My soap box

Congress is reportedly attempting to improve the safeguards for the investing public. Sweeping financial services reform legislation was approved last week in the House of Representatives. But there were some evidently last minute changes inserted into the bill by lobbyists to benefit big Wall Street Broker Dealers such as Charles Schwab.

Registered Investment Advisors give investment advice and they have a fiduciary duty to always do what’s in the best interest of the client. Broker dealer representatives are not responsible to do what’s best for the client and operate at a lower standard of what is called “suitability”. They only have to do what is suitable for the client, not what is best.

Some financial advisors are registered as both investment advisors that operate under the fiduciary duty and also representatives of the broker dealer and operate under the lower suitability standards. These double licensed individuals change from the White hat of investment advisor to the Black hat of the salesman. It is impossible for clients to know which hat the advisor is wearing and whether they are getting advice or being sold a bill of goods.

It was the Security and Exchange Commission’s recommendation that all individuals who give financial advice should operate with the client’s best interest in mind at all times. The head of the committee that produced the bill, Barney Frank, agreed that investors should be projected by the fiduciary standard.

So how is it that the House of Representatives passes legislation, if enacted, would require the Securities and Exchange Commission to write rules that would establish a fiduciary duty for brokers to provide investment advice but the bill adds a qualifier to that requirement saying,” nothing in this section shall require a broker or dealer or registered representative to have a continuing duty of care or loyalty to the customer after providing the personalized investment advice about securities.”

Consider the example. You go to a financial adviser and pay a fee to analyze your investments. As a result of the analysis, it is recommended that you buy $10,000 of an emerging market fund, $15,000 of a small value fund and $25,000 of an intermediate bond fund. Ideally the advisor then would present the best, lowest cost funds of each type. However this legislation would allow the adviser at take off his “fiduciary duty hat” and put on his “suitability hat’. The salesman is then free to sell his company’s high priced funds in each of the general categories.

This provision that was inserted, with virtually no one knowing about it, would render the fiduciary duty of brokers useless and therefore the public would have no safeguards, as was the intent of the Securities and Exchange Commission recommendations.

This is yet another example of how money from Wall Street goes into the lobby industry’s pocket to influence legislation that is not in the best interest of the public but is in the best interest of Wall Street.

If you as an individual want objective unbiased investment advice that is always in your best interest, it is essential that you seek advice only from Registered Investment Advisors that are not representatives of a Broker Dealer.

The simple test is to call your advisor and ask if they are a “representative of a broker dealer”. If they say yes, you have the wrong advisor.

For list of fee-only advisors check the website for the National Association of Personal Financial Advisors (NAPFA) or Garrett Planning Network.

Michael Chamberlain CFP®
Ca Registered Investment Advisor

Send your questions to mike@chamberlainfp.com or call 800-347-1340

This article is for informational purposes and should not be taken as legal, tax or investment advice.

I recently had a newspaper clipping mailed to me by a client.  It was an advertisement for a high yielding CD, safe, FDIC insured, etc. After reviewing the “fine print,” we found that it was an introductory offer of 5% for 3 months and no mention of the rates after that.  There was a $10,000 maximum limit as well.  We also found that you could only get a CD after a financial meeting with one of this annuity company’s sales associates!

After calculating the costs to the company, we found that it was cheaper for them to pay this interest short-term than to pay for a dinner presentation, workshop, and marketing services.  It was just another way of paying to get clients in front of their sales associates.  The concept is similar to the free vacation/time share selling.

Be aware of any offer that has strings attached like this one.  Sometimes that dangling carrot is there for a reason and it is not for your benefit.  It could land you in a less than favorable situation that is difficult to get out of.

While seeking stockholder approval of the deal to acquire Merrill Lynch, the Bank of America told its shareholders that Merrill would not pay year-end bonuses to its executives. But the bank had actually already reached a deal with Merrill Lynch that allowed it to pay $5.8 billion dollars in bonuses. This type of information must be disclosed under financial regulations but was not.

The Securities and Exchange Commission found that the stockholders of BoA were intentionally misled (lied to) when they were told that no bonuses would be paid to the Merrill executives. Bank of America agreed to pay US regulators a $33-million-dollar fine for misleading its investors about billions of dollars in bonuses.

If BofA lies to it’s own owners (shareholders) of the Bank, what type of treatment would its customers expect to receive? This is an example of why people should not seek objective financial advise from a bank but should look for the protection of the fiduciary standards of a Registered Investment Advisor.

76% of those surveyed did not know the difference between a sales representative of a Broker Dealer and that of a Registered Investment Advisor. The reason is the term “financial advisor’ is often utilized by stockbrokers, insurance agents and others who are looking to sell you a product.

A “broker dealer representative” is a salesman of stocks, bonds and mutual funds. Many times they also are also involved with the sale of insurance and their parent company can also provide mortgages (all for commissions). “Insurance agents” represents the interests of one or more insurance companies and only get paid when they sell you a policy. They too are salesmen not advisors.

Neither the BD rep or the insurance salesman get paid to give you advice, hence they are not “advisors”. They get paid when they sell a product hence they are salesman, So to decrease the public confusion lets call them salesmen and not advisors!

People are confused when salesman and their companies use the terms “financial counselor”, “financial consultant” or” financial adviser”. In the vast majority of cases there is no advice at all, only an attempted to generate a commission for the salesman and his or her company.

We do not have “Used Car Advisors”, “Carpet Counselors” or “Door-to-Door Consultants”. These are all salesmen and the public can recognize them as such. But when salesmen (insurance companies, in the banks and at other large financial institutions) are called “advisors”, the public gets confused.

There are true financial advisors but most people do not know of them. Fee-only Registered Investment Advisors do not sell product. They work for the client and are paid by the client for the advice. This is a true form of a “financial advisor”.

The only true “ financial advisors” are registered with the proper governmental agency as a Registered Investment Advisor (RIA) and are situated to provide objective advice with out a conflict of interest.

If the government wanted to decrease financial sales abuse, it should require those selling product to use the label “salesperson” not prevent the use of the title “advisor”!

Recent research shows that investors who begin investing during bear markets do better over the long run than investors who begin in bull markets.  T. Rowe looked at four different thirty-year periods, two of which that started with bear markets (1929 and 1970) and two that began with bull markets (1950 and 1979). They looked at the difference in the outcomes for investors who contributed $500 a month over these periods.  They found, the investors who had begun investing in bear markets had much higher overall returns than the investors who had started investing in during a bull market. Keep in mind this is true for those who stay invested for a long time frame. Is more applicable to young investors then for retirees.

The stock market has always gone up with time but never in a linear fashion. There are times for a rapid increases as well as times when the market drops. Historically, the markets have always rallied and gone to new highs. As a result, purchasing mutual fund shares in a down time for the market is like buying things on sale. You get a great deal for the dollar. Whereas purchasing shares in a bull market is likened to paying top dollar for that item you just have to have now. There is less room for a continued rise and actually an increased chance for a short term fall in value. Just look at the tech boom a few years ago or more recently the housing market.

The best advice for investors is to not try and predict which way the market will go or what sector will be hot but to consistently invest in an appropriate asset allocation to fund your future goals.

The correct mix of investments should be based upon your risk tolerance (your mental ability to handle the ups and downs), your risk capacity (your financial circumstances, income, assets and liabilities), as well as your goals, which include your time frame.

If you don’t know anything else about investing, the one thing that is paramount to know is the different legal safeguards and standards of care depending upon from whom you receive your financial advice.

You have three options for receiving investment advice:

1) Registered Investment Advisor (RIA). According to state and federal law anyone providing financial advice for a fee must be registered with his or her State or the federal government as a Registered Investment Advisor (RIA). These individuals are paid a fee by their clients for the advice and are called “Fee–Only” Advisors. They have a legal and ethical requirement to always do what’s in the client’s best interest and is known as the “fiduciary standard” which is based on 5 core principles;

• Put the client’s best interest first;
• Act with prudence; that is, with the skill, care, diligence and good judgment of a professional;
• Do not mislead clients; provide conspicuous, full and fair disclosure of all important facts;
• Avoid conflicts of interest; and
• Fully disclose and fairly manage, in the client’s favor, unavoidable conflicts.

2) Broker Dealer Representative. Another alternative is to get advice from a broker dealer representative who earns commissions by selling products. Unfortunately, these salespeople’s legal duty and obligation is to their employer (a large for-profit corporation) and not to their clients. There is no fiduciary standard, only the requirement that the salesperson provide products that are suitable. This means if there are three suitable products paying commissions of 7%, 5% and 1% it would be legally permissible to sell the high commission product even thought it was not best for the client. KEEP IN MIND EVERY TIME A COMMISSION IS INVOLVED THERE IS A CONFLICT OF INTEREST BETWEEN WHAT IS BEST FOR THE CLIENT AND WHAT IS BEST FOR THE SALESPERSON AND THEIR COMPANY.

3) Duel Registration. Recently, some advisers are both a representative of a broker dealer (sell products for commission) as well as being an RIA and charging fees for advice. The problem with this situation is the client has an extremely difficult time knowing when the advisor is wearing the hat of a RIA with its fiduciary responsibility to always do what’s right or when the advisor is in fact operating under the lower standard of suitability during the selling process. This has become a greater problem since the federal courts struck down certain SEC guidelines. Many brokerage firms and banks now provide the option of “money management” and collect a fee for referring the client to a RIA to have their assets managed.

76% of investors surveyed did not know the difference in the methodologies and safeguards between using the services of a RIA and broker dealer. As a result, most investors pay more for their investment advice via the commissions and higher costs associated with using commission-based products than if they use the services of an RIA and the use of noncommissioned products.

The only way for you to know that the advice you’re getting is always in your best interest and you have the protection of the fiduciary standard is to use a Fee-Only advisor who does not sell product.

Money magazine, Kiplinger Personal Finance, CNN Money, MorningStar, MSNBC, Newsweek, and AARP all recommend readers use “fee only” advisors who provide advise and do not sell products with the inherent conflicts of interest.

Financial planning is the process of helping you to obtain your goals in life by making better decisions in the management of your finances. Everyone has different goals therefore everyone’s financial plan will differ. However, the process of financial planning is always the same and will include:

1. Defining your goals both short-term and long-term

2. Gathering the necessary information as the basis of the plan

3. Analyzing and evaluating your current status

4. Developing recommendations and alternatives to reach your goals

5. Implementing the recommendations in your financial plan

6. Monitoring and reevaluating your status and goals over time

Your personal financial plan should be tailored to your unique set of circumstances and goals. It should contain a checklist of the recommendations needed to help you reach those goals.

Your financial plan should contain both “defensive elements” such as estate planning and risk mitigation as well as “offensive elements” such as investment analysis and recommendations, retirement planning projections, education funding options, tax strategies as well as basic cash flow analysis.

Your financial plan should be in a written format, which will allow you to go back and reference it over time. Having a written document also makes it clearer with less likelihood of misunderstandings.

If you would like to have a better understanding of the areas that should be addressed in your plan go to http://www.chamberlainfp.com/fp_quiz.html and complete the Financial Satisfaction Survey. It is free and can be very enlightening. It has been said that” it’s what you don’t know that can hurt you most”. The survey is a good way of finding out the areas where you may need help.

The two important points to remember about obtaining a financial plan are:

1. Always go to a Certified Financial Planner practitioner ™. The CFP Board of Standards assures the public that the certified planner has met minimum education requirements, passed a comprehensive test, meets ethics standards, meets continuing education standards and has had at least three years of experience. There is no other certification that ensures the public of this level of the planner’s competency.

2. Never go to a financial planner who sells insurance or investments. Whenever there is a sale of a product there is a commission paid which creates a conflict of interest between what is best for the buyer vs. what is best for the seller. Regardless of how ethical the salesperson seems you never know if the sales recommendation is truly best for you or is best for the salesman. By going to a “ fee-only” planner (do not sell products) the recommendations will always be 100% objective since the planner has no vested interest in the recommendations because there is no benefit to the planner with the sale of a product. Numerous publications recommend that you should go to the following sites to find a list of “fee only” planners in your area. www.garrettplanningnetwork.com/ or www.napfa.org/

In the good old days a bank was a bank. It was where you deposited your paycheck, had a savings account and got a car loan. Laws were changed (due to heavy lobbying by the banks) to allow them to sell investment and insurance.

Most banks now have a subsidiary company/partner that is a Broker Dealer (BD) and the financial advisors at the branches are employees of the BD.

Here are some reasons why it may not be in your best interest to buy investments from a bank.

1. All financial advisors in the banks have a legal loyalty to their employer not the client. They do not have a responsibility to disclose conflicts of interest, or to do what is in the client’s best interest. The only two requirements are to “know your customer” and provide products that “are suitable”. Suitable does not mean what is “best” long for the client but could be what is best for the bank.

2. Banks are publicly traded companies who answer to Wall Street. The Board of directors and CEO’s are charged with increasing stock value for the shareholders. The Board sets policy, which affects the products that can be offered for sale and what not to sell. Would it surprise you that they are more likely to approve high commission products and encourage sales?

3. Banks are under tremendous pressure to fatten up the bottom line. Increasing profits from the sale of investments and insurance is a quick way to do that in this low interest rate environment and that many banks must begin the repayment of the federal bailout money with interest. There is a lot of pressure to increase income. This can lead to the sale of products with higher commissions as well as inappropriate sales which is may not to be beneficial to the customer

4. Allowing investments to be sold in a bank has resulted in confusion for many clients. One client reported going to her bank to acquire a CD. When she expressed disappointment at the low rate she was directed to a financial adviser who sold her an Equity Index Annuity, which provided the bank and a representative with the commission of up to 7%. The client was not aware that she could not get all her money back without penalty for 10 years. The lady was 83 at the time.

5. There is a higher average turnover of financial advisers in banks then elsewhere. This can result in dealing with less experienced salespeople or those that have not been successful elsewhere.

6. The integrity and ethics of some banks can be questioned.

a. Wells Fargo was recently sued by the State of California for selling investments to clients as being safe when there was risk and failing to disclose the inherent risk. Other banks did the same thing but at least provided some form of restitution.

b. Bank of America was sued for involvement in a Ponzi scheme.

c. Bank of America sued for not disclosing the true facts related to the purchase of Merrill Lynch that resulted in the Government granting BoA 20 Billion and later to guarantee another 90+ billion.

d. Several banks recently went bankrupt due to poor management with the changes in the economy.

e. U.S. government’s stress tests results revealed that nine out of the 19 banks tested do not need additional capital including; B of A. wells Fargo and Citicorp

In reality, many of the same situations exist when dealing with for-profit corporations such as Morgan Stanley, Edward Jones, Smith Barney and other of broker-dealers.

A better option would be to use the services of a Registered Investment Advisor (RIA) who does not sell product. RIA’s have a legal fiduciary duty to disclose potential conflict of interest and to keep the clients interest foremost at all times. When there are no sales of product and no commission, there is no worry.

Regardless of what’s going on in the economy and the stock market, do not stop funding your 401(k) accounts!

Most workers with 401(k) plans have viewed their retirement savings as having trickled away with the current stock market plunge.  In addition, 25% of US employers have or are planning to eliminate 401(k) matching contributions as a way to make it through these difficult economic times.

87% of those polled felt the companies matching feature was an important motivation for them to contribute to their 401(k).  Without the match, there’s less motivation to contribute.

These two facts have prompted some individuals to stop contributing to their 401(k), which is exactly the opposite of what they should do.

Income in retirement comes from Social Security, (which has some significant issues going forward), pension income (which most come is no longer offer) and from resources saved during one’s working years (401(k), IRA, Roth IRA Sep IRA etc.)

The 401(k) is a great way to accumulate retirement dollars because;

1.     The deposits a comes right out of the check and is deposited automatically,

2.     There is usually a good choice of investment types

3.     It is easy to administer

4.     You save current income tax.

Now is a crucial time to make sure that your investments within your 401(k) are appropriate for your risk tolerance, you risk capacity and your goals including timeframe.  Once you make sure you have the right allocation continue funding your 401(k) so that you’re more likely to have the retirement you envision. 

A client recently called me and was shocked that the annual interest rate on the money market sweep account at Bank of America Investment Services is currently at 0% interest. Most other money markets are currently paying less than 1% interest.

Banks, and credit unions and mutual fund companies offer money market accounts.  These accounts consist of very short-term debt securities.  The investments are highly liquid and considered safe because of the short maturities of the underlining obligations. Last year there was some concern when some money markets held debt from companies in question such as Leman brothers. People and institutions use the accounts to park funds that they intend to use in the near future.

Most money markets invest in similar types of short-term investments but the big difference in yield is in the expense ratios.  See some examples below:

Vanguard prime money market              0.28%

TIAA CREFF                                                 0.25%

AARPMMF                                                   0.33%

Fidelity cash reserves                                 0.44%

HSBC Prime MMF                                        0.80%

Columbia cash reserves                            0.85% (This is the fund that BoA uses)

You will note that the BoA expense ratio is 3 times higher than what others charge. No wonder B of A Investment services money market is paying 0% when they pay out of line fees to themselves and their vendors.

It just goes to show that you need to look out for your self or have help watching out for you by some one who is not selling you a product!