Industry News

Water Cooler Wisdom:
Breathe. Repeat.

April 6, 2017 by Michele Suriano

As you can tell from the title, this quarterly opinion letter should be the “fluff” part of your ad hoc reading list. Otherwise, buyer beware.

Last quarter we talked about the “Trump bump” and I’m delighted that most of the U.S. equity gains have remained and the larger growth stocks have risen to match the “bump” seen by smaller value companies last quarter. Now the current price-to-earnings ratios (“P/E”) as a percentage of the 15-year average P/E range from 112.5% to 123.6% (see “Returns and Valuations by Style”). In short, everything is overpriced now.

The next six months in the U.S. stock market look rocky as the new administration struggles to fulfill their campaign “promises” and we try to sort fact from fiction daily. The consensus is that any change is going to take longer than expected and obfuscation is the norm. On the positive side of the ledger, consumer confidence is high, and Americans are hard-working and hopeful. Confidence is a lagging indicator but I’m still part of the hopeful bunch.

On a drearier topic, the growth in the working-age population (see “Long-term drivers of economic growth”) is a topic of concern. You should not hear Americans complain that an illegal immigrant stole their job because the labor force isn’t growing fast enough to fill the current jobs and growth is projected to drop by another 50% in the next decade. What does that mean for our GDP? Not good. If there is no growth in workers we are all going to have to be a bit more productive. That might push me out of the hopeful bunch.

Yet there is a drearier topic (see “Federal finances”). The Congressional Budget Office forecast an increase in the Federal net debt from 77.5% to 88.9% by 2027 due, mostly, to our aging population. “In particular, spending as a share of GDP increases for Social Security, the major health care programs (primarily Medicare), and interest on the government’s debt.”1

At this point you must wonder who is going to build the wall and pay for it. Perhaps the millennials will move out of the basement, build it, and pay for it. Go Texas, Arizona, California, and New Mexico. There is lots of potential population growth in the border towns. It’s going to be bigly.

Then there is one topic that doesn’t show up in the charts that I’ll end with. Love. We don’t measure it, nor its impact, but we know it exists.

In Paul’s words. “4 Love is patient, love is kind and is not jealous; love does not brag and is not arrogant, 5 does not act unbecomingly; it does not seek its own, is not provoked, does not take into account a wrong suffered, 6 does not rejoice in unrighteousness, but rejoices with the truth; 7 bears all things, believes all things, hopes all things, endures all things.”2

Love does, in fact, endure all things and that keeps me in the hopeful bunch.

1 httpss://www.cbo.gov/publication/52480
2 I Corinthians 13:4-7 (New American Standard Bible)

Positive Thinking – Fiduciary Rule

March 3, 2017 by Michele Suriano

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

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

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:

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

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

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

February 15, 2017 by Michele Suriano

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.

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

January 13, 2017 by Michele Suriano Leave a Comment

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 10^th, 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

Ask Your Financial Adviser: Do You Adhere to the Fiduciary Standard?

January 9, 2017 by Michele Suriano Leave a Comment

Give your Financial Adviser a call this week and ask them this question:

“Do you adhere to the Fiduciary Standard?”

This one question could save you a great deal of money.

If they say yes, this means they are putting your interests first when recommending where to invest your retirement funds.

If they say no, then they are able to make recommendations that benefit them (in the form of a commission, for example) even if it is not the best choice for your money. It’s probably time to walk away.

Consider your retirement money and how hard you’ve worked for it. Do you want your adviser to put your interests first?

Over the next couple of weeks we’ll discuss more about how working with an adviser that is not a Fiduciary can impact you, and we’ll cover some of the misinformation out there about the Fiduciary Standard which will go into affect April 10th, 2017.

Castle Rock Investment Company has been a Fiduciary since opening 10 years ago. Our project based and monthly retainer pricing model ensures that you always know how much you are paying us. We value transparency and never charge hidden fees or earn a commission on our recommendations.

Call us at 303.725.7086 or email Michele Suriano at MSuriano@CastleRockInvesting.com today to start working with a Financial Adviser who will always put your interests first.

Will Trump Repeal the Fiduciary Rule?

November 16, 2016 by Michele Suriano

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 10^th, 2017?

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

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.
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.
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.
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 80^th 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

October 28, 2016 by Michele Suriano

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.

Will Morgan Stanley Replicate Merrill Lynch?

October 20, 2016 by Michele Suriano

During Morgan Stanley’s third quarter earnings conference call, James Gorman (CEO of Morgan Stanley) stated that the firm will announce their plan to comply with the DOL’s upcoming Fiduciary rule within the next couple of weeks. However, James Gorman did state that “we are not changing things”, “we run our business with the values of doing everything we can to support our clients and we will continue to do so.” In other words, Morgan Stanley will more than likely not go the Merrill Lynch route by no longer offering commission based IRA accounts.

So, if Morgan Stanley decides not to forgo commission based retirement accounts, what would be another possible strategy for them? Although the Fiduciary Rule will technically still allow commissions, it will be required for brokers and advisors to disclose all conflicts of interests to their clients with retirement accounts. It is also important to note that Morgan Stanley’s wealth management division currently oversees $2.1 trillion in client assets, with $855 billion of those assets being under a fee-based model which is a 75% increase from the third quarter of last year. In other words, Morgan Stanley’s strategy could have a significant ripple effect with their clients as well as their advisors.

In addition, Morgan Stanley was charged by the Commonwealth of Massachusetts with “conducting an unethical, high-pressure, sales contest amongst its financial advisors to encourage clients to borrow money against their brokerage accounts.” Morgan Stanley says the allegation is “without merit” and will “vigorously” defend itself. Please note that Morgan Stanley has $70 Billion in client loan balances, which is a new record according to them.

With Morgan Stanley’s strong stance on how they run their business, it will be very interesting to see how this will all play out in the next couple of weeks. And if the charges from Massachusetts are correct, Morgan Stanley will face a world of hurt from regulators and potentially lose client assets. Click on the links to read further into Morgan Stanley’s conference call and the Massachusetts allegations.