Five Thankings
Wednesday, November 21, 2012 at 10amBy John Friedman
Some thinkings on thankings:
1. Politics. I’m grateful that the election came out the way it did, with pretty much every close call going the Dems’ way (yesterday Allen West began what I hope is his soldier’y fade-away, and may it please be quick). To look at just a small, but I believe quite significant slice of what this means, I’m thankful that the party whose leaders cannot say, “I believe in science” are, at the least, not currently ascendant, and are perhaps in the descendant. On the other side of things, I’m glad that there are people out there who have a big voice and who are also knowledgeable — say, the Bad Astronomer — and who use their voice to smartly make a good case for things like gravity and geology.
2. The Wonder of the Physical Body. Aging brings with it an ever-more intimate sense of the wonder of our most precious precious, as friends and family and acquaintances all take their own unique, never-fully-knowable-by-anyone-else journey with their one true physical self. As a for-instance, I’m blessed with easy sleep while many friends are not; with time, and increasing disparities among us peers, I find myself more and more often thanking my lucky stars for this simple pleasure. For another instance, my folks, now in their late 80s, are going strong, while a dear friend’s also-dear canine friend, now in her early teens, is not likely to survive the year, the vet having uttered those terrifically sorrowful words, If I were you I’d put her . . .
3. Ess Eff See A. I’m thankful for San Francisco and the Bay Area and, for that matter, all of Northern California. One way or another I’ve been plumbing these depths since the mid-70s and, to this day, most every day, I continue to be surprised and in utter awe of what we human beings, aided mightily by a beautiful chunk of Earth, hath wrought.
4. Music. The art form I love most is the one which takes up time and vibrates air. I’m thankful that, for every weird-panted, not-much-music-in-him-as-best-I-can-tell smash-hitter of a Justin Bieber (his appearances and award-getting on the AMAs this week were frightening!), there is also someone out there with music oozing out of their every fiber (I found Pink‘s and No Doubt‘s AMA performances quite intriguing, as well as Psy’s, who seems to have glommed onto something that’s appreciated on a somewhat global scale — call it infectious joy maybe?), and then there are also all the people, everywhere, happily making music on a small scale for themselves and anyone within air-vibrating-distance.
5. Clients and FHA’ing. It’s been a slow-build. It took until the Aughts. And now as we approach the Teens it’s very much fully formed. Being an FHA — a Financial Health Advisor (which I define as being a combo of financial coach, financial planner, financial manager and financial educator, coupled with a business model that’s all about pure advice, and which does not include product sales or asset-gathering) is for me very much a happy home, and an endeavoring that will, I am as sure as I can be, serve as my most-long-term, ’til-the-day-I-die endeavoring. So thanks to all the people who put their trust in me and who so graciously welcome me into their financial lives. Thanks, too, for those who helped with the new site (Jen and Otis) and to all my business acquaintances and business pals, both new and old, and those soon-to-be.
* * *
No, make that six thankings: I’m so very grateful for waking to hear my wife’s lovely laugh this morning, and most mornings, and for all that it implies and explies. It never gets old, HB . . .
About 650 words (about a seven-minute read, sans links)
Friedman’s Law of the First Thing, as Applied to Income Taxes: Marginal Tax Brackets
Tuesday, November 20, 2012 at 3pmBy John Friedman
Friedman’s Law of the First thing says that, for each aspect of your financial life, you should know, at least, the first thing about it.
Now, it might be that some of you should know, or might benefit handily from knowing, the second, third, fourth and even the x’th thing about a given aspect of your financial life (you know who you are!), but clearly some of you should stick to knowing just the first thing (you know who you are too!). So for some, it’s more-is-better; for most, though, it’s just-the-first-thing’s-plenty-enough.
* * *
The first thing anyone needs to know about income taxes is what marginal tax brackets are all about
Like clockwork, though, we see stories in the media of people who do not understand what marginal tax brackets are all about, and who, as a result, are likely to diminish their overall financial health.
So here’s a piece to help you know the first thing about taxes.
* * *
Marginal tax brackets are best understood through illustration; fortunately, there are some great online tools to help you see how these things work and, doubly fortunately, you have your friendly neighborhood financial health advisor slash blogger to help as well. Take your pick! Or try both!
My favorite site for online financial tools is MoneyChimp. Its tools are good at illustrating concepts, and many of the tools also do a decent to great job of explaining concepts as well.
So please do, if you wish, click through to MoneyChimp’s tax calculator and learn about how marginal tax brackets work.
For those not wishing to go to MoneyChimp, as well as for those who went there and want to see how I explain this stuff, please do read on.
* * *
Marginal tax brackets are all about chunks of income, which you can think of as ever-increasing amounts of income. The first chunk of your income is taxed at one rate, while the second chunk — which is money you earn in excess of the first chunk but that’s also less than the third chunk — is taxed at another rate, and so on.
Now lets get real. In 2012, the federal tax rate on taxable incomes of married people who file their taxes together is:
10% of the couple’s taxable income from $0 to $8,700, plus
15% of the couple’s taxable income from $8,701 to $35,350 plus
25% of the couple’s taxable income from $35,351 to $86,650.
So the first chunk is taxed at 10%, the second at 15%, and the third at 25%.
These days we also have a few more chunks in the chunk-tree, but to keep it simple, we’ll leave it at three.
A couple with taxable income of $8,000, then, pays $800 of tax — that much is eyeballable (10% of $8,000 = $800). From there on, though, everyday eyeballability evaporates because you have to do the same calculation for each chunk of income.
For instance, a couple with $9,000 of taxable income pays $915 of tax, calculated as follows:
First marginal tax bracket: 10% of $8,700 = $870
plus
Second marginal tax bracket: 15% of $300 = 45
Do you see where the $300 comes from? It is the couple’s $9,000 of taxable income minus the $8,700 of the couple’s taxable income that was taxed in the first bracket. That $300 — the leftovers from the first bracket — falls entirely into the second marginal tax bracket, and is therefore taxed entirely at the rate for the second marginal tax bracket, i.e., at 15%.
Now let’s scope this whole thing out, shall we? And let’s do that by looking at the couple’s overall tax rate.
Since some of the couple’s taxable income is taxed at 10% and since whatever’s *not* taxed at 10% is instead taxed at 15%, it stands to reason — and to math — that the couple with $9k of taxable income is income-taxed at a rate of more than 10% but less than 15%, right?
More specifically, the couple’s overall effective tax rate on their taxable income is 10.1666666666% — $915 divided by $9,000 is to 10.16666666 (and more 6s continuing forever . . . ) divided by 100.
Likewise, a couple with $10k of taxable income would pay an extra $150 over what the previous couple paid (because all of this couple’s taxable income that exceeded the other couple’s taxable income falls within the 15% marginal income tax bracket), for a total of $1,065 in taxes, which comes to 10.65% — or about a half a percent higher overall effective income tax rate.
* * *
As you can see then, in this simple marginal tax bracket framework, earning an extra dollar can never result in paying more than a dollar of additional taxes. The arithmetic simply cannot work that way — only a marginal tax bracket higher than 100% could accomplish that. And so far we have not done that (though I suspect that those who practice at the outer fringes of tax lunacy have come across bass ackward instances where similar such things have happened).
* * *
So now you know the first thing about taxes.
And that means that, the next time you hear some Pat or Terry say that making more money would decrease their after-tax income, you’ll know that s/he — literally, by Friedman’s Law of the First thing — doesn’t know the first thing about what s/he’s talking about.
About 850 words (a nine-minute read, sans linked-to content)
Getting Smart About the Economy at Large: a Thank You to Paul Krugman
Monday, November 19, 2012 at 12pmBy John Friedman
Many of us took Macro 101 somewhere along the way. That introductory macro course — macro being short for macroeconomics — looked at the very largest of economic phenomenon, such as money, interest rates, international competition, etc.
Many of us also took Micro 101 — micro being short for microeconomics — which looked at relatively small-scale phenomenon such as pricing, supply and demand, competition between companies and the like.
Macro, more so than micro, as best I can tell, separated a lot of wheat from a lot of chaff — some people got it just fine and some people just dittint.
Both those who took to the macro water and those who did not, though, mostly remember one thing, which is this equation:
Y = C + I + G + NX
And a lucky and talented few also vaguely remember that the equation breaks down the size of the entire macro economy — the whole dern thing, forever mysteriously labeled in this equation as Y — into four components, i.e., the sum of private consumption (C), plus gross investment (I), plus government spending (G), plus net exports (NX).
Does that ring a bell?
* * *
For many folks that equation rings a bell, though a bell that rings somewhat obscuredly off in the distant past, as the Y = C + I + G + NX equation is what they learned about, years and years ago, in the early weeks of their first-and-only macro class, after which the class went on to use the Y = C + I + G + NX equation as the basic building block for everything that was to follow. From that use and re-use, they mostly understood the equation, but that was many, many years ago . . .
They remember, though, that, way back then, the equation was mostly not even remotely subject to debate; instead, it was the starting point for learning about how the world — the macroeconomic world — worked.
Rather like evolution and biology.
* * *
More recently, this equation, more than any other, has been at the heart of what is probably our greatest political divide, due to that G variable in the equation — government — and the whole question about whether government spending is good or bad or both and whether it is good or bad or both some of the time/all of the time/never.
Take a look at the equation again.
Y = C + I + G + NX
It takes but elementary-school arithmetic to see from the equation that, when government spending goes down (a decrease in G), then, ceteris paribus (economist-speak for all things being equal), overall economic output, or Y, must necessarily go down as well — otherwise, the equation would not balance which, is, ya know, the whole thing about equations, right? They have to balance; one side and the other have to equate. So if you decrease G on the right, and all the other things on the right stay the same, then overall economic output, the only thing on the left, must also decrease.
Simple.
If you believe the equation, then, and if you believe that the ceteris paribus assumption can reflect reality, and if you think that the economy getting smaller is a bad, bad thing to be avoided if it’s at all possible to do so, then you must necessarily also think that government should increase spending during a recession rather than decrease it because C and I — the goods and services we all as a group consume and invest in — go down mightily in recessions as we all pull back and tighten up our spending behavior.
Yet most of what we hear — and most of what has been done during the Great Recession throughout Europe in particular — has been to reduce government spending.
That would be just the opposite of what the equation indicates should be done.
* * *
Picture, if you will, that you are at the top of your chosen field — you’ve had your pick of any job in the field, and you’ve won all the awards. And then picture that the absolutely most fundamental learnings of your field — learnings that are well more than half a century old, and that have been tested time and time again in a myriad of contexts since then — are capable of helping us, The Big Us, avert a huge problem, but that those learnings are being largely ignored by the powers that be, and entirely ignored by about half of the Ps-that-B.
Finally, picture that your chosen field is one that touches every person’s life in one of the most fundamental ways possible and that ignoring the learnings of the field means fundamental sorrow for the entire globe.
Such is Paul Krugman’s plight.
* * *
Paul Krugman writes for the New York Times, both in a daily blog called The Conscience of a Liberal and a twice-weekly column. He is also a professor at Princeton. He is a Big Deal in lots of ways.
He is also, as you can note from the title of his blog, not afraid to use the word liberal.
One of his areas of expertise is The Great Depression, so Paul has a thing or two to say about how we as a group can smartly respond to recessions and depressions. He is a Keynesian — some would say he is The Keynesian — which means that he truly, deeply believes in the Y = C + I + G + NX equation.
And he has been doing his best to get the GPs-that-B — the Governmental Powers that Be — to increase governmental spending rather than to curtail it.
As best I can tell, Paul has had some success in shifting the debate, but it’s been nearly a half-decade-long slog, during which time the conventional wisdom has in fact gone if anything the other way.
Which is too bad because, as best I can tell (disclosure: I was more chaff than wheat in Macro 101) Paul has been right about pretty much everything the past five years, right down to his predictions trumping those of bigwig bond billionaire-guy Bill Gross and bigwig investor billionaire-guy John Paulson.
* * *
This time of year we give thanks.
I give thanks to Paul Krugman. Some years ago, in attempt to make myself more wheat than chaff in macro, I decided to read his blog every day. So I give thanks to him at the micro level: he has helped me smarten up a lot.
Paul is a great writer. I think people miss this facet of his work because his subject matter is so important. He can quickly write great pieces in 500 words or less (I count his words sometimes . . . ) and does so on a near-daily basis. He is not, as I am, an abuser of curly-cued, multi-comma’ed sentences (or parentheticals), or re-words, i.e., retreaded versions of old words, or newards, i.e., entirely new words never before known to roam the earth; nor does he too heavily rely on semi-colons or ellipses . . . or on placing phrases in places that lawyers only would love.
And he never goes for the cheap sentence-start of using sing-songy conversational words like and and but. He’s also good at staying away from the building-long-compound-words-via-the-dash malady.
So I learn at his feet, not only about how the financial world out there works, but also how to write about complicated things in a very straightforward, accessible voice.
* * *
More importantly, I also give thanks to Paul on a The Big Us scale — on the macro scale, because macroeconomics really is one of the most fundamental aspects of all of our lives.
And, while we’re at it, let’s get down into the detail and rank it, shall we? Let’s call it the second most fundamental of all aspects of our lives because, after love, there’s pretty much nothing more important to each of us than our basic economic well-being — a roof over our heads, enough food to eat, clothes to wear, etc. You know: it really *is* the economy.
Paul has been doing his ever-lovin, model-buildin’, data-based, prediction-filled, proud-liberal best to help all of us have a better world in which to live.
Thanks, man.
* * *
One demerit: unlike Paul, I do *not* hear much music in the music of either The Civil Wars or Arcade Fire, and actually hear their music being rather lacking in music-ness. Feist, on the other hand, I totally get; she has music coming out of her every pore, as best I can tell.
So Paul and I differ on music more often than not. But that’s nothing.
* * *
Thanks, Paul, for doing what’ch’ya do.
Exactly 1400 words (about a fifteen minute read (sans linked-to content)
Entropy, Dodo Birds, and Reducing Complexity in Your Financial Life
Friday, November 16, 2012 at 10amBy John Friedman
We learn today that Hostess — maker of Twinkies and Hostess Cupcakes — is going to cease to exist. It will be no more.
Michael Pollan cheers. So do I (though, given the nasty labor vs. capital fight that is going on here, I limit my cheer to the part of the story pointing towards the possible permanent disappearance of a major vein of food-like substances).
But the little-me of 45 years ago — the one who absolutely delighted in eating frozen Twinkies — is having a little-sad.
It’s not clear that Twinkies et al. will also cease to exist — the brands could end up with Kellogg or someone else. But it’s also not clear that, a month from now let alone a year from now, you’ll be able to buy yourself a Ding Dong or a Ho Ho, as these food-like and rather-yummy-in-their-own-evil-way substances might be going the way of the dodo bird.
* * *
We live in a world which is hard-wired for comings and goings. Death ends life. Physical objects entropy their way towards decomposition and then into utter non-physicalness.
And businesses come and go.
Our world is one of creative destruction — of Schumpeter’s gale and Harrison’s Pisces Fish.
We are, therefore, always a least a little bit on death watch — some of us more than others, but each of us some of the time, especially when it’s looking like our own time or that of someone we love.
* * *
Ahhh . . . but this is a blog about financial health, right? So let’s bring things back to the financial plane of our lives — shall we? — and leave behind the plane of physical comings-and-goings, even though it has a whole heck of a lot to do with our financial health.
Two related threads come to mind . . .
First, businesses really do come and go all the time, and some of us — especially back in the halcyon, pre-bubble (choose your bubble) days — can lose track of this coming-and-going fact.
Look at your local business district. Does it look like it did in 2006? No, right? It probably doesn’t even look like it did in 2011.
Here in Noe Valley, Esseff, CA (Noe is pronounced with two syllables, with the accent on the first, as in NO’ wee), the changeover is fast and the goings are brutal (all, except, the closed Real Foods storefront owned by Nutraceutical, a Bain Capital company and vitamin store roll-up play, which has lain abandoned and vacant for nearly a decade following Nutraceutical’s shutting of the business for purported business reasons but which the NLRB long ago found to be for illegal union-busting reasons . . . ).
Taking things bigger, right now it looks like Groupon, Zynga and Blackberry (a/k/a the badly named RIM), to name a few, are on the ropes. And a lot of folks will not be convinced that Facebook is heading towards long-term survivability until it pulls a Google, i.e., until it shows that it can transform all that attention it sucks up each moment of each day — all the eyeballs looking at its site — into a very real torrent of Google-like cashflow, as in gargantuan numbers of dollars flowing in every day and growing like all ever-lovin’-get-out.
And then there’s Mr. Softee. Given that I have no idea of how I would go about buying a Surface tablet if I wanted one, and given the hastening retreat of brain-extending machines away from sedentary boxes and towards the cloud, I am also now wondering for the first time whether Microsoft will long-term survive.
So businesses really do die.
* * *
Second, since businesses really do die, so, too, do they do something short of that. They wax and they wane, they ebb and they flow, they zenith and they nadir.
Directly investing in a single business is not, therefore, a set-it-and-forget-it sort of route to financial health, nor is investing in a large number of businesses, unless (a) you’re willing to watch all of that go on over the long-run, and (b) you’re lucky/prescient/smart enough to invest in companies that are Built to Last and actually do last, and/or you’re lucky/prescient/smart enough to dis-invest in companies for which the jig is at least temporarily up, and then you’re able to follow that up with yet another instance of you being lucky/prescient/smart enough to pick a replacement investment, and then, in a wash/rinse/repeat sort of way, you’re lucky/prescient/smart enough to keep on doing all of that all the live long day. Or at least, say, 55% of the time.
Years and years ago I invested in a company that was widely touted as having that Built-to-Last quality, including a big touting from Jim Collins, the instigator of the Built-to-Last label. That company was Motorola and it was not, as it turned out, built to last; it has ceased to exist in its old form, and a big chunk of its new form has been unceremoniously swallowed up by Google, which was buying it mostly for its patents — non-physical objects which, by definition, do not last.
* * *
All of this coming-and-going suggests the following approach to investing in companies:
1. If you invest directly in companies (rather than investing in mutual funds which then turn around and invest your money directly in many, many companies), you need to attend to those investments on a fairly regular basis: you either have to do it yourself, or you have to hire a money manager to do it on your behalf. After all, one of those companies into which you’ve invested your hard-earned dollars might be swooning or even nadiring (and, gee, if it is, do you sell it because it’s a loser or do you buy more because it’s now on sale? Hmmm . . . ).
2. If you invest in mutual funds, then you need to attend to the mutual funds on a regular basis, but you don’t need to attend — not much, anyway — to each of the investments in companies that the mutual fund owns on your behalf. Instead, you need to attend to things like how the mutual fund is performing, who is making the investing decisions within the mutual fund, whether the mutual fund is doing what it said it would do, etc.
Importantly, the “regular basis” on which you should attend to mutual funds you own is considerably less frequent than is the similar “regular basis” for stocks you own.
When you add all that up, one thing becomes exceedingly clear: being smartly attentive to stocks you own is a lot harder than being smartly attentive to mutual funds you own.
And this is especially true when the mutual funds you own are seeking to match a given chunk of the overall market, i.e., index-based mutual funds aka index funds. The amount of attention they require is close to nil.
* * *
I have yet to work with a client who wants to have a high-maintenance financial life. I’m sure such people exist, but as best I can tell they are as rare as, not the Dodo bird (which is 100% rare because the last dodo died in 1693 or so), but as hen’s teeth (which, because hens still walk the earth, still has a chance, though slight, of happening).
Instead, my experience is that, since pretty much everyone finds it difficult to regularly maintain their basic financial life — there’s that human nature thang at work again — it’s really not a good idea to add complexity to it.
And that’s why I recommend that most people — particularly people who are managing their investments on their own — *not* invest in single stocks, and that they instead invest in mutual funds. And that’s also why, if those same people allow me to do some ‘splainin’, I also recommend that a lot and, for some, most or even all, of their investing should be via index funds.
* * *
When you think about it, this, too, is about entropy. If you just let things happen in a stock-based portfolio, the portfolio will drift in various directions and, ultimately, will become something quite different from what it was; creative destruction will make something of your portfolio, though ahead of time we know not what.
But if you just let things happen in an index-fund based portfolio, the portfolio will in all likelihood continue to track whatever indexes you selected and very well might end up looking a lot like what it looked like when you first designed it.
In a way, then, index-based mutual fund investing is a good antidote to entropy — a good hedge against the unhappy situation in which you’re looking at a portfolio somewhere down the line and not recognizing it as one of your own, at which point you may ask yourself, how did I get here?
And, in that way, index-based mutual fund investing is a great method for reducing complexity in your life and, for many, an integral part of building a low-maintenance, long-run financial life. Yay.
And how will it perform, you might ask?
That is a question for a different day.
About 1500 words (about a fifteen-minute read sans linked-to content)
Tommy Lee Jones, Ameriprise and the Double-Deal
Thursday, November 15, 2012 at 10amBy John Friedman
I like Tommy Lee Jones, the actor. He can play lunatic nuclear-bomb-thrower as well as wise-old self-sacrificing native American father-in-law hero and everything in between. He also plays cops a lot — good cops. And these days, as time changes his face, he can do a fantastic quiet melancholy without saying a word, his craggy face saying it all.
Right now, though, many of us are seeing him as a pitchman for Ameriprise, a context I find quite discombobulating. Founded in 1894, the ad says, Ameriprise has always been committed to putting clients first.
That’s most definitely not my take on Ameriprise.
So the first time I saw the ad, my thought was, Tommy, did you really have’ta?
* * *
In most segments of the Financial Services Industrial Complex — the FSIC — bigger truly is better, and the focus is on HNWs and UHNWs. These abbreviations, quite familiar to everyone in the industry but gobbledy-goop to everyone else, stand for High Net Worth and Ultra High Net Worth, as in, We’re targeting HNW individuals and families, or, more simply and more jargon’y, We’re targeting UHNWs.
So just about all financial planners and money managers and insurance sellers and bankers, etc., etc., etc., want to work exclusively with HNWs and UHNWs. Many succeed.
(Are you curious about what numbers go with those tags? As best I know, there is no firm agreement on the numbs, but I can tell you this: a BigDeal Silicon Valley lawyer once told me that $50 million liquid was, by his yardstick, big money. That was 1995, and when he said liquid he was referring to wealth held in discretionary assets, i.e., assets that could be spent, on pretty much a moment’s notice, when desired, e.g., not the house(s) and not the business(es), but yes the stocks and yes the bonds.)
Ameriprise, to its credit, works with NFs (an abbreviation I might have just termed; I use it here to stand for Normal Folks). In fact, way back when, at the dawning of my career in financial planning, I interviewed with Ameriprise (back when it was still part of American Express) and was told that standard operating procedure for all newcomers was to require them to dial-for-dollars, every Saturday morning, all morning long, with AmEx cardholders being their warm-call targets, with no minimum account floors or anything else along those lines, the mantra being to simply get them in the door as paying customers.
Sure, Ameriprise advisors, like everyone in the FSIC, are exceedingly happy to work with HNWs and UHNWs, but most of them start with NFs and, as best I can tell, many of them do a quantity business (lots of customers and clients) throughout much or all of their career.
So kudos and gosh-speed to all of you Ameriprisers who work with NFs: they need able assistance, and the FSIC is, on the whole, really just not that into them.
And kudos also to the many of you Ameriprisers who are great people doing many great things for many great communities out there.
Such are the positives as I see them.
* * *
And then there are the negatives.
I’m sorry to say that I cannot recall ever having seen someone with Ameriprise in their life whose overall financial health was improved as a result of that relationship.
And I also cannot recall ever seeing someone who thought that Ameriprise had been good for them.
To these broad statements, though, I add one exception, which is that I have seen people who, but for Ameriprise, would not have IRA accounts in their lives. As it happens, then, and within my admittedly limited number of data-points on this topic, I’ve seen people who knew that Ameriprise had been good for them insofar as it had gotten them to open up and then contribute to IRAs.
But after that . . .
* * *
In a bit of delicious irony, some of the NFs (normal folks . . . ) who work within Ameriprise, i.e., Ameriprise’s own employees, have been a bit P.O.’ed at the company for allegedly larding up its 401k plan with . . . drum roll please . . . Ameriprise-centric mutual funds — so much so that, about a year ago, some of them got together with some lawyers and filed a class action law suit.
In a regulatory filing from just last week, Ameriprise described the situation thusly (see bottom of Page 46):
The action alleges that Ameriprise breached fiduciary duties under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), by selecting and retaining primarily proprietary mutual funds with allegedly poor performance histories, higher expenses relative to other investment options and improper fees paid to Ameriprise Financial or its subsidiaries. The action also alleges that the Company breached fiduciary duties under ERISA because it used its affiliate Ameriprise Trust Company as the Plan trustee and record-keeper and improperly reaped profits from the sale of the record-keeping business to Wachovia Bank, N.A. Plaintiffs allege over $20 million in damages.
The Court held a hearing on the motion to dismiss on June 13, 2012, and the Company is awaiting the decision
In other words, some Ameriprise employees are saying, “Ameriprise, when you selected the menu of investments offered within our 401k plans, your selection process was driven, not so much by whether the investments were great or even decent investments for us employees to invest in, but, rather, because those investments would help you, Ameriprise, make, in at least a couple’a different ways, your bottom line each quarter. And, oh yea, you know those dollars that flowed to your bottom line? Well, a decent number of those dollars came straight out of our pockets, and did so in a way which is not OK under the law.”
* * *
So remember all the talk in here about the FSIC’s asset-gathering model and AUM fees? And remember how, for asset-gatherers, success is defined by the numbers of assets gathered, i.e., the grand-total dollar-amounts in all of the asset-gathering-business’s customer and client accounts? That’s what’s involved in the employees’ assertions here — that Ameriprise is viewing its employees’ 401k plans as assets to be gathered in a way that is not OK under the law.
Now it’s not unusual to see businesses with their hands in many different pots, steering good things from one of their pots to another of their pots — with each pot backscratching the other. It happens all the time, and most of the time it’s legal (if often a bit stenchy). So stock brokerages hawk their own products, and doctors send their own patients’ lab-work to labs the doctors own, etc., etc., etc.
But in some places it works better than others.
And it just so happens that a company’s own 401k plan is among the least great places for it to attempt to backscratch one part of its business with another part of its business, i.e., it’s a lousy place from which to gather lots of assets in order to bundle them into the company’s own asset-base.
This is where the phrase fiduciary duties, as used in the block quote up above, comes in, because it just so happens that a 401k plan, run by a company on behalf of its employees, is a place where the definition of doing the right thing gets a little bit more persnickety and little bit more demanding than usual, i.e., it’s a context in which you’ll find fiduciary duties.
Now, the exact places in which you’ll find those duties is complicated and beyond the scope of this piece, as is talking in detail about any particular element of fiduciary duties. Those are big topics.
For here it’ll suffice to say that, among the concepts that fall well outside of dutiful fiduciary compliance is that of double-dealing — or backscratching as I used the term above, or self-dealing as lawyers might call it.
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So even though FSIC companies sell their own stuff to their customers all the time (indeed, doing so is straight down the middle what may of them do), here in the 401k context it might be entirely possible (quite likely?) that Ameriprise bent over a little too far when making the selection of which funds would be on the 401k menu, and decided to make that selection in a way that, while providing an employee benefit (if an allegedly lessened one), was much more about providing top-line revenue and bottom-line profit generators for itself.
And, if it did indeed bend over a bit too far, then the claims mentioned above in the block quote are true.
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Now I’m not saying that Ameriprise did breach its fiduciary duty. I don’t know that to be the case. For all I know, the law suit could just be a bunch of jerk employee crybabies and a bunch of nasty greedy trial lawyers trying to make a quick, dirty buck.
But here’re a few things I do know:
1. Ameriprise is actively fighting this lawsuit. If you were in its position, mightn’t you think about settling and/or sprucing up your 401k offering to have some funds in there that did not smack of being more about your interests than those of your employees? I mean, after all, it opens you up to people saying to NFs, “You know what Ameriprise is like? They are soooooooooo very much only looking out for Number 1 that their own employees are suing them for having too many crappy investments in the company’s own 401k! — crappy investments that happen to be part of Ameriprise’s business, either via ownership or some other arrangement that makes Ameriprise view those funds more favorably than it otherwise would. Clearly those employees do not want to eat their own dog food! (at which point the listener looks confused, and the conversation turns to an explanation of what dog-food-eating is all about).
2. I have never seen a non-Ameriprise account that included an Ameriprise-branded investment (note that Ameriprise-branded mutual funds went the way of the dodo mid-decade last decade, at about the time Ameriprise was spun out from American Express, and that, back when they existed, Ameriprise and American Express funds were also a target of litigation).
3. Most small Ameriprise-housed IRAs I’ve seen have suffered from the same malady of which the 401k litigants complain: they’ve been overly stuffed with Ameriprise-centric investments (which these days go by the names Columbia and Riversource and, reading between the lines, you can’t help but wonder if the Ameri*** branded mutual funds ended up too too tarnished to continue under their then-name).
4. Ameriprise is a public company, which means, among other things, that it has to manage its day-to-day business in a way that makes it likely it’ll hit its quarterly reporting numbers. As best I can tell, financial services companies that are publicly held tend to do the wrong thing (because that’s where the money is) a bit more readily than companies that are not publicly held (Vanguard be thy name, though it’s ownership structure has its own demerits . . . ).
5. I have never advised anyone to get-ye to Ameriprise. If someone wants to set up, say, an IRA and do it quickly and easily in downtown SF, I’d say get ye to the Fidelity branch at Market and Monty. And if someone wants to go with something that’s better but that doesn’t have a branch in SF (or anywhere else, for that matter), then I’d say get ye to your phone or browser and make your connection with Vanguard.
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So, Tommy, just out of curiosity: do you have any of your own money invested with Ameriprise? Sure, you’re a UHNW (unless you’re also a UHS — an Ultra-High Spender), so it’s not a very good fit for you — the best money managers would be oh-so-happy to gather your assets — but there’s that thing about putting your money where your mouth is, you know? Right next to the dog food you would’a just ate?
And just to let you know: Tommy, every time I see one of your Ameriprise ads, I see your you devalued. Pretty soon you’ll look less like the wise-man in Missing and more like the lunatic in Under Siege, but now updated to have a whole lot more facial crag and crevice (soon to be crevasse?).
So, please, Tommy, won’t’c’h’ya please stop pitchin’ Ameriprise?
About 1800 words (about a 20-minute read sans linked-to items)