Castle Rock Investment Company

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retirement

State Farm and Edward Jones React to the Fiduciary Rule

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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

HSAs and what you need to know about them!

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By Mack Bekeza

Since 2003, Health Savings Accounts (“HSAs”) have been an excellent tool for families to help cover current healthcare costs, along with future healthcare costs. HSAs are also known to be an excellent tax-planning tool since participants are allowed to contribute on a pre-tax basis and the funds grow tax deferred. Additionally, participants are able to make tax-free withdrawals for qualified medical expenses. Funds in an HSA may also be invested in a list of mutual funds, or even have a brokerage link for more savvy investors. On top of that, people have until April of the following year to make contributions (similar to an IRA).

With all of these excellent benefits, there are a few caveats:

  • There is a yearly contribution limit of $3,400 per year for individuals and $6,750 for family plans in 2017. If your health plan runs from January to September, you can only make contributions for these months.
  • There can be tax penalties if withdrawals are made for non-qualified medical expenses before age 65. This involves paying income taxes for the non-qualified withdrawals as well as a whopping 20% penalty.
  • In order to qualify to contribute to an HSA, individuals must have a high-deductible health care plan (“HDHP”). This means that an individual plan must have a minimum deducible of $1,300 and minimum “maximum out-of-pocket costs” of $6,550 for 2017. For family plans, the minimum deductibles and maximum out of pocket costs would be $2,600 and $13,100 respectively. You also cannot be enrolled in Medicare.
  • Finally, if you are currently enrolled in a health plan that is a part of a healthcare.gov exchange, finding a health plan that is HSA eligible for 2017 will be nearly impossible since the requirements for a health plan to be eligible for a government exchange go against the requirements for a plan to be HSA eligible.

These setbacks should not prevent people from taking advantage of these accounts. In fact, HSAs will more than likely save people money in the long term and even in the short term. With having a HDHP, premiums will be notably less expensive for individuals and families, meaning that people can use those up front savings towards HSA contributions. Also, people can reimburse themselves for medical expenses that occurred in the past as long as the HSA was opened before that expense occurred. This means that if someone needed to make a non-qualified distribution, he or she can make it appear as if they were reimbursing themselves for a prior medical expense.

Although you will have to increase your deductible and maximum-out of pocket costs, utilizing a Health Savings Account could be one of the best decisions you will make if you want to plan for future health needs, even in retirement. And, don’t forget to keep your medical receipts…you may need them later!

© 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

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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

Active Versus Passive Investment Strategy…Which is Best?

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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

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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

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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.

White House Memo: A Moment of Opportunity for Fiduciaries to Retirement Plans

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Famous showdown between "Fast Eddie" Felson and “Minnesota Fats” in the iconic American film, The Hustler
Showdown between “Fast Eddie” Felson and “Minnesota Fats” in the iconic American film, The Hustler

If you think we’re letting go of the “fumbling children” reference made by FSI chairman Adam Antoniades, you have another thing coming. He reminds me of the proud “Minnesota Fats” character in the classic film The Hustler— he doesn’t want to recognize the truth and talent of the situation he’s faced with by “Fast Eddie” Felson (Paul Newman), because it means that his reign as best player has ended.

Mr Antoniades goes so far to call the leaked White House Memo from January 13 simplistic, though it refers to more PhD studies than his fumbling response could even spell, so he’ll have to try and respond again.

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