Financial Symmetry News & Views

Posts Tagged ‘financial terms’

We in the financial planning community believe that something called a “fiduciary standard” is the very best framework for professionals to work with our clients.  That’s why we’re so angry over something that happened in the Senate over the weekend: Senator Tim Johnson of South Dakota inserted an amendment into the new regulatory reform bill–and, with the casual stroke of a pen, eliminated an important and powerful consumer protection.

This amendment cuts out a part of the original bill that would have required everybody who gives investment advice to the public to act as a fiduciary.  Senator Johnson wants the Senate to “study” the issue instead.

Why should you care?

The fiduciary standard is a legal concept, but its core idea is not complicated.  To act as a fiduciary means we professionals have to put aside our own financial interests, and also put aside the business/financial interests of any company we work for, and give recommendations that are solely and completely in the best interests of people like you, our customers or clients.

In other words, our recommendations have to be made with only one concern: is this the best thing I (the professional) can do for you, given what I know about who you are and what you want and need?

So what does it mean NOT to be a fiduciary?  Imagine that there were two kinds of health practitioners in the world.  One group functions much like doctors do today: they work out of independent offices, meet with you, diagnose your ailments, prescribe a medical solution that they believe is the very best course of treatment, and you pay them directly for this service.

The other group of health care providers operates somewhat differently.  They’re employed in the branch office of a large multinational health conglomerate which requires its employees to recommend certain treatments which are most profitable to the company, so long as these treatments are considered to be “suitable.”

These might not be the best treatments, but under a set of very complicated regulations, these less-than-ideal prescriptions are deemed to be legally-defensible ways to address certain medical problems.  These other health care providers are paid by the company according to how many of these treatments they can sell.

Now imagine that these larger companies, because of the very high profits they’re making on these treatments, are able to gain a lot of influence over the process that decides which treatments are “suitable.”  In fact, their executives sit on the governing board of the organization that makes these determinations.

Finally, imagine that something went horribly wrong.  Several of the most popular treatments that these non-fiduciary medical professionals were eagerly peddling to their “patients” were not at all as their companies had portrayed them.  The result: catastrophic consequences, pain and suffering throughout the world.  An enormous mess.

To bring the analogy back to the financial world, these terrible treatments (investments) actually DID bring the global economy to the brink of financial collapse, a mess that required our taxpayer money to fix.  These companies had become so entwined in the system that the government had no choice but to help them recoup the staggering losses they brought upon themselves.

Not surprisingly, an outraged public demanded that this must never happen again.  To the real fiduciary practitioners, the solution is obvious: require everybody to act in the best interests of their customers/clients by imposing a fiduciary standard.  No more shady “suitable” treatments.

We were encouraged when Congress drafted legislation which, among other things, would bring every provider of financial advice under a fiduciary standard.

So here’s why professional financial services providers are angry.  Now that the catastrophic global meltdown, TARP, massive losses in the stock market and the longest recession since the 1930s is beginning to fade from memory, those companies that provide “suitable” non-fiduciary advice have gone back to business as usual–and very quietly, a Senator from South Dakota has now inserted a provision into the reform bill saying that instead of imposing this fiduciary requirement, that instead Congress will “study” the issue.

The Senate has decided to leave fiduciary out of the final bill.  Even the Wall Street Journal is outraged–here’s a link to a strongly-worded column that clearly explains what happened: http://online.wsj.com/article/SB10001424052748703940704575089413832399630.html

And here’s a link to another article which talks about how the legislative process favors the organizations that take the most money out of the pockets of their customers: http://www.financial-planning.com/fp_issues/2010_1/angels-and-demons-2665124-1.html

It would be nice if everybody called their Senator and Congressperson and said that they were just as angry as we are in the professional community.  A groundswell of public opinion might make our elected representatives understand that we haven’t forgotten TARP and all the rest of it.  Right now, the only people lobbying on your behalf are the professionals themselves, and there apparently aren’t enough of us to get the attention of the Congressional representatives who may be looking out for their own interests more than ours.

• This article is written by Bob Veres, publisher of Inside Information.  Inside Information is a journal that keeps financial advisors on the cutting edge of industry news. We found this piece particularly relevant to the heated debate surrounding the fiduciary vs. suitability discussion.

If you invest in your employer sponsored retirement plan you have probably heard of Target-Date funds.  These funds are characterized as investments that change the allocation of stocks, bonds, and cash according to your specified retirement date.  In theory, these funds should progressively reduce risk exposure as the target date approaches.  However, there are no universal allocation standards, so the returns have varied widely from plan to plan.  This was highlighted by the market downturn in 2008 when funds with a target date of 2010 lost an average of 25%, with some posting losses of over 40%.

While the concept of these funds is great; taking the guesswork out of retirement planning for the average investor; further research, transparency, and likely regulation is required.  To that aim the Senate Special Committee on Aging will be introducing legislation that would require fiduciary responsibility for target-date fund managers. This is a step in the right direction, but there are still many other concerns that warrant attention.  In October 2009 Morningstar’s vice president of research Jon Rekenthaler testified before the Senate Special Committee on Aging.  You can read his testimony here:

“Five Concerns About Target Date Funds”

http://advisor.morningstar.com/articles/article.asp?docId=17632

Have you made your 2009 Roth IRA contribution?

If you have not yet made the maximum contribution, you still have time!  Tax payers have until April 15^th of 2010 to make their Roth contributions for the 2009 tax year.  If you are within the income limitations to make contributions, a Roth IRA is an excellent investment account as investment growth is tax deferred and withdrawals in retirement can be tax free.  For 2009, single filers are able to fund their Roth IRAs with 100% of the contribution limits if their income is below $105,000.  Their amount of contribution availability drops if they are above the $105,000 and are phased out completely at $120,000.  For Married Filing Joint taxpayers, income restraints begin at $166,000 and end at $176,000.

Looking forward for 2010 contributions, contribution limits for this year have stayed the same.  This includes the limits for the Roth and Traditional IRAs and the majority of employer sponsored plans such as 401ks and 403bs. A very good practice is to contribute enough of your salary to receive at least the employer match.  Also, pay raises often present an easy opportunity to increase your deferral, while reducing your adjusted gross income.

The contribution limits for nearly all types of retirement plans are listed in the following chart:

Qualified Plans	2009	2010
401k, Roth 401k, and 403b plans	$16,500	$16,500
Catch-up for ages 50 & over	$5,500	$5,500
457 Plans of tax exempt employers	$16,500	$16,500
Catch-up for ages 50 & over	$5,500	$5,500
SIMPLE IRA or SIMPLE 401k plans	$11,500	$11,500
Catch-up for ages 50 & over	$2,500	$2,500
Limits on annual additions to SEP Plans	$49,000	$49,000
Traditional and Roth IRAs	$5000	$5000
Catch-up for ages 50 & over	$1000	$1000

Our wealth management service monitors your income and determines every year how much you should be contributing to each of these investment accounts.  It also reviews your income tax and estate picture, which may provide opportunities for tax savings.  If you are interested in this service, please contact us.

Morgan Stanley Smith Barney is offering as much as 330% of a brokers annual production to join the firm.

Understanding the difference between a fiduciary standard and a suitability standard could pay major dividends in a relationship with a financial professional.  Operating under the fiduciary standard requires a planner to put the client’s interest ahead of his or her own.  In other words, don’t be afraid to ask your financial advisor the motivation behind his or her recommendations.  Recently, the FPA in a combined effort with NAPFA and the CFP Board have made a big push to have the fiduciary standard applied to securities brokers that give investment advice as well.  In this msn.com article, Liz Pulliam Weston does a nice job breaking down the differences between these two words and lists some questions you might like to ask your advisor.

Can You Trust Your Financial Advisor?

Written by Chad Smith, CFP®.

Many of us are familiar with inflation.  But what about deflation?  Just like it is important to understand inflation, it is equally important to understand deflation and it’s potentially dangerous effects.  We came across a very detailed “visual guide” that helps to explain deflation from Mint.com

Check out the post by visiting  A Visual Guide to Deflation.
As always, please feel free to contact us with any questions.