Pros & Cons: Rule 10b5-1

Pros of Rule 10b5-1:

For a senior manager, some of the benefits of having a formal program to manage the sale of your employer’s stock may include:

• Elimination of risk related to insider trading.
• Reduced risk of a concentrated holding.
• An ability to plan sales around vesting (or other) events.
• Tax-efficient transfer of wealth to family, charity, etc.
• Access to liquidity at predetermined future dates.
• An opportunity to construct an optimal investment portfolio.

 

Cons of Rule 10b5-1:

Some of the cons of a Rule 10b5-1 plan are related to the 'flawed legislation':

• Predetermined sales dates may cause for execution (sale) of the stock trade at a price that could be lower than the average price over a period for the executive's stock, on the day of trade execution (i.e. subject to normal market fluctuations).
• 10b5-1 Plans do not need to be filed with the SEC, creating a loophole for executives to exploit (they can later claim that the sale was part of a 10b5-1 disposition, although it may not have been).
• The executive can – at any time – decide to cancel or change the plan (implying an ability to manipulate the sales plan to fit the stock price).
• There is no requirement for how long the plan has to be in place, before trading can begin (meaning that one could e.g. start a 10b5-1 sales plan, and trade later that same day).

Some suggested improvements:

• Companies could be required to disclose the terms of the disposition plan, and trading arrangements, as part of their SEC filings.
• A time limit could easily be implemented, e.g. the plan has to be in place for 30 days before trading can commence.
• Once implemented, the executive cannot have the ability to cancel or change trades.
• The more detailed the plan, the lower the risk of suggested impropriety.
• Executives should ideally be in one plan, and not several at once.

There are several formal groups that use a variety of different methodologies to lobby the SEC to issue proper guidance on some of the issues above.  It is also possible that there may be new amendments to Rule 10b5-1 in the near future.

As usual, the chasm between the intent of the regulation and the knack that 'street-smart' people have in creating and/or finding loopholes around government regulations… is a great divide that is not easily crossed!

What is Rule 10b5-1?

Securities and Exchange Commission

Adopted as part of a set of rules to govern insider trading, Rule 10b5-1 was established by the United States Securities Exchange Commission (SEC) to allow insiders of publicly traded corporations to set up a future dated (trading) plan, to sell their company stock.

Some countries have adopted similar rules, often with more logical naming conventions – e.g. a Canadian ASDP – meaning “Automated Securities Disposition Plan.”

These rules allow major shareholders who are insiders to sell predetermined numbers of shares at predetermined, future dates.  For the purpose of this blog posting, insiders are defined as executives or senior managers with inside information about a publicly traded company, i.e. information that “outsiders” cannot possibly know about.

Why have such rules?   

Quite simply, and by way of an example, to avoid an insider selling his/her company stock at a high price prior to the company making poor financial results public (or another material issue that will cause shareholders to suffer a loss).  Disclosing poor financial results may cause the company stock to suddenly lose value, but this executive had then sold his/her stock PRIOR to the announcement.

To demonstrate the effect of the rule, let’s consider a major shareholder with inside information (e.g. the CEO), who may decide to sell 80,000 shares of his/her employer's equity.  To comply with the 10b5-1 rule, the CEO may decide to sell 10,000 shares at the end of every calendar quarter, for the next 8 quarters, instead of selling 80,000 shares immediately, at one time.  Of course, a large, unexpected sale of company stock by the company's CEO may cause market jitters anyway!

Corporate executives therefore use this rule to avoid possible accusations of impropriety when trading their company stock, because it is unlikely that they could be accused of having knowledge today, of something that may be deemed as inside information in the future, medium term.

The CEO may also elect to sell the shares and donate some (or even all of) the proceeds to a registered charity, further eliminating the possibility of being accused of trading on inside information for personal gain.

Let’s briefly explore the origin and intent of Rule 10b5-1:

The SEC website explains: "Section 10(b) of the Securities and Exchange Act of 1934 makes it unlawful for any person to use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe." 

Spooky, and perhaps somewhat vague language... but it was written in 1934!

Later, the SEC adopted 10(b)5, which added that

“It shall be unlawful for any person, directly or indirectly… 

(a) to employ any device, scheme, or artifice to defraud,

(b) to make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, or

(c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of a security.”

After that, the SEC adopted Rule 10b5-1 that provides that a person is trading on the basis of material nonpublic information if a trader is "aware" of the material nonpublic information, when making the purchase or sale.  The rule also sets forth several affirmative defenses or exceptions to liability.  The rule permits persons to trade in certain specified circumstances where it is clear that the information they are aware of is not a factor in the decision to trade, such as pursuant to a pre-existing plan, contract, or instruction that was made in good faith.

So… regulations are intended to provide rules that will protect the public from harm, financial loss, etc.  However, as with any government regulation, there are pros and cons.  In the next post, we’ll explore some of these in more detail.

What is a Variable Annuity?

Variable annuities (“VA”) have become a part of the retirement and investment plans for many people. Before you buy a VA, you should know some of the basics – and especially the fees!  Be prepared to ask your insurance agent, broker, financial planner, or other financial professional lots of questions about whether a VA is right for you.

A VA is a long-term investment vehicle designed specifically for retirement purposes.

It is also a contract between you and an insurance company, under which the insurer agrees to make periodic payments to you, beginning either immediately or at some future date.  You purchase a VA contract by making either a single purchase payment or a series of purchase payments.

A VA offers a range of investment options for you to choose from.  The value of your investment as a VA owner will vary depending on the performance of the investment options you select.  The investment options for a VA are typically mutual funds that invest in stocks, bonds, money market instruments, or some combination of the three.

Although VAs are typically invested in mutual funds, variable annuities differ from mutual funds in several important ways:

1.     A VA lets you receive periodic payments for the rest of your life (or the life of your spouse or any other person you designate).  This feature offers protection against the possibility that, after you retire, you will outlive your assets.

2.      A VA has a death benefit.  If you die before the insurer has started making payments to you, your beneficiary is guaranteed to receive a specified amount – typically at least the amount of your purchase payments.  Your beneficiary will get a benefit from this feature if, at the time of your death, your account value is less than the guaranteed amount.

3.     VA contributions are tax-deferred.  That means you pay no taxes on the income and investment gains from your annuity until you withdraw your money.  You may also transfer your money from one investment option to another within a variable annuity without paying tax at the time of the transfer.  When you take your money out of a variable annuity, however, you will be taxed on the earnings at ordinary income tax rates rather than lower capital gains rates.  In general, the benefits of tax deferral will outweigh the costs of a variable annuity only if you hold it as a long-term investment to meet retirement and other long-range goals.

It is important to make sure you understand any ongoing costs, because compounded fees impact your future compounded returns!

Invest in You: Part 4

You need more than a good idea to start a business!

Nancy Strojny, chair of the Maine chapter of SCORE, a non-profit that offers mentoring to aspiring business owners said: "In reality, it's never the idea, it's always the execution."

I am inclined to flip the statement above and offer that many successful businesses are actually copies of other, similar businesses.  Failure most commonly results due to a lack of - or simply poor - execution of a well thought-out plan.  

To this end, one doesn't really need a new idea, but rather the ability to execute.  There are examples aplenty in the marketplace, in as much as there are many successful burger joints, plenty of similar cars to choose from, etc.  In fact, no single idea that is unique, and that creates a foundation for a new business, stays that way for very long!

So, in order to become an entrepreneur, even a part-time, self-employed entrepreneur, it is worthwhile considering these tips:

1. Prepare relentlessly. Plan and prepare, achieve buy-in from your family, assess your skills to ensure a fit between your abilities and your plans.  Know your market, know your competitors, potential customers, etc.
2. Network.  This helps unearth new ideas.  Constant dialogue with like-minded people will help you to interpret your potential customers' thoughts and feelings about your proposed plans, and your product/service before, and after your business is up and running.
3. Accept advice: It doesn't matter how good YOU think your product or service is... others need to want it in order for you to succeed.  One way to achieve this buy-in is to make sure others rate your proposed product/service at least as high, or higher than you do.
4. How much can you afford to lose (or invest)?  This is a critical step.  Do not invest everything you have in one, singular venture.  Diversification means that you derive income from multiple sources; the work you do, property you own, stocks/bonds, a viable business, i.e. other assets.  Simply put, don't e.g. cash your 401(k) savings to start a new business!  Create a budget, allocate seed capital to your new venture, and live within your budget (you do have a budget already, don't you?).
5. Consider an exit strategy.  Say what?  Yes, think ahead whether someone would be able to take over the business from you one day (e.g. your child), whether you'd be able to sell it in order to retire, etc.  For example, if you're a single-person consultant, you will not be able to sell your business, because you are the business.  On the other hand, if you have the legal right to distribute products - even as a sole proprietor - someone else could acquire the distribution rights from you at a price, allowing them to distribute those products in the future.
6. If you have cash on hand to invest in a turn-key business, consider buying a franchise.  Because the franchisor (who sells you the franchise rights) has already successfully 'packaged' everything you need to start the business, including teaching you how to be successful, etc.  Your chances of success may be better, and you'd ramp up faster in terms of learning the ins-and-outs of your new business.
7. And finally, make sure you understand the legal requirements, local compliance requirements, etc.  It's important to know that your business fits the zoning regulations of the building you may want to lease, your insurance requirements in the event that you are dealing with people, the taxes you would be subject to, licenses you require, etc.

The good news is that older adults often already have the unique skills required to start a new business.  Today - according to the popular website MarketWatch - older adults represent a growing share of new entrepreneurs.  The Kauffman Foundation, in their Kauffman Index of Entrepreneurial Activity, demonstrated that in 2011, nearly 50% of all entrepreneurs were in the age categories 45-54 and 55-64.

As suggested in many blog posts before... the good news is... it's never to late to start investing in yourself... but, you need to proceed cautiously, and with thorough, thoughtful planning!

Invest in You: Part 3

Being self-employed is often a bit too much of a roller-coaster ride for many people, both emotionally and financially.  It's worth noting that the impact of self-employment insecurity will extend to those closest to you as well.  Despite their stated and demonstrated support of your new venture, your loved ones may be experiencing similar highs and lows as you are, as the aspiring entrepreneur.

An important message for anyone wanting to try their hand at self-employment: if you are still working for a salary, mitigate the risk of lost income by starting something small on the side that does not impact your relationship, trust, or earnings potential, as it relates to your current employment.  In other words... don't bite the hand that feeds you!  View an attempt at an entrepreneurial venture as an opportunity cost expended in lieu of idle time spent watching TV, or weekends when you may have time to do something useful that may generate an income (after you've mowed the lawn at home).

Here are just a few guidelines:

1. Always ensure you have enough money set aside to cover at least 6 months of expenses - one year's worth of expenses would be even better!
2. Start with what you know, and start to sell your services and/or products to people within your network, whether you're making cupcakes, or selling services related to a skill you have learned and mastered.
3. Create a comfortable workspace if you're planning to do some work from home.  Make sure others know and respect the time and place where you do your work, and make sure you create family & friends time, sufficient to allow you to enjoy life while you're working multiple jobs!
4. Be thrifty.  New technology, like social media, reduces start-up costs, especially as it relates to marketing yourself.  Most social media tools are easy to use an inexpensive, or free.  Use these to promote your services/products, while you avoid further fixed overheads by working from home, in your spare time.
5. Make sure that people can find you.  In addition to old-fashioned networking, ensure that you create an online profile.  'Websites' are available for free, like this blog, or a business page you could create via FaceBook.
6. Present a professional business image.  Look the part - whatever it is that you're doing - dress appropriately, offer a store-printed business card, create a business email address with a formal signature, etc.
7. Look for more work than what you think you are able to bear.  If you make cupcakes, look to sell and deliver to ten stores every Monday morning (so that you can bake over the weekend).  If you try and sell to ten new customers, don't be offended if only 1 or 2 place a small order, especially at the start.
8. Charge what the market will bear.  Do some homework!  If a shop sells cupcakes for $3, you may be able to sell your freshly baked cupcakes to them at a wholesale price of $1 each - don't sell yourself short.  If you have a salaried job, divide your gross salary by 2,000 (hours; as in 50 weeks x 40 hours per week).  Using this example, if your salary as a technical writer for your employer is $60,000 annually, your hourly rate is $30.  Add a 50% mark-up for freelance work.  If you are offered and accept a gig to write an instruction manual for a manufacturing company's product - work that's not in conflict with your day job - quote $45/hour and estimate the number of hours in order to offer them a quote for the job.  20 Hours earns you $900!
9. Source help if you need it.  Use friends, family and students if you have more work than you're able to do, by yourself.  Pay them.  They'll help your business prosper, and after all... you already have more work than you can manage on your own.

If you follow these simple steps, take control of your own future, work a little harder to change your situation, find enjoyment in creating work for yourself (and others), turn your hobbies and/or passion into cash, and so on... you're at least one step closer to achieving financial sustainability.

In the next post (Retirement Fix: Part 4), we look at a few more formal steps for budding entrepreneurs to explore.

Invest in You: Part 2

Today, the most logical way to start a small business with low overhead, is to make something and sell it.  Or, you could find a product and sell it.  Or, you could sell something you already own, but this last option may be limiting, unless you happen to have a large quantity of things that other people may want.

The easiest way to sell something, is online.  It's not scary.  If you have one thing to sell, you could offer it for sale on eBay.  If you happen to have many things to sell, you could also sell it on eBay.  They'll take a small percentage of your gross sales price as a commission, and you get the rest.  You can learn how to sell on eBay here.

In a recent article, well known radio host, Kim Komando offered "6 great ways to make money online," including the 5 suggestions below:

1. Sell art, crafts and collectables online - this one is easy, assuming you can make or source something that others would buy.
2. Cash in on your photos - another simple idea.  If you have old photos of historical value, like political figures, celebrities and/or historic architecture, you could upload your pictures to sites that resell them to advertisers for a small fee.
3. Take on microjobs and quick tasks.  Perhaps you could help out at your local neighborhood restaurant in the evenings, instead of watching 'nothing' on TV? Or you could help a local business on weekends, when other employees want time off, etc.  There are 'professional' dog walkers who earn 6-figure salaries!
4. Tutor and teach.  If you're reading this, you may have a skill that millions of people around the world would like to acquire and/or improve upon... English language.  Offer classes to new immigrants for a fee; even at no charge to start, in order to gain confidence and to help you build a curriculum.  Many people do this full-time, including in some exotic locales, where the income from being a tutor covers their cost of living entirely! Or, if you are reasonably efficient playing an instrument, why not use that skill to teach some beginners.
5. Freelance.  Do you have a skill that you could develop into a second career?  How about being a freelance photographer, ski instructor, etc.?

These are very basic ideas, none which require much - if anything - in terms of start-up fees.  As we progress through the different iterations of trying to help find a Retirement Fix, we may stumble upon some more complex solutions, perhaps discuss opening a 'brick & mortar' business, even venture into a little M&A probability.

Do you have other, or better ideas?  Please join the debate by posting a comment below.

Invest in You: Part 1

As suggested in the previous post, you will not be able to "save your way out of trouble."  The financial difficulty that you face in terms of a lack of investment sustainability for your future is your doing, and now you will need to fix it!

For the first installment, I've revisited some logic and common sense available at no charge to everyone, via Altucher Confidential.  James writes one of the best blogs available on the web, mixing his entrepreneurial flair with his down to earth writing style.  In a recent post James offered this opinion:

I don’t care how much you set aside for your 401k. It’s over. The whole myth of savings is gone. Inflation will carve out the bulk of your 401k. And in order to cash in on that retirement plan you have to live for a really long time doing stuff you don’t like to do. And then suddenly you’re 80 and you’re living a reduced lifestyle in a cave and can barely keep warm at night.

The only retirement plan is to Choose Yourself. To start a business or a platform or a lifestyle where you can put big chunks of money away. Some people can say, “well, I’m just not an entrepreneur .”

This is not true. Everyone is an entrepreneur. The only skills you need to be an entrepreneur: an ability to fail, an ability to have ideas, to sell those ideas, to execute on those ideas, and to be persistent so even as you fail you learn and move onto the next adventure. Or be an entrepreneur at work. An “entre-ployee”. Take control of who you report to, what you do, what you create. Or start a business on the side. Deliver some value, any value, to any body, to somebody, and watch that value compound into a career (sic).

In my post "U.S. Retirement Woes" I added some simple math - unless you have about $1,000,000 saved AND you are able to live comfortably with a return of around $70,000-100,000 annually, your 401(k) and similar investments may not sustain you during 20-30 years of "retirement."  Of course, that also assumes that people aspire to retiring at e.g. 65, and may live to e.g. 85-90.

You only have two high level - or macro - alternatives to the Retirement Fix challenge: either significantly increase your net asset value, or reduce your spending (or both). 

So, with this first installment of the Retirement Fix, the proposal is simply this: think beyond your current job, find value that you can deliver, and execute on that... i.e. if you deliver value for a commensurate fee, you will be able to derive another source of income, or multiple sources.  Executed successfully, this could mitigate the financial sustainability risk inherent in your inadequate savings/investment value today.

In the next few posts, we'll explore some more concrete Retirement Fix ideas, focused mostly on increasing your net asset value.   

Only you have the ability to control, manage and decrease your spending!

U.S. Retirement Woes

Start by reading "What is Retirement Anyway." Do not approach the problem of your inadequate retirement savings with a defeatist attitude.  If that were the case, first consider an attitude adjustment!

Then, consider this disclaimer:  Trying to repair your self-inflicted financial mismanagement is no different than trying to repair, for example, uninhibited weight gain over a 20-30 year period... a crash diet simply won't work!  Translated, and in simple but direct terms: no-one can attempt or expect to fix years of financial mismanagement in one article, so keep that in mind as your read.

Let's first explore some simple mathematical facts:

If you have $1,000,000 invested in a mix of market-performing Dow stocks, you will likely be able achieve a return of around $70,000 - $100,000 (with reinvested dividends, and before tax) on an annual basis.  This means that a similar $100,000 investment will return $7,000 - $10,000 annually, and so forth.  

Now that we know that 46% of Americans have only $10,000 saved for retirement, we also know that these savers will be able to generate a return of $700 - $1,000 annually, or less than $100 per month.

Hopefully this helps to frame the discussion? 

Now, some further discussion points (likely the first of many posts on the same topic):

1. It is highly improbable that you will be able to "save your way out of trouble."
2. Your inability to save now and invest for your future (or, your ability to consistently spend more money than you earn) requires a fundamental change to your lifestyle, or way of life.  Refusing to acknowledge this would be like an alcoholic saying "one drink won't do any harm;" a smoker saying "I'll quit after this pack of cigarettes;" or a spender saying "my credit score is blown anyway, so getting more into debt doesn't matter."  These are obsessive human behaviors, requiring help - find a person you can trust, who may be able to help you overcome these compulsions (Note: I said "who can help you overcome these compulsions", and not find a person to manage your money, consolidate your debt, etc.).
3. There is likely no-one other than yourself, and (perhaps) your immediate family, who you may be able to rely on for some measure of sustainable financial (or similar) assistance in the future.  However, it is NOT your family's responsibility to help you pay for your mismanagement of your own financial affairs!
4. Alongside # 3 above, note that the government - hopelessly unable to manage the state's financial affairs - also CANNOT be relied on to provide you with financial support in the future.  If you end up getting a regular gratuity from your government in the future, then consider yourself lucky!
5. Pensions - aka Defined Benefit plans - are going away.  If you still have a pension plan, you may be one of very few people to have such a promised benefit for your future.  However, this financial safety net is also "safe as houses."  Or, in other words, nothing is guaranteed, least of all the ability to rely on working people to pay for your relaxed living, when you've stopped contributing.

Famous philosopher, Victor Hugo, was quoted as saying:  

"Forty is the old age of youth; fifty the youth of old age"

If you've read this post to here, you may have arrived, or perhaps are approaching the "youth of your old age."  What we need to do now, is to step up to the retirement challenge and your financial responsibilities.  Start working with me and others to fix the retirement woes of older adults, wherever you may live.  Share the message!

In the next few blog postings, we'll start exploring some solutions to this shared problem.

The Facts of U.S. Retirement Stats

In a recent "tweet show", I mentioned a posting by Tyler Durden.  It was posted at Zero Hedge, titled "So You Want To Retire? Five Disturbing Statistics About Retirement: An Infographic." This article provided disturbing facts about lack of financial planning by Baby Boomers in terms of saving for their retirement, and/or even any attempt at achieving financial self-sufficiency, let alone financial freedom!

While it is bad enough that 46% of Americans have less than $10,000 saved for retirement, the facts get even worse when one takes into consideration that 29% of Americans have less than $1,000 saved for retirement!

The Infographic included in the article then concludes, quite correctly, that the good news is... it's never too late to start thinking about retirement planning.  True as that may be, quite literally there comes a time when it is simply too late to think about retirement planning, because the horse had bolted.

By way of examples, the article offers that people in their 50's should:

• cut off grown kids
• exploit catch-up provisions
• lock up long-term care
• dial back investment risk, and
• know where you stand

Of these 5 ideas, only the second bullet above makes sense, and that's only true if one is still working.  The contribution limit for U.S. 401(k) plans was increased from $17,000 in 2012 to $17,500 in 2013.  However, the catch-up contribution limit for employees age 50 and older will remain unchanged at $5,500.

The above simply means that an employee - with a paying job - can maximize his/her savings to the tune of $17,500 (tax deferred) and that an employee aged 50+ can contribute an additional $5,500 per year (tax deferred).  This latter age group represents the bottom of the so-called Baby Boomers in terms of age category.  Assuming an employee works another 10+ years, this catch-up provision would amount to $100,000+ (compounded).  But... it also assumes that this same employee was already maximizing his/her 401(k) contributions, because otherwise the catch-up provision is redundant.

Given that half of the working population has only saved $10,000 - according to the Employee Benefit Research Institute - all 5 bullets above may therefore prove to be redundant!

So, the question becomes... what now?

Tyler concluded his article on Zero Hedge by saying "To all Americans in their twenties, thirties, forties, or even fifties, naively looking forward to their retirement, we have two words: "good luck."

I am less inclined to throw in the towel, proverbially speaking.  We know that we simply cannot trust or rely on the government to bail us out of our financial misery, caused by their (and our) decades of financial mismanagement.  In a follow-up post, I will explore a few ideas that may help some people realize that a new beginning is possible, although "saving your way out of trouble' over a short period - although beneficial - will not deliver you into a realm of financial freedom.