New Real Estate Sector Puts Equity REITs in the Spotlight
Publicly traded REITs and other listed real estate companies are being moved to a distinct Real Estate sector by S&P Dow Jones Indices and MSCI.
S&P Dow Jones Indices and MSCI recently moved publicly traded equity real estate investment trusts (REITs) and other listed real estate companies from the Financials sector into a new, separate Real Estate sector effective September 1, 2016. (Mortgage REITs remain in the Financials sector, along with banks and insurance companies.) There are now 11 headline sectors instead of 10. It’s the first time a new sector has been added to the Global Industry Classification Standard (GICS®) since it was created in 1999. (1)
The move has implications for investors, because S&P and MSCI indexes are common benchmarks for investment performance, and the GICS is often used as a framework for portfolio construction. By some estimates, fund managers could shift as much as $100 billion to the Real Estate sector in a collective effort to follow the market weightings of various indexes. (2)
The change could also affect the asset allocation decisions of some individual investors by drawing more attention to equity REITs as income-generating assets with the potential for capital appreciation.
Fixed-income appeal
An equity REIT is a company that combines capital from investors to buy and manage income properties such as apartments, shopping centers, hotels, medical facilities, offices, self-storage units, and industrial buildings. Publicly traded REIT shares can generally be bought or sold on an exchange at a moment’s notice, making them more liquid than physical real estate investments, which involve transactions that can take months to complete.
Many REITs generate a reliable income stream regardless of share price performance, primarily because they are required by law to pay out 90% of their taxable incomes as dividends to stakeholders. In the second quarter of 2016, the S&P REIT index had a dividend yield of 3.73%. (3) The performance of an unmanaged index is not indicative of the performance of any specific security. Individuals cannot invest directly in an index.
REIT share prices can be sensitive to interest rates. As rates rise, steady dividends may appear less attractive to investors relative to the safety of bonds offering similar yields. On the other hand, current fundamentals, including modest economic growth, lower unemployment, and rising rents, are generally seen as positive conditions for REITs and other real estate businesses.
Diversification tool
Breaking real estate out of the Financials sector acknowledges that the industry’s business models and ties to underlying property markets produce a distinctive risk-return profile, including a relatively low correlation to the rest of the stock market. (4) Because the share prices of equity REITs don’t rise and fall in lockstep with the broader stock market, including them in your portfolio could help reduce the overall level of risk.
The return and principal value of all stocks, including REITs, fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Diversification and asset allocation do not guarantee a profit or protect against investment loss; they are methods used to help manage investment risk.
REIT distributions are taxable to the extent they include any ordinary income and capital gains. Some REITs may not qualify as a REIT as defined in the tax code, which could affect operations and negatively impact the ability to make distributions.
There are inherent risks associated with real estate investments that could have an adverse effect on financial performance. Such risks may include a deterioration in the economy or local real estate conditions; tenant defaults; property mismanagement; and changes in operating expenses (including insurance costs, energy prices, real estate taxes, and the cost of compliance with laws, regulations, and government policies).
Breaking real estate out of the Financials sector acknowledges that the industry’s business models and ties to underlying property markets produce a distinctive risk-return profile, including a relatively low correlation to the rest of the stock market.
(1) , (3) S&P Dow Jones Indices, 2015-2016
(2) Investor’s Business Daily, March 18, 2016
(4) FinancialAdvisor.com, March 1, 2016
The foregoing is provided for information purposes only. It is not intended or designed to provide legal, accounting, tax, investment or other professional advice. Such advice requires consideration of individual circumstances. Before any action is taken based upon this information, it is essential that competent, individual, professional advice be obtained. JAS Financial Services, LLC is not responsible for any modifications made to this material, or for the accuracy of information provided by other sources.
Identity Theft
It seems there are an increasing number of reports of identity theft ID). I recently saw an article by Sid Kirchheimer that was published by AARP about the use of identities of people that have died. “Postmortem identity theft may be shocking but it’s hardly rare, especially because the victims.”
One of the best known sources of information for ID is the Social Security Administration’s Death Master File. The list is maintained to allow employers, financial institutions and government agencies to identify fraud. That file’s use is intended to be restricted to those entities.
“But federal law requires a version known as the Social Security Death Index be made available to the public.” Social security numbers are not on the list. Information on the list is often enough information for ID theft. The details maybe available free on genealogy and other websites.
Kirchheimer’s article includes the following to block ID theft of the deceased:
- “Immediately send death certificate copies by certified mail to the three main credit reporting bureaus. Request that a ‘deceased alert’ be placed in the credit report.
- Mail copies as soon as possible to banks, insurers and other financial firms requesting account closures or change of joint ownership.
- Report the death to the Social Security Administration at 800-772-1213 and the IRS at 800-829-104. Also notify the DMV.
- In obituaries, don’t include the deceased’s birth date, place of birth , last address or job.
- Starting a month after the death, check the departed’s credit report at www.annualcreditreport.com for suspicious activity.
IRS Taxpayer Guide to Identity Theft:
Office of the Inspector General Social Security Social Security Administration – Report Fraud:
The lessons learned from “the old Enron story” still apply.
The following is from Edward Mendlowitz’s Feb. 24, 2015 Blog.
“in his book Money: Master the Game, Tony Robbins dredges up the old Enron story, which I agree with, and want to call to your attention now. Here is a brief listing copied from Tony’s book of the lauds, Enron received right up until their bankruptcy filing.
Mar 21, 2001 Merrill Lynch recommends
Mar 29, 2001 Goldman Sacks recommends
June 8, 2001 J.P. Morgan recommends
Aug 15, 2001 Bank of America recommends
Oct 4, 2001 A G Edwards recommends
Oct 24, 2001 Lehman Brothers recommends
Nov 12, 2001 Prudential recommends
Nov 21, 2001 Goldman Sacks recommends (again)
Nov 29, 2011 Credit Suisse First Boston recommends
Dec 2, 2001 Enron files Bankruptcy
Millions of Investors trusted these venerable firms and followed their recommendations. A question I had at the time was, “How much work did they do before they made their recommendations?” I could not have been too much since every recommendation was wrong. Another observation is that many of the largest mutual funds has significant positions in Enron.
Now, lets fast forward to today. Has anything changed? Were lessons learned? Are more intensive analysis being done now? I suggest that nothing has changed. Examples are in the many recommendations to buy oil stocks a few months ago before a subsequent additional 35% drop. …Next, as Robbins points out, most actively managed mutual funds do not outperform the index they are trying to beat….
The principles in the book are easy to understand, digest and act on…. I have condensed them [his seven steps] and … restate as follows:
1. Commit to regular savings program
2. Know and understand why you are investing in
3. Develop a plan and, while at it, reduce spending, keep investment costs low and shed debt
4. Allocate your assets carefully and rebalance periodically
5. Create a lifetime income plan
6. Invest like the .001%, i.e. don’t be stupid and re-look at step 2
7. Be happy by growing and giving
All good advice you can start following today.
Privacy Breaches
Two recent articles discuss privacy breaches.
“Sidestepping the Risk of a Privacy Breach”, posted by the nytimes.com February 7, 2014, discussed the security of personal data when using “plastic”. A representative of the American Bankers Association expressed concern that criminals seem to be ahead of the marketplace, the regulators and the consumers.
Starting in 2005, there have been 4.167 known breaches that exposed 663,587,386 records of personal information. Recent headlines have revealed continuing breaches at some very large and sophisticated entities.
Over 30% of people whose information was breached in 2013 became victims of some kind of identity theft. That is an increase from about 12% three years ago.
Emails are increasingly exposing us to the threat of breaches to our privacy. If you receive an email asking for personal information and there is anything that raises concern, go to the website and call the entity. If there is a known breach, it may be on the website or the representative of the entity can tell you if it is legitimate.
“Leading a cash-only life is a theoretical possibility, but it boxes you out of most online shopping and makes traveling difficult. Going cash-only mostly means endless trips to the A.T.M. and all the fees and hassle that come with it”.
“With the right tactics, however, it’s easy enough for most people to greatly bolster their odds of avoiding the worst of the problems.”
Gregory Karp’s article “Think before buying ID theft protection” was in The Chicago Tribune Feb. 9, 2014.
He believes that you probably should not subscribe to identify “protection” services, “if your only concern is a thief fraudulently using your payment card information. Typically, that’s not a big deal, and you won’t lose any money. ”
A representative from the Identity Theft Resource Center was quoted: “You can’t make the blanket statement that all of these services are bad or not worth your while.” A representative of the Privacy Rights Clearinghouse indicated the services have “dubious value. It’s fairly expensive, and there are other ways you can protect yourself.”
He noted that Consumer Reports had the following on their website: “Don’t get fleeced by identity-theft protections services.” Gregory noted that some felt the claim of “prevention” and “protection” are exaggerations. The benefit of these services is that they provide more timely alerts to a breach.
If you are thinking of getting this type of service learn exactly what you get. You need to educate yourself and follow through if you do not get this type of service.
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Reverse Mortgage Changes
Several changes have been made to the federally insured Home Equity Conversion Mortgage (HECM) reverse mortgage program to shore up the viability of the program. The changes are generally designed to improve the odds that homeowners taking out a reverse mortgage will be able to meet their obligations and not become a burden on the program. The changes are generally effective for new reverse mortgages after September 30, 2013 (but prior rules generally apply to case numbers assigned before September 30, 2013, if closed on or before December 31, 2013). Additional financial assessment and set-aside requirements take effect January 13, 2014.
Initial disbursements limited
One change generally restricts the amount that can be disbursed to you within one year of your obtaining the reverse mortgage. Under the new rules, the maximum amount that can be disbursed to you at closing or during the first 12-month disbursement period is equal to the greater of (a) 60% of the principal limit or (b) the sum of your mandatory obligations plus 10% of the principal limit (not to exceed 100% of the principal limit). Mandatory obligations include items such as the initial mortgage insurance premium, the loan origination fee, recording fees and taxes, credit reports, a survey, a title examination, title insurance, a property appraisal fee, fees for warranties or inspections, funds to pay any required repairs, and amounts used to discharge liens, debt, and taxes. Except in the case of a single disbursement lump-sum payment option, additional amounts can be disbursed in later years, up to 100% of the available principal limit.
New mortgage insurance premium rates
Another change increases the basic initial mortgage insurance premium, and applies an even higher rate if more than 60% of the principal limit can be disbursed to you in the first year. Under the new rules, an initial mortgage insurance premium fee of 0.5% of the maximum claim amount will generally be charged. The initial fee is increased to 2.5% of the maximum claim amount if required or available disbursements to you at closing or during the first 12-month disbursement period are greater than 60% of the principal amount. In either case, there is also an annual fee equal to 1.25% of the mortgage balance.
Financial assessment and set-asides
Finally, changes are made to improve the odds that you will be able to meet certain of your obligations under the reverse mortgage. For case numbers assigned on or after January 13, 2014, you must undergo a financial assessment prior to approval and closing on a reverse mortgage. Based on your assessment and as a condition of loan approval, you may be required to use proceeds from the reverse mortgage to fund a lifetime expectancy set-aside for payment of property charges or authorize the mortgagee to pay property charges from your monthly payments or your line of credit. Property charges include property taxes, hazard insurance, and flood insurance.
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New Mortgage Rules Scheduled to Take Effect in January
The Consumer Financial Protection Bureau (CFPB) has issued new mortgage rules that are scheduled to take effect on January 10, 2014.
In 2008, the rise in home foreclosures was viewed by many as the result of substandard mortgage lending practices. Subsequently, Congress passed the Dodd-Frank Act in 2010, which created the CFPB and set forth a number of financial industry regulations aimed at protecting consumers, including some pertaining to mortgage lending. In January 2013, the CFPB issued mortgage rules that implement the mortgage provisions set forth by Congress under the act.
Highlights of the new mortgage rules
The new rules broaden coverage of existing ability-to-repay rules, which require a lender to make a reasonable, good faith determination that a consumer has the ability to repay a loan. The rules extend coverage of the ability-to-repay rules to the majority of closed-end transactions secured by a dwelling (with certain exceptions).
In addition, the rules set forth specific procedures a lender must follow when determining a borrower’s ability to repay a loan, including the consideration and verification of certain consumer information (e.g., income, employment status) and the calculation of the borrower’s monthly mortgage payment.
The rules also center on what are referred to as Qualified Mortgages. According to the Dodd-Frank Act, lenders that issue Qualified Mortgages will receive a presumption of compliance with ability-to-repay rules, thereby reducing their risk of challenge from a borrower for failing to satisfy ability-to-repay requirements.
The rules specify various requirements that a loan must meet in order for it to be considered a Qualified Mortgage, including:
- Limits on risky loan features (e.g., negative amortization or interest-only loans)
- Cap on a lender’s points and fees (3% of the loan amount)
- Certain underwriting requirements (e.g., 43% monthly debt-to-income ratio loan limit)
What do the new rules mean for consumers?
The new mortgage rules were mainly put into place as a way to end irresponsible mortgage lending and ensure that borrowers will only be able to obtain a mortgage loan that they can afford to pay back. Proponents view the rules as welcome industry safeguards that simply mirror responsible mortgage lending practices that are already in place.
However, some mortgage-industry experts fear that the new rules may end up making obtaining a mortgage loan more difficult than it has been in the past–especially for borrowers who have a high debt-to-income ratio. Borrowers may also find themselves burdened with the task of providing lenders with additional documentation that they may not have had to in the past.
For more information on the new mortgage rules, you can visit the CFPB website at http://www.consumerfinance.gov/
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Conventional wisdom does not always apply.
This is the subject in Gregory Karp’s article, “Turning conventional wisdom on its head”, in his October 6th article in The Chicago Tribune. Following are excerpts from that article.
“Getting credit cards at a younger age can be a good thing. ‘It seems that the type of people who get credit early are better borrowers – less likely to default…’”.
“Part of the reason young borrowers become better borrowers may be that they are once bitten, twice shy. ‘They have some minor delinquencies and they learn their lesson’”.
“The takeaway? Don’t necessarily discourage a young adult from getting a credit card.”
“You might think that sticking with your auto insurer year after year breeds good will and maybe even lower rates…according to the Consumer Federation of America…some insurers are illegally jacking up car insurance rates on people who, faced with higher rates, are less likely to shop for a better deal, a practice called price optimization.” “…the takeaway is tried-and-true advice regardless of price optimization: Regularly shop around your insurance coverage to make sure you’re not overpaying.”
“Those ‘use by’ and ‘sell by’ dates on food items seem like helpful guides, but they actually don’t mean much. That’s because they are not standardized or regulated…”
Based on this article and numerous other similar articles, it may be more important than ever to exercise due diligence rather than rely on conventional wisdom.
Fees of a Fee-Only adviser are only paid by the client.
I have not understood why there has been any resistance to requiring financial planners and investment managers to be held to a fiduciary standard. A recent article in the Wall Street Journal (WSJ) may indicate why some do not want to be held to a fiduciary standard.
The Free Dictionary by FARLEX defines a Fiduciary as: “An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another’s benefit.”
A fiduciary relationship encompasses the idea of faith and confidence and is generally established only when the confidence given by one person is actually accepted by the other person.”
Many of us believe it is putting the client first.
Jason Zweig’s September 20th article “ ‘Fee-Only’ Financial Advisers Who Don’t Charge Fees Alone” may show why there is resistance to a fiduciary standard for financial planners and investment managers. They found that 24% of the 33,949 certified financial planners (CFP) they analyzed described their compensation as “fee-only”.
The article notes that “Securities lawyers and government regulators say that an adviser who works for a brokerage firm or insurance company that charges commissions shouldn’t describe his services as ‘fee only’, even if the adviser himself doesn’t charge commissions to his clients.” Although none of the CFPs at major banks and brokerage firms, the WSJ identified 661 listed CFPs who call themselves ‘fee-only’” at some of the major banks and brokerage firms. The problem extends beyond CFPs.
Can you argue that if the compensation is not accurate, the advisor is not a fiduciary?
Tips for selecting a fianncial professional
Linda Stern (Reuters) provided some tips for getting help selecting a financial planner and/or adviser in her August 4, 2013 column in the Chicago Tribune.
The first part of the article summarizes the battle that has been going on since the 1990s to impose a requirement that all financial planners and/or advisers put their client’s interest first. The point she was making is that you should not wait until Congress decides who should be covered and by what standard as an excuse for not getting help with your financial matters.
“If you are getting your financial advice for free, you are not getting an adviser who is putting…” your interest first. “Smart and unconflicted financial advice is worth something…” Many of us provide guidance, support, etc. for those that want to manage their financial matters themselves.
“Look for the term ‘fiduciary planner’.” Until Washington waters it down, it means the adviser has to make sure your investments are the best possible investments for you.” Those that have the Personal Financial Specialists Credential (PFS) had to establish they had the specified experience, specified education and successful completion of the required examination. As a member of the AICPA, we are also are subject to the AICPA Code of Professional Conduct. CPA/PFS professionals must maintain objectivity and integrity, be free of conflicts of interest, and shall not knowingly misrepresent the facts. Some believe these requirements are the essence of the fiduciary duty.
“Regardless of where you get your advice, make sure your assets are held in a bona fide brokerage account insured by the Securities Investor Protection Corp. “
Bottom line is that you should not delay planning. Delays can limit you alternatives and require more effort to reach your financial goals. You should also do your due diligence in selecting a professional to guide you through the process.
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Does the Health-Care Reform Law Apply to You?
Beginning in 2014, the mandatory health insurance coverage provisions of the Patient Protection and Affordable Care Act (ACA) go into effect. But the law does not require everyone to have health insurance, nor are all of the coverage requirements applicable to all types of health insurance.
Are you exempt from the health insurance mandate?
Most U.S. citizens and legal residents are required to have health insurance beginning in January 2014 or face a penalty tax that can be as high as 1% of taxable household income exceeding the taxpayer’s federal income tax filing threshold (increasing to 2% in 2015, and 2.5% in 2016). You can avoid the penalty tax if you already have health insurance for the entire year, and the coverage is obtained from one of the following:
Medicare
Medicaid or the Children’s Health Insurance Program (CHIP)
TRICARE (for service members, their families, and retirees)
The veteran’s health program
Employer-provided health coverage
A policy you purchase on your own that’s at least at the Bronze level
A plan that is grandfathered (in existence prior to the enactment of the ACA that meets the requirements of grandfathered plans under the law)
However, certain groups are not required to be insured and thus are not subject to the penalty tax. The ACA specifically excludes people who are members of an exempt religious sect or division, members of a health-care sharing ministry, Native Americans, undocumented immigrants, incarcerated individuals, people whose income is so low that they don’t have to file federal income taxes, and people eligible for a hardship exemption (when the cost of insurance after employer contributions and federal subsidies exceeds 8% of their income).
What types of insurance are not affected by the health-care reform law?
The health-care reform law does not apply to automobile insurance, homeowners insurance, and umbrella liability coverage, even though they provide some health-related coverage. Also not subject to the law’s provisions are life, accident, disability, long-term care, and workers’ compensation insurance. Medigap (Medicare supplement) insurance is generally not covered by the ACA if it’s sold as a separate plan and not as part of a comprehensive health insurance policy. In addition, retiree-only plans are exempt from the ACA’s provisions. These plans are group health insurance plans with fewer than two participants who are current employees.
For more consumer information about enrolling in a health insurance plan, government subsidies, and tax credits, visit the U.S. government’s website, www.healthcare.gov.
