In Defense Of Playing Defense (Part 3)

My Comments: On Wednesday I usually talk about Globla Economics. Today, however, I’m less concerned about emerging markets than I am the evolution of ideas that influence what is happening on Wall Street. Yes, it’s influenced by the hiccups we see in emerging markets globally but the political and economic forces at work in this country suggest the potential for something dramatic.

That’s a mouthful to absorb. What I hope you will get from these comments from Erik Conley is that being defensive right now with respect to your money is a good thing. I know I am with my money.

by Erik Conley, 9/18/2018

Summary
I lay out the case for playing smart defense in order to fill the hole that’s left open with the Buy & Hold approach.

When the stakes are high, it makes sense to have a contingency plan in place.

It is reasonable to expect that a solid Plan B could reduce the downside of these bear markets by at least 50%, which would have the effect of shortening the time it would take to reach one’s goals.

This idea was discussed in more depth with members of my private investing community, The ZenInvestor Top 7.

In part 1 of this series I posed the following question:
What would you do if you found out that your entire approach to investing was wrong? I said that this happens more often than you might think, and for a good reason. The investment advice industry, and the major financial media outlets, work hard to create the impression that the Buy & Hold method is far superior to any other approach that an investor can choose. But is this true?

In part 2 I closed with this thought:
The solution to managing risk with a B-H approach is to play smart defense. What’s that? My version is having a rules-based Plan B that is designed with one purpose in mind – shortening the amount of unproductive time that is wasted with a B-H approach.

Today in part 3, I will lay out the case for playing smart defense in order to fill the hole that’s left open with the B-H approach. Note that I’m not calling for anyone to abandon their B-H approach, especially if it’s been working well for them. What I’m proposing is adding a defensive piece to the B-H approach. Here’s how.

When the threat of a new recession, or a new bear market, is sufficiently high – turn to your Plan B.

Fans of the comedy show It’s Always Sunny in Philadelphia have come to know how the gang operates. After sitting around their (empty) bar and tossing around ideas about how to get people to come in and spend money, they finally agree on a Plan.

Each week the plan that the gang dreams up is more outrageous than the last one, and the plans never seem to work. What’s missing is that they never have a Plan B in case Plan A blows up, as it inevitably does. Maybe if they took the time and effort to make a backup plan, they could someday fill the bar with paying customers.

Here’s another couple of examples. Football coaches always have a Plan B ready to go if their original game plan isn’t working. Soldiers on the battlefield would never think about venturing beyond the compound without having a Plan B and a Plan C in place.

You get the idea. When the stakes are high, it makes sense to have a contingency plan in place. So what would a Plan B look like for a B-H investor?

Plan B. A rules-based, systematic procedure that is clear and concise – leaving nothing to chance.

Here are some of the steps that a B-H investor can take to manage downside risk.
• Sell your worst-performing holdings, and allow your best-performing ones to run. Review this monthly or quarterly.
• Set up news alerts on your main holdings. At the first sign of a regulatory body asking questions about accounting irregularities, misbehavior in the C-Suite, or a bad miss on an earnings report, sell first and ask questions later.
• If one of your companies announces a dividend cut, sell first and ask questions later.
• If you catch wind that the company may not be able to meet a loan recall, or roll over a line of credit, head for the door.
• If the company brings in a new CEO who has no experience in the business involved, leave quietly.
• If the CFO gives evasive or confusing answers to analyst questions on a conference call, sneak out the back door.

Macro signals
As I said earlier, recessions and bear markets are killers, especially when looked at from the perspective of time lost. The B-H promoters claim that there has never been a 20-year period in the market when investors lost money. This is true. But is it relevant? I think not, and here’s why.

We invest to grow our purchasing power. It’s that simple. But we don’t have an unlimited amount of time to accomplish this. There have been 4 really bad bear markets in the last century, and each one of them brought pain and suffering to investors. None of them suffered more than the true believers in B-H.

The investment business will tell you that bear markets are just part of the game, and if you are patient, you will recoup your losses in due time. This is another example of the mythology of B-H. It’s partly true, but it’s irrelevant. This approach requires you to sit back and watch as your life savings spend 10, 15, 20 years or more “under water.” When you finally get back to even, there is no getting around the fact that you have just wasted a significant amount of time getting to your ultimate goal, which is financial independence and security.

“Time is the one resource that can never be renewed. Once it’s gone you can never get it back.”

Major bull & bear markets throughout history
The table below shows all of the major bull and bear markets since the Great Crash of 1929. It shows what was happening at the time to cause the bear markets, the losses suffered by investors, the loss of time, the macro environment that was present during each event, and the bull market recoveries that followed.

According to my analysis, a B-H investor would have earned an average annual return of about 9.7% throughout this entire period. That’s not bad at all. But it would have taken much longer to reach her investing goals if she simply rode out all of the ups and downs along the way.

It is reasonable to expect that a solid Plan B could reduce the downside of these bear markets by at least 50%, which would have the effect of shortening the time it would take to reach one’s goals.

For example, an investor who used a simple moving average crossover system as a way to reduce equity exposure would increase their returns from 9.7% to 11.6% per year, over the entire time frame.

An investor who systematically avoided the worst parts of economic recessions, and the bear markets that accompany them, would have achieved an annual return of 12.22%.
And an investor who used both the recession warning model and the bear market probability model would have achieved an annual return of 14.10%.

The reason for these better outcomes is based on the fact that markets go through long periods of over-valuation and under-valuation, and an astute investor will pay attention to which environment is in play at all times. Today the market is somewhat overvalued, so it makes sense to reduce exposure to the riskiest parts of the capital markets.

Likewise, in 2003 and 2009, the markets were very undervalued, and it made sense at that time to increase exposure to the risky end of the market. This is not rocket science. It’s just common sense.

Everybody is a Buy & Hold investor until their account value starts going down.

Where do we go from here?

In the next installment, I will present a few options for playing smart defense. Moving average crossovers are one. Mean Reversion is another. Sector rotation is a third. They are all defensive strategies that can be part of a solid Plan B.

See you next time.

Note from TK: Read Mr. Conley’s original article HERE.

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How Social Security’s Troubles Could All Just Go Away

My Tuesday Comments on Social Security: Some of us remember what happened in 1983 when Congress was sane and was facing a financial crisis. Within the span of six years, which happened to be the same six year election cycle of the Senate, the system was expected to crash. So bending to common sense, Congress made some changes that resulted in the system we more or less have today.

That was 35 years ago and there is writing on the wall that more changes will need to be made. The changes need not be dramatic and are relatively simple. But it will require leadership committed to the welfare and well being of the people they allegedly profess to lead. Right now I’m unsure about that.

The takeaway here is that my children will arrive at a point in time when Social Security will become a critical part of their ability to pay their bills and live what to them is a normal life. They are going to have to learn that if that is to happen, they have to vote for candidates who will work on their behalf.

by Dan Caplinger, August 19, 2018

The release earlier this year of the Social Security Trustees Report brought about the usual set of headlines explaining the financial crisis that the retirement and disability benefits program faces. The latest projections confirmed expectations that if nothing changes, the Social Security Trust Funds will be out of money by 2034. That could force an immediate and dramatic benefit cut for tens of millions of Social Security recipients at a time in their lives when they’re least able to weather an income cut.

Yet when you look at the report, you’ll find several instances within its 270 pages in which the trustees say that things might well turn out OK. Actuarial projections in these cases work out positively throughout the next 75 years, and Americans are able to keep getting their benefits without any threat to the trust funds. Under this rosy scenario, no changes to Social Security end up being necessary in order to assure the survival of the program and full benefits for all.

That raises an obvious question: What has to happen for this favorable outcome to happen? You’ll find the answer in the report, in its discussion of what it calls the low-cost assumptions for Social Security.

Projecting the future of Social Security
To make the sophisticated actuarial projections that go into producing the numbers in the Social Security report, those who prepare the report have to make assumptions about key variables that determine how much money Social Security brings in and pays out. But economists can’t be certain about exactly how those factors will play out. As a result, Social Security uses three different sets of assumptions: low-cost, intermediate, and high-cost.

These three sets of assumptions work the way you’d expect. The low-cost assumptions are generally optimistic, predicting quicker recoveries from economic downturns, expecting stronger economic growth over the long haul, and seeing other factors work out favorably from the standpoint of funding Social Security. The high-cost assumptions take a more pessimistic view, expecting weaker growth and prolonged recessions along the way. The intermediate assumptions split the difference.

In particular, here are a few of the assumptions that the low-cost model makes, compared to the intermediate scenario:
• Fertility rates of 2.2, compared with 2.0 under the intermediate assumptions.
• A rise in economic productivity at an ultimate average annual of 1.98%, rather than 1.68%.
• A rise in the consumer price index at an average of 3.2% annually, rather than 2.6%.
• An expected growth rates in average earnings of 5.02%, compared with 3.8%.
• Long-run real wage differentials of 1.82%, versus 1.2%.
• Larger working-age populations and labor force participation than in the intermediate model, with unemployment rates of 4.5% compared with 5.5%.
• GDP growth of 3.2% rather than 2.4%.
• Real interest rates of 3.2% versus 2.7%, based on nominal interest rates of 6.4% compared to 5.3%.

How all these factors interact gets complicated quickly. But in general, using the low-cost assumptions, things work out well for Social Security. Relatively lower life expectancies reduce the length of time retirees collect benefits, and a lower number of married couples cuts the burden of spousal and survivor benefits on Social Security’s shoulders. Higher interest rates let the trust fund balances generate more income.

A low-cost scenario would be great — but don’t hold your breath
The Trustees’ Report shows the benefits of having the low-cost scenario play out. Under those projections, the combined trust funds for the old age and disability trust funds never run out, with the combined funds declining from the 2018 level of about 289% to reach a low point of 113% of expected annual benefits in 2050. From there, a shift back in demographics helps the trust funds build up capital again, topping two years’ worth of benefits by 2095. That’s a far cry from dealing with completely using up both trust funds by 2034.

The challenge with the low-cost assumptions is that they’re unlikely to occur. The fact that projections haven’t deviated much from their course of expecting trust fund exhaustion in the mid-2030s shows that the intermediate assumptions on which those projections are based have generally turned out to be accurate historically. It would take a fundamental shift to make low-cost assumptions more realistic.

Most of the reason the low-cost assumptions are there is to give a sense of how sensitive the results are to economic factors that differ from the intermediate assumptions. Just because the low-cost assumptions exist doesn’t mean that there’s any significant chance that they’ll actually occur. For those who think that the assumptions under the low-cost model represent targets for economic and fiscal policy to strive toward, it’s extremely unlikely that the economy will cooperate enough to fix Social Security without specific and direct action from lawmakers.

When Is The Next U.S. Recession And Bear Market?

My Monday Comments: All my clients, at least those who haven’t left me for greener pastures, are all concerned about the future of their money. Like me, most of them are going to need their money to pay bills as their years unfold. Losing a big percentage in a market crash makes us nervous.

In my files I have an article dated July 30, 2016 by Jeffrey Gundlach where he yells “SELL EVERYTHING”. In retrospect that would have been a terrible idea. But the headline above still resonates since we know it’s coming sooner or later.

This is long and a little technical so if you are not inclined to worry about it much, you can stop here. On the other hand if you want to explore further, be my guest.

by Jesse Colombo, September 14, 2018

It’s been a decade since the Great Recession, so the obvious question that is now on many people’s minds is “when is the next recession and bear market”? As someone who is warning about a dangerous stock market bubble, I am asked this question quite frequently. Unfortunately, it is impossible to predict the timing of future economic events with a high level of detail and accuracy such as “the market will top on April 17th, 2019” or “the recession will begin in August 2020”, but there are certain tools that help to estimate where we are in the economic cycle. In this piece, I will discuss the U.S. Treasury yield spread and yield curve and how it is useful for estimating the approximate time frame when the next recession and bear market may occur.

Let’s start with a quick explanation of the Treasury bond yield curve: in a normal interest rate environment, bonds with shorter maturities have lower yields, while bonds with longer maturities have higher yields to compensate for the greater risk incurred when holding for a longer period of time (primarily default and inflation risk). The chart below shows an example of a normal yield curve. A normal yield curve takes shape early on in the economic cycle and lasts for the majority of the cycle. A normal yield curve is usually a sign that the bull market in stocks has further to run.

As an economic cycle matures and the Federal Reserve has raised interest rates quite a few times, the yield curve flattens (see the chart below for an example). The Fed controls the short end of the yield curve, and their succession of rate hikes causes the short end to catch up with the longer end. A flat yield curve is a signal to investors that the bull market is “middle aged” – no longer young, but not quite ready to die just yet.

Check your math, central banker says: less immigration equals less growth

My Comments: I have an interest in the immigration debate. I’m an immigrant, granted US citizenship on May 1, 1959. As I read horror stories about parents and others being deported, it has crossed my mind that I’m at risk. Probably not, but with ICE nosing about, who knows?

It’s not just the New York Times that’s publishing articles on immigration. This one comes from Reuters, the global news agency. (Disclosure: my great-great grandmother, Anna Mathilde Kraul married Peter William Reuter on August 10, 1857. Same family as the news agency.)

Anyway, if the administration continues to insist on restricted immigration, and Congress goes along with it, we can expect a slow but pervasive decline in our economy of the next few decades. Talk about ceding global economic supremacy to China, this is the way to make that happen.

Ann Saphir \ August 7, 2017

(Reuters) – Less than week after a U.S. President Donald Trump embraced legislation to reduce immigration, Minneapolis Federal Reserve Bank President Neel Kashkari urged residents of South Dakota to embrace newcomers instead.

“Just going to math, if a big source of economic growth is population growth, and your population growth slows, either because you restrict immigration or because you have fewer babies, your economic growth is going to slow,” Kashkari said at the Rotary Club of Downtown Sioux Falls, responding to a question about a Trump-backed bill to cut legal immigration by 50 percent over the next 10 years. “Do we want economic growth, or not? That’s what it comes down to.”

Kashkari not alone in seeing immigration as key to U.S. economic growth.

Dallas Fed President Robert Kaplan routinely points out that immigrants have historically boosted U.S. workforce growth, and therefore economic growth, and has warned that the crackdown on illegal immigration could hurt consumer spending. Fed Chair Janet Yellen told U.S. lawmakers earlier this year that slowing immigration could probably hurt growth.

Most economic research suggests that immigration has little effect on wages of U.S. workers, and one recent study of what happened after the U.S. ended a guest-worker program for Mexican farm workers in the 1960s showed that growers, instead of raising wages to attract more workers, simply automated more of their field work.

The U.S. economy has been stuck at about 2-percent growth in recent years, and appears unlikely to break to out of that pattern anytime soon, St. Louis Fed President Bullard said earlier Monday.

“You can either accept slower growth; you can spend a lot of money to subsidize fertility – child care etc, very expensive – or you can embrace immigration. That’s math,” Kashkari told the audience in Sioux Falls, where the foreign-born population grew by more than a third from 2010 to 2014, figures from the U.S. census show.

“You guys have done a pretty good job of embracing immigration and that is a source of economic growth vibrancy.”

Why the American Middle Class Is Disappearing (and What It Will Mean for the Economy)

My Comments: Today is Wednesday and my topic is, as usual, ‘global economics’.

The decline of the middle class has not happened overnight. It brings to mind the phrase ‘watching grass grow’ or ‘watching a car turn to rust’. You know it happens, but from day to day, you never notice any change.

And what’s confounding to me is that the people most impacted by this decline are the very same people who send Republicans to Congress and the White House. Years ago, Republicans were very aware that their future was dependent on an emerging middle class. Today they are beholden to those at the very top and are blind to the potential consequences.

States around the world that have the most dramatic economic discrepancy among their populace are not democracies, but autocracies where the ruling class is wealthy and everyone else is poor.

As a child I lived in India. At that time abject poverty was the norm where the streets at night were filled with people sleeping on the sidewalk. Children overwhelmed you whenever you left the hotel or apartment begging for food or currency with which to buy food. It began to change after the British left and people like Nehru became leaders. Today it’s a thriving democracy with a growing middle class.

Apart from the political ramifications of a disappearing middle class in the United States, there is a significant economic outcome on the horizon. Corporate America needs a middle class with the capacity to consume goods and services in order for there to be an incentive to manufacture goods and services and thereby earn a profit. If we allow the middle class to disappear, who is going to buy new homes and cars and all the goodies that advertising encourages us to purchase?

by Chris Hughes, Co-Founder of Facebook, Co-Chair at Economic Security Project, author of Fair Shot: Rethinking Inequality and How We Earn, on Quora:

Democracies do not last long without strong middle classes. I believe unless we make significant changes today, the income inequality in our country will continue to grow and call into question the very nature of our social contract. It is such a fundamental idea behind America that if you work hard, you can get ahead — and you certainly don’t live in poverty. But that is increasingly less true today. Many scholars smarter than me have looked at how democracies slide into authoritarian rule, and growing class resentment and the emergence of nativist or populist leaders is a recurring theme. (This is the concern that I share with many about Donald Trump’s dangerous lack of respect for the rule of law.)

Economically speaking, the biggest driver of growth in our economy is consumer spending. If we want to grow our economy, we have to put more money in the hands of working people. If you put a $100 in the pockets of the poor or middle class, they’ll naturally spend the vast majority of it on products and services they need, spurring economic growth. That same $100 put in the hands of the wealthy will mostly go into the bank for savings. The Roosevelt Institute has looked at the effects of this practically speaking: a guaranteed income of $500 a month to all Americans could add as much as 7 points to GDP growth over the next eight years.

History has proven that the “trickle-down” economic worldview may be good for America’s corporations, but it is not good for Americans. Just because economists tell us the economy is healthy again does not mean the American dream is strong.

I spend a lot of time discussing this exact topic in my book, particularly in the last couple chapters.

Source article: https://www.inc.com/quora/why-american-middle-class-is-disappearing-and-what-it-will-mean-for-economy.html

Ten years after Lehman Brothers, spotting the next crisis

My Comments: Known as the Great Recession, to distinguish it from the Great Depression, the financial crisis that ended in the first week of March in 2009 was a multi-generational event. The chances of us having another one before I die in a few years is slim to none.

But that does not mean no more market crashes, some of which will cause people to jump off buildings. There are too many signs that one is just around the corner. And I say that mindful of the fact that I’ve been saying that for three years now. Sooner or later I’ll be right!

My money is positioned cautiously, and I’m never very far away from a sell order. What you do with your money is your business but to the extent you will need most of it if you plan to keep living, I encourage you to be very careful.

by Jamie McGeever | September 11, 2018

LONDON (Reuters) – As financial market participants reflect on the 10th anniversary of Lehman Brothers’ collapse, the consensus is there will be no repeat of the near-death experience, largely because authorities simply will not allow it.

The once-in-a-generation financial meltdown and economic catastrophe was so grave that, to borrow from ECB chief Mario Draghi, they will do whatever it takes to make sure it does not happen again. Painful lessons have been learned.

But the idea that a financial crisis on the scale of a decade ago could not happen again is far fetched, and not a little naive. In fact, many of the roots of the blow-up 10 years ago are still alive and well today.

All we can say with some degree of certainty is that the next crash will probably germinate in a different corner of the financial ecosystem before spreading. Familiar warning signs may flash, but what triggers one crisis may not trigger another.

Financial crashes usually result from one or more of the following: high debt and leverage, across household or corporate sectors; increased risk taking; excessive investor complacency, greed and exuberance fuelled by low volatility; rising interest rates; lower corporate profits.

There are signs that, to varying degrees, these conditions are in place today. Debt levels are higher now than before the Great Financial Crisis. According to McKinsey, total global debt rose to $169 trillion last year from $97 trillion in 2007.

Leverage in the banking system is lower now, but a decade of near zero interest rates and ultra-low volatility has fuelled speculation and risk-taking across the financial ecosystem. Remember, it was barely a year ago that Argentina launched a 100-year bond to much fanfare.

The world economy, markets, and policymaking – both fiscal and, especially, monetary – have changed radically since the financial crisis, symbolized by the U.S. investment banking giant Lehman’s implosion on Sept. 15, 2008.

With interest rates so low, central bank balance sheets so big and national debt levels so high, relatively speaking, policymakers may be running low on crisis-fighting ammunition.

Central banks now have a permanent presence in financial markets, and it is highly unlikely they will return interest rates or their balance sheets to pre-crisis “normal” levels.

Japan’s experience of extraordinary measures including QE and zero interest rates, and subdued growth rates over the last 20 years is a useful guide to what we can expect across the developed world.

“KNOWN UNKNOWNS”

There are also fresh market risks, such as the rapid advance of algorithmic trading, a passive and ETF-driven investment universe that is now worth trillions, the crypto world, and the proliferation of artificial intelligence and big data.

All that is set against an increasingly fragile political and structural backdrop. Populism, the far right, and strong-arm leaders are on the rise, globalization is fading, and public trust in governments and institutions is waning. That is a potentially toxic mix.

Global borrowing costs are rising, led by the Fed. The rise may be gradual but is coming from the lowest base in history, so the context is unprecedented. Higher U.S. rates are rarely good news for asset markets, no matter how slow the rise may be.

The corporate bond universe, particularly China, is vulnerable to higher borrowing costs and stronger dollar. Emerging markets too, especially those reliant on deficit-plugging capital from overseas – look at Turkey and Argentina.

Other emerging markets, such as Brazil, Indonesia and South Africa, have come under increasing pressure but contagion has been pretty limited. Developed markets, puzzlingly, remain largely unscathed.

That may be because economic growth, corporate profitability and asset prices have been inflated by the trillions upon trillions of dollars of liquidity pumped into the system by central banks since 2008. But that is now slowly reversing.

There is a degree of complacency across financial markets – volatility has rarely been lower, ever – and many of the risks and potential flashpoints have been well flagged. In Rumsfeldian terms, they are all “known unknowns”.

They include a corporate bond blow up in China; an emerging market crash sparked by rising U.S. rates and dollar; U.S. corporate profits diving; euro zone break-up; a global trade war; a plunge in oil prices; a sharp rise in inflation.

Of course, anticipating what may trigger a downturn and making contingency plans for it are two different things. How are you supposed to adequately prepare for the possibility that Italy might, at some unknown point in the future, leave the euro zone?

Rightly or wrongly, investors are simply hoping for the best. If the euro zone avoided Grexit and impending collapse in 2012, it will surely do so again, right? And no one in the White House really wants a full-blown global trade war, do they?

Maybe. But maybe not.

The Fiduciary Rule Is Dead. What’s an Investor to Do Now?

My Comments: Under the Obama administration, a long awaited and necessary step was taken to introduce rules that protected consumers of investment advice. It created a fiduciary standard for licensed financial professionals that formalized a ‘best interest’ mindset for professionals when working with clients.

Very soon after Trump became president, he announced this idea was a waste of time, presumably responding to pressure from Wall Street firms. As someone who has embraced a fiduciary standard in my practice for over 40 years, I saw it as a way to better serve my clients and to level the playing field among financial professionals, some of whom choose to cheat.

Interestingly, many national and regional financial firms of every stripe chose to embrace the idea of a fiduciary standard, recognizing it’s value in an ever competitive world. My suspicion is that if and when Trump is gone from the scene, this valid idea will resurface. Finding ways to cheat and not be held accountable is not in my client’s best interest.

By Lisa Beilfuss Sept. 9, 2018

It is a tricky time to be working with an investment professional.

Regulation is in flux, and different types of professionals are held to different standards when it comes to giving advice and recommending products. So, it can be hard to know exactly what you’re paying for.

Muddying the waters, a U.S. Circuit Court in June threw out the Labor Department’s fiduciary rule, an Obama-era regulation that sought to curb conflicts of interest in financial advice that the Obama administration said cost American families $17 billion a year and a percentage point in annual returns.

The decision was a final blow to a rule that the financial-services industry fought, saying it would make advice more costly, and that the Trump administration had put under review for revision or repeal.

The Securities and Exchange Commission, meanwhile, has been working on its own investor-protection measure. The agency’s version may wind up replacing the fiduciary rule, though it is shaping up to be less restrictive for brokers, and consumer advocates say that it would do little to raise the standard of care that is currently required.

Here are a few things investors should know as they navigate their financial relationships.

Names can be crucial
Financial pros can go by a number of titles: There is wealth manager, financial planner, broker, financial adviser—as well as “advisor” with an “o”—and more. The difference is sometimes semantics, but it is often much more.

For one, financial advisers, regulated by the SEC, have for decades been held to a fiduciary standard, meaning they have to put clients’ interests before their own. The requirement traces back to the stock-market crash of 1929 and subsequent Depression, which Congress in part blamed on abuses in the securities industry.

Brokers are regulated by the Financial Industry Regulatory Authority, or Finra, the securities industry’s self-regulatory body. They must provide what the agency describes as “suitable” investment advice—short of the fiduciary care required of their adviser counterparts.

Where things get tricky is that some financial professionals are dually registered, and some have professional designations that carry requirements trumping the standards required by regulators. For example, a broker who’s also a certified financial planner has to serve as a fiduciary, when doing financial planning, to maintain the designation.

The best way to know whether your adviser is a registered investment adviser, broker or both is to search BrokerCheck, a database maintained by Finra. An individual’s profile will denote his or her title and regulatory overseer.

But industry professionals and consumer advocates say investors should confirm any information with their adviser. Even better, the experts say: Investors should ask a financial professional to put in writing whether he or she is a fiduciary in their particular relationship.

Location matters
When it comes to which standard of care is required of an investment professional, where he or she works matters. Advisers who are held to a fiduciary standard must choose products that are in the best interest of the client. But what products an adviser can pick varies from firm to firm.

For example, at stand-alone investment advisories—-those that aren’t connected to a bank or brokerage—advisers typically have access to the universe of investment products, including the cheapest index funds. Some brokers at firms connected to banks do too, but not always. Some firms have house funds and lucrative partnerships with fund companies, and their brokers have more limited menus of investment options from which to choose.

To understand any constraints and incentives an investment adviser might have in recommending products, consumer advocates suggest checking firms’ securities disclosures. Advisory firms regulated by the SEC have to spell out conflicts of interests in those.

With the Labor Department’s fiduciary rule dead, brokers don’t have to disclose conflicts the way they did under the rule. Observers say potential rules from the SEC requiring that brokers serve clients’ best interest may emphasize disclosing conflicts over mitigating them.

For now, the best way to understand conflicts and constraints is to ask your broker, and to have him or her explain product selections.
“Never own something you don’t understand,” says Patti Houlihan, who heads the advocacy group Committee for the Fiduciary Standard. “If you can’t understand [a product] after reading a few pages on it, you shouldn’t be buying it,” she says, suggesting investors walk away from anything that is confusing or sounds too good to be true.

Fees don’t necessarily mean ‘best interest’
Many investment advisers, already required to act as fiduciaries, charge investors a percentage of their assets under management. Doing so eliminates commissions, which can cause conflicts of interest by pushing an adviser to recommend one product over another to the detriment of the client.

After the fiduciary rule was unveiled—and then went into temporary effect—many brokerages accelerated moving clients toward fee-paying accounts from commission accounts. They said it made compliance with the new regulation easier, because charging commissions under the fiduciary rule would require disclosures and contracts that executives said were too onerous and costly.

Fee accounts are regulated by the SEC, meaning once you’re in one, the adviser needs to act as a fiduciary. But that doesn’t mean being put into one was actually in your best interest.

A fee account “doesn’t keep your fees from being way higher than they should be,” says Barbara Roper, director of investor protection at the Consumer Federation of America.

“The fee-based accounts at brokerage firms still incorporate the conflicts of the broker-dealer model,” Ms. Roper says, such as revenue derived from fund companies, proprietary products and incentives meant to encourage broker behavior.

Ms. Roper encourages investors to ask their financial professionals for detailed fee breakdowns. For example, is a 1% advisory fee all-inclusive, or is that separate from underlying product fees? Investors with more complicated financial pictures might pay more to get more service, but even they should be wary of paying much more than 1%, Ms. Roper says.

“That’s a hole you have to dig out of,” she says, referring to the long-term effect of fees on investment returns.

By the same logic, paying commissions doesn’t necessarily mean you don’t have a fiduciary. In the spirit of the obligation, investment professionals are expected to evaluate on an individual basis what type of model is best.

Source: https://www.wsj.com/articles/the-fiduciary-rule-is-dead-whats-an-investor-to-do-now-1536548266