Why is this Topic Important to Wealth Managers? Discusses opportunity presented by the looming muni bond market.  Offers an alternative investment to muni bonds that contains similar tax benefits.

The Wall Street Journal has recently noted that significant withdrawal of funds from municipal bonds throughout the country totaled over $4 billion in a one week period. [1] According to some estimates, the withdrawal accounts for only one tenth of one percent of the overall muni bond market.  [2] Yet, the numbers are record breaking.  The withdrawal is the largest from the muni bond market since last November, reports the Wall Street Journal.

However, the trouble seems to have started well before Meredith Whitney appeared on “60 Minutes”  in late December of last year when she call for the future “collapse” of the muni bond market.  In her opinion, the state and local governments will be forced to default on obligations made to bond holders because the governmental entities are quickly running out of liquidity.  Nevertheless, the muni bond numbers reflect the ”10th straight week of outflows, which total roughly $20.6 billion.” [3]

Whitney though may have created in the muni bond market what is now known as Gladwell’s “Tipping Point”.  It reasonably appears that she has influenced an overall decline in the faith and credibility of the muni bond market.  “The four-week moving average, a more meaningful number because of the longer time span it measures, was an outflow of $2.2 billion versus an outflow of $1.9 billion in the previous four-week period.” [4]

Many individuals are aware of the bad financial positions of more than a few states.  In California alone, the budget deficit is over $25 billion.  Some are even speculating about another “bail-out” for state and local governments who can’t meet their obligations.

How does all this affect wealth managers?

What exactly will happen is yet to be decided.  However, what is currently known is many individual investors recently liquidated tax favored investments.  Furthermore, it has created a perfect opportunity to promote other tax favorable investments such as life insurance and annuity products.  Because many investors in the muni bond market are accustomed to tax free interest on their investment, and further since life insurance and annuity products offer similar tax treatment, the switch is an appealing conversion.

In fact, lately some insurance companies have repositioned their annuity products to be presented in a light that provides a safe guaranteed source of income.  Many investors who were seeking the “safety” offered by instruments backed by state and local governments are likely to be more amenable now to funding investments offered by private institutions.  Annuities specifically fit the bill, and since most companies offer a line of annuity products from fixed rate to variable and indexed, there is certainly a product out there to fit most investor’s needs.

Next week’s blogs will be discussing more market opportunities for wealth managers.

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

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[1] Kelly Nolan.  Wall Street Journal. “UPDATE:Muni Mutual Funds See $4B Outflow In Latest Week—Lipper”. http://online.wsj.com/article/BT-CO-20110120-717343.html.  January 20,1011.  Last Accessed January 20, 2011.

[2] .  Nicole Bullock.  Financial Times. “Record amounts withdrawn from US muni funds.” http://www.ft.com/cms/s/0/0aae4f6a-24ff-11e0-895d-00144feab49a.html#axzz1BdnfaiYw. January 21, 2011.  Last Accessed January 20, 2010 (PST).

[3] Kelly Nolan.  Wall Street Journal “UPDATE:Muni Mutual Funds See $4B Outflow In Latest Week—Lipper”.

[4] Id.