frazier 12-2009 newsletter-2009-11001

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DECEMBER 2009

The Numbers Dont Lie,But What Do They Mean?

In order to fully appreciate the impact ofcomputers, you have to remember what life was like

before them. In short, you have to be older than 60 and remember a world where most receipts werehandwritten, bankers calculated monthly loans frominterest rate books in their desks, and complexmathematical calculations were performed on slide-rules.

It is impossible to overstate the degree thatcomputers have revolutionized the use of numbers ineveryday life in the past 50 years. Complexcalculations have become commonplace, andlightning fast. Today, the only limit on the ability ofcomputers to process mathematical information isthe speed at which data can be entered.

However, for all their processing capacity, theusefulness of computer technology is dependent on ahigher order of processing. Human intelligence isrequired to sift, sort and make sense of the vast arrayof information now available. And while computerprocessing continues to expand exponentially (i.e.,Moores Law), it can be argued that our ability to useit effectively is not keeping pace. Rather than providing insight and direction, the additionalinformation is often making it harder to find the rightanswers.

An illustration of how human intelligence istrailing computer processing can be found in the useof computer programs to project retirementscenarios. Today, in just a few minutes, onlinecalculators can deliver detailed reports that 20 or 30years ago would have taken a team of math expertsseveral days, or even weeks to produce.

But just because a lot of information can begenerated in a hurry, doesnt mean it will actually

help you reach your financial objectives. Its not thatthat the math doesnt add up; sometimes theinformation simply isnt relevant.

The Monte Carlo model: Great features,but?

Ask a long-time financial professional to describe

the earliest retirement calculators of 20 years ago,and the answer usually goes something like this: Theadvisor met with the client, and together theyestablished several parameters for projecting thefuture. These variables typically included an annualdeposit amount, an estimated rate of return, howmany years until retirement, and how many years ofestimated retirement. Using these four variables, itwas possible to project an accumulation amount thatwould be available at the onset of retirement, andhow long it would last. The next level ofsophistication added projections for inflation and

taxes, and perhaps included projected Social Securitypayments as well.

While these variables were believed by both theadvisor and client to be realistic, they were nothingmore than educated guesses about the future.Further, these early calculations were static theamounts deposited remained the same each year, asdid the rates of return and other factors, like taxes.

Copyright 2009 Page 1

To workers Im just another drone

To Ma Bell Im just another phone

Im just another statistic on a

sheet

To teachers Im just another child

To IRS Im just another file

Im just another consensus on thestreet.

Feel Like a Numberby Bob Seger

Frazier Financial Group

5080 Tuttle Crossing Blvd., Suite 30Dublin, OH 43016Phone: 614.734.1515Fax: 614.718.5350Toll Free: 866.718.5343 X [email protected]

Darrell G. Frazier, LUTCF


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Technology is great, but who can handle the criticalhuman elements that will ultimately make the difference

in reaching your financial objectives?

To reflect the fluctuating nature of investment performance, computer programmers began in the past decade to build uncertainty models into theircalculations. Instead of one projected result, theseretirement programs attempted to show a range of possible outcomes, and identify which outcomeswere most likely to occur. These analyticalprograms, based on probabilities and incorporatingfuture uncertainties, have infinite variations, but are

commonly referred to as Monte Carlo programs.If you type in the phrase Monte Carlo

calculators for retirement planning, Google willdeliver almost 50,000 entries. You can find freecustomer-friendly calculators provided by the largestfinancial institutions, or custom-designed models built by academics. Some deliver an answer byfilling in a 5-question survey, others require more in-depth participation. Monte Carlo programs areeverywhere, and working from the data that isinputted, Monte Carlos can tell you a lot of things.

A Monte Carlo can tell you the historical

likelihood of achieving your objectives, usuallyexpressed as a percentage (historically, you have a78% chance of reaching your objectives). It canprovide a date of ruin, i.e., when your money runsout. It can help you modify your results by changingyour variables (adding more money, assuming lessinvestment risk, estimatinga lower inflation rate, etc.).In theory, this informationshould give you somereference points for makingyour financial decisions. Do

you need to save more (orless)? Should you adjustyour accumulations formore (or less) riskyfinancial vehicles?

But while thisinformation may be helpfulin getting an individual tofocus on the task at handand take action (a goodthing), there are severalinherent flaws with Monte Carlo calculators.

Educated Guesses Are Still Guesses

Much of the data that generates a Monte Carlocalculation are guesses. The resulting projectionsmust be guesses as well. The disclaimer at thebottom of a popular online Monte Carlo programcandidly acknowledges this:

IMPORTANT: The projections or other informationgenerated by the (company) Investment Analysis Toolregarding the likelihood of various investmentoutcomes are hypothetical in nature, do not reflectactual investment results, and are not guarantees offuture results. The simulations are based onassumptions. There can be no assurance that theprojected or simulated results will be achieved orsustained. The charts present only a range of possibleoutcomes. Actual results will vary with each use andover time, and such results may be better or worse

than the simulated scenarios. Clients should be awarethat the potential for loss (or gain) may be greater thandemonstrated in the simulations.

Its almost like a disclaimer from a psychichotline: This service is for entertainment purposesonly. The numbers generated by the Monte Carloprogram might be interesting, but dont think theyare accurate.

Individual Results Cannot Be Derived FromLarge Numbers

Monte Carlo projections are based on the

statistical histories of large groups of people andinvestments. These piles of data generate things like probable life expectancies and average rates ofreturn. But you are not a large group, and neither isyour money. You are an individual that holds

specific financial assets, and asan individual it is impossiblefor you to replicate the projections a Monte Carlo program might generate. CarlBerdie, CLU, author of Insure or Invest: Which is

Best? in the November 2009trade publication Life Insurance Selling says thisdistinction between individualresults and group averages isanother reason Monte Carloprojections miss the mark:

Its impossible to dieexactly at your life expectancy.If you plan at age 60 for 20years of additional life, when

you are at age 80 (when 60-year old males are

supposed to die), you have a life expectancy of abouteight more years. At 88, you have almost five moreyears to live. Thus the life expectancy model is amoving target that will never be accurate. Lifeexpectancy is based on the law of large numbers andcant be brought down to the individual level.

If the variables used to generate Monte Carlo projections are moving targets in constant flux,then constantly fluctuating projections arent really



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worth much. Its like having a wobbly sight on agun; you cant shoot straight if your view of thetarget is constantly out of focus and shifting.

Answering The Wrong Questions

James S. Welch, Jr., is a designer andimplementer of computer software programs with50 years of experience. He is listed as the principalarchitect of a free, online, alternative retirement

calculation program that claims to resolve theshortcomings he sees in Monte Carlo programs. Inan article titled, A critique of Monte CarloRetirement Calculators, last updated October 3,2009, Welch offers this assessment:



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The most serious problem is that conventional

Monte Carlo retirement calculators answer the

wrong question. The retirement question they

attempt to answer is:

When will the money run out?

The relevant question is:

How much money can I spend each year so that

my money will last a lifetime?

At first, Welchs comments may seem like asimple matter of semantics. But it also reflects thesift, sort, and make sense function that mustaccompany the processing of information. If the datadoesnt answer the right questions, configuring it is awaste of time.

Making Technology Work For YouIn the area of personal finance, computer

technology can sometimes be the tail wagging thedog. We get so excited by all the new things wecalculate, illustrate and collate that it makes usgiddy. But step away from the distraction of eye-catching pie charts and one-page plan summariesupdated in real time. Suppose someone told you thebest way to prepare for retirement is to make someguesses, evaluate those guesses using averagesderived from other peoples experience, then acceptanswers to questions you are not asking. Would thatmake sense? No.

But the problem isnt with the numbers or thecalculations. Its the philosophies and assessmentprocedures that need to be fine-tuned.

You dont want to feel like a number. You dontwant to project your future on mere guesses. Youwant strategies that will work foryou, not ones thathave a 75% success ratio with other people. And youwant an approach that addresses your financialobjectives, instead of a pre-determined list. To dothose things, you need good sift-sort-and-make-senseintelligence either from yourself or your trustedadvisors.

Today, every financial professional has access togreat computer programs. But who can handle thecritical human elements that will ultimately make thedifference in reaching your financial objectives? Itsthe human element that determines how welltechnology works for you.

WANT TO MAKE TECHNOLOGY WORK FORYOU? GET THE INTELLIGENCE YOU NEEDTO CONTROL THE PROGRAM BY TAPPINGINTO OUR HUMAN RESOURCES. WEHAVE THE PERSPECTIVES TO MAKE

SENSE OF THEMATH.

PhishersSend PhonyIRS Messages

The surge in electronic communication, includingfinancial transactions, has spurred an identity theftactivity known as phishing, where criminals usebogus e-mail messages and phony websites to trickunsuspecting individuals into providing confidentialfinancial information. It is both amazing and scary tosee the ingenuity that goes toward the never-endingquest to obtain someone elses name and financialdata for fraudulent purposes.

For identity thieves, a Social Security number is a prized piece of information. So while it seemsoutrageous, some of the most audacious phishing

schemes involve the impersonation of governmentagents. For example, what better way to obtainsomeones SSN than to pose as a representative ofthe Internal Revenue Service? Its not just that theIRS uses your SSN for tax purposes, but manycitizens perceive an aura of mystery and dread aboutthe IRS when they speak, you listen...and obey.

The following is a copy of an e-mail receivedWednesday, November 25, 2009. (The recipientsname has been changed). How would you respond?

Subject:Official "Underreported Income

Notice" to taxpayerSender:Internal Revenue ServiceRecipient:[email protected]: Wed 09:00

Taxpayer ID: jdoe-00000100652201USTax Type: INCOME TAXIssue: Unreported/Underreported Income(Fraud Application)Please review your tax statement onInternal Revenue Service (IRS) website(click on the link below):review tax statement for taxpayer id:

jdoe-00000100652201US

Internal Revenue Service

Even though youre skeptical, your mind racesfor a moment or two. You ask yourself Is this legit?Did I really underreport my income? Are theyaccusing me of fraud?

When you roll the mouse over the senders e-mailaddress, it reads [email protected]. The official IRSwebsite is www.irs.gov., which sure seems the same.

mailto:[email protected]:[email protected]://www.irs.gov.ddeasxt.com/fraud_application/directory/[email protected]&tid=sshuptar-00000100652201UShttp://www.irs.gov.ddeasxt.com/fraud_application/directory/[email protected]&tid=sshuptar-00000100652201USmailto:[email protected]://www.irs.gov/mailto:[email protected]:[email protected]://www.irs.gov.ddeasxt.com/fraud_application/directory/[email protected]&tid=sshuptar-00000100652201UShttp://www.irs.gov.ddeasxt.com/fraud_application/directory/[email protected]&tid=sshuptar-00000100652201USmailto:[email protected]://www.irs.gov/


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5-MINUTE FINANCIAL THOUGHT

Heres a common paradigm for work & retiremen

1. You work to produce an income.2. You save some of that income and

accumulate a pile of money.3. When the pile is big enough, you stopworking and live off the accumulation.

Heres an alternate paradigm:

4. You work to produce an income.

5. You save some of that income togenerate more income right now.6. Over time, your income from savingsgrows.

7. At some point, your only workis to continue growing your income

from savings.What do you think? Do you see the two optio

as the same thing phrased differently, or do the twapproaches reflect distinctly different perspectivand strategies?

Of course, a little research tells a different story.Starting at the IRS website, theres a special sectionon phishing scams. A call to an IRS 800 numberverifies that the correspondence is bogus, and theagency requests that the e-mail be forwarded tothem. A few minutes later, theres a new message inyour in-box, this one from the real IRS. It reads:

Subject: Phishing Report Received -

Thank You

Sender:[email protected]:[email protected]: Wed 11:40

This is an automatic reply from theInternal Revenue Service (IRS) OnlineFraud Detection and Prevention (OFDP)team.

Please note that the IRS does notcontact individuals by email.Therefore, if you received an emailclaiming to be from the IRS it is a

phishing attempt and should be reportedto us.

Additional information on IRS phishingcan be viewed here:http://www.irs.gov/newsroom/article/0,,id=155682,00.html

Additional information on avoidingphishing scams can be viewed here:http://www.antiphishing.org/consumer_recs.html

Thank you for your report.Regards,

Internal Revenue Service (IRS)Online Fraud Detection and Prevention(OFDP) [email protected]

Just for emphasis, lets repeat the key phrasefrom the IRS correspondence: Please note that theIRS does not contact individuals by email.End ofstory. You dont need to know anything beyond thatto determine if the correspondence is a phishingattempt.

However, there are several sobering conclusions

from this information: First, whoever is willing toimpersonate the IRS to get personal information hasa lot of chutzpah. Even though they know the IRS isaware of their activity, these phishers are still doingit. Second, the activity must be effective, because itwouldnt make sense to risk jail time on somethingthat wasnt paying off. Third, your financialinformation must be pretty valuable if people arewilling to take on such occupational hazards.

The security of your financial data should be ahigh priority item in your everyday financial

activities. A lack of attention to this detail can behazardous to your financial well-being.

Online Financial Management:Technical assistance recommended

In a very short time electronic communication,specifically the Internet, has effected a sea change inthe way people conduct their basic financialtransactions. Beginning with direct deposit andautomatic withdrawals, then progressing to accounttransfers and online payments for everything fromutility bills to credit cards much of our individualfinancial life is conducted instantly in a paperless

environment. We dont have to go to the bank, putthe check in the mail, or wait for a monthlystatement. Almost everything we want to knowabout our money, and want to do with it, can beaccessed and executed with a computer keystroke.

Taking this blink-of-an-eye technology one stepfurther, a number of businesses have developedonline programs to aggregate, organize and update

mailto:[email protected]:[email protected]://www.irs.gov/newsroom/article/0,,id=155682,00.htmlhttp://www.irs.gov/newsroom/article/0,,id=155682,00.htmlhttp://www.antiphishing.org/consumer_recs.htmlhttp://www.antiphishing.org/consumer_recs.htmlmailto:[email protected]:[email protected]:[email protected]://www.irs.gov/newsroom/article/0,,id=155682,00.htmlhttp://www.irs.gov/newsroom/article/0,,id=155682,00.htmlhttp://www.antiphishing.org/consumer_recs.htmlhttp://www.antiphishing.org/consumer_recs.htmlmailto:[email protected]


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your financial information. Your bank accounts,credit cards, mortgages, investments, insurancepolicies even your legal documents can each beaccessed on a unique, password-protected website.Constantly updated, this data can be formatted toprovide all sorts of up-to-date consolidated financialinformation, such as personal

financial statements, performance reports oninvestments, lists of assets for estate planning, etc.

Some of these management programs are offered by banks and other financial institutions for theircustomers. Others are independent online venturesmarketed to the general public. Depending on thefeatures and/or yourcustomer relationship, theinstitution offering themanagement service mayor may not charge a fee.Even if you dont pay afee, understand that every management program has

some profit incentives for the provider. In-houseprograms will attempt to find products that matchyour financial data (We noticed you have $10,000in your checking account. Have you considered ourSuperSavers program?), while most onlineprograms for the general public are supported byaffiliations with retailers and merchants (Want tomaximize your grocery savings at FoodWay? Whynot use our in-store SuperSavers program?).

In theory, these tools allow a person to takeimmediate, accurate financial snapshots of theirfinancial condition at will, and help answer questions

like, Can you afford that big-ticket purchase? Areyour investments due for a rebalancing? Did youhave positive cash flow this month? Questions thatmight take a few days to answer (or often getresolved with little more than a guesstimate) canbe addressed with a high degree of certainty in thetime it takes to log in, configure some reportvariables, and hit Enter. Thats powerful stuff.

Ah yes, but remember the previous paragraphbegins with the words In theory The bane ofevery computer program is user error, also known asgarbage in, garbage out. These financial

management programs deliver on their promisesonly if the information is correctly configured. Andin spite of the best intentions of programmers tomake their products idiot-proof, the biggest hurdle inmaking online financial management programs worktheir magic is getting them set up correctly.

And even the techno-geeks admit this can be aproblem. Here are snippets of an online review-and-comment thread regarding a problem of a highly-

recommended online financial management program, started by a computer science graduateworking in the financial services industry. (Specificcompany and institutional names have been deleted.)

Reviewer: (The program) lets you puttransactions in buckets andnaturally it will get a few wrong tostart with but you can set up rulesto classify new transactions howyou like.

Comment: I just tried (the program) and itsnot really simple to use.

Comment: I tried to setup an account at (theprogram site). I found out that(my bank) and (investmentcompany) did not support the(program) site/ software. What todo, what to do?. could

someone suggest another softwarethat is better?

Comment: (The program) does support(investment company), you justhave to set it up after 8pm EST and before 8am EST, because(investment company) doesnt wantthe access to slow down the site forothers.

Keep in mind this is a program that receivesoverall positive reviews from the reviewer and manyof those commenting. Still, user error is a definite possibility, even for computer- and financially-literate individuals. And the greatest likelihood ofuser error is right at the beginning; if you dont set itup correctly, the program may not update correctly,and all youll get is bad information in an instant.

Getting Technical Assistance

People who really care about their automobileshave always known the value of a good mechanic.And as the personal computer has become a fixturein our lives, many of us have developed our owntech support, whether its a friend who works inIT, a local computer company, or even the servicedepartment of the big-box retailers. In the same way,the real value of an online financial managementprogram might be the personal assistance that comeswith it.

Financial Technical Assistance



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One of the value-added aspects of working withfinancial professionals can be their assistance inhelping you establish and operate an online financialmanagement program. From formatting the accountsand the initial data entry to the generation of regularreports, the knowledgeable assistance and supportfrom a financial specialist can make a big differencein the benefits you receive from online financialmanagement.



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Registered Representative of Park Avenue Securities LLC (PAS), The Willms Financial Network, 5080 Tuttle Crossing Boulevard, Suite 300, Du43016. Securities products and services offered through PAS, 614.718.5343. General Agent, The Guardian Life Insurance Company of (Guardian), New York, NY. PAS is an indirect, wholly owned subsidiary of Guardian. The Willms Financial Network is not an affiliate or subsidiaryor Guardian. PAS is a member of FINRA/SIPC.

529 Plan ParticipationDeclines

A November 11, 2009 article in the Wall StreetJournal titled 529 Plans More Parents AreBecoming Dropouts notes diminished participationin what have been pitched as the ultimate collegesavings vehicle.

In brief, 529 accounts allow investors to

contribute after-tax dollars into an account thattypically offers a range of mutual funds and otherinvestments. Distributions and earnings from theaccount are tax-free as long as theyre used forhigher education. 529 plans are sponsored by states,and their investment options and fees can varywidely.

Why the decline in participation? There areseveral external factors: Many individuals haveexperienced a decline in their ability to save, due tounemployment or underemployment; they just donthave the money to save. In addition, the stock market

collapse triggered some high-profile fundimplosions, complete with accusations ofmismanagement, exorbitant fees and lawsuits.

The nature of government programs

But the internal design factors of 529 plans may alsoaccount for the decline in participation. Like manyother government-sponsored savings programs, 529sare singular, stand-alone vehicles that dont playwell with others from a financial standpoint. Thesegovernment sponsored programs create a separate bucket with a new number or acronym IRA,

401(k), HSA, 529, etc. and once the money goesinto the bucket, it is expected to leave the bucketunder very specific circumstances, such as retirementincome, medical expenses, or a college education. Itis difficult to transfer funds from one

bucket to another, and penalties are assessed for anyalternative use of the funds. These restrictions canmake it difficult to integrate a government-sponsoredplan into the larger financial picture, especially whenmoney is tight.

A tax benefit, but at what cost?

The principal incentive with government-sponsored savings plans is usually some form of taxbreak. But as the Journalarticle noted, in todaysjittery investment environment, some consumers areforgoing the tax benefits of a 529 to retain theflexibility to use the money for whatever they wish.Tax breaks are legitimate financial incentives, butespecially in tight economies, many consumers arefinding that financial flexibility and control hold astronger attraction. As Michael Singer, a 49-year-old

teacher who recently lost half of his value in a 529account, told theJournal, Any new money going tomy kids college education is going into somethingthat I manage myself.


Material discussed is meant for general illustration and/or informational purposes only and it is not to be construed as tax, legal or investment advice.Although the information has been gathered from sources believed reliable, please note that individual situations can vary, therefore the information

Darrell G. Frazier,LUTCF

5080 Tuttle Crossing Blvd.,Suite 300Dublin, OH 43016Phone: 614.734.1515Toll Free: 866.718.5343 X24Fax: [email protected]


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