Tag Archives: retirement advisor

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

Advertisements

10 things I’ve learned 10 years after I finished medical school

Friday’s Random Thoughts: I’ve long argued that the health care system in America is a mess. (How Did Health Care Get to Be Such a Mess?)

These next words from Kevin Tolliver, a physician with a strong exposure to economics and finance, is a welcome addition to the debate. It’s taken a long time to reach the mess we have and it’s going to take a long time and an attitude adjustment among the citizenry if it’s going to get better.

I was once very hopeful that the ABA (ObamaCare) was going to turn the tide toward a better national outcome. But unless the Democrats take over the House of Representatives in 2 months, we’re going to lose any gains we’ve made. There will be an effort in the lame duck session to abolish it entirely. Be prepared to start shouting from the rooftops.

Kevin Tolliver, MD, MBA/Aug 30, 2018

1. Our health care system is broken, and there isn’t going to be an easy way out. Costs are too high and our outcomes too poor. There’s a lot of finger-pointing in how we got to this point, but one thing is for certain — physicians must lead the way to a better system. The heart of health care is still the doctor-patient relationship and that needs to be protected at all costs. Historically speaking, physicians have tended to shy away from the business side of medicine in lieu of caring for patients, but that’s no longer a realistic option. Physician leadership is a must.

2. Nurses are underpaid and underappreciated. Physicians diagnose and develop treatment plans, but the nurses are the ones who carry things out. They’re present for the good, the bad, the embarrassing and whatever else becomes necessary. They spend substantially more time with patients and families than the physician. A competent, compassionate nurse is an invaluable benefit for a physician and shouldn’t be taken for granted. I feel this more strongly with each passing year I work alongside them.

Trade Wars: Stop Hyperventilating, It’s All About the Dollar

My Comments: Since this article first appeared several months ago, the current administration has doubled down on the idea of import tariffs. For some reason, it thinks that trade wars are what is needed to ‘Make America Great Again’.

A reverse analogy that comes to mind are the gas price conflicts that used to appear in town when some gas station owner decided to lower the price by a few cents, only to have the station across the street do the same thing. Before long, gas was being sold below cost.

As consumers we got to enjoy a price break, but the gas station owners got to lose a lot of money until someone said ‘enough’ and it was over. Tariffs wars between nations simply raises the price on what we buy and we as consumers ultimately lose. At what point do we declare ‘we’ve won’ and life goes back to normal?

By Krishna Memani | March 07, 2018

So, I’ve been reading a lot of articles, such as the one by Noah Smith on Bloomberg titled: “What Trump’s Trade Guru Doesn’t Get About Economics.”

In this article, Smith, a really good blogger who tends to boil things down to simple stuff, goes on to explain to us in detail why trade wars are bad economics.

Of course, I fully agree with him on this. As someone who grew up in the 1970s and 80s—especially in an industrially insular India—I experienced firsthand the bad economic policy of protectionism.
I know, I know. Tariffs won’t meaningfully reduce the trade deficit. For that matter, I also know that, for a country with a low savings rate, eliminating or reducing the trade deficit may not be the best thing for near-term growth. Furthermore, one would have to sleep through an “econ 101” class to not see how tariffs could reduce productivity growth and act as an indirect tax. Also, it is quite obvious that other countries are likely to respond to Trump’s trade provocation, a scenario that of course will cause the steps laid out in this paragraph to happen all over again.

While I don’t know this for sure, I am quite certain that Peter Navarro, the loudest proponent of this protectionist policy, who I believe happens to be an economist by training, gets all of this, too. The point I’m trying to make is that this policy, in my view, has nothing to do with economics. Instead, it’s all about politics, which, as we all ought to know very well, happens to be messy.

Arguing on the economics of this topic as a market participant is a useless exercise because it does not bring us to any conclusion. Trump got elected on a protectionist agenda—and to placate his base he is moving forward on that agenda. And no amount of pleas by the commentariat on the economic principles is likely to help.

So, I have accepted the fact that while it may be bad economic policy, some form of tariffs on some imported goods are likely to be passed. But it’s not the end of the world or a risk to the outlook for the financial markets from my perspective.

To carry forward the political argument a bit, I believe it is also true that if the Trump Administration further intensifies the trade conflict, the real damage to the economy will be quite substantial. The same base that is cheering him on right now may not be so enthusiastic later—and no one understands that more than Trump, in my judgment.

Further, while limited tariff policies make us uncomfortable and create all sorts of bad outcomes and dislocations (remember the “voluntary” auto restraint agreement of 1981 and numerous other such initiatives?), the impact on the longer-term growth potential of the economy would be modest at best. Further, protectionist policies prove themselves over time to be bad and eventually get unwound. I suspect they will be no different this time.

They will certainly create near-term issues with the markets. However, given the momentum in the global economy and the deficit-financed “oomph” to the U.S. economy, my expectation would be that markets will stabilize and move forward after a short hiatus, at worst.

With that being said, the risks to the market cycle and the markets have increased. And that increase has nothing to do with the tariffs themselves. Instead, these increased risks are coming from the almost certain prospect of a weakening dollar. It is this potential weakening of the U.S. currency that has the potential to change things dramatically. If the dollar weakens a lot, thereby indicating that financing flows to the United States are slowing, inflationary pressures will rise and bring the current market cycle closer to an end. I hope somebody emphasizes that consequence to Trump rather than talking to him about the benefits of trade.

So, let us all stop talking about the economic logic of trade because it has no bearing on the debate. Instead, we can focus on the politics and hope that the dollar doesn’t weaken too much while we are waiting for this to pass.

Social Security’s future

My Comments: Followers of my comments know that I’ve talked in the past about how to fix the projected ‘crisis’ of the Social Security system. I remember the last one, and in 1983 it was fixed. At least for the time being.

What happened then was the upper threshold of income subject to what we all think of as the FICA tax was raised. In other words, if your income was higher than the earlier threshold, you continued to contribute to the system. In addition, the percentage of that income, paid by both you and your employer was raised.

We can argue until the cows come home that all that does is create job losses, and there are those who will lose their jobs. But think back to the years since 1983 if you can, and tell me that the increase I referenced in the above paragraph caused any significant economic turmoil in these United States.

Now think about the economic turmoil that will happen if 50 million people suddenly lose 21% of their income. Talk about job losses if that much money suddenly stops flowing to grocery stores, restaurants, gas stations etc.

But given the nature of politics, the fix won’t happen until the crisis happens within the last election cycle of those we elect to Congress. It’s another reason to make sure as many people as possible are registered to vote. If you are likely to be affected in some way by the 20% drop in Social Security benefits, you need to pay attention.

Sean Williams, The Motley Fool Published 10:00 a.m. ET July 9, 2018

To be frank, Social Security is a financial foundation that millions of seniors simply couldn’t do without. According to the Social Security Administration, more than three out of every five aged beneficiaries lean on the program for at least half of their monthly income, with just over a third essentially reliant on the program for all of their income (90 percent or more).

Furthermore, the Center for Budget and Policy Priorities finds that its mere existence keeps more than 22 million people, including 15.1 million seniors, above the federal poverty line. We’d probably be contending with a genuine elderly poverty crisis right now if not for the guaranteed monthly payout associated with Social Security to eligible beneficiaries.

Big changes are underway for America’s most important social program

But therein lies the rub: This guaranteed payout is in some serious trouble. While Social Security is in absolutely no danger of going bankrupt — which means current and future generations will receive a retired worker, disability, or survivor benefit, should they qualify — it is on the brink of a major transformation.

The latest annual report from the Social Security Board of Trustees finds that America’s most important social program will begin paying out more in benefits than it collects in revenue this year. In each year thereafter, with the exception of 2019, the net cash outflow from the Social Security is expected to increase. By 2034, the $2.9 trillion in excess cash that has been built up since the reforms of 1983 were passed are expected to be completely gone.

What happens then, you ask? Again, it doesn’t mean the program is bankrupt. But it does clearly demonstrate that the existing payout schedule isn’t sustainable. Assuming no additional revenue is generated above and beyond the intermediate-cost model projections from the Trustees report, an across-the-board cut in benefits of up to 21 percent may be necessary to sustain payouts (without any further cuts) until the year 2092.

Considering how dependent today’s senior citizens are on Social Security, the thought of a 21 percent reduction to benefits is frightening. As a reminder, the average retired worker is only receiving $1,412 a month, as of May 2018. This would push the average payout down to just $1,115 a month, using 2018 dollars. For added context, the federal poverty level for an individual on a monthly basis in 2018 is approximately $1,012.

What’s Next For Investments???

My Comments: You have not heard much from me lately. That’s because I’ve been spending hours and hours building an internet course on retirement planning. I’m not there yet but soon will be. Keep following this blog and you’ll get an announcement when it’s ready.

In the meantime, we’re at the end of Quarter 1 of 2018 and it was an interesting quarter for a lot of reasons. For those of you with time on your hands and sufficient interest to explore the details, the following article from The Heisenberg Report is revealing. Whether it helps you make money or helps you not lose money remains to be seen.

Go HERE if you are ready to wade through 8 pages of commentary and graphs. The conclusion you will discern is that market complacency is diminishing rapidly and that something uncomfortable is likely to happen soon.

How your 401(k) can survive and thrive in the next bear market

My Comments: Some of you reading this have money in 401(k)s and 403(b)s and cannot simply remove it and place it somewhere safer. Which means you’re completely exposed to the vagaries of the markets and you can only hope for the best.

I learned long ago that HOPE is not an effective investment strategy. So these words from Adam Shell may make your life a little easier. If you want more information, you know how to reach me.

Adam Shell, March 9, 2018

The nine-year stretch of rising stock prices won’t last forever. So now’s a good time for investors to bear-proof their 401(k)s before the next financial storm.

The current bull market, now the second-longest ever and celebrating its 9th birthday on Friday, is most likely in its final stages, Wall Street pros say. That means a bear market will occur at some point, and the stock market will tumble at least 20% from its peak.

What could cause it and when? No one can know for sure. A recession perhaps, or a surge in interest rates and inflation? An unexpected event or investors getting too giddy about stocks and driving prices up to unsustainable levels? All could be the triggers of a big drop in stocks.

Remember, if you have any money invested in stocks, you won’t be able to avoid all the pain that a bear inflicts on your 401(k). While a drop of 20% from a prior peak is the classic definition of a bear market, most drops are more sizable. The average decline for the Standard & Poor’s 500 stock index in the 13 bears since 1929 is 39.9%, S&P Dow Jones Indices says. A swoon of that size would shrink a $100,000 investment in an index tracking the broad market to roughly $60,000.

Prepare ahead of time

“The best way to survive a bear market is to be financially prepared before one happens,” says Jamie Cox, managing partner for Harris Financial Group.

That means not having 100% of your money invested in stocks near a market top. It also means maintaining low levels of debt and having some emergency savings to avoid having to sell stocks in a down market to raise cash, he says.

From a portfolio standpoint, make sure your investment mix isn’t too risky. Are you loaded up on high-fliers that have greater odds of suffering steep drops if the market tanks? Make sure you own some “defensive” stocks, such as utilities, consumer companies that sell everyday staples like soap and cereal, or health care names, which tend to hold up better when markets fall overall.

“Investors should take the time to control the parts of their portfolios they can control,” Cox advises.

If, for example, your portfolio was designed to have 60% in stocks, and that percentage has ballooned to 80% due to the long period of rising stock prices, consider “rebalancing” your portfolio now. Sell some stock to get back to your initial 60% target.

Play defense

The time to be aggressive in the market is when stocks are up, and you can make tactical moves likes cashing out stocks, says Woody Dorsey, a behavioral finance expert and president of Market Semiotics, a Castleton, Vt.-based investment research firm. It makes more sense, he adds, to be defensive when the market is entering or in a period of falling prices.

“Does a bear market mean an investor needs to freak out? No. But it does mean you should be more careful,” Dorsey says. “If the market is going to be difficult for one or two years, just get more defensive. Keep in simple.”

One simple strategy to employ is to get “less exposed to the market and raise cash,” Dorsey says. “Most people are not used to that message, but it’s a good message.” While a normal portfolio might consist of 60% stocks and 40% bonds, a bear market portfolio, he says, might be 30% cash, 30% U.S. stocks and the rest in foreign investments and bonds.

Main Street investors could also consider defensive strategies employed by professional money managers, he says. They can buy things that hold up better in tough times, such as gold. Or add to “alternative” investments that rise when stocks fall, such as exchange-traded funds that profit when market volatility is on the rise or funds that can short the market, or profit from falling prices.

Identify severity of bear

The next bear isn’t likely to be as severe as the epic one following the Great Recession or the dive in early 2000 after the dot-com bubble burst, says Liz Ann Sonders, chief investment strategist at Charles Schwab. Both of those bears saw market drops of about 50% or more.

“The next bear will be a more traditional one that likely comes from the market sniffing out a coming recession,” she explains. “We don’t think it will be caused by a global financial crisis or bubble bursting.”

That means fear levels likely won’t spike quite as high. Investors will also have a better idea of when the bear market might hit, as it will be foreshadowed by signs of a slowing economy.

It also suggests the market will likely rebound more quickly than the average bear of 21 months. As a result, employing basic investment principles, such as portfolio rebalancing, diversification and buying shares on a regular basis, which forces folks to snap up shares when prices are cheaper, can help investors emerge from the next bear market in decent shape.

“Diversification and rebalancing are boring to talk about,” says Sonders. “But they are more useful strategies than all the hyperbole on when to get in or get out of the market, which is not an investment strategy.”

Buy the ‘big’ dips

There are big market swings even in bear markets. A way investors can play it is to buy shares on the days or periods when stocks are under intense selling pressure. “There will be lots of wild swings,” says Mike Wilson, U.S. equity strategist at Morgan Stanley.

Investors have to take advantage of stock prices when they are depressed and present good value, he says, even if it seems like a scary thing to do at the time.

“You have to be willing to step in” when market valuations fall a lot, no matter what’s going on in the world, Wilson advises.

Guess How Many Seniors Say Life Is Worse in Retirement

My Comments: After 40 plus years as a financial/retirement planner, I’ve lost count of the number of people who, as they approach retirement, ask whether they’ll have enough money. Or the corollary, when will they run out?

If you expect to have a successful retirement, ie one where you run out of life before you run out of money, you had better have your act together long before you reach retirement age. Here’s something to help you get your arms around this idea. https://goo.gl/b1fG39

Maurie Backman \ Feb 11, 2018

We all like to think of retirement as a carefree, fulfilling period of life. But those expectations may not actually jibe with reality. In fact, 28% of recent retirees say life is worse now that they’re stopped working, according to a new Nationwide survey. And the reasons for that dissatisfaction, not surprisingly, boil down to money — namely, inadequate income in the face of mounting bills.

Clearly, nobody wants a miserable retirement, so if you’re looking to avoid that fate, your best bet is to start ramping up your savings efforts now. Otherwise, you may come to miss your working years more than you’d think.

Retirement: It’s more expensive than we anticipate

Countless workers expect their living costs to shrink in retirement, particularly those who manage to pay off their homes before bringing their careers to a close. But while certain costs, like commuting, will go down or disappear in retirement, most will likely remain stagnant, and several will in fact go up. Take food, for example. We all need to eat, whether we’re working or not, and there’s no reason to think your grocery bills will magically go down just because you no longer have an office to report to. The same holds true for things like cable, cellphone service, and other such luxuries we’ve all come to enjoy.

Then there are those costs that are likely to climb in retirement, like healthcare. It’s estimated that the typical 65-year-old couple today with generally good health will spend $400,000 or more on medical costs in retirement, not including long-term care expenditures. Break that spending down over a 20-year period, and that’s a lot of money to shell out annually. But it also makes sense. Whereas folks with private insurance often get the bulk of their medical expenses covered during their working years, Medicare’s coverage is surprisingly limited. And since we tend to acquire new health issues as we age, it’s no wonder so many seniors wind up spending considerably more than expected on medical care, thus contributing to both their dissatisfaction and stress.

And speaking of aging, let’s not forget that homes age, too. Even if you manage to enter retirement mortgage-free, if you own property, you’ll still be responsible for its associated taxes, insurance, and maintenance, all of which are likely to increase year over year. The latter can be a true budget-buster, because sometimes, all it takes is one major age-related repair to put an undue strain on your limited finances.

All of this means one thing: If you want to be happy in retirement, then you’ll need to go into it with enough money to cover the bills, and then some. And that means saving as aggressively as possible while you have the opportunity.

Save now, enjoy later

The Economic Policy Institute reports that nearly half of U.S. households have no retirement savings to show for. If you’re behind on savings, or have yet to begin setting money aside for the future at all, then now’s the time to make up for it.

Now the good news is that the more working years you have left, the greater your opportunity to amass some wealth before you call it quits — and without putting too much of a strain on your current budget. Here’s the sort of savings level you stand to retire with, for example, if you begin setting aside just $400 a month at various ages:

You can retire with a decent sum of money if you consistently save $400 a month for 25 or 30 years. But if you’re in your 50s already, you’ll need to do better. This might involve maxing out a company 401(k), which, as per today’s limits, means setting aside $24,500 annually in savings. Will that wreak havoc on your present spending habits? Probably. But will it make a huge difference in retirement? Absolutely.

In fact, if you were to save $24,500 a year for just 10 years and invest that money at the aforementioned average annual 8% return, you’d be sitting on $355,000 to fund your golden years. And that, combined with a modest level of Social Security income, is most likely enough to help alleviate much of the financial anxiety and unhappiness so many of today’s seniors face.

Retirement is supposed to be a rewarding time in your life, and you have the power to make it one. The key is to save as much as you can today, and reap the benefits when you’re older.