90% to 100% invested in stocks as their target date fund would suggest. 

The mutual fund industry needs to wake up and realize that the financial crisis of 2008 has completely shifted how investors of all ages view risk.  Besides, basing a risk level purely on age misses the point.  A person’s Financial DNA is much more complex these days.  It is yet an example of one more outdated philosophy on how to invest. 

 

 
The Next Step into Socialized Medicine - Blue Cross Blue Shield Drops PPO

July 24, 2015

By Bob Brooks

When Obamacare went into existence, you had to know that drastic changes were going to take place with health insurance.  Socialized medicine is not remotely possible without significantly changing the system.  I just would have never dreamed that we would see it this soon.  Already costs have risen dramatically and will continue to do so.

Blue Cross Blue Shield one of the largest writers of individual health insurance announced that they would be dropping their PPO plans.  However, they will be keeping their HMO plans.  What does that mean?  In a PPO, individuals can chose their doctor.  PPO’s are about choice. HMO plans are not about choice.  They are about choices being made for you. 

Doctors have been leaving the HMO networks right and left after Obamacare came into existence because the insurance companies don’t pay hardly anything.  Of course, that is the exact reason why BCBS made the decision.

The bottom line is the bottom line.  They are paying out way more in claims than they are collecting in premiums.  They lost 400 million in Texas. 

Those losses come after large premium increases last year for individual health insurance holders.  Of course, those increases were determined on the income levels of each region. The poorer regions didn’t see increases.  The higher income levels received the biggest increases.

What will all of this mean?  For the 367,000 Texas insureds it means they will be forced to find another plan.  What does it mean for doctors?  It looks like they will be facing a hard choice.  Do they join the HMO network and accept less or do they snub one of the largest writers of health insurance? 

In reality, it only affects 367,000 people in a state whose population is 26 to 27 million. However, that is not the point.  It is the shot across the bow and maybe where all insurance companies will eventually go.  It could be the next step in the socialization of the healthcare industry.   

 

 
LifeLock in Trouble….Again

 

July 23, 2015

By Bob Brooks

 

LifeLock seems to have a tough time staying out of legal trouble.  The story starts with LifeLock’s “innovative” and “state of the art” identity theft protection system.  What was so innovative about the system?  If you wanted to sign up for LifeLock, you call the company and their innovative system was to call the credit reporting agencies on your behalf and place a fraud alert on your credit report and continue to renew it.

A fraud alert will tell anyone trying to issue new credit in your name that there is the possibility that your personal information has been compromised.  Thus before any new credit is issued, they have to verify it is you requesting the new credit. 

So, why in the world would the Federal Trade Commission (FTC) have a problem with their innovation?

First, the Fair Credit Reporting Act says any consumer can place a fraud alert on their account.  So, you can do this yourself for free.

Second, the Fair Credit Reporting Act says a consumer can request a fraud alert be put on their account “whose asserts in good faith a suspicion that the consumer has been or is about to become a victim of fraud or related crime…”  The Fair Credit Reporting Act does not say that you can just request a fraud alert because you want to. There has to be a reason.  Thus, LifeLock was using the system to their advantage.

In 2010, LifeLock agreed to pay 11 million dollars to the FTC and 1 million back to customers to settle deceptive practices charges that they were using false claims to promote their identity theft protection services.   They were also required to take more stringent measures to safeguard the personal information they collected from their subscribers.

As a side note, CEO Todd Davis would give out his social security number on TV and said he was not worried because he was also a customer.  Maybe he should worry since his identity was compromised 13 times.

Fast forward to Tuesday of this week and the FTC is at it again.  The FTC said in court documents that were filed Tuesday that the company is continuing to make misleading claims about its service.

The FTC also alleges that LifeLock failed to fulfill the original settlement in 2010 by not creating and maintaining "a comprehensive information security program" to protect customer data such as credit card, bank account and Social Security numbers.

The FTC also claimed that LifeLock falsely claimed in ads that it provided customers with the same sort of protections used by financial institutions, and that from at least January 2012 through December of last year, the company "falsely claimed it protected consumers' identity 24/7/365 by providing alerts 'as soon as' it received any indication there was a problem."

So, this brings us to a question.  Do you do business with a company who settled for 12 million dollars one time and is being charged a second time by the Federal Trade Commission?  In addition, all charges revolve around deception? 

Although they are not guilty until they settle, there are too many companies with integrity.  Where there is smoke, there is probably fire.  For me, I wouldn’t trust them to be my strategy for protecting my identity.

 

 
Health Insurance is Going to Get Even More Expensive for 2016

By Bob Brooks
July 20, 2015

Health insurance premiums are going up…again.  It shouldn’t be any surprise.  We have a broken system that cannot pay for itself. Thus, someone has to pay for it.  Insurance companies are requesting 20 to 40% increases in insurance premiums for 2016.  Last year, at least in the DFW area, we were soaked for around a 20% increase.  The health insurance companies are discovering that people are sicker than they thought.  In many cases, health insurance costs are exceeding the actual premiums that health insurance companies are taking in.

Blue Cross and Blue Shield is clearly the biggest player in the Affordable Care Act.  They are seeking rate increases that average 23 percent in Illinois, 25 percent in North Carolina, 31 percent in Oklahoma, 36 percent in Tennessee and 54 percent in Minnesota according to a CNBC article.

The article cites President Obama saying that consumers should put pressure on state insurance regulators to scrutinize the proposed rate increases. If commissioners do their job and actively review rates, he said, "my expectation is that they'll come in significantly lower than what's being requested."

Either our President is truly disconnected (which I don’t think he is) or he is having difficulty coming up with a say to spin this situation.   

Then there is this response from Sylvia Mathews Burwell, the secretary of health and human services.  Mrs. Burwell said consumers could also try to find less expensive plans in the open enrollment period that begins in November. "You have a marketplace where there is competition," she said, "and people can shop for the plan that best meets their needs in terms of quality and price."

Reality check is that there is not that big of a difference in costs for these plans. The only way to get a cheaper plan is to go straight with the HMO which is the worst option on the marketplace. Doctors know it which is why they are fleeing HMO’s quicker than you can say lower pay-outs for doctors.

Health insurance companies aren’t out there to give anyone a good deal.  It is about survival.   One insurance company collected premiums of $39.7 million and had claims of $56.3 million in 2014. It has requested rate increases averaging 45 percent for 2016.

It is simple math.  At what point do we reach a tipping point where consumers simply cannot afford the “Affordable Care Act.”   When the ACA became law I felt we would be in a honey moon period for a few years before they started aggressively increasing premiums.  Unfortunately, that is not the case. 

What’s even more unfortunate, they will raise the rates only in the higher income areas and leave alone the rates for the lower income areas.  It is wealth redistribution.  They did it in 2015 and they will do it again.  Welcome to unsustainable socialism!

#becominglikeGreece

 
Can Bankruptcy now Eliminate Student Loan Debt?

By Bob Brooks
July 15, 2015

The Department of Education just released guidance on student loans and bankruptcy.  Does this mean you can discharge a student loan in bankruptcy?

To answer that question, you first need some background.  On the radio show, I always refer to student loan debt as the debt you can never walk away from. Although it is possible to challenge a bankruptcy court on student loan debt, it is virtually impossible to be successful.  The attorneys for the lenders are notorious for tying cases up in court making it an almost impossible financially to get the case to the finish line. 

So if you were going to attempt to discharge a student loan, then you better have the financial resources to fight it.  Of course, if you are in bankruptcy court, you probably don’t have the resources.  The attorneys take advantage of that small challenge.

The student bill of rights which was passed in March of this year requested that the Department of Education revisit student loan debt and bankruptcy and issue guidance to make it more of an option. 

They just released guidance which offers some “light” guidance.  Unfortunately, they were clearly doing the bare minimum not making creating the relief that was the intent of the request for guidance. 

The National Association of Consumer Bankruptcy Attorneys (NACBA) and National Consumer Law Center, Inc. (NCLC) were not happy about the outcome and issued the following joint statement:

(in the fairness of time, I have included only parts of the statement)

“Last week, the Department of Education responded to the White House in the worst possible way by giving a green light to the loan holders’ aggressive strategy of fighting virtually every case in which undue hardship is claimed.  Not only is this completely contrary to the intent of President Obama to find a way to help out more student loan borrowers suffering genuine financial distress, it will only serve to encourage loan holders and the Department’s contractors to be even more ruthless in systematically using their considerable legal might to crush any such filings under a mountain of appeals, delays, and other tactics.

 

Because federal law treats student loan debt as non-dischargeable in bankruptcy proceedings except in the case of undue hardship, borrowers can be burdened with this debt for a lifetime even if circumstances make it unlikely that the borrower will ever be able to repay.

 

The need for action with respect to the student loan debt crisis is urgent.  Today’s response from the Department of Education enshrines the worst practices of loan servicers to ride roughshod over borrowers suffering real financial distress. The White House should instruct the Department of Education to reconsider its response and, instead, to adopt an approach that recognizes that a real crisis requires a real solution.”

So to answer your question probably much has not changed in the form of student debt relief.  You have to remember this is nothing more than an entitlement based socialism program where the intent is to give everyone a college education because everyone is “entitled” to it.   They don’t want to let you off of the hook no matter how bad things get.  That is not an indictment against those who have borrowed money.  It is an indictment of the system. 

As I have always said borrowing money from the government is much like borrowing money from a loan shark.  It was easy to get it and they own you until you pay it back.  Isn’t that always the case when it comes to government run socialism programs? 

 

 
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