Castle Rock Investment Company

Independent Guide, Trusted Partner.

IRA

State Farm and Edward Jones React to the Fiduciary Rule

by

By Mack Bekeza

With April 10th, 2017 quickly approaching, a large number of investment firms and insurance agencies are scrambling to comply with the DOL fiduciary regulation. However, some firms believe they have found a solution to the upcoming rule. Knowing that their representatives cannot put their clients’ interest first, State Farm and Edward Jones have announced plans to prevent their employees from selling mutual funds when the new fiduciary rule takes effect next April.

So how will they be able to do this without significantly reducing their revenue? State Farm plans to only sell and service their mutual funds, variable products, and tax-qualified bank deposit products by a self-directed call center, as opposed to having their agents sell the products directly. In other words, State Farm still wants their customers to purchase these products while being able to avoid liability if the product turns out not being in a customer’s best interest.

Edward Jones’s solution involves curtailing retirement savers’ access to mutual funds in commission based accounts and lowering their investment minimums. Basically, Edward Jones is planning to shift completely into the fee only side of compensation for retirement accounts and allow more investors to move their money to them.

Although it will be interesting to see how State Farm’s self-directed call center will play out, at least they have a strategy to deal with the upcoming rule. As for Edward Jones, going completely towards the fee-only side for retirement accounts is a good move as they are eliminating a major conflict of interest for recommending certain products.

Although there are a number of firms still trying to strategize to comply with the DOL rule, we are still waiting to hear plans of other advisers that sell investments that may not be in their clients’ best interest. However, we will attempt to keep you posted as more firms finalize their strategies.

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523

The DOL Rule and Why Brokers and Insurance Agents Should be Concerned

by

By Mack Bekeza

Are you currently a Registered Representative or an Insurance agent? If so, you will want to keep reading!

As you may know, the Department of Labor will have new regulations in effect on April 10, 2017, which will change how Brokers and Insurance agents conduct business with retirement investors.

For starters, when dealing with retirement investors, the broker or insurance agent cannot receive variable compensation. This means that someone receiving commissions, asset based fees, 12b-1 fees, etc. must create a uniform method of compensation.

Additionally, any investment recommendations must be in the retirement investor’s best interest, meaning that the agent or broker must have a thorough understanding of the client’s overall financial picture and cannot just rely on FINRA’s suitability standards.

Finally, if you still want to receive variable forms of compensation, you must be able to comply with something called the Best Interest Contract Exemption, aka the “BICE.” And, in order to truly comply, you have to be certain that recommending a product that will pay you variable compensation is in the retirement investor’s best interest.

The major caveat with complying with the BICE is that even though the client is fully aware of how you are compensated, if he or she believes the product is not their best interest, he or she can file a lawsuit against you. In other words, you can still sell commission based products, but don’t expect the BICE to bail you out if you are sued!

So, who is considered to be a retirement investor? To make this simple, do you sell or make investment recommendations for the following accounts?

  • ERISA governed Retirement Plans (with less than $50 million)
  • Non-ERISA Retirement Plans (e.g., Keogh, Solo Plans)
  • IRAs
  • Health Savings Accounts, Archer MSAs, and Coverdell ESAs

If you fall into one of these categories, you will want to seek advice on where to go from here! If you reside in the Greater Denver Area, Castle Rock Investment Company and The Law Offices of Ed Frado, LLC are hosting an event to educate Brokers and Insurance Agents on the details of the new DOL regulation on September 20th at Maggiano’s in the Denver Tech Center. If you would like to register, click here

We hope to see you at the event!

© Castle Rock Investment Company. All rights reserved. Please share your insights with us at info@castlerockinvesting.com or via phone at 303-719-7523

Fund Families sued by their own employees over their retirement plans??

by

By Mack Bekeza

Over the past two years, a number of investment firms have been sued by their employees over their 401(k) plans. That’s right! Investment firms have been sued over their own in-house retirement plans! Why? In most cases, these firms would only provide proprietary funds to their employees at a full or slightly reduced cost. In fact, here are just a few of the recent cases from the past two years:

1. Transamerica
2. Fidelity Investments
3. Ameriprise
4. New York Life
5. Great West (Empower)
6. MFS Investment Management
7. Waddell and Reed
8. Allianz Global Investors
9. MassMutual
10. Neuberger Berman
11. Putnam Investments
12. BB&T
13. Edward Jones
14. Morgan Stanley
15. American Century

Why do these investment firms offer their own funds to their employees without significantly lower fees? First, they do not want to convey to their employees that there are potentially superior investment opportunities outside of the company. For instance, Fidelity might not want to offer an outside fund that could be cheaper and possibly better performing than a comparable Fidelity fund. Additionally, since these plans tend to be very significant in size, reducing investment fees for their own employees could be problematic, since it could potentially increase fees for their retail investors to absorb the cost.

Is there a solution to this dilemma? Yes, there actually is! For the investment firms that are currently offering their proprietary funds to their employees without reduced expenses, these firms should consider offering outside funds to their employees. This could potentially result in lower expenses for the employees. Furthermore, this could remove the target off their backs from ERISA once the DOL regulation becomes effective in April of 2017. Of course, this is a lot easier said than done because it requires investment firms to expose their weak spots in their investment line ups, which could also potentially leak out to their retail investors. Also, a retirement plan was never meant to make the employer money, it is supposed to be a generous benefit for its employees.

With the new DOL regulation coming in April 2017, 2016 has proven that broker dealers and investment advisors are not the only target, but the fund families have also been dealing with quite the roller coaster themselves. And, as retirement investors, we should be glad that the investment business is starting to clean up its act for good and will in return make the industry more beneficial for everyone.

© Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523

Active Versus Passive Investment Strategy…Which is Best?

by

By Mack Bekeza

Investors have been debating if it is better to have an active investment strategy or a passive one. On one side, investors claim that being active will allow them to capture the best investment opportunities and optimally manage risk. On the other side, investors claim that going passive will help them secure long-term returns while being able to diversify unnecessary risk. Is one side more accurate than the other? We can’t really say. However, we can say that there is one thing that plays a very significant role in this argument…fees!

How do fees affect investment returns? First, let’s review the three common places fees show up in our investments, particularly mutual funds: Sales-loads, management fees, and 12b-1 fees.

How do these fees affect overall investment performance? Recently, Standard and Poor’s conducted research on how fees affect active managers’ performance against their benchmarks and came out with some noteworthy results. For U.S equity funds,       70% – 92% of active funds in their respective categories underperformed their benchmarks[1] over five years, net of fees. In other words, the vast majority of actively managed U.S equity funds underperformed U.S equity index funds over the course of five years[2] after fees. However, only 30-65% of actively managed fixed-income funds in their categories (excluding long term government, high-yield, and emerging markets) have underperformed their benchmarks after fees. International equity funds have also experienced a smaller percentage of their funds underperforming after fees, ranging from 47%-79% in their categories.

So, what does this mean for those who invest in mutual funds? Although there could be a case made that going active in fixed-income has benefited investors, being passive (investing in market index funds) has been more rewarding to investors over the course of five years. Will this trend continue? We don’t know. However, we do know this: index funds have posted better long-term performance than active funds due to having fewer fees and by mimicking the market, rather than trying to beat it.

© Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523

[1] Note that the benchmarks in this study are indexes made by Standard and Poor’s, this writing only mentions returns after fees with retail mutual funds, not institutional mutual funds. Here is the study that we are referencing: http://us.spindices.com/documents/research/research-spiva-institutional-scorecard-how-much-do-fees-affect-the-active-versus-passive-debate.pdf?utm_medium=Email&utm_source=Eloqua

[2] Index funds are not the benchmarks themselves, rather they attempt to mimic them.

How to Get the Most Out of Index Funds

by

By Mack Bekeza

Although index funds can be an excellent choice for retirement investing, many people do not have a complete understanding of how they work. Before we get into the main topic, let’s get some facts straight about what these funds have done historically.

  1. Over the long term, have index funds outperformed the large majority of their active cohorts? Yes!
  2. Are index funds a much cheaper way to invest than actively managed funds? Yes!
  3. So, just because someone is only invested in index funds, have they significantly reduced their portfolio risk? Well… not exactly.

Being able to understand the risk of an index fund has been difficult for some investors, simply because they do not have a complete understanding of what they are invested in. For instance, a study conducted by Natixis, found that 64% of investors believe that index funds will help minimize investment losses. Natixis also found that nearly 7 out of 10 investors believe that index funds “provide the same access to the best investment opportunities in the market.”[1] Is this true? Again…not exactly. So, how can investors reduce investment losses with index funds? The simple answer is through diversification.

Diversification, or what is known to academics as the only free lunch in investing, is simply investing across different asset classes (stocks, bonds, cash, etc.) and across numerous regions around the world (i.e. domestic funds and international funds). As a result, investors reduce risk by having funds that do not all go up and down together. For example, let’s take a $1,000 portfolio that has 50% invested in a stock index fund and 50% invested in a bond index fund. If the stock index fund loses 2% in one year and the bond index fund gains 4%, the portfolio has increased by 1%.

So why doesn’t the portfolio go up 2% if it has a 50/50 split between stocks and bonds? Well… let’s find out. At the end of the year, the $500 that was in the stock fund turned into $490 and the $500 in the bond fund turned into $520. If we add them together, the portfolio is now worth $1,010, a 1% gain. Diversification is meant to be used to reduce risk and stabilize the portfolio. And, if you diversify with index funds, you have found a way reduce risk while saving money!

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523

[1] Here is the article about the study: http://www.planadviser.com/Investors-Miss-Much-of-the-Subtlety-in–Active-vs-Passive-/

The People’s Best Interest…The Battle Continues

by

By Mack Bekeza

The official ruling for “fiduciaries,” meaning people who are legally bound in the best interest of retirement investors, will not take effect until April of 2017. However, the Department of Labor (“The DOL”) has been bombarded by lawsuits. This brings us to the recent filing from the National Association for Fixed Annuities (“NAFA”) in June 2016 with regards to how the ruling is defining a “fiduciary,” along with other material in the ruling.

Before we get into what exactly NAFA is complaining about, let’s review how the DOL defines a “fiduciary, which is:

“Any person who exercises any discretionary authority or control respecting the management or disposition of its assets or has any discretionary authority or responsibility in the administration of the plan” as well as “any person who renders investment advice for a fee”. [1]

So, what exactly is NAFA complaining about? According to them, “Congress intended ERISA fiduciary duties to apply only to those who participate in ongoing management of a plan or its assets.” As we mentioned in the previous paragraph, this is not the case. NAFA completely disregarded that fiduciaries are those who render investment advice for a fee. Put it this way, an annuity can play a large role in someone’s retirement, so how would selling annuities to people not be considered rendering investment advice?

Another claim made by NAFA was in regards to how the DOL is allegedly “exceeding its authority by imposing ERISA fiduciary obligation on parties to transactions involving IRAs.” Again, NAFA has it wrong. Although investment advisors to IRAs are considered fiduciaries, those individuals are not subject to the same scrutiny that an ERISA fiduciary would be.

This case is an excellent example of how people who work in the commission-based side of the financial services industry are trying to keep their industry alive. They realize that (as of late April 2017) their ways will no longer work for them in the marketplace, so they are desperate to fight this. Keeping things how they are now can lead to many retirement investors losing billions of their hard earned dollars from commissions and expensive products.

Attached is a link to the article that we used as a reference. And, for those who want to see the DOL’s official response to NAFA, click here! However, just a warning, the official response is about 105 pages long.

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at info@castlerockinvesting.com or via phone at 303-719-7523

[1] As a note, Castle Rock Investment Company falls under the DOL’s definition of a fiduciary for both ERISA plans and IRAs.

Are you In or Out?

by

What sense does it make to pay for investment advice that comes from someone who is putting his or her interests before yours?

The Department of Labor, through Phyllis Borzi, is fighting to make sure that a loophole allowing conflicted advice to retirement plans is closed. As of last week, an online petition was started by consumer groups and retirement industry giants, including AARP, at http://saveourretirement.com/. The petition is to tell Washington to stand up to Wall Street and close the loophole.

We at Castle Rock are proud to endorse this petition.

The low returns that people often find in their 401(k) or IRA accounts are due to fees that are either hidden or “bundled” so that you need hire a detective to figure out who is getting paid and how much. Please do your homework when you look for an advisor for your retirement plan. In America, today, folks can pay for advice that is in conflict with their best interests and there is no law against it.

We are proud to put our clients’ interest first and maintain our independence from compromised business practices. If you support our work and want conflict-free investment advice to be the law of the land, please sign the petition at http://saveourretirement.com/take-action.html.

Are you in or out? Will you join the fight for qualified retirement investment advice?

 

Michele L. Suriano, Accredited Investment Fiduciary™, is president of Castle Rock Investment Company, a woman-owned SEC registered investment advisory firm serving qualified retirement plans. www.CastleRockInvesting.com