Saturday, January 31, 2004

403(b) Market Could Double In The Blink Of An Eye

A bill has been introduced in the House of Reps that would extend the 403(b) to state & local government employees. This would almost immediately double the number of possible 403(b) participants (and the number of people who could potentially buy my book!!). As you might expect I support this bill and hope it passes - if it does it could create an opportunity for major changes throughout the 403(b) industry and an all out war among the debating theories of how 403(b) plans should be distributed. I don't expect this bill to get much attention any time soon as it didn't come from the people who normally are behind this type of stuff, however if enough people show their support we just might see some action on this. I am doubtful it will be passed under the current budget constraints and it really isn't needed - after all, how many government employees can afford to contribute to two retirement plans (403(b) & 457(b)) in the same year? It's a bit overkill, but I support it anyway - even if just for selfish reasons!

Read my website and for continued coverage of the extended 403(b) and LSA's & RSA's.

Till next time......ScottyD

What Did I Tell You About Variable Annuities

Hmmmmm........Looks like mutual funds aren't the only scandalous game in town. As many people have suspected for a long time, the VA industry is guilty of not acting in the best interests of its clients - of course I doubt anyone is really surprised. The investigations are just starting, but I expect this to be bigger than the mutual fund industry scandals and spread much further than just market timing. The VA industry is an industry that is driven by greed and high commissions, look for some major lobbying from NAVA and ACLI to sway the regulators, lawmakers, and policyholders that the VA companies are innocent bystanders - don't believe a word.


Monday, January 26, 2004

Variable Annuities Are Next

Mark my words - Variable Annuities are next in line to be caught up in mass scandal. If you think that mutual fund scandals were bad, I suspect what we learn about Variable Annuities will be much worse. I don't like or dislike Variable Annuities - they are simply a tool - though most of the VA products on the market are pure junk. VA's are not subject to breakpoints and they are used instead of mutual funds because of it - of course it also doesn't hurt that VA's come with features that allow advisors to use the term "guarantee" - be very weary of an advisor selling you a variable annuity.

New Teachers Advocate is Available

For those of you who read my e-newsletter - The Teacher's Advocate - it is now available on my website ( Have fun!

More State Attorney General Stuff & The Junk e-mail Keeps Coming

As for the latest on the State's Attorney Generals office decision about the Envoy situation....I am now leaning toward believing the AG's office will rule against Envoy. I am not usually one to believe rumors, but the rumor mill is strong that the AG's office will come out with an opinion against the fee Envoy charges vendors. I suspect that Envoy believes they will be able to stay in business even if the fee is ruled illegal, I don't know how they plan on doing it but I bet they have something up their sleeve. It might be possible that they will give away their TPA services in exchange for the right to market to the educators their high cost, junky products - I would actually be fine with that as long as the fees are not charged to the vendors. I would rather have them gone - but my real beef is with the fee and how it will affect teachers long term.


Wednesday, January 14, 2004

Envoy & The State Attorney General

I spent a few minutes speaking with the individual working on the opinion regarding Envoy today. The gentleman was very concerned about the topic from all sides of the debate (which is good). I explained my rationale for being against the fee and believe that he listened to it and will take it into account. By no means am I positive that the AG's office will rule against Envoy in this situation - there is a possibility that Envoy will win out. Either way the issue of legality should be cleared up. I will have some additional comments soon.

Until next time....

Paying For Shelf Space & The Toothless SEC

For those of you who don't know, I came from the brokerage industry. I served time at three major brokerage oufits, Merrill, Morgan Stanley, & Smith Barney. Each of these firms favored certain fund companies - no surprise that the funds they favored were "loaded" funds. I knew for a fact that these "favored" funds had arrangements with the company and were paying the company a fee for having a "favored" status, everybody knew it. The correct term is "paying for shelf space." It is the practice of paying a broker/Dealer (industry speak for a brokerage firm) to put your fund company on a favored list - it is a classic "pay to play scheme". The arrangements are never explicitly disclosed, but every broker knows they exist in one form or another - if they don't then they are either ignorant or plain stupid. The SEC just released a study saying that it found abuses at 13 of 15 unnamed brokerage firms in a probe of "revenue-sharing." Here's the funny part, reports "As scandals simmered across the $7-trillion mutual fund business, the SEC said it found that "revenue sharing" -- or mutual funds paying brokerages to tout the funds' shares -- is "common practice," based on a probe launched in April 2003." The funny thing is the probe was only launched about 9 months ago, despite the fact that the SEC knew this was going on for probably at least a decade, if not more. Why did the SEC all of a sudden launch this probe? Elliot Spitzer. The NY State Attorney General Elliot Spitzer has ruthlessly gone after fund companies and broker/dealer for conflicts of interest - had the AG not stepped in the SEC would never had started a probe and none of the enforcement activities would be happening. The SEC has not did its job for years and now is trying to play catch up with Elliot Spitzer in order to save face.

I am not defending the practice of "paying for shelf space," simply saying that the practice was well known by the industry and the SEC and the SEC chose to do nothing about it, now they suddently care? There efforts too clean up the industry are a little late, by not enforcing existing rules (or spirit of the rules) they effectively have told the industry that what they are doing is ok, we will look the other way. They are sending a mixed message to Wall Street and mutual fund companies (and inevitabley Variable Annuities) - that message: We will look the other way while you clearly violate shareholders interests, as long as we aren't embarrased by a state attorney general, if we are, then we will enforce and come down on you as if you are evil.

Well, the companies are basically greedy and evil, but the SEC might as well have been a partner in the wrongdoings because they never acted as a regulator and constantly turned there head when they knew bad things were going on. Heck, I knew bad things were going on after only a few months at a brokerage firm - I was only 23 years old....

As stated before, I think it is rather slimy to pay a company to promote your product. It is a huge conflict of interest - but it is an industry norm that has been tolerated by the SEC, basically a tacit endorsement. Now the fund companies are under investigation for paying these fees and there reputations are at stake. I don't promote any of the funds that are implicated, or that will be implicated because the funds I use rarely show up in brokerage firm accounts - the reason: they won't pay for shelf space. However, some of the fund companies being implicated are good, honest fund firms - American funds come to mind. It will be interesting to see how the SEC handles this issue going forward. The have been asleep at the wheel so long, the question is, have they awoken in time to steer the car away from the ditch?

If the SEC truly were an enforcement agency then Elliot Spitzer and his band of publicity hungry state AG's would not be involved in the numerous mutual fund, broker-dealer, & eventually variable annuity scandals that have been unearthed and will be unearthed. Shame on the SEC, they've been toothless for so long - does anyone really believe they suddenly have fangs?

Until next time...


Monday, January 12, 2004

What Your Broker Isn't Telling You About Dividends

The last tax act that passed congress made many dividends taxable at only a 15% rate (sometimes less), this is significant because they are usually taxed as ordinary income (when held outside retirement plans - dividends inside retirement plans are tax-deferred and tax as ordinary income when distributed). This is a significant development in the world of stocks and has some people changing their portfolios. What most people don't know is that their dividends may actually be taxable as ordinary income, not at the 15% rate - the reason? Their brokerage firm.

In the new tax act their is a provision that makes dividends taxable as ordinary income if received from the lending of your securities. Without getting into the specifics, brokerage firms make big money lending your stocks to other institutions (such as hedge funds), however when they do this the institution that borrows the stock receives the dividend and you receive an "in-lieu" payment of equal amount, the problem is that this "in lieu" payment is taxable as ordinary income because it isn't really a dividend. There is a simple solution to this problem, don't open a margin account - if your taxable assets are held in a straight "Cash" account without Margin than your brokerage firm cannot lend your securities out.

Don't count on your brokerage firm to tell you this though. As I stated earlier, they make big money lending your securities out to others and face a conflict of interest by telling you to switch to a cash account. They lose out on potential gains by telling you to switch, yet it is usually in your best interest. This is yet one more example of how brokerage firms take advantage of their clients and do not put their interests first. If you think this is limited to just the major brokerage firms that I usually rag on (Merrill, Morgan, Smith Barney - etc) you are wrong. Fidelity is in on it as well - the disclosure they send to their clients reads: “You are not entitled to any compensation in connection with securities lent from your account or for additional taxes you may be re-quired to pay as a result of any tax treatment differential between substitute payments and actual interest,” - of course you first have to find this disclosure...Goodod luck.

If Fidelity and the other institutions were truly putting your interests first they would do more - they would write letters in plain english and urge you to switch your account to a cash account and even include the forms. Better yet they would automatically switch you if you didn't sign an opt-out form. This is just one more reason you need someone looking out for you - you can't count on the regulators and you can't count on your brokerage firm.

If you want more info on this subject just e-mail me and I will send you a link to a good article.

Until Next Time............


Saturday, January 10, 2004

Envoy Situation Is Submitted To State Attorney General

The California State Attorney Generals office is set to offer its opinion on the Enovy situation. CalSTRS originally referred the Envoy problem to the state AG and then Envoy submitted a request for a formal opinion through an El Centro Congresswoman (Bonnie Garcia - Bonnie, be careful who you deal with...). The request was poorly worded and designed to decieve (that is my opinion - you can read the actual request in the latest teachers advocate - should be out soon). The request gave little context and no history of why the opinion was being sought. The opinion request was eventually revised with a much simpler wording as follows: May a school district assess a fee for providing deferred compensation plans to cover the district's administrative costs?

I have heard through the grapvine that the AG's office will have its opinion written and released within the month. I submitted a five page commentary in regards to the opinion that provided for a proper history and context. It is my belief that the opinion will not be in favor of Envoy. We will have to wait and see. The question remains what will happen if the AG's office says the fee is illegal? I actually don't know - but I do know that the media outlets will probably love to report on school districts who are doing things that are illegal - especially when the teachers bear the brunt of it. If the school districts don't drop Envoy (or at least begin making plans to drop Envoy) then I will bring the full pressure of the media down on Envoy and the districts until the correct decision is made. Unfortunately I can't just make a couple calls and "poof" the media responds - but I do have several people in the media that I think would love this story and good stories catch like wildfire, especially when money is invovled.

If for some odd reason the AG opinion supports Envoy then I have another trick up my sleave - I have found another portion of law that may render Envoy's fee illegal - of course I can't give that away yet. I may reveal this in my next Teachers Advocate, but I don't want to give the other side (Envoy) any more advanced notice than they deserve!

For those of you who think I am picking on Envoy - you are right. I think the company is rotten to the core and harmful to the long term financial health of school dsitrict employees. I would not be waging battle except that Envoy clearly violates what is in the best interest of my cilents and employees of the school districts. If they didn't I wouldn't have a problem.

Until next time..................


Wednesday, January 07, 2004

I'm Back!

Sorry for the long absence from this blog - I have been busy with life and business and have neglected the blog! My next Teachers Advocate will be out very soon and will have updates from the last two months of what has been happening in the world of teachers and retirement plans. you can view it at

AB 2506

I just returned from a trip to Sacramento where we had another Advisory Committee meeting on AB 2506. For those of you who don't know what AB 2506 is - it is a bill that is being implemented by CalSTRS that will create a registration process (for 403(b) vendors) and a databank that will allow comparison and disclosure of 403(b) plans sold to educators. I believe this is an important project and the the rest of the nation is wathching to see how this turns out. What follows is my update:

The project is being led by Eric Norton, a project manager hired by CalSTRS and the project is overseen by Ed Derman (Deputy CEO) & Jack Ehnes (CEO of CalSTRS). I think Eric and his team are doing an incredible job and I am quite impressed at the progress being made and excited about the debut of the website, . The website will make its debut on July 1st, 2004. I have scene preliminary screen shots of the project and can assure you that it is going to look great. I believe that the educators who are eligible for 403(b) products will be very happy with this new tool. The project is still far from complete, the next 6 months are very critical and their are a lot of details still to be worked out, but overall everything seems to be on track. The meeting today officially unveiled the website name and dealt mainly with the search functionality of the website - there was a lot of disagreement among the attendees as to what should and shouldn't be allowed in a search function. I think the discussion was very constructive and that the Project team will be able to further refine their plans for this important function. I would like to hear from the readers on this one - please e-mail me at and let me know what is important to you when attempting to find a 403(b) product. In other words, what criteria would you like to see available to be able to be searched on.

The most important aspect of the new site will be the educational content - the project teamed unveiled prelimiary topics today and I think that by the time everything is finished it will be rich in valuable content. This site promises to be very educational, in short it will be a great tool. Despite some vendor negativity I thought the meeting went well and the project is on track. There will always be people who want to see this project get derailed or watered down and their presence is felt in the room, but rest assured that myself and many other people (including the good people at CalSTRS) are 100% behind this project and have the educator in mind - a first in the 403(b) world!!!! (Only slightly joking!!).

Ok - I am tired and need some rest, I'll write on some other topics soon.