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Positive Thinking – Fiduciary Rule

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Despite the news that advisers may not be legally required to provide advice that benefits their clients more than themselves (in the form of commissions and kickbacks) we’ve seen a lot of good come from the fiduciary rule already.

These are the four major benefits we’ve seen:

1. Many major investment companies are making changes to their fee structure. Several of them have said they will maintain these changes even if the rule is postponed.

Take a look at the following list of brokers who are changing their practice whether or not the Fiduciary Rule goes through:

A Complete List of Brokers and Their Approach to ‘The Fiduciary Rule’ - WSJ
A Complete List of Brokers and Their Approach to ‘The Fiduciary Rule’ – WSJ
Some brokerages have already rolled out a number of changes to comply with the fiduciary rule and are sticking with plans to improve disclosures to investors—regardless of the rule’s fate.

2. Investors are taking the time to educate themselves rather than blindly trust their advisers.

The following two articles are great examples of how investors are educating and empowering themselves to work with fiduciaries rather than commission based advisers.

How the Benefits of the DOL Fiduciary Rule Have Already Taken Root | IRIS
How the Benefits of the DOL Fiduciary Rule Have Already Taken Root | IRIS
When Linda and Bill came into my office, I could sense their hesitancy right away. And when they told me their story, I could understand why they were so apprehensive about meeting with a financial advisor. They had, quite simply, learned not to trust.

Ask your broker/adviser about the Fiduciary Rule

I thought it might be worthwhile to email my financial services company (Schwab) and ask them if they were planning to adhere to the standard of the proposed fiduciary rule despite Trump’s delay of its implementation. The answer I got back was polite,…
via: dailykos.com

3. Outlets are providing more and more education for investors.

Individuals are encouraged to arms themselves with information rather than trusting their adviser is always putting their best interests first:

The 21 Questions You’re Going to Need to Ask About Investment Fees - The New York Times
The 21 Questions You’re Going to Need to Ask About Investment Fees – The New York Times
Are financial advisers trying to part you from your money in ways you don’t understand? Ask them this set of questions.

4. Hundreds of advisers are coming out of the woodwork to declare themselves “Fee Only” and “Fiduciaries” whether or not the rule goes into place.

Take a look at some of the hashtags on twitter: #FeeOnly#Fiduciary and our personal favorite (our new hashtag) #FiduciaryDefender

As new information pours in daily, we’ll continue to do our part to defend the Fiduciary Rule and fight for applicability.

Don’t forget, there is still hope! This was definitely our favorite headline from last week:

Ask your broker/adviser about the Fiduciary Rule
I thought it might be worthwhile to email my financial services company (Schwab) and ask them if they were planning to adhere to the standard of the proposed fiduciary rule despite Trump’s delay of its implementation. The answer I got back was polite,…
The 21 Questions You’re Going to Need to Ask About Investment Fees - The New York Times
The 21 Questions You’re Going to Need to Ask About Investment Fees – The New York Times
Are financial advisers trying to part you from your money in ways you don’t understand? Ask them this set of questions.
DOL Wins Fiduciary Rule Case in Texas
DOL Wins Fiduciary Rule Case in Texas
Congress “gave the DOL broad discretion” to protect retirement investors, the decision says.
Until we hear differently, we’re going to continue thinking positively and counting down to the April 10th date!

Access Denied? Download DOL Fiduciary Rule FAQs Here

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Hoping to read the Consumer FAQs that the DOL published? Unfortunately, they are no longer available on their website. The page that used to host the FAQs now simply says “Access Denied.” Don’t worry, we have you covered! You can download the FAQs below.

 

Know Your Rights When Getting Financial Advice

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Your financial adviser is not currently legally required to act in your best interest.

Financial companies often pay advisers more to promote certain products rather than to recommend what is best for their customers which creates a conflict of interest.

These conflicts of interests sometimes can cause advisers to give bad advice.

Americans lost $17 billion last year due to conflicted advice from their financial advisers on their IRAs alone. (President’s Council of Economic Advisers)

The Department of Labor’s recently adopted Conflict of Interest Rule which protects retirement investors by requiring advisers to adhere to a fiduciary standard and give advice that is in the investor’s best interest.

Read the following excerpts of FAQs provided by the DOL on the new rule. To read longer explanations, click here.

BACKGROUND FAQs

Q1. Why did the Department adopt the Rule?

A. The Department adopted the Rule to better protect retirement savers when they receive investment advice.

 

Q2. Will the Rule cause change in the financial services industry?

A. Yes.

 

Q3. Will the Rule better protect my retirement savings?

A. Yes.

 

Q4. Which financial advisers are fiduciaries under the Rule?

A. A fiduciary is someone who is paid for giving investment advice about retirement accounts.

 

Q5. What loopholes are being closed by the Rule?

A. The Rule closes the large loopholes that permitted conflicted investment advice

 

Q6. Why did these loopholes get the Department’s attention now?

A. Recent research has found that advisers’ conflicts cause real harm to ordinary investors who rely on their advice.

 

Q7. How much do America’s working families lose due to conflicted advice?


A. About $17 billion per year

 

Q8. How much does a typical worker lose due to conflicted investment advice?

A. 1 percent more in fees every year on a $100,000 account earning 6% could cost you $16,000 over 10 years.

 

Q9. I’ve heard that some advisers will get “exemptions.” What does that mean?

A. They must comply with certain conditions designed to ensure they act in your best interest.

 

Q10. What happens to financial advisers if they provide investment advice that is not in their retirement investors’ best interest?

A. Investors will be able to hold them legally accountable.

 

Q11. Will the Rule prevent me from getting advice paid for with commissions?

A. No.

 

FAQs About My Adviser

Q12. Who is a fiduciary adviser under the Rule?

A. When your financial adviser is paid for making an investment “recommendation” about your retirement accounts, he or she is a fiduciary.

 

Q13. What counts as a fiduciary “recommendation” as opposed to general investment education?

A. A “recommendation” is a suggestion that you take a particular course of action.

 

Q14. What does it mean to me to have investment advice provided by a “fiduciary”?

A. A fiduciary must act prudently and solely in your best interest when he or she gives you investment advice.

 

Q15. What does it mean to me to have investment advice provided in my best interest?

A. It means financial advisers must put your financial interests in the driver’s seat, rather than their own competing financial interests.

 

Q16. Is my adviser liable if I lose money in my retirement account when I follow his recommendation?

A. No.

 

Q17. Does the best interest standard mean that my financial adviser must search for and identify the absolute best product for me?

A. No.

 

Q18. Can I continue to work with my financial adviser after April 10, 2017?

A. Download this list of questions to ask your financial adviser.

 

FAQs About IRAs, 401(k) Plans and HSAs

Q19. My broker tells me that he is a fiduciary when he gives me advice about my 401(k) and IRA account investments, and not a fiduciary for my after-tax account. Is this true?

A. It could be.

 

Q20. My financial adviser tells me that he is providing me with investment education but not advice. What is the difference?

A. Education is general financial and investment information and cannot include an investment recommendation.

 

Q21. I receive financial advice from a stockbroker and an insurance agent for my 401(k) plan investments. Does the Rule apply to these types of financial advisers? 


A. Yes.

 

Q22. My financial adviser says he must switch my IRA from a “non-advisory” account where I currently pay commissions for each transaction to an “advisory” account for which I will pay an annual fee based on the assets in my IRA. Do the Rule and exemptions require this change? 


A. No

 

Q23.  Do the Rule and exemptions limit the investments that I can hold in my IRA?

A. No.

 

Q24. Does the Rule restrict my broker from following my direction?

A. No.

 

Q25. What circumstances require my financial adviser to give me a “Best Interest Contract” for my IRA investments?

A. If you pay for investment advice through commissions.

 

Q26. I participated in a 401(k) plan at an old job. Can I get investment advice on what to do with my account in the 401(k) at my old employer?

A. Yes.

 

Q27. My financial adviser said my IRA will be grandfathered. What does that mean?

A. Your financial adviser will continue to provide advice on your existing investments but will not provide you with a Best Interest Contract.

 

FAQs About Timing And More Information

Q28. There are reports that the Department has fined financial institutions that are not compliant with the Rule. Is this true?

A. No.

 

Q29. When do the Rule and exemptions become applicable?

A. April 10, 2017

 

Q30. Where can I find more information on the Rule and exemptions?

A. Click here for more information.

Water Cooler Wisdom: Fourth Quarter 2016 The “Trump Bump”

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The U.S. stock market soared after Trump’s electoral victory.  Investors and traders put bets on his pledge to reduce corporate tax rates, pull back regulations and increase infrastructure spending. As seen in the chart on the right, fourth quarter returns for the U.S. stock market were higher for small companies and value-oriented stocks. Looking forward, the common theme among market forecasters is a low to moderate US stock market return (mid-single digit). This may be due to current valuations (see chart below) with price to earnings ratios well above their historical norms and an underlying fear of bubbles resulting from the Great Recession.

During a market update call on January 10th, an adviser asked if the “Trump Bump” could really be paid for by the President-elect.  The market strategist explained it may be possible through reducing corporate tax rates and that every 1% drop in the effective corporate tax rate potentially generates an additional $1.50 of earnings for the S&P 500, currently at $115 per share (see attachment “Corporate profits”).
“If Trump dropped the current effective tax rate from 26% to 18%,” the strategist hypothesized, “earnings per share would increase to $128 and pay for the rally.” Ironically, “in each year from 2006 to 2012, at least two-thirds of all active corporations had no federal income tax liability…for tax years 2008 to 2012, profitable large U.S. corporations paid, on average, U.S. federal income taxes amounting to about 14 percent of the pretax net income that they reported in their financial statements (for those entities included in their tax returns).”[1]

So, what do we know?  There is a general concern about a continued decline in Treasury prices that coincides with the expectation of three Federal Reserve rate hikes in 2017. Also, leading economists like Trump’s commitment to infrastructure spending and believe it will boost non-college wages and jobs while, at the same time, they strongly disagree with his isolationist policies and deregulation of the energy industry.[2]

What we don’t know?… the price of populism. I could not find an estimate on the timeframe or projected cost to Americans that economists fear.  By the time you read this, America will have inaugurated Donald Trump as President of the United States and we will be embarking on his “100-day action plan to Make America Great Again” (attached). Whether it’s due to economic insecurity or a cultural backlash, Europeans and Americans have voted for protectionist leaders that have made big promises of change. Perhaps America will be the model for Brexit.

[1] GAO-16-363:  Published:  March 17, 2016 “Most Large Profitable U.S. Corporations Paid Tax but Effective Tax Rates Differed Significantly from the Statutory Rate”

[2] httpss://www.igmchicago.org/surveys/100-day-plan

Will Trump Repeal the Fiduciary Rule?

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For those who work for Broker-Dealers and Registered Investment Advisers, no one is certain whether Donald Trump or the Republican Party will attempt to eliminate the Fiduciary Rule or keep it intact. But before we get ahead of ourselves it is important to ask one question, will Donald Trump or the Republican Party be able to dismantle the Fiduciary Rule before it becomes enforceable on April 10th, 2017?

Although we cannot answer this question in confidence just yet, repealing this legislation will be quite a task for a few reasons:

  1. With the Fiduciary Rule being effective since April 2016, the rule cannot just simply be thrown out by an executive order. It is also worthy to note that the legislation took 6 years to be written, so the likelihood of the DOL eliminating it is extremely slim.
  2. Broker-Dealers, Insurance Firms, and Investment Advisers have already spent significant resources in designing compliance friendly products and re-inventing their business platforms. So, if the rule were to be thrown out, the government could have dozens of lawsuits on their hands, especially from those who were for the rule.
  3. Despite the Republican Party holding the majority in Congress, they still do not have enough seats to overthrow a filibuster from the Senate. In addition, repealing legislation can take months or even years, during which the rule could have been enforceable for a notable amount of time.
  4. With Donald Trump already planning to tackle dozens of issues in his first 100 days, repealing the Fiduciary Rule is more than likely not his top priority. The rule will also become enforceable by the 80th day of his presidency.

Although it appears that the Fiduciary Rule is here to stay, we will keep you updated if there is anything that will threaten the rule.

Morgan Stanley Sticking With Commissions

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By Mack Bekeza

Morgan Stanley recently announced how it plans to comply with the impending Fiduciary Rule. As expected, Morgan Stanley did not follow the Merrill Lynch path. Instead, it plans to operate under a provision of the rule called “Best-Interest-Contract Exemption (“BICE”)”. In other words, Morgan Stanley’s strategy is to tackle the compliance requirements and have its clients sign additional disclosures.

Morgan Stanley has decided to take the BICE route because it believes that its “advisers can most effectively uphold a fiduciary standard of care and work in clients’ bests interests by continuing to offer choice.” Morgan Stanley further stated, “Delivering a retirement account platform based on fiduciary principles that provides the widest possible capabilities and preserves client choice is our vote of confidence in our advisers’ continuing commitment to placing client interests first.”

Essentially, Morgan Stanley believes that offering clients the choice between having a commission-based or fee-based retirement account is in the client’s best interest. This also assumes that Morgan Stanley advisers will not sell or recommend certain alternative investments that might not optimally meet a client’s liquidity and retirement needs.

In our opinion, Morgan Stanley may have chosen its business model to differentiate itself from Merrill Lynch. Many advisers only sell commission-based products and want to work for a large broker dealer. The rule points out that paying commissions may be in a client’s best interest (versus asset-based fees) if they have few transactions. However, the firm might still come under fire if its clients believe they are being misled. At the end of the day, it’s about putting the clients first.

If you would like to read further into the decision, check out Investment News’s post about Morgan Stanley’s decision.

©2016 Castle Rock Investment Company. All rights reserved. Please share your insights and comments with us at Mack@Castlerockinvesting.com

Getting the Facts Straight about Qualified Plan Loans

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Are you considering making a large purchase but don’t have the money to do so? Are you in need of emergency cash? Typically, they are many options for people in that situation such as a home loan, a home equity line of credit, personal loans, etc. But what if you do not want to deal with a bank or have a poor credit score? Fortunately, there are a few options, with the most notable being the Qualified Plan Loan. That’s right, you could be able to take a loan from your employer’s retirement plan. In fact, over 75% of Qualified Retirement Plans allow participants to take loans from their accounts.

So now to the big question…is it worth taking a loan from your retirement plan? In short, no. However, it is still important to weigh the options of taking such a loan. Below are the major pros and cons of taking loans from your employer’s retirement plan.

Pros:
1. Qualified Plan loans offer a low interest rate, which is usually the prime rate plus 1%

2. You are not borrowing from a bank; you are just borrowing from yourself. In other words, the interest that you pay will actually go into your retirement account balance. (However, please note that all loan payments going back into the plan are in after-tax dollars).

3. The loan process is typically very easy and you can get the needed cash in a timely manner. On top of that, payments are simply deducted from your paycheck.

4. Loan minimums can be as low as $500-1,000 and people can borrow up to 50% or $50,000 of their vested balance, whichever is less.

Cons:
1. Payment options are not as flexible as other loans since the only two options are the minimum payments deducted from your paycheck or to pay the balance in full.

2. You have 90 days to start making payments back into the plan or else the loan will be considered taxable and will trigger a 10% tax penalty (for borrowers under 59 ½). Remember, if you are laid off, you may only have 90 days to pay the remaining balance in full or the loan will become a taxable event and will also trigger the 10% tax penalty (for borrowers under 59 ½)

3. People who borrow from their employer retirement plan may face loan fees, i.e. loan origination fees, loan maintenance fees, etc. And if the loan is particularly small (say $1,000 for an example) you could theoretically be paying 15% just in fees, which will not go back into your plan.

4. Finally, there are major opportunity costs associated with a Qualified Plan Loan. For example, if the borrowed funds in your account can potentially earn an average of 8% a year while your borrowed funds can only earn a theoretical 4.5% with the interest from the loan, you could theoretically be losing money (depending on market conditions).

In the end, a Qualified Plan Loan may not a great idea for those who have other means of getting an affordable loan and in most cases should only be used as a last resort.

So, how can someone get money for large purchases without going to a bank or borrowing from their retirement plan? For starters, people can make it a monthly habit to contribute to an emergency fund and/or a special purchase(s) fund so that they will not have to borrow money in the first place (please read our previous blogs on emergency funds and on general savings tips).

Overall, borrowing can be quite a hassle and could be costly in the long run no matter how you look at it. However, if you develop a plan for making a large purchase or plan ahead of an emergency, funding these events in our lives can be a much smoother and inexpensive process. If you currently do not have a plan, contact Castle Rock Investment Company to help you reach life’s major financial milestones, we will always work in your best interest!