HomeAbout UsContactBlogBuilding Wealth For Life

Evan K. Beecham
Prosperity Economic Advisor

© 2015 Beecham Financial Services, Inc.


5 Ways Your Business Can Benefit from Life Insurance (Part 2)

by Evan Beecham on 09/28/15

In part one of “ 5 Ways Your Business Can Benefit from Life Insurance,” we named 3 Myths that business owners may have about life insurance. We also mentioned a study conducted by The Guardian Life Small Business Research Institute, which interviewed nearly 700 small business owners to determine their top ten business concerns.

As we summarized in part one, five of the top ten financial concerns can be impacted by life insurance solutions for business owners:

  1. Planning for the future

  2. Tax minimization

  3. Cash flow management

  4. Financing capital expenditures

  5. Providing employee benefits (which also helps with what these small business owners identified as their TOP challenge of finding the right employees).

In Part One we covered #1 – planning for the future through such solutions as buy-sell agreements and key employee policies and #2 – tax strategies. Today, we explore the last three challenges named above, and how life insurance can provide surprising solutions for business owners.

  1. Cash Flow Management.

Cash Infusion. The ability to borrow against cash value in lean times or when emergencies arise is a key feature of whole life insurance policies. Too often, small business owners, especially those operating out of the home with low overhead, assume they have little need for emergency savings in their business. But any company, regardless of size, could run into cash flow-sabotaging issues such as:

  • a product recall

  • late-paying clients

  • loss of a key client or distributor

  • necessary technological upgrades

  • an economic downturn, or other unforeseen occurrences.

When the Great Depression threatened to wipe out businesses, James Cash Penney used his whole life insurance policy cash value to meet payroll and other expenses. The liquidity it provided him literally saved the department store, allowing it to survive when others failed.

Creditworthiness. Another way that life insurance helps cash flow management is by improving the credit-worthiness of a business owner, or even the corporation itself. While the policy-owner (an individual or a corporation) can always borrow against their cash value directly from the life insurance company, as we noted in a recent post, a policy’s cash value can also be used to obtain loans at preferred rates… from a bank!

Lending institutions look for business loans to be repaid from the operating profits. Additionally, they want to know that borrowers have other assets to fall back on should the business cash flow falter or fail to commence to protect their interest. Life insurance cash value is an asset that can factor favorably into a lending decision. It demonstrates financial stability and can even be used as collateral for a loan.

Life insurance is often also a requirement of business loans, such as many SBA (Small Business Administration) loans. Term or permanent works in this case, as the objective is to ensure the debt for the term of the loan.

  1. Financing Capital Expenditures. 

As an added bonus, when business owners utilize life insurance loans to finance equipment or other capital expenditures, they never have to worry about loan qualification, credit scores, or paying exorbitant rates. Currently adjustable rates are around 4.6%,

From tractors and combines to new computer systems to cash flow crunches, life insurance cash value provides greatly enhanced liquidity and financial flexibility for business owners.

  1. Providing Employee Benefits.

The top problem identified by small business owners is that of finding (and keeping) the right employees. An attractive benefit package can help a business secure and keep top talent.

Life insurance can be used to fund employee benefits in various ways, thus helping business owners attract and retain high-quality employees.

Life insurance benefits. Executives often desire higher death benefit protection for their families, so life insurance can be a part of an appealing benefit package. Split dollar-life insurance policies allow companies to offer life insurance as a benefit to employees while recouping their premium outlay.

While an employer cannot discriminate who can or can’t have a 401(k), except in broad strokes (such as full-time vs. part time, or employees that have been with the company a certain length of time), employers CAN selectively choose who is offered life insurance benefits.

Non-qualified deferred compensation and SERPs. Life insurance is also often used to offer deferred compensation and other benefits to executives and other employees. NQDC (non-qualified deferred compensation) plans generally use the contributions of the employees. SERPs are supplemental Executive Retirement Plans typically funded by the company. Both can help employers attract, retain, motivate and reward key executives.

The benefit of a SERP or NQDC plan for the business owner? As with life insurance benefits, these plans can be used to provide benefits or compensation for key executives and employees. Additionally, non-qualified plans are not subject to the same vesting requirements as qualified plans. While bonuses, qualified retirement plans, and stock options are popular choices, deferred vesting options offer a compelling incentive for employees to stay on board for the long term. (They also do so without diluting company stock, an important consideration in some corporations.)

In “The Top 10 Uses of Life Insurance in a Family Business Succession Plan,” an article by estate planning author, expert and attorney Julius H. Giarmarco, Esq., Giarmarco discusses some of the benefits of nonqualified deferred compensation plans:

A nonqualified deferred compensation (NQDC) plan can be used by a small business to provide members of the senior generation with death, disability, and retirement benefits. A NQDC plan may be particularly useful in situations where the senior members have transitioned the business to the junior members and are no longer receiving compensation. A NQDC plan also ensures that key employees remain with the business during the transition period — a so-called “golden handcuff.” Because life insurance offers tax-deferred cash value growth and tax-free death benefits, it is the most popular vehicle for informally funding NQDC plan liabilities.

Non-qualified retirement plans also have greater flexibility, in general, than qualified retirement plans. Plans can even be designed  to meet the unique needs of a specific company or executive.

But perhaps the most compelling reason that employers choose non-qualified retirement plans is the reliability and affordability of using life insurance to fund employee benefits. Not only do life insurance companies offer less volatility than stock-driven plans, but the internal rates of return often compete handily with other funding vehicles.

As Peter N. Katz states in his white paper, “Why Life Insurance is a Popular Funding Vehicle for Non-Qualified Retirement Plans, ” Life insurance is widely used as an informal funding vehicle because it can lower the plan’s cost. Many corporate decision-makers have concluded that, in addition to providing a life insurance benefit, the tax advantages of life insurance can produce higher after tax internal rates of return than other funding approaches.”

Is It Time for Your Business to Start Benefiting from Life Insurance? 

As you can see, life insurance for business owners can fulfill many purposes contact us at Beecham Financial Services to obtain a policy quote and discuss how life insurance can help your business.

© Beecham Financial Services & Prosperity Economics Movement

5 Ways Your Business Can Benefit from Life Insurance (Part 1)

by Evan Beecham on 09/24/15

Cash value life insurance plays a massive role in financial institutions, corporations and banks…. Not only does it increase their financial stability and reduce their taxes, it is an ideal place to fund employee pensions, healthcare costs, and other benefits.”
– Jake Thompson, Money. Wealth. Life Insurance.

Today, we’ll explore 5 ways that life insurance helps business owners solve some of their biggest challenges. But first, let’s set straight some myths about businesses and life insurance.

3 Myths About Life Insurance for Business Owners 

Myth #1: Life Insurance is only for big businesses. 

Fact: It is true that banks and corporations are big buyers of permanent life insurance (known respectively as “BOLI,” Bank-Owned Life Insurance, and “COLI,” Corporate-Owned Life Insurance.) But it’s a myth that life insurance can is only practical or advantageous for large businesses. Even very small businesses with less than 5 or 10 employees can benefit greatly from life insurance! 

Myth #2: Term Insurance is all you need. 

Fact: Banks and corporations use permanent life insurance for a reason! While term insurance may have a proper place in your business as well as your personal financial strategy, permanent insurance provides important long-term benefits. When strategizing for long-term success, term insurance is almost always an expense to a company, while permanent insurance can provide both short and long-term liquidity, tax savings, and other benefits that can far outweigh the costs. 

Myth #3: Only the business owner needs life insurance. 

Fact: While every business owner can benefit from having life insurance, almost any business owner can multiply the benefits and the meaningful protections with multiple policies insuring partners and key employees. Let’s explore why insurance is an asset in business, helping business owners solve many of their top financial challenges.

Five Financial Concerns of Small Business Owners

Nearly 700 small business owners were interviewed by The Guardian Life Small Business Research Institute to determine the top ten challenges of small business owners. Five of those top financial concerns were extremely relevant to the solutions that life insurance can provide:

  1. Planning for the future

  2. Tax minimization

  3. Cash flow management

  4. Financing capital expenditures

  5. Providing employee benefits (which also helps with what these small business owners identified as their TOP challenge of finding the right employees).

We’ll explore the first two in this article and the remaining three in part 2.

  1. Planning for the Future.

There is perhaps no better financial product for long-term planning than life insurance. Life and business are both full of the unexpected, and wise business owners will be as well-prepared as they can be for any possibility. There are several ways life insurance can help with such strategies.

Succession Planning. A life insurance policy is often the cornerstone of a business’s succession plan. The business uses life insurance to fund a buy-sell agreement, allowing surviving partners to purchasing a deceased partner’s share of the business from their estate. In this way, surviving spouses and heirs receive their share of the business, and the living partner(s) maintain control of the business. Buy-sell agreements can reduce conflict and allow the business to keep running smoothly.

The accumulated policy cash value can also be used or leveraged to help one partner purchase another partner’s interest in the business, upon mutual agreement. A one-way buy-sell agreement can be constructed in cases when a chosen successor wishes to purchase the company upon a founder’s or partner’s retirement from the business.

Key Employee Policies. No business would think of not insuring their buildings and equipment, yet often, they don’t ensure its greatest asset – the people whose skills, knowledge and experience are essential to its operation!

Traditionally known as “key man” policies, life insurance policies taken by the business or business owner on a hard-to-replace employee are now referred to as key person or key employee policies. Examples could be:

  • A company manager

  • The head chef of a restaurant

  • An organization’s top salesperson

  • Any employee whose absence would cause a severe disruption of a business.

The policy provides a business with additional liquidity and savings that could be borrowed against in an emergency. The policy also benefits the insured and their family. The policy would provide an additional income for the spouse in the case that anything happened to the insured.

Pension Maximization. The policy also enabled the “key man” employee to choose a higher “single life” pension payout, should they survive their spouse. This pension maximization strategy using life insurance can benefit couples as well as employees, and it can be used with social security payouts as well.

Estate Equalization. Often times, business owners will have several adult children who may have varying degrees of interest and involvement in the family business. When Brenda is a lawyer across the country but Brad is a manager in the family business and an obvious choice to take it over someday, how do you solve the estate planning dilemma? Life insurance provides the solution by creating an additional asset that can be used in a multi-generational balancing act.

As with personal life insurance, often a combination of term and whole life is a good solution. Even if someone aims to retire at a certain age or after a certain number of years, we highly suggest planning for flexibility since many people find they enjoy being active in business well into their 70’s and 80’s.

Interestingly, the research institute survey revealed that many small business owners already owned whole life policies, term policies, key employee policies, and insurance-funded buy-sell agreements. Yet in some cases, almost as many survey respondents “planned to acquire” such policies the following year. Of course, it’s always best to acquire the policies before they are needed, which may be sooner rather than later.

  1. Tax Minimization.

The tax-free growth of life insurance cash value is an attractive benefit to most companies, and one reason why banks and corporations fund permanent insurance policies. Cash value accounts grow tax-free while within the policy.

In a white paper entitled, “Why is Life Insurance a Popular Funding Vehicle for Nonqualified Retirement Plans?” attorney and insurance professional Peter N. Katz explains,

 Like the individually owned annuity, cash value accumulations grow tax deferred. But life insurance has even greater tax benefits than an annuity in that accumulations can be accessed in a tax advantaged manner by withdrawing values to basis and then using loans. Using this approach, the cash values can be accessed free of income tax. For individual annuities, loans and withdrawals are treated as income distributions first, then basis. Going yet a step further, unlike the annuity where remaining values are taxed upon or shortly after death, life insurance death proceeds are generally received income tax free under IRC §101(a)(1).
This combination of tax factors can allow a life insurance policy to produce an internal rate of return that exceeds that of a taxable portfolio growing at a similar rate.

In some situations, life insurance premiums may even be deductible.

Is It Time for Your Business to Start Benefiting from Life Insurance? 

Contact us  at Beecham Financial Services to obtain a policy quote and discuss how life insurance can help your business. Evan Beecham has more than 23 years’ experience helping business owners and individuals with their unique financial needs, including life insurance solutions.

(And stay tuned for Part 2 of this article… coming soon!)

© Beecham Financial Services & Prosperity Economics Movement

Crash Proof Your Portfolio with Non-Correlated Investments

by Evan Beecham on 09/02/15

The only sure thing about luck is that it will change.”
– Bret Harte, American author and poet

It’s been a wild, wild ride the last week. Stock markets around the world plunged on Monday, August 24, beginning with an 8.5% percent drop in China’s benchmark Shanghai Composite index. Stock markets in Japan, South Korea, and Australia followed China down. That sparked selloffs in European markets and a dramatic, historic 1,000 point dive of the Dow, with a partial comeback by the closing bell. The S & P 500 Index fell by nearly 4 percent on Monday, following sizeable losses last week.

China’s Shanghai Index continues to drift downward, meanwhile, U.S. stocks rallied yesterday, August 26th and the Dow gained more 600 points in a single day, the biggest one-day increase since 2011. U.S. stocks have continued to climb since (with substantial daily ups and downs), yet remain nearly 6% down from one month ago.

China’s popping stock bubble (on a downward plunge since June) and weakening yuan are the most-often-named catalysts for the recent stock market volatility. And this drives home a fact we would be well to take note of:

We live in an interconnected world in which the stock market can be crashed for many, many reasons, ALL of which are out of our control.

If your money is in the stock market, it is affected by:

  • decisions, policies and elections within our government

  • decisions, policies and elections in foreign governments

  • currency prices

  • terrorism and political unrest around the world

  • mega-crimes from Madoff and Enron schemes to big bank price fixing scandals

  • the many factors that affect company values, from the health of a CEO to commodity prices

  • disruptive technologies that make yesterday’s successes obsolete

  • the weather and natural disasters, from droughts to earthquakes

  • and the list goes on and on.


Where are stocks headed next?”

This is the obsession of the financial media’s analysts, internet articles, and talking heads on TV. And the truth is, absolutely nobody knows with any certainty. It’s nothing but speculation. Analysts speculate what they think will happen, then explain why something else happened instead.

Sir Ernest Cassel, a 19th century British merchant banker and capitalist, put it this way:

When I was young, people called me a gambler.
“As the scale of my operations increased
I became known as a speculator.
Now I am called a banker.
But I have been doing the same thing all the time”.

Wall Street is simply Vegas on a much larger scale, wearing a suit and tie.

Phil Bodine asks his clients, “How much money would you have today if you just hadn’t taken any unnecessary risks?”

It’s an excellent question that every investor should be asking themselves. And if you’re like most, you’ll have to count the cost of the unnecessary risks and gambles that didn’t quite pay off as you hoped.

We advocate Prosperity Economics products, processes and strategies that are NOT affected by market whims, do NOT require a crystal ball, and make PROTECTION of assets rather than speculative gains their TOP priority. Why?

  • Because we take rule #1 – “Don’t lose money” – seriously.

  • Because we think there are better things to do with your emotional and mental energy than watching stock charts and worrying how global political and economic changes will affect your personal economy.

  • Because “typical” financial strategies such as “Max out your 401(k) in mutual funds, cross your fingers and hope it all works out” don’t even produce the best results!

  • And because we refuse to give our clients false security.

The stock market may or may not bounce back to its pre-August-2015 shake up levels in the near future. But if that’s what you’re waiting for, stop and think:

Are you really “gaining” if the gains aren’t locked in and every day you roll the dice again?

Why does it matter what today’s stock market prices are if you don’t know what tomorrow’s will be?

Are the “gains” you’ve made in the market gains you can count on and actually spend?

The chart below illustrates the last five years of the Shanghai Index (orange), The Dow Jones (pink), and the S & P 500 (blue). Do you REALLY want to leave your future prosperity and peace of mind up to  whims of the market?

Our recommendation: It’s the same today as it always has been, it is time to get out of the stock market and the same recommendation we were making before the Great Recession stock crash.

Get out of the stock market and put your money into stable financial vehicles that are sustainable, reliable, and will grow your money while protecting it.

As our free eBook Financial Planning Has Faileddetails , I have come to believe that our current financial strategies are literally INSANE, and we MUST start to save and invest differently if we want to guarantee the prosperity of our families and our nation.

We recommend strategies for asset growth, cash flow, and saving that are non-correlated to the stock market.

This is the KEY to crash-proofing your investments. Some people like to “hedge their bets” by betting against the stock market while also participating IN it. But why not simply get out of speculation altogether and invest in solid non-correlated vehicles with a long history of earning in spite of market conditions?

For growth: We advocate life settlement investments that capitalize on the secondary market for life insurance policies. (If you aren’t familiar with them, contact us for further information including a short video that will explain this asset class favored by investors such as Warren Buffet,  Bill Gates, Merrill Lynch, UBS, and many pension funds.)

In a nutshell, some seniors who no longer want or need their life insurance policies and who have a short life expectancy due to age and health prefer to SELL their policies so that they can put money to use now, while they are still living. These policies are purchased as investments, often in the form of private equity funds, and create a win-win for investors as well as seniors.

With the stock market, you purchase and hope the prices rise, hoping to gain equity. With life settlements, the gains are as guaranteed as death and taxes (literally), the only educated guesswork has to go with the exact timing and costs.

For cash flow: For those with only modest sums (as little as $25k), we recommend short-term commercial bridge loan deeds of trust – currently paying 7% and upwards, and for accredited investors, we recommend bridge loan funds that are delivering low double digit returns in steady monthly payments.

For those who want reliable monthly payments and the option to contract with a company who sources the loans and holds a second position for added security, commercial bridge loans offer impressive protections for principle along with very healthy cash flow.

For those who have money trapped in taxable accounts, we can offer strategies to help more of your dollars end up in your OWN pocket than in Uncle Sam’s!

For cash: First of all, we recommend that people SAVE and not simply “invest”! We have lost the art of saving in this country, and it seems that everyone wants to skip that step and go straight to “investing” – or should we say, speculating!

For those who want a long-term strategy to store cash where it can grow in a tax-advantaged environment and be protected from the increasing privacy and security issues facing banks – while remaining liquid and easily usable as collateral, we recommend exploring high cash value dividend-paying whole life insurance.

While not a fit for everyone or all situations, for those who have a decade-plus time frame to save and qualify (or have insurable interest in other families or business partners), cash value insurance can provide an ideal foundation that can help you optimize many OTHER aspects of your personal economy. For those with financing needs (cars, business, college) and/or for those who wish to have an efficient asset transfer strategy, we invite you to contact us for more information on how this life insurance can benefit you (while you’re living!)

Is it Time to Crash-Proof Your Portfolio?

For more information, we invite you to contact us.

© Beecham Financial Services & Partners 4 Prosperity

Financial Self-Reliance: Building Bullet-Proof Wealth (How To Weather The Storms)

by Evan Beecham on 08/26/15


Economic self-reliance: the ability of a person, place or nation to endure successfully without additional financial support from government or other agencies.

From earthquakes in Nepal, tsunamis in Indonesia hurricanes in the South, mudslides in Northwest, and drought in Africa (and now, California), it doesn’t take a weather report to convince the average person that life is full of surprises and challenges.

There will be personal storms and economic ones too. We’ve weathered severe economic storms in the recent past, and, coupled with challenges on the political and international fronts, our economy has taken a beating. The housing market tumbled, the stock market dove, and for awhile, it seemed the only things on the rise were inflation, unemployment, and financial stress.

Now in 2015, it may feel a bit like the calm before (or between?) the financial storms. And so it probably is. The same hedge fund managers and economists who predicted the 2008-2009 stock market crash are sounding warnings again of an impending crash.

So, just how do you prepare for a variety of possible economic tempests, squalls, blizzards and gales?  Here’s how, in four steps…

Self-Reliance Solution #1:  Take Control of your Personal Income

Research confirms that those who are entrepreneurial-minded are more likely to accumulate significant personal wealth. Simply put, self-employed people and business owners – accountants, lawyers, physicians, the woman who owns a popular boutique – are more likely to be millionaires or multi-millionaires than those who work for others.

Bert Whitehead, a financial specialist and writer, conducted a study which found that only 20 percent of our working population are self-employed or business owners. However, three-quarters of millionaires who work are self-employed or business owners.

There’s logic to this finding. First, those who have built their own work are protected from unemployment because they create their own income source. And with no boss to impose a glass ceiling, they can rise as high as they want in their own business.

As financial author Kate Phillips wrote in an ode to self-employment, “We’ve put our faith and trust in the wrong places, counting on an employer or a company to sustain us, when we should have been developing our own value in the marketplace. We can no longer count on jobs to sustain us, rescue us or bail us out.”

Successfully self-employed people also learn valuable money-making skills and principles out of necessity. They develop an aptitude for sales and service, attracting customers that return. They learn how to tough out the slow growth times, and bootstrap when necessary.

Many business owners become skilled managers of both people and business. They may become adept with finance, marketing, public relations and networking. It’s often been said that success breeds success and this is clearly the case with entrepreneurs.

Do they need a traditional job? Not with their own source of income. Furthermore, consider their ability to achieve the next solution...

Self-Reliance Solution #2:  Develop Multiple Streams of Income

Once you have regained control of your own income, you want to make sure that you do not trade ONE job for ONE source of business or self-employment income! You must diversify your sources of income.

Smart business owners diversify their income. Rather than trading dollars for hours doing one thing, they leverage their time and offer multiple products and services, ideally, in a scalable way.

Economic self-reliance also means not relying on one business or investment alone. Many wealthy people own investment real estate (even if it’s not their primary business), receive dividends from participating whole life insurance, and make investments such as tax liens, bridge loans, peer lending, or businesses with which they have expertise. They put their money to use and concentrate on cash flow rather than accumulation.

And the next step separates the self-reliant from the spenders...

Self-Reliance Solution #3:  Save Money Like a Millionaire… or a Duck!

Remember Scrooge McDuck, the cartoon character renowned for his gold?  Donald Duck’s rich uncle, Scrooge McDuck is an industrious duck with an somewhat Scottish accent.  According to Disney, McDuck is the richest duck in the world, having gained massive wealth from hard work, multiple business endeavors, and saving all he can.

Well, according to the work of Thomas Stanley and William Danko which formed the basis of the book, The Millionaire Next Door, our millionaire friends follow a similar formula as McDuck. Many millionaires and multi-millionaires describe themselves as  honest and frugal, squirreling away on average more than 15 per cent of their incomes every year. Most could live on their savings for 12 or more years at their current standard of living.

Interestingly, Stanley and Danko, discovered that most millionaires did not inherit their wealth, don’t fancy upper-crust foods such as caviar, and don’t reside in homes in the most expensive neighborhoods.  They don’t ‘dress to kill,” maintain a host of fancy vehicles, or spend untold thousands on diamonds or other luxuries. Self-made millionaires prefer to save their money that spend it on high-priced status symbols.

But how do you ensure the safety and therefore, durability of wealth?  We’ve heard way too much in the past few years about instability in government… real estate… the economy… investments.


Self-Reliance Solution #4:  Grow Your Money Safely

Remember the old adage: a fool and his money are easily parted? It’s still true. Those with wealth don’t rely on luck or subject their dollars to the whims of the market. They don’t confuse saving with investing, or investing with gambling. Investing your dollars is not the same as speculating with them.

Prosperous people don’t hand their assets over to someone else’s control without knowing they can expect predictable, even guaranteed results. And when they pay fees or commissions, they are sure what they are getting. Simply put, the truly wealthy leave little to chance.

Unfortunately, too many people don’t save enough, so they try to make up for their lack of savings by taking larger risks, chasing unrealistic rates of return. They try to “beat the market” (even though the professionals rarely can). Some even entrust their security to software that chooses their stocks for them, which could be particularly tricky in this brave new speed-trading world.

The wealthy choose solid investments over quick-buck schemes or the ups-and-downs of the stock market. They choose consistent savings, solid growth, and the principles of prosperity over market hopes and promises. Often, their portfolios consist mostly of business assets, real estate, and guaranteed assets such as cash value life insurance. In fact, most millionaires don’t go near the stock market with more than 20 per cent of their assets, according to Stanley and Danko’s findings.

Those who live by the Principles of Prosperity don’t cross their fingers in the hopes that a stock doesn’t fall or that they’ve chosen just the right moment to sell high. No, they spend their energy creating value, which leads to wealth, not worrying about the Dow Jones or the prices of commodities.

Are you financially self-reliant? If not, decide to develop your own financial stability through taking control of your earning power, developing multiple streams of income, saving all you can, and concentrating on reliable investments with known or guaranteed returns. That way, even in times of stormy economic weather, you will find yourself on solid ground.

Can we help you save and invest safely with reliable returns? Contact us today.


© Beecham Financial Services & Prosperity Economics Movement

How Risky Is That Risk Assessment Questionnaire?

by Evan Beecham on 08/11/15

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” 

-Paul Samuelson

If you’ve ever walked into a financial planner’s office or a brokerage firm, chances are you were handed a “risk assessment questionnaire," or something like it. The purpose of the this quiz is to assess how much risk you are comfortable with when it comes to investing.

To determine your risk assessment profile, you'll proceed to answer questions such as:

“Would you be willing to take risks in order to meet your long-term financial objectives or would you rather protect your principal at the expense of future gains?”

“Would it be acceptable to experience a 30% loss if it was followed by a 30% gain later on?” (We’ll be looking at this question in more detail below).

“Will you need this money in ten, twenty or twenty-five years?”

A computer program will then use this information to assign you a risk tolerance label such as “moderately conservative” or “aggressive.” A chart will then be generated with recommendations to “diversify” your assets into a variety of stocks, bonds and/or mutual funds.

Here are the problems with this all-too-common scenario:

1. Only a limited menu of investment options are presented.

If your financial planner presents you with a narrow choice of stocks or bonds, why would you question whether or not these are your only options? Be aware that your “investment representatives” are often salespeople hawking financial products from a large corporation – hardly unbiased advice! Even fee-based advisors are often uninformed about any out-of-the-box (or off Wall Street) investment strategies.

The consumer is forced to assume that stocks, bonds and mutual funds are the preferred options, as no other choices are typically offered. You invest your assets according to the computer-generated chart, when your best strategies might be literally off-the-chart!

2. Psychological pressure is brought to bear on the consumer by the risk assessment process.

You’re probably aware of the Milgram experiment where subjects thought they were administering electric shocks to an unseen participant. Even when they thought they were causing harm, the subjects were so unwilling to disobey authority that they continued to give shocks.

Risk assessment profiles fortunately don't involve any electricity - real or imagined. And yet, a similar game is played in which investors be unwilling to speak up or contradict a financial expert who surely "knows best."

The questionnaires serve the purpose of convincing those taking it that a certain level of risk is necessary. You might withhold questions or protests rather than appear hesitant or foolish in front of a professional, especially one assuring you that you have plenty of time for the market to work its magic. You might be told that you "can afford to take some risk," or even that you need to take on risk.

You may feel subtly pressured, but rest assured, stock market risk is not some necessary financial rite of passage, no matter what you are told.

3. The client is forced to act based solely on conjecture and speculation (otherwise known as guesswork).

You might have the stomach for extreme sports such as snowboarding or mountain-climbing, but that is not an indicator of how well you can stomach losing your hard-earned money. However, you will be asked to project how you will feel about hypothetical financial scenarios that will drive your investments for decades to come.



4. The future performance of conservative, moderate or aggressive portfolios is also nothing more than a “best guess”.

The famous disclaimer goes “past results are no guarantee of future performance”. And yet all the recommendations you receive will be based on the questionable practice of looking at how similar investments performed in the past!

“We don’t believe in guesswork when it comes to your risk.” This ironic statement comes from the website of an advisory firm. Their clients can choose between 32 possible responses in an effort to provide “a technical approach to investment planning and management.” Each choice is assigned a numerical value and then added up to arrive at a score that will dictate the entire basis of their financial approach.

However, none of the assigned categories (conservatively moderate, moderate, moderately aggressive and aggressive) present the possibility of a 45-50% loss, which many investors experienced in 2008-2009. Instead, a hypothetical $100,000 portfolio is shown as having a limited range of growth and shrinkage:


Therefore, investors are asked to predict how much they are comfortable losing, while the advisor cannot guarantee the portfolio will perform in those ranges.

5. An illusion of security is fostered by risk assessment profiles.

A financial planner making recommendations might predict that a portfolio won’t realize more than a 5 or 10% loss, when a much larger loss is actually feasible.

Even people who have lost 50% of their portfolio value doubt a repeat crash could happen again. The 2008-2009 losses are seen as being a one-time glitch in the system, even though questionable Wall Street practices such as investing in derivatives, CDO's and other high stakes gambling with other people’s money have either continued or resumed.

Mr. Value Investor himself, Warren Buffet, couldn’t sidestep the economic downturn. In September 2008, Berkshire Hathaway shares had reached a high point of $147,000. By March, 2009, that number had plummeted more than 52% to $70,050. It took five years and two months for this stock to recover and finally surpass its 2008 level.

If the most profitable investor of all time can be caught unaware by a Wall Street crash, how reliable will a questionnaire and a computer algorithm be in keeping your investments safe?

6. An acceptable loss for whom?

Remember the profile question that asked how an investor would feel about a 30% loss if it was followed by 30% gain? If you do the math, it is obvious that the question will catch most people off guard.

Let’s say the hypothetical $100,000 portfolio loses 30% -- that would leave $70,000. But then if there is a 30% increase, all is well, right? Not exactly, as 30% of $70,000 would be $21,000, bringing the principal back to only $91,000. This is still a total loss of 9%, not counting any penalties or fees.

(That is the difference between the average rate of return versus the actual rate of return, and it's another way that investors can be misled.)

Who Benefits The Most From A Risk Profile?

At this point, it should be clear that risk assessment profiles are not in place to protect the investor, they are there to mitigate the risks of stock brokers and financial planners. In the words of Tamris, a financial consultancy firm, “An investor enters a wealth and asset management relationship with expectations. If these expectations are not carefully managed and assessed by the advisor there will be conflicts later on in the relationship.”

Ultimately, a risk assessment profile is a way to prepare you to lose money, and to give your "permission" to the broker or planner to lose it for you!

If the investment strategy results in a low or negative return, it isn’t the responsibility of the financial planner. After all, you were the one directing how your money was invested, according to risk tolerance levels determined by your profile.

Lawsuits are filed against brokers and financial planners for fraud, misconduct or making inappropriate investments (such as sinking a senior’s portfolio into nothing but stocks). But when investors sign off on wishes to be “aggressive” with their funds and then sustain large losses, the broker has protection.

Risk assessment profiles are also used to get us to buy into such financial half-truths, such as:

      ·         You can’t get decent returns through safe investments.

·         The only big earners are those willing to embrace aggressive strategies.

·         It is business-as-usual to let someone else control your assets until they are needed for retirement.

·         It isn’t your financial planner’s job to protect you from losses, it's only their job to help assess your level of risk tolerance.

Reduce Your Risk AND Raise Your Investment Results!

If you want to learn how modern finance really works, read Kim Butler’s Busting The Financial Planning Lies. The book demonstrates how wealthy people ignore typical financial advice, and instead follow what Butler describes as "Prosperity Economics" principles and strategies. Read it today and take back control of your thinking and your money! For more information regarding savings without market risk, contact me today.


HomeAbout UsContactBlogBuilding Wealth For Life

Subscribe to our blog updates

* indicates required
  Can We Help You?
      Contact Us
 for a complimentary