Mandatory Arbitration Is the Best Dispute Resolution Tool

The title of this blog post is, in my opinion, a solid myth.  Good proof of that are recent bills in Congress intending to end binding arbitration because, in general it is:

•  Unfair.  The process is heavily biased in the industry's favor  Which is probably why the Securities Industry and Financial Markets Association (SIFMA) is against reforms.  In addition, the arbitrator's decision can rarely be appealed, which denies customers their legal due process.  It also precludes the victim from joining a class action.
  
• Expensive.  To be sure their treatment is legal and fair, injured parties must hire legal representation, as they're up against massively wealthy private institutions.
  
• Inefficient.  The financial services industry essentially has a monopoly on individual dispute resolution.  As a result there are substantial incentives to drag out the process and burn out their victims.

 The InvestmentNews article at the above link only compares arbitration with outright litigation.  Indeed, arbitration can be faster and cheaper than court proceedings.  However, I would rather have a judge decide what evidence is admissible as opposed to an industry insider.

But isn't there an even better alternative?  Since 2007 my advisory contracts have had a Mediation clause instead of arbitration, mandatory or otherwise.  (BTW, I've never even had to use Mediation with a client).  Here is Sec. H of my contract:

"H.MEDIATION
Should any dispute(s) arise between Client and Adviser or any of its directors, officers, employees,representatives or affiliates, Client and Adviser agree that dispute resolution through professional mediation is the most desirable first resort. A mutually agreed upon mediator shall be jointly selected by Adviser and Client according to the Oregon Mediation Association’s guidelines:
http://www.ormediation.org/. This clause shall be considered automatically modified, or voided in its entirety, where it conflicts with applicable laws and/or regulations."

My theory is that if we have a dispute, both parties just want to settle it.  If we can't work it out amongst ourselves then we agree to get another adult in the room to help us out.  If that fails, then you can sue me.

The takeaway:

1. Insist on a written agreement between you and your adviser (not to be confused with Investment Management Agreements, all of which currently contain arbitration clauses), spelling out your mutual obligations and expectations.
2. Don't sign such a contract unless there is no arbitration obligation.
   

Your Constructive Comments are Welcome!

HEALTHCARE WILL BE YOUR BIGGEST RETIREMENT EXPENSE

 The truth of this blog heading depends, of course, on the health and wealth of the individual.  But it is still rarely true.  In the plans I've developed, Taxes usually exceed projected health care costs 3 to 1.  I think a lot of health care cost calculators are unjustifiably alarmist for the purpose of selling insurance.  For example AARP's calculator said my health care costs would be close to $800,000 during my lifetime.

Huh?  If I met my maximum OOP every year for the rest of my life that would only add up to about $120,000.  Oh, you know, I'll bet they're referring to the total healthcare cost before insurance.  So why didn't they just say that?  How many age 65+ people are completely uninsured?

Vanguard Health Care Cost Estimator, on the other hand, seems to be more accurate.  I urge you to try it.  I plugged in all my details and here's what it churned out:

 

So that's a bit less than $120,000 in today's dollars.  And far less than the terrifying $800,000 generated by AARP's calculator. 
 

Taxes, on the other hand, take up the slack.  Below is a typical cumulative income tax projection that I create for clients.  (Here in Portland, OR we should probably include property taxes too as they average $500/mo. and increase about 3%/yr.  This is especially draining for fixed income folks.  But that's not included in the chart below).  Total tax bill for this client- without any strategizing -by 2040 is $837,000!!
Do you think it's essential, then, to have a retirement cash flow plan that factors in taxes?  A specific, written retirement cash flow plan is the only "insurance" for reducing that gigantic tax bill.

Your Constructive Comments are Welcome!

Here's A Cryptocurrency Tax Surprise

As David Lenok points out in his excellent article, [1] the fact that crypto is called a “currency” confuses people.  Normally, if you take cash out of your savings account that isn’t a taxable event.  However, crypto currencies like Bitcoin and Ether are not considered currencies by IRS.  They are in effect commodities and subject to the same taxation as commodities:   long and short term capital gains.

Let’s say you bought one Bitcoin for $333 in 2015.  As of March 29 that one Bitcoin is worth $57,456.  So you decide to buy a Tesla Performance Model Y for $62,000, kicking in the extra $4500 from savings.  What a deal!  A Model Y for $333!  But wait, is that what this transaction is really going to cost you?

No.  By spending that Bitcoin you will trigger capital gains taxes on $57,123, the current value minus your purchase price of $333 in 2015. 

Uh oh. 

Your normal taxable income is around $80,000.  So, with that additional $57,123 you’re solidly in the 15% Federal cap gain bracket and 9.9% Oregon income tax bracket.  And it gets better.  Because your Schedule A deductions- including the Oregon capital gains tax (which is the same as income tax rates) can’t be deducted from Federal taxable income You’ll owe 15% on the whole $57,123 or $8568.  Then, kick in Oregon tax of $4999 for a total of $13,567 extra you’ll need to pay after you get a courteous letter from IRS in 6 months.

How will the IRS know?  Well, take a look at the latest 1040.  Do you dare lie to IRS?  I wouldn’t.  That counts as perjury. 

Still, what a deal to get a Model Y, without doing any work, for less than $5000 out of pocket!

Have any questions? Let me know!

• Gary

Your Constructive Comments are Welcome!