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4. Taxationtheir return generating process. It is important for financial planners to beaware of this in the asset allocation process.g. For all of their effort, how good are bond fund managers at predicting credit risk?Cici and Gibson (2010) find that bond fund managers fail, on average, to selectbonds that outperform others with similar characteristics. They also find that bondfunds have rather limited factor-timing ability. They find that the return contributionfrom both security selection and factor timing is less than management fees andtransaction costs.(1) Example: The return contribution from security selection and factortiming was 27 basis points per year, on average, for actively managedinvestment-grade bond funds. However, management fees and transactioncosts were 88 basis points per year. The return contribution from securityselection and factor timing was 4 basis points per year, on average, foractively managed high-yield bond funds. However, the management feesand transaction costs were 138 basis points per year. Cici and Gibsonattribute this underperformance largely to the bond market being moreefficient than the stock market due to a higher proportion of the marketparticipants being informed traders. Perhaps it is this relative efficiencythat underpins Domian and Reichenstein’s (2010) finding that one of thestrongest predictors of bond fund returns is expenses.a. Clients who own bonds or bond funds in taxable accounts should be aware thattheir tax treatment will differ depending on whether they invest in treasuries,municipal bonds, or corporate bonds.(1) The interest on treasuries is not subject to state taxation.(2) The interest on municipal bonds is not subject to federal taxation.(3) If the issuer of a municipal bond is of the same state the investor is aresident of, then the interest on municipal bonds is generally not subject tostate taxation either.(4) The interest on corporate bonds is fully subject to both state and localtaxation.b. The tax advantages of municipal bonds come at a cost of lower yields. It thereforemakes little sense for municipal bonds to be considered for inclusion in qualifiedaccounts. They should be considered for inclusion in taxable accounts only if theafter-tax expected return on the municipal bonds exceeds the after-tax expectedreturn on corporate bonds. Longstaff (2009) finds that the break-even marginaltax rate is roughly equivalent to the maximum federal marginal tax rate, whichsuggests that municipal bonds are most suitable for high income investors.c. Treasuries are unique in that they are considered by most to be free of credit riskand also have an inflation-protected variety known as TIPS. Because treasuriesare considered by most to be free of credit risk, they are a rather attractivecandidate for laddering strategies. TIPS take the guesswork out of estimatinginflation because they automatically adjust for changes in consumer prices.Therefore they protect a portfolio from inflation risk.7.8
LO 7-1-4: Using mutual funds and other professionally managed funds inretirement income planning1. Mutual funds in retirement planninga. Define and describe mutual fundsb. Categorize and identify types of managed products, including mutual fundsc. Risks and costs of mutual fund investingd. Selecting mutual funds for retirement income planning2. Mutual fund fundamentalsa. Mutual funds are financial intermediaries(1) Why are intermediaries important in our economy?(2) What financial intermediaries did you use today?3. UITs and management investment companiesa. Management investment companies(1) Open ended “mutual funds” – NAV(2) Close ended – similar to a stock(3) Diversified or nondiversified(4) Shell company4. Uniform mutual fund rules5. Taxationa. 75% / 25%b. 75% of assets may not:(1) Acquire more than 10% of a controlling interest(2) Have more than 5% in any one securityc. 25% of assets(1) Fair game(2) Invest in anything they want(3) Generally not utilizedd. Additional IRS rules to keep pass-through statusa. Distribute 90% of gross income from securities (avoids income tax)b. Distribute 98% of ordinary income and LTCG (avoids excise tax)c. Subchapter M – pass through6. Services provideda. Investment adviserb. Administratorc. Custodiand. Transfer agente. Distributor7. Operational structuresa. Open ended(1) Trade at NAV(2) Fund acts to distribute7.9
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Huebner School SeriesHS 353 STUDY O
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THEAMERICANCOLLEGE.EDUThrough The A
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c. But it is more comprehensive bec
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(3) Work part-time during retiremen
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SECTION 2: UNDERSTANDING RETIREMENT
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d. Solutions(1) The model considers
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. Other sources of retirement incom
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c. Another option for solving cash
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(b) Net worth statements that ident
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d. Be ready to reengage with the cl
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(b) In financial planning(c) In inv
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j. Planning Point: Planners can use
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e. We also need them to have a bett
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Assignment 2IDENTIFY RETIREMENT INC
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(2) Income4. Determining risk toler
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collaborative experience which focu
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6. Asset allocation and risk tolera
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c. How long will the income last?d.
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. Durationc. Reliabilityd. Other6.
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c. Supplemental Security Income (SS
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. An unused emergency fund can supp
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5. Inflation(2) The expense method
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Assignment 3CHOOSE APPROPRIATE STRA
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. Save as a percentage of income an
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(1) Note that 38% of second income
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(4) The AARP website has a national
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4. Contributions to IRAs and Roth I
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carve out the nondeductible contrib
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(2) Plus salary deferrals (for an i
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a. Example:(1) Save $10,000 in 25%
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(a) This requires knowing four fact
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. Solution(1) Li and Lin Lin are bo
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(1) The increase in dollar amounts
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9. In some circumstances, an indivi
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2. Reverse mortgage basicsa. Almost
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5. Planning considerations(b) Keep
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(2) Some funds that are promoted as
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(1) Berstresser, Chalmers, and Tufa
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RESOURCES FOR COMPETENCY 3: CHOOSE
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(2) From the previous employer(s) p
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8. IRA funded plans (IRAs, SEPs, SI
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. Does the distribution election fi
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6. Net unrealized appreciation rule
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a. Tax-exempt plans include Roth IR
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8. Calculating required distributio
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(2) Exception: If there are separat
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5. Impactc. Tax rates are low in ea
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(7) Based on ordering rules, identi
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7. A married couple who file jointl
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(1) Needed to provide the appropria
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13. Transfers at deatha. Wills(2) A
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(1) The Retirement Equity Act manda
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(2) Beneficiary designation of bene
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13. Overview14. Types(2) The donor
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(1) Charity needs only to payout in
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c. Access should be granted to an a
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nightmare of living probate might h
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(6) Powers to represent their princ
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c. If the policy is term coverage w
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e. Factoring personal and family he
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problem. On the other hand, we can
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d. Adding a cost of living adjustme
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g. Planning Point: Sometimes a high
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(2) Clients may not be able to “a
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c. Ensure that the client is receiv
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a. Example: Because of physical and
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options about where to get his/her
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(2) Facilities, monthly fees, and s
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8. Other strategies that help to co
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standard deviations of the returns
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a collapse in the real estate marke
Page 150 and 151: a. In a later competency we will di
Page 152 and 153: years of service with the employer)
Page 154 and 155: a. Planning Point: Planners should
Page 156 and 157: (2) If you have locked in food, ren
Page 158 and 159: (4) Loss-of-spouse risk—Deferred
Page 160 and 161: (1) Excess withdrawal risk—The us
Page 162 and 163: (5) Frailty risk—Managing assets
Page 164 and 165: 7. Practice good career management:
Page 166 and 167: Assignment 6CHOOSE APPROPRIATE STRA
Page 168 and 169: c. Example: Chuck and Sarah divide
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Page 178 and 179: markets have declined by a specifie
Page 180 and 181: (2) Annuities and long-term care an
Page 182 and 183: anticipates ramping down her activi
Page 184 and 185: c. Each of the three portfolios wil
Page 186 and 187: SECTION 4: THE ESSENTIAL VERSUS DIS
Page 188 and 189: d. Clients give up investment contr
Page 190 and 191: geared toward long-term growth. Thi
Page 192 and 193: . Trade-offs involve:(1) Irrevocabl
Page 194 and 195: (1) Rate at which banks lend to the
Page 196 and 197: . Dollar-denominated liabilities of
Page 198 and 199: (a) Dividend taxed in year paid out
Page 202 and 203: . Close ended(1) IPO style launch(2
Page 204 and 205: (3) Tax control17. Conversations in
Page 206 and 207: (3) Mutual funds provide lower cost
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Page 212 and 213: 6. Today’s annuitization rates ar
Page 214 and 215: h. Planning Point: Markets are very
Page 216 and 217: a. The client may not be clear abou
Page 218 and 219: a. Problems with implementation are
Page 220 and 221: c. Product solutions work together
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Page 224 and 225: (b) A traditional fund company(c) A
Page 226 and 227: d. Evelyn is in great health and he
Page 228: RESOURCES FOR COMPETENCY 7: INTEGRA
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