Blog: Steven Pierce

So, I'm stuck with "piercefinancial" as the name of my firm, though maybe I should have called it "Pierce Wealth Management".  Which do you like better?  Before you answer, you should know that I did wrestle with the naming.  Since it became clear that abbreviating it helped me incorporate my passion for music, it's become nearly impossible to change.  Because people don't work with me based on the name of my practice, I'm content with it.  It seemed so critical at the time...

A few years after its inception, the logo came to me, not like a lighting bolt, but a passing glance in the mirror that helped illuminate my practice in a way I found both simple and elegant.  When shortened to "pf" it evokes the musical dynamic markings piano and forte, and is a metaphor for the shared goal I have with clients – to make their investment grow from soft to loud, from small to large, or from less to more relevant in their lives.

I grew up in Ann Arbor and the birthing of my business let me share the torch carried by my grandfather, who started his first of three businesses in 1923, my father-in-law-who started his business with two children in college, and with my brother-in-law who started his own business a number of years ago.  It seemed almost a birthright that I be successful. Think of it as: "Ann Arbor's native son returns from Wall Street to Main Street to help local individuals with investments."

Community involvement, which was once a blind leap of faith, has become my modus operandi. So, I was a sommelier for the Ann Arbor Art Center, where I sponsored an evening with local and world-renowned composer William Bolcom in the Art Center’s 2nd Floor Loft. I've been a table captain for Ele's Place (for bereaved children) for two consecutive years. I'm in the Rotary Club of Ann Arbor, the St. Paul School Board, and recently joined the Ann Arbor Symphony Board.  

Once I found that it resulted in business, I determined that it was good and right that it should. When you give you get. When you're active in causes that are dear to you, you become acquainted with others you can help, and with whom you have things in common.  Business also comes from the "law of attraction," that says people do business with people they like. It makes the business of business more enjoyable. When combined with community involvement and an optimistic attitude it lends confidence to the prospect of working with you.

Another thing that I'm passionate about is Ann Arbor. It's my hometown. Combine it with my passion for music and my growing confidence and you might find a lesson, be who you are and follow your passions and success will follow – like the saying goes, "do what you love, and you won't work a day in your life."

The federal government should encourage policies that foster self-reliance, self-employment and new business formation.  This would be especially helpful now, as the economy continues to suffer from high unemployment and constrained consumer spending that accounts for 70% of our economic output.  Instead, "government" has been slow to adapt to the fast-changing, shrunken economy, and has dragged its feet on confronting bloat, entitlements, and personnel benefits.  What some might argue are government's "best intentions", its laws have unintended consequences that hurt the very sector critical to creating and maintaining prosperity.  Here are my thoughts on a couple things.

You should know that I'm self-employed with a bias towards self-reliance.  Recently, my incentive to maintain my "consumer-driven," HSA-eligible, lower cost, higher deductible health insurance and its companion Health Savings Account (HSA) – was reduced twice.  First, the effect of the "Patient Protection and Affordable Care Act (PPACA) of 2010" led to a 55% increase in my Blue Cross Blue Shield of Michigan (BCBSM) policy premium.  

The passage of the Patient Protection and Affordable Care Act (PPACA) marked an historic occasion for our country...  PPACA requires some changes to your MyBlue individual health care plan...  As a result of these additional health care benefits, your rate will change.  The new rate for your health care coverage will be effective January, 2011.  Your next invoice will reflect the new rate. ?    
  –Excerpts from BCBSM notice, dated November 30, 2010

In late April, I received a second notice that my premium would increase again by an undisclosed sum.  BCBSM attributed this second increase in five months to costs exceeding premiums.  They either didn't know what the damage would be, or didn't want to say.

In 2003, the federal government passed a law that permits individuals to save their own money by purchasing less generous "HSA-eligible" high-deductible health care (HDHC).  The personal cost savings that results may be invested in tax-advantaged Health Savings Accounts (HSAs) to pay the out-of-pocket costs of less coverage.  Withdrawals from HSAs are made by debit card (or check) as needed.  Deposits are tax-deductible and may be stored in cash or invested in mutual funds.  Any remaining balances grow without tax liability and may be withdrawn at age 65 to help pay for retirement.  The legislation is "win-win" because it encourages participants to seek cost-effective treatment to save their own money and keeps treatment costs honest.  It also addresses Americans' epidemic nest egg underfunding.

However, as legislation drives up the price of lower cost plans (HDHC), the savings over higher cost plans shrinks, leaving less money available to deposit into HSAs and making more-generous plans more attractive.  Thus, the personal incentive granted by this Federal legislation to shop for cost-effective treatment is greatly reduced, leaving us with no "skin in the game" and no regard for the cost of treatment save for the out-of-control premium costs that continue to result.  

So, one of the initial barriers to entry, or disincentives to become self-employed, is health care costs.  Right out of the gate my preferred provider organization (PPO) plan cost $1,000 per month for my family at a time when my business was very young and my revenue was low.  At the same time, Michigan had a taxpayer-subsidized plan that cost around $200 per month. 

You might imagine when paying 100% of health coverage costs at amounts such as these, it's hard to muster sympathy for those requested to pay just 10-12% of their coverage.  Paying just 10-12% of my coverage would be a huge windfall for me.

It was also interesting to see Gov. Rick Snyder considering HSA plans for state employees. The thought was that Michigan would pay both the HDHC premium, or the insurance cost, and would put an amount equal to the employee's annual deductible in an HSA savings account. You might guess that my response was that the more removed a person is from the cost, the less they care about savings.  And, if it wasn't their money going into the HSA, their incentive not to spend it would be greatly reduced.  It's the same argument as "rent vs. own".  If you rent an apartment, you'll care a lot less about the hole in the wall than you would if it was your own wall...

Another entrenched disincentive for self-employment is self-employment tax, which effectively punishes the self-employed by making them pay more as a percentage of their salaries, or nearly twice as much, in FICA (Federal Insurance Contributions Act) tax as an individual employee.  FICA tax pays for Social Security and Medicare.  It's crazy for the government to maintain such a tax policy that punishes personal risk.

I could go on, but let me say that I believe that our new shrunken economy and our present paradigm call for dramatic action by the government.  I think that federal and state governments should pull out all the stops to create economic growth.  They are so insulated from economic pain, that they've slowly simmered into economic crisis, and they're biting the hand that feeds them by punishing the self-employed and taking the little accountability that entered the health care system back out of it.  With individuals without any "skin in the game", we should expect costs under new health care legislation to continue to rise unless drastic measures are adopted.  "Desperate times call for desperate measures," and I don't know if governments have the business knowledge or the political will to take the bold action that's required.

I'd like to offer my interpretation of our financial collapse and some of the local fall-out.  We would all do well to understand that there's less money to go around, and reserve judgment on those charged with righting the ship.  Like my father always said, "You cannot milk a duck."  

The housing bubble that was financed through securitization of bad debt caused this Great Recession.  Home values were thrust upward by relaxed lending standards.  Banks made home equity loans based on the increasing market value trend for which they were responsible.  When lending dried up, our economy shrank and is still searching for a level of activity consistent with a new paradigm independent from the value of homes.

Economic capacity was expanded to meet the higher demand resulting from increased home equity (home values minus mortgage debt).  When the housing market crashed, spending imploded and took private sector profitability with it.  Panicked businesses cut back over night.  Corporate and individual donations evaporated.  Tax revenue funding oversized government went away... and the stock market crashed.

Our Detroit Symphony Orchestra (DSO) is the poster child for this phenomenon.  It was taking excess withdrawals from its endowment to meet budget shortfalls.  It took two hits when the stock market crashed.  Its decreasing endowment value was exacerbated by withdrawals.  Further, the Symphony had taken out a large mortgage in 2003 to renovate the Max M. Fisher Music Center.  As revenue decreased, it became harder to service that debt.  Had DSO predicted the market collapse, it would have behaved differently.  Our Ann Arbor Symphony Orchestra (A2SO) was not immune.  It cut one full-time staff position, and Maestro Lipsky took a voluntary pay cut.  We can take pride that A2SO's contract dispute is now resolved, its ticket sales are up, and its budget is in the black.

Consider, too, the Ann Arbor Public Schools (AAPS).  Decreased tax revenue has starved our state government.  Michigan has been forced to make difficult and unpopular decisions that include reduced school funding.  The governor has cut higher education funding by 15%.  AAPS has responded by proposing the sharing of school principals, the elimination of 70 teacher positions, and the removal of all high school busing.  Exploding pension and health care liabilities erode an ever-increasing budget share of federal, state, and local governments, and agencies like the AAPS.

Used to be that lenders were responsible for the creditworthiness of their borrowers, but "securitization" offered incentives for volume over quality and abdication of responsibility.

Securitization is a process whereby lenders can send their loans into giant pools that shower monthly loan payments onto investors.  In effect, investors who seek income become lenders without control or knowledge over the loans they've bought.  Lenders receive fee income for the loans they send, take the loans off of their books, and absolve themselves from any financial liability that results from troubled borrowers.

Institutions that receive these pooled loans and package them for the financial marketplace include taxpayer-funded government agencies like Fannie Mae, Ginnie Mae, and Freddie Mac, as well as private for-profit investment banks that are well-known Wall Street heavyweights.  You may have heard of "Fannie Maes" and "Ginnie Maes," who enjoy the implicit backing of the U.S. government.  As a result of the crisis, they're left holding the bag, and possess many of our bad or underperforming loans.  Now, there's a debate over whether or not the federal government that spawned these agencies should even be in the mortgage business.

Securitization was "win-win" until borrowers got in trouble.  Borrowers got their money, investors got their income, and both mortgage originators and pooled-loan investment issuers collected fees.

When combined with among the less noble of human natures, this system triggered our economic collapse that began in late 2008.  The market panicked when it woke up in complete ignorance of the collective credit-worthiness of its "mortgage-backed-securities".  Many were even issued by the U.S. government and enjoyed the best of all credit ratings (as per Standard & Poor's, Moody's, etc).  The system had been generating investment income for individuals, corporations, world governments, and even international banks on the backs of U.S. homeowners with mortgages.  

So, the market didn't know how to put a price on its pooled loans.  Nobody wanted to buy them.  They were spread like a virus around the world.  Nearly all sellers and no buyers populated the market.  There was a slow and painful reckoning as individuals and institutions realized that they were infected.  Mortgage lending came to a screeching halt that spread to all other types of lending and brought our great economy, as well as that of the entire developed world, to its knees.  It was a vicious cycle that invaded every corner of our country, and it's still with us.

Mortgage lending and its increasing home appraisals had fueled all of our spending.  It gave nearly everyone a false impression of the extent of our economic growth.  It was a bubble that bought flat-screen TVs, new cars, home-improvements, and more until it popped and made these purchases into monuments of a by-gone era.  The stock market struggled to "find a bottom", which meant determining how much economic growth to erase to determine when the bubble began blowing, so that we could start at that point and rebuild our economy in real, tangible and fundamental ways.  The bottom, or close-of-market low of the Great Recession was reached on March 9, 2009.  Not since January 8, 1997 had the Dow Jones Industrial Average closed so low.