When Congress names a bill look in the mirror

Apples and OrangesWhen Congress names a department and/or passes an “act”, it generally does the opposite of what it’s named. How “secure” is our Social Security, and how much offense has the “Department of Defense” been playing over the last several years?

In October, the House of Representatives passed “The Retail Investor Protection Act.” The Investment Company Institute, (the national association of U.S. investment companies), supported passage. The Consumer Federation of America, called it “cynically misnamed”, and offered an opposing view.

The Department of Labor (DOL) has jurisdiction over retirement plans while the Securities and Exchange Commission (SEC) regulates brokers, dealers and people licensed to give financial advice. The DOL worked with the SEC on new regulations concerning the “Fiduciary” versus “Suitability” standards. The current bill prohibits either from issuing any regulations on the subject without a lot of theoretical oversight and approval.

In a nutshell, those who manage other people’s money are generally held to one of two standards. The higher standard is called “Fiduciary”. That means the representatives must put the client’s interest ahead of their own. Many Certified Financial Planners and fee based investment advisors, because of their certification and designation, are held to the fiduciary standard.

For example, they may suggest the client invest in a particular sector fund (utilities for example). A representative held to the Fiduciary standard must recommend the best option for the client. If they do not follow that standard they are vulnerable to a lawsuit and could lose their license.

The “Suitability” standard is one associated with most stockbrokers and advisors who work for investment companies that sponsor a large number of mutual funds. The advisor looking at utility funds is not required to choose the one that is best for the client. They may choose one of their company’s own funds, or other high commission products. As long as a recommended investment is deemed “suitable” for the client, they are complying with the law.

This creates a natural conflict of interest; do they recommend the best option for the client, or the one that pays them the best commission? High fees have a major impact on a retirement portfolio.

Do not confuse the standards with how advisors are paid. Many Certified Financial Planners can receive commissions from products they sell; however they ethically should divulge this information to their clients. While both can receive commissions or fees for products they sell, only the advisor held to the fiduciary standard is required to put the client’s interest ahead of their own.

Look in the rear view mirror and you see the opposite

The government tracking website tells us about the new act:

“After the date of enactment of this Act, the Secretary of Labor shall not prescribe any regulation under the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1001 et seq.) defining the circumstances under which an individual is considered a fiduciary until the date that is 60 days after the Securities and Exchange Commission issues a final rule relating to standards of conduct for brokers and dealers….”.

The bottom line is the House of Representatives does not want either agency to issue a ruling without:

“providing a report to the Committee on Financial Services of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate describing whether-….

(iii)the adoption of a uniform fiduciary standard of conduct for brokers, dealers, and investment advisors would adversely impact the commissions of brokers and dealers, the availability of proprietary products offered by brokers and dealers, and the ability of brokers and dealers to engage in principal transactions with customers (emphasis mine); and

(iv)the adoption of a uniform fiduciary standard of conduct for brokers or dealers and investment advisors would adversely impact retail investor access to personalized and cost-effective investment advice, recommendations about securities, or the availability of such advice and recommendations.

What does this mean to individual investors?

The bill has not passed the Senate at this time but it makes little difference if it does. The government does not want any regulations that might adversely affect the profits or commissions of the big Wall Street Firms. Wall Street is very adept at greasing the political machine. Before any regulations are issued the agencies have to report to the various committees, setting up the lobbyist gravy train once again while the consumer is anything but protected.

In layman’s terms, congress told both agencies not to add more consumer protection, which could cost Wall Street firms a lot of money, without their approval. As always, political donors are looked after before the average citizen.

Nothing has changed. Individual investors understand “Caveat Emptor”, also known as, “Let the Buyer Beware!”. Go to any Money Show and the halls are filled with firms, generally those held to suitability standards, hawking their wares, wanting you to invest your money with them so they can earn nice fees and commissions.

Good friend, Andrey Dashkov, is a terrific Chartered Financial Analyst. He constantly reminds me that complaining about the government may be a national sport; however all investors should focus on things over which we have control. This is a perfect example of what he means.

Let’s face it. Those with a $100 million+ nest egg can afford their own private bankers and army of financial advisors. The average baby boomer who has just rolled their 401 (k) over into an IRA or has a brokerage account is not well protected, and probably never will be. The government must look after Wall Street first!

Here are some common sense steps every “do it yourself”, or hybrid (do it yourself with some help) investor should do regardless of the laws or regulations that happen to be on the books.

Get an annual financial checkup with a qualified financial professional. Find someone who is fee based, and may charge a few hundred dollars, but has no financial incentive to sell you any products. Lay out your portfolio and ask their advice.

Decide what level of help you need and are comfortable with. It seems like a no-brainer that every investor, particularly those investing money for retirement, would want the added protection of dealing with an advisor held to the fiduciary standard. It may take some shopping to find an advisor, or firm that matches up with your needs. If you have a $1 million nest egg and the advisor’s average client is $10 million you probably need to keep looking.

Ask directly about how they are compensated, and put it in writing. If an advisor is unable or unwilling to do so, can you trust them? Never forget they are helping manage your life savings and it is not the time to be shy.

Set realistic expectations. In today’s investment climate, preservation of capital is more important than a couple of percentage points in yield. Make sure you and your advisor are in complete agreement. Likely all the long-term projections you made while accumulating your nest egg were based on 6-8% return, but that is not relevant today. You must deal with the here and now of the investment world.

Audit the results annually. Your advisor must be held accountable. If you have done well, great – as long as you followed the plan. If you did poorly, what adjustments need to be made? Could adjustments have been made earlier in the year as things came into focus?

The most important rule of all – Delegate but never abdicate total responsibility to anyone, no matter how qualified, or trusted (family member) they may be. It is your nest egg. If you have left the work force you may never be able to go back and earn what you did in your peak earning years.

Education is a continuous process. Things change and you must always continue to read and educate yourself. While you may be able to retire from working full time, you must never stop learning. The positive side is you have plenty of time to accomplish the task.

I agree with the premise that the government should not issue regulations that, “adversely impact retail investor access to personalized and cost-effective investment advice, recommendations about securities, or the availability of such advice and recommendations.” While it sounds like a “Retail Investor Protection Act”, don’t be fooled. The government is protecting Wall Street. We must protect ourselves.

On the Lighter Side

I am constantly amazed at how technology has impacted our lives. Did you know it is possible to take your home TV programming with you on your cell phone, tablet or computer without having to pay for programming?

In the spring Jo and I purchased a product called a Slingbox 500. It is an interface between your cable or Directv box, your modem and television. The app is free and can be downloaded on your phone, tablet or computer. It took less than ten minutes to set up.

If you have access to Wi-Fi, you can watch any channel that you get on your home television, it’s like taking your cable box with you. You see the guide, change channels, and a fast Wi-Fi connection will give you a great high definition picture.

  • We watched a hockey game on my phone and the quality is so good we could follow the puck.
  • When we drove across country we took turns driving. Jo drove when I wanted to watch a baseball game.
  • What do you do in the doctor’s office or when you are waiting after you have checked all the email on your phone? Log in and watch the news or your favorite TV show.

I got an astounding email Sunday from my son Drew. “I am currently on the plane on my way to India. The plane has pretty good Wi-Fi and I have been watching your sling box.” We have our Slingbox 500 set up in the spare bedroom so it does not interfere with the big TV in the family room. Drew logged in, changed the channel, and watched a football game while flying to India.

If you think this is a commercial for the product, you are correct. When I started this blog I vowed to keep it FREE for my readers. It is expensive to have a blog but we would have to find other ways to offset our costs. We now have an arrangement with Amazon. On the right side of the page you see an Amazon link. If you buy from them, which Jo and I do a lot and heartily recommend, going through the link on the website will help us out.

Your costs stay the same; however they send us a small stipend to help us defray our publication costs. It is a win/win.

I promise I will not have a product commercial each week. When you do see one like this it is a product we use, love and would readily recommend.

Christmas is coming. When you let your fingers do the walking, please consider logging into Amazon through our website and helping us out.

And finally…

Who says cell phones are not integrated into our society?

Cell Phone Cartoon

Until next time…


  • Ricardo Mauzer

    Dennis, I got a “heads up” on your web site from Chuck over at Ever Bank….I like what I am seeing and so far, you are “spot” on with many of your commentaries! I appreciate ALL the information that I have read so far. The topic concerning investing and the use of a fiduciary was most appropriate for me. I have been self directing my investments so far and have done OK. However beginning next year I wiil be forced to begin taking R.M.D.’S. I realize the fact that if I do not, I will be penalized heavily. I will be searching for a “fee only” C.F.P. that will be acting as a fiduciary and will get it in writing…….however, I am still a bit fearful of dealing with someone with my “nest egg.” Once again, thank you for sharing your knowledge with the world…..especially us “boomers”……knowledge is power!

    • Dennis Miller

      Dear Ricardo,

      Thank you for the response. I would suggest you scroll back in the archives as I wrote about the IRA issue a couple times (1/14 & 2/10) since the first of the year. In the January article I dealt with RMD’s. As you will see, I have many concerns about those who have IRA’s that have the means to roll them into a Roth.

      As you have probably discovered already, I don’t trust the government to keep their hands out of our pockets.

      While I am not licensed or qualified to give individual, personal advice, one thing I can say is this. Take your time, trust your judgment, and if you are not comfortable with a CFP candidate, keep looking.

      Good luck and thanks again,

      Dennis Miller

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