Why is this Topic Important to Wealth Managers? This week we continue our series on “Wealth Management in Today’s Economic Environment”. The series is designed to address the specific question many wealth managers are currently asking: “what are the best investment, retirement and financial planning tools given the current global financial position?” We explore alternatives from “safe” to “risky” from “traditional” to “emerging” to discover and discuss the most relevant wealth management tools and techniques available today. We look forward to presenting this discussion and think you will find the information quite valuable. Please note that this series is presented in continuation starting with last week’s entries. That being said each blogticle resumes discussion from the previous day.

In September 2008, “investors started a money fund version of a run on the bank.” The figures represent that “nearly $200 billion cascaded out of money funds” before the Treasury stepped in to guarantee principal values of money market funds.  The approach is similar to the FDIC model. [1]

Generally, deposit accounts at an insured bank or saving association are fully insured up to $250,000. In addition, an individual may have more than $250,000 located at one bank and still be fully covered.[2] Moreover, federal law provides for insurance coverage of up to $250,000 for certain retirement accounts.

Thus, clients may generate minimal returns as a tradeoff to enjoy the safety provided by the FDIC guarantee on some savings vehicles.

Single Accounts, Joint Accounts, IRAs and other certain retirement accounts, and revocable trust accounts all provide for a maximum of $250,000 of insurance.  However, clients may qualify for more than $250,000 in coverage at one insured bank or savings association if the deposit accounts are classified to different ownership categories.

Payable on Death (POD) and  in trust for (ITF) accounts — also known as testamentary or Totten Trust accounts — are the most common form of revocable trust deposits. Generally, these “informal revocable trusts are created when the account owner signs an agreement — usually part of the bank’s signature card — stating that the deposits will be payable to one or more beneficiaries upon the owner’s death.” In addition, living trusts (or family trusts) are a more formal arrangement that may also utilize the FDIC insurance provisions.

Generally, deposit “insurance coverage for revocable trust accounts is provided to the owner of the trust.” Nevertheless, the actual amount of insurance coverage provided is based on the number of named beneficiaries.  In other words, each owner’s share of revocable trust deposit is insured up to $250,000 for each beneficiary (i.e., $250,000 times the number of different beneficiaries), regardless of actual interest provided to beneficiaries. Special rules also apply for revocable trust deposit accounts with more than six beneficiaries.

Example: a father owns a $750,000 POD account naming his two sons as beneficiaries, the account is insured for $500,000 — $250,000 for the interest of each beneficiary. The remaining $250,000 is uninsured.

The FDIC is an independent government agency that has been protecting Americans’ savings for 75 years. Created in 1933, the FDIC promotes public trust and confidence in the U.S. banking system by insuring deposits.

The FDIC insures more than $4.8 trillion of deposits in over 8,200 U.S. banks and thrifts—deposits in virtually every bank and thrift in the country. Throughout its 75-year history, no one has ever lost a penny of insured deposits as a result of a bank failure.

Our series continues tomorrow to continue to explore financial planning in today’s economy.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Series Author: Benjamin Terner

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[1] See Chris Farrell. Safe Investing in a Troubled Economy. Bloomberg Businessweek. September 25, 2008. http://www.businessweek.com/magazine/content/08_40/b4102063709852.htm. Last Accessed 6/6/2011.

[2] See generally Federal Deposit Insurance Company. Deposit Insurance FAQ. http://www.fdic.gov/deposit/difaq.html. Last Updated 07/20/2010. Last Accessed 6/6/2011.

Why is this Topic Important to Wealth Managers? Today we continue our series on “Wealth Management in Today’s Economic Environment”. The series is designed to address the specific question many wealth managers are currently asking: “what are the best investment, retirement and financial planning tools given the current global financial position?” We explore alternatives from “safe” to “risky” from “traditional” to “emerging” to discover and discuss the most relevant wealth management tools and techniques available today. We look forward to presenting this discussion and think you will find the information quite valuable. Please note that this series is presented in continuation. That being said each blogticle resumes discussion from the previous day.

As was discussed yesterday, one option investors may currently consider seeking is U.S. government debt. However, ten-year note yields bottomed out at 3.05 percent last week.[1] Clients are being advised that they “should think twice” about treasures, that’s because consumer inflation continues to outpace those yield figures.” [2] Treasury yields are stupidly low,” says Robert Auwaerter, head of the fixed-income group at Vanguard Group. [3]

Are there any other U.S. government options that provide reasonable rates of return? Given the national debt issues and current low Fed rate will inflation play a part? Presented below is one option that may help clients hedge against inflation.

Treasury Inflation-Protection Securities

Treasury Inflation-Protected Securities, or TIPS, provide protection against inflation. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, clients are paid the adjusted principal or original principal, whichever is greater. This provision protects clients against deflation.

TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.

TIPS are marketable securities whose principal is adjusted by changes in the Consumer Price Index. With inflation (a rise in the index), the principal increases. With a deflation (a drop in the index), the principal decreases.

The relationship between TIPS and the Consumer Price Index affects both the sum clients are paid when the TIPS matures and the amount of interest that a TIPS pays every six months. As stated above, TIPS pay interest at a fixed rate. Because the rate is applied to the adjusted principal, however, interest payments can vary in amount from one period to the next. Thus otherwise stated, if inflation occurs, the interest payment increases. In the event of deflation, the interest payment decreases.

But according to the returns on TIPS they may not offer investors growth relative to the security they desire. For example the TIPS due February 2041 are currently yielding only 1.774%. [4] Moreover, interest on tips is generally subject to federal tax unlike some other government issued debt.

For more in-depth discussion on treasuries, see AdvisorFX: U.S. Treasury and Government Agency Securities.

Our series continues next week with a discussion of municipal bonds, cash accounts, commodities, international investment and more.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Series Author: Benjamin Terner

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[1] Reuters. “Treasuries-Gov debt prices fall on profit taking”. May 27, 2011.  http://www.reuters.com/article/2011/05/27/markets-bonds-idUSN274758020110527. Last Accessed 5/30/2011.

[2] Chris Farrell. Safe Investing in a Troubled Economy. Bloomberg Businessweek. September 25, 2008.

[3] Id.

[4] Wall Street Journal. Friday, May 27, 2011. Market Data Center- Treasury Inflation-Protected Securities. http://online.wsj.com/mdc/public/page/2_3020-tips.html.

Why is this Topic Important to Wealth Managers? Today we continue our series on “Wealth Management in Today’s Economic Environment”. The series is designed to address the specific question many wealth managers are currently asking: “what are the best investment, retirement and financial planning tools given the current global financial position?” We explore alternatives from “safe” to “risky” from “traditional” to “emerging” to discover and discuss the most relevant wealth management tools and techniques available today. We look forward to presenting this discussion and think you will find the information quite valuable. Please note that this series is presented in continuation. That being said each blogticle resumes discussion from the previous day.

Warren Buffett’s mentor, “legendary investor” Benjamin Graham, once “wrote that when challenged ‘to distill the secret of sound investment into three words, we venture the motto, Margin of Safety.’ Those are wise words for all seasons, but especially at a time like this.” [1]

Are government backed investments one way in which clients can find some safety?

Generally United States “securities are debt instruments issued by the U.S. Treasury to raise money needed to operate the federal government and to pay off maturing obligations.” [2] The “paper” is backed by the “full faith and credit of the United States government guarantees that interest and principal payments will be paid on time, and thus, these securities are considered very safe investments.” [3] But has the financial position in Washington changed the traditional view of these obligations?

Treasury bills, or T-bills, “are short-term government securities with maturities ranging from a few days to 52 weeks.” [4] The Bills are generally sold at a discount from the par value or face amount of the bill.  An example, an investor may pay $990 for a $1,000 bill.  When the bill matures, the investor is paid the full $1,000.  The discount or difference between the purchase price and the redemption price is interest.

Treasury notes, or T-notes, are “issued in terms of 2, 3, 5, 7, and 10 years, and pay interest every six months until they mature.”  [5] Further, the notes may be sold at a discount (for less than face value), at a premium (for more than face value) or for face value.  When the note matures, the investor is paid full face value, in addition to the interest payments received.

A few of the key features of T-notes include:

• The yield on a note is determined at auction.
• Notes are sold in increments of $100. The minimum purchase is $100.
• Notes are issued in electronic form.
• An Investor can hold a note until it matures or sell it before it matures. [6]

Treasury bonds are issued for terms of 30 years and pay interest every six months until maturity. When a Treasury bond matures, the investor is paid its face value.

“The price and yield of a Treasury bond are determined at auction.” [7] Like a T-note, a T-bond, may be issued at a discount, premium or face value.  T-bonds “exist in either of two formats: as paper certificates (these are older bonds) or as electronic entries in accounts.”   Today, Treasury bonds are issued exclusively in electronic form.

Total current outstanding debt issued by the Treasury in bills, notes, bonds and other evidence of indebtedness is approximately 13.8 Trillion dollars, as of the end of November 2010. [8]

Tomorrow we continue our series with additional U.S. government investments.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Series Author: Benjamin Terner

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[1] Chris Farrell. Safe Investing in a Troubled Economy. Bloomberg Businessweek. September 25, 2008.

[2] AdvisorFX.  AUS Main Libraries ,  Section 22.2  Investment Vehicles, B—U.S. Treasury and Government Agency Securities. http://www.advisorfx.com/articles/f22-2_1_13_3760.aspx?action=13.  Last Accessed 11/29/2010.

[3] AdvisorFX. U.S. Treasury and Government Agency Securities.

[4] Untied States Department of the Treasury.  Treasury Direct-Treasury Bills.  http://www.treasurydirect.gov/indiv/products/prod_tbills_glance.htm.  Last Accessed 11/29/2010.

[5] Untied States Department of the Treasury.  Treasury Direct-Treasury Notes.  http://www.treasurydirect.gov/indiv/research/indepth/tnotes/res_tnote.htm.  Last Accessed 11/29/2010.

[6] Untied States Department of the Treasury.  Treasury Direct-Treasury Notes.

[7] Untied States Department of the Treasury.  Treasury Direct-Treasury Bonds.  http://www.treasurydirect.gov/indiv/products/prod_tbonds_glance.htm.  Last Accessed 11/29/2010.

[8] Damian Paletta.  The Wall Street Journal. Debt-Panel Chairmen Work to Gain Support.  November 29, 2010.  http://online.wsj.com/article/SB10001424052748703785704575643111128016590.html.  Last accessed 11/29/2010.; see also Untied States Department of the Treasury.  Treasury Direct.    http://www.treasurydirect.gov/NP/BPDLogin?application=np.  Last Accessed 11/29/2010.