Fire My Adviser?


Fire My Adviser?

This month, Kim Lankford answers your questions on about evaluating your financial advisor, IRA makeovers, New FDIC Limits and Lehman pink sheets.

I'm a novice at investing, and I keep begging my financial adviser to give me specific advice during this economic downturn. But it seems as though, with all my research, I'm the one giving him advice. Am I expecting too much? Should I move on to another adviser? Sandy St. John, Forney, Tex.

It's essential that advisers be accessible to clients and explain their plans during times like these. Your adviser seems to be failing, and that's certainly grounds for dismissal. In fact, in a market like this one, in which virtually everyone is losing money, accessibility can be more important than a negative return.

There are other benchmarks to help you determine whether it's time to move on. Find out how your investments have performed compared with relevant indexes or other funds with similar investing strategies. You should generally focus on long-term results, but pay extra attention to how your investments have performed during the bear market. "No client of a financial planner or investment adviser should be doing as poorly as the markets," says Bob Veres, publisher of Inside Information, a newsletter for financial planners. "The best advisers also make sure their clients keep enough cash and ultra-safe bonds on hand so that nobody has to sell stocks for two years into the teeth of a bear market." Not having that kind of diversification, says Veres, "is a reliable sign of incompetence."

Your investments should also match your time frame and goals. Keep your long-term assets primarily in stocks. But short-term investments should be in bank accounts or money-market funds. That way, "the money you need for this year is never exposed to any risk," says Mark Johannessen, a certified financial planner in McLean, Va., and president of the Financial Planning Association.


In addition, ask your adviser about his strategy for meeting your medium-term goals. "Our retired clients have five to eight years' worth of certainty in their portfolios," with investments such as Treasury and municipal bonds, bond exchange-traded funds, and CDs, says Johannessen.

What adjustments is your adviser making during the current market? "You're looking for someone who sees opportunities to offset capital gains with losses, provides good diversification, recommends cautious additions to stocks and counsels against making wholesale changes until the market has regained its stability," says Veres.

Finally, consider how well the adviser prepared you for this situation. "A good adviser will have put a plan in place that expects horrible times in the markets," says Daniel Moisand, a certified financial planner in Melbourne, Fla. "If you were clueless that your portfolio could drop, you have to consider whether you were well prepped by your adviser in the first place."

Is my annuity safe? How concerned should I be about the financial strength of the insurance company that issues my annuity? -- Joyce Rusch,Toledo


It depends on the type of annuity you have. With a variable annuity, money is invested in mutual fund-like accounts that are segregated from the insurer's assets and are unaffected by the insurer's financial situation.

But money in fixed annuities and equity-indexed annuities could be in jeopardy if the insurer were to become insolvent. And if you have a variable annuity with guaranteed minimum benefits, those benefits could also be at risk. Check on your company by going to our Insurance page and clicking on the box for A.M. Best, which rates the financial strength of insurers.

Before it gets to that point, however, you have several layers of protection. Annuities are issued by life-insurance companies, which are strictly regulated to make sure they have enough assets to pay claims. And if the insurer does have financial troubles, policyholders and annuity holders are protected by state guaranty associations.

These associations must provide at least $100,000 in withdrawal and cash-value coverage for annuities, and 16 states have limits as high as $300,000 to $500,000. Payouts on immediate annuities continue without a break, says Peter Gallanis, president of the National Organization of Life and Health Guaranty Associations (see for your state's rules).


Policyholders generally get back more than those state limits because insurers are required to hold significant reserves to pay claims. And policyholders are given priority over creditors, says Gallanis.

If you're thinking about buying an annuity that is much larger than the limits of your state guaranty association, consider purchasing smaller ones from several insurers, each of which has separate coverage limits.

And if you're tempted to make changes in an existing annuity, tread carefully. Cash it out and you'll pay taxes on the earnings plus a possible 10% early-withdrawal penalty if you're under age 59. You can make a tax-free exchange to another annuity, but you could be hit with a surrender charge, especially if you've held the annuity for just a few years.

Lehman stock. I am a former Lehman Brothers employee, and I still own stock in the company. The stock continues to trade on the pink sheets. Who is buying it and why? -- Lisa Solomon, New York City


We can't exactly be sure who's buying, but we do know who did quite a bit of selling. Not long after the investment bank filed for bankruptcy on September 15, chief executive Richard Fuld, other company officials and two directors sold millions of shares at prices ranging from 7 cents to 30 cents. The stock, which fetched as much as $68 in November 2007 and now trades under the symbol LEHMQ.PK, sold for 6 cents a share in early November.

Why would these insiders sell for so little? Because they know it's virtually certain that Lehman's common stock will eventually be rendered worthless; that's usually what happens when a company files for Chapter 11 reorganization. From the perspective of the honchos, a few pennies on millions of shares is better than nothing at all.

Doing the buying are undoubtedly high-risk gamblers, as well as unsophisticated investors who figure they can make a killing if Lehman shares return to even a hundredth of where they were during the glory days. And who knows? Speculators may make money if they can sell to a greater fool.

An IRA do-over. In January 2008 I transferred about $80,000 from a traditional IRA to a Roth IRA with the same investment company. It's now worth $15,000 less. Can I undo the transfer and then redo it so that I don't have to pay taxes on the $15,000 in lost value? -- N.K., Mehoopany, Pa.

You're in luck. This is one case in which the IRS permits a do-over of the conversion so that you can lower your tax bill. When you convert a traditional IRA to a Roth, you normally need to pay income taxes on the full amount of the conversion (except for any nondeductible contributions), even if the account is worth a lot less by the time your tax bill is due. But you can shrink the tax bill by undoing the conversion.

This process is called recharacterization. If you ask the IRA sponsor to recharacterize your conversion and put your money back into a traditional IRA, then you don't need to report the original conversion to the IRS. You can convert the traditional IRA to a Roth later on and pay taxes on the smaller balance.

If you're in the 25% tax bracket and you had to pay taxes on the full $80,000 conversion, you'd end up with a $20,000 tax billÑa hard hit to absorb considering that your account has lost so much money. But if you recharacterize and then convert the new, $65,000 balance to a Roth, your tax bill would shrink to $16,250Ña savings of $3,750.

You have until six months after the due date of your 2008 returnÑor October 15, 2009 -- to undo a 2008 Roth conversion (see IRS Publication 590, Individual Retirement Arrangements).

New FDIC limits. I know that the ceiling on deposits insured by the Federal Deposit Insurance Corp. has been raised to $250,000 for individual accounts and $250,000 for each person's share of joint accounts. But isn't there an expiration date on that? What happens if you have a CD that matures after the limits go back down? -- Roslyn DeGregorio, North Canton, Ohio

You're right. The higher ceilings are effective until December 31, 2009, after which they'll drop back down to $100,000 for in-dividual accounts and $100,000 for each person's share of a joint account. As a result, you need to be particularly careful about buying a large CD with a long maturity.

For example, if you invest $250,000 in a two-year CD today, the full amount will be covered for a year, until December 31, 2009 (as long as you don't have any other individually titled accounts at that bank). After that date, however, FDIC coverage will drop to $100,000. Unless Congress changes the rules again, that would leave you with a $150,000 deposit that would be uninsured for another year.

If you are thinking about depositing more than $100,000 in a CD that matures after December 31, 2009, consider dividing the money between two or more banks (see for details on coverage limits).

My thanks to Manny Schiffres for his help this month.

Got a question? Ask Kim. Kimberly Lankford is the author of Ask Kim for Money Smart Solutions (Kaplan, $18.95).