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!

Fiduciary Advisers Who Offer Insurance Products Are Just Out To Make Money

Just to be clear, this blog is about Financial Myths and the name of this post is indeed a myth.  Or can be.  There are "advisers" who sell insurance products in the absence of a financial plan in order to make a quick buck.  But at prevailing money management fee rates (1.02% as of 9/20/20)
an adviser would make twice as much over a ten year period selling asset management vs. an annuity for example.
As this article points out, "selling" insurance products is a "hot-button" issue, unjustifiably so.  The celebrity "advisers" (hack, gag) often use this as a deal killer, "run in the opposite direction" they say, if your adviser offers annuities or life insurance.  Unfortunately, life isn't this simple.
A true fiduciary recognizes the importance of risk management through transference of risk, the law of large numbers, and risk pooling.
Risk management starts with identifying, measuring the impact of and weighting a client's existing and future risks.  Then the practicality and cost effectiveness of solutions are explored.  Then the practical and cost effective solutions are implemented.
Which involves transference of risk, normally to a legal third party such as- for example -an insurance company or options seller thereby taking advantage of the law of large numbers (as the size of a statistical population increases, its behavior and outcomes become more precisely predictable) through risk pooling (combining resources with others on a mass scale).
It is impossible to be a genuine fiduciary and ignore or- worse -disparage well-proven yet boring actuarial science.

Your Constructive Comments are Welcome!

Top Three Influencers of Fiduciary Advice

I've always believed a universal fiduciary standard should exist for anyone who gives advice to others that can affect- and ruin -lives, whether it's journalists, bankers, stock brokers, teachers or wedding planners.  I don't know why the fiduciary focus is strictly on finances.  If you hold yourself out as an expert, you'd better not be faking it until you make it or, worse, have self serving or even malicious intent.
I want to pass on this 2 1/2 year old article by Shelby George, written when a universal financial fiduciary standard looked like a sure thing.  Turns out Wall Street succeeded in killing it (Great PR move, Wall Street, fighting an initiative that puts your customers first).
I also want to emphasize this key phrase in her article, "The Fiduciary Rule puts a specific emphasis on the damage done by investor behaviors" whether self or advisor induced.  It would have helped protect investors not only from inexperienced or dishonest advisors, it would have helped protect them from themselves!  Virtually all of the big ripoffs of investors are catalyzed by investor greed, carelessness, unrealistic expectations and trusting without verifying.  Even with a universal, well-enforced fiduciary standard, investors still need to do their due diligence by verifying the credentials and recommendations of their advisors.

3 Influencers Driving Today’s Fiduciary Best Practices

November 21, 2016 | Fiduciary

Shelby George

Senior Vice President, Advisor Services

As the Department of Labor (DOL) has redefined “investment advice,” they have undoubtedly accelerated the evolution of what it means to be a fiduciary. Regulators are but one of the three key influencers shaping best practices for new fiduciaries. Financial institutions are working aggressively to comply with the DOL’s new rule; however, advisors can take actionable steps today to better identify the needs and best interests of retirement plan participants and IRA holders.

Influencer 1 – The Markets

The markets are an often overlooked key influencer. The current slow growth, low interest rate, long-term economic outlook creates new challenges for savers that were not a concern for the last generation of retirees. Fortunately, there has been an increased focus on savings as study after study finds that we need to save more for retirement than in previous years. Unfortunately, savings is only a part of the solution.
The Fiduciary Rule puts a specific emphasis on the damage done by investor behaviors and encourages new fiduciaries to pay particular attention to each investor’s unique risk tolerances and reactions to the markets as well as the investor’s long-term savings goals. In today’s market, where volatility is a “new normal,” it becomes critical for fiduciaries to frame investment due diligence and portfolio performance around the investor’s objectives rather than a hypothetical benchmark.

Influencer 2 – The Regulators

In the DOL’s own words1, the new rule will, “mitigate adviser conflicts and thereby improve plan and IRA investment results, while avoiding greater than necessary disruption of existing business practices.” However, certain compensation arrangements are viewed with heightened skepticism. In particular, the DOL application of ERISA’s self dealing prohibited transaction to all ERISA plans and IRA accounts will cause significant disruption to traditional brokerage models.
As the DOL encourages more level, transparent fee structures, fiduciaries must shift their focus to offering a service rather than selling an investment product. The value of the fiduciary’s services is based on the need of the investor.

Influencer 3 – The Litigators

ERISA class action litigation dates back to 1998 as an outgrowth of securities and class actions. Since that time, the volume and scope of the litigation has ballooned, especially when the stock market drops.
Recent 401(k) litigation demonstrates that no fiduciary decision is insignificant. IRA advisors are paying increasing attention to recent 401(k) fee litigation because of the DOL’s Best Interest Contract Exemption and the possibility of class action lawsuits.
With the new DOL Rule, advisors need to view each plan decision independently and have a repeatable and documented process for each. All processes should be designed to identify the needs of plan participants or the IRA holder and then make a recommendation based on that need. Each step of the process and the resulting recommendation should be documented with reasons given as to why the decision is in the best interest of the client.
To learn more about the three key influencers shaping fiduciary best practices and more on the DOL’s Fiduciary Rule, visit www.manning-napier.com/EvolutionaryFiduciary.

¹Source: Federal Register. Department of Labor. Rules and Regulations. Volume 81, no. 68, p. 20952.

 
Your Constructive Comments are Welcome!

Annuities and the F-WORD Belong in the Same Sentence.

I've had the good fortune to meet and work with Frank Maselli.  He is a brilliant, affable and hilarious adviser to advisers.  Below I've simply cut and pasted a great and timely article he just wrote for us advisers.

• Published on March 8, 2017

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Frank Maselli

Author of "Referrals The Professional Way"​, Keynote Speaker

I never pitch products in my training programs or keynotes because I believe that advanced skills are product neutral. It's up to each advisor to decide what's best for the client.
But I am seeing a confluence of market and demographic forces right now that is causing me to line up enthusiastically behind one particular product strategy. 

I think we have entered the Age of the Annuity!

If you've never done one before, it's time to take a hard look at them. And if you're already using them…you might want to double your efforts for the next couple of decades.

DOL & the “F-Word!”The Department of Labor “fiduciary rule” is currently stuck in the mud of Washington confusion at the moment. No one can say today if this thing is going to survive or what form it might take after all the bureaucratic sputtering is finished. [as of 6/2018 the industry managed to kill the rule]

But even if DOL disappears completely...The F-word will not. “FIDUCIARY” is here to stay!

Acting in our clients' best interests is what we do every day. So this is not a major shift in anyone's business philosophy. But it is a big shift in perception. 

The public is being told by regulators and the media to ask advisors right up front, “Are you a fiduciary?” 

Few clients understand the implications of that word, but they're certain a “No” answer, or any hesitation, is bad news. And it's likely to become a major differentiation. 

The choice to become a fiduciary is a big one and there are several sides to this issue. But being a fiduciary means a lot more than simply avoiding high fee products. In fact, when you identify the greatest threat to financial survival that most Americans are facing, fees and commissions are a minor concern. 

By far the biggest danger ahead is the very real risk of outliving our money and not having a reliable income in retirement. 

The second biggest danger is in trying to navigate retirement without some kind of professional help. Sadly, that's what the DOL rule may mean for millions of Americans.

Combined...these two risks mean that if you DON'T show the client an annuity option, you may be in for a seriously expensive lawsuit down the road. 

"Annuity Now!"

There's a classic episode of Seinfeld where Frank Costanza (George's father) tried to reduce his stress by shouting “Serenity now!” My annuity mantra may be a slight modification, but the idea is the same.

To effectively reduce the stress and fear that millions of retiring Boomers are about to face, an annuity in some form may be the best, if not the only answer. 

And you have a wide range of options to accommodate nearly every need including immediate, fixed, indexed, variable and investment only...so there really are no excuses anymore. There may be a slight learning curve, but the effort will be richly rewarded.  

Bottom line: If annuities are not part of your product mix in a major way…you need to re-think your approach fast. 

From Hater to Fan

As a former wirehouse stock-jockey, I used to pitch against annuities. I was never a fan. But times have changed. 

John Maynard Keynes famously said, “When my information changes, I alter my conclusions. What do you do, sir?” 

I believe today that annuities are the only reliable way to guarantee a steady stream of income in retirement. And before you say “Bonds do that too.” I hasten to point out that the 33-year falling interest rate cycle is over. Very few advisors today know the pain of destroying client wealth in a bond portfolio. 

The reality is that most people are living far longer than their money will last. Given that fact, annuities might be the only salvation for tens of millions of Americans. 

Plenty of advisors are already on board with annuities, but far too many are not yet. Add to that the fact that the whole DOL debacle feels like a direct assault on the annuity industry just at the time Americans need these programs most. The irony there is painfully sad. 

Best Interests! Really?

So go back to the whole “fiduciary” thing for a minute. What is truly in the client's best interests? (Allowing for different needs and objectives of course.) 

Is it better to show a client an annuity with some kind of commission charge…

Or should you try to build a portfolio of super low-fee, passive ETFs or mutual funds and craft a lifetime income stream from that?

If you said “Both” that's fine! But at least put a portion of the portfolio into something that's protected forever. Why would anyone disagree with that? 

And if costs are your concern...what if the annuity itself was also low fee? 

Annuity firms right now are bringing new programs to market that look better than anything we've ever seen with lower fees, great investment choices, fantastic liquidity, and more income flexibility.
They might never get as cheap as an index fund, but let's say for the sake of argument that the incremental fee for an annuity was around 100 basis points per year. How would you ever go to a client who had depleted their assets by age 80 and say, “Gee Bob, I'm really sorry. I had a chance to guarantee a portion of your retirement income...but I was really worried about charging you 1% more in annual fees!” 

That is not a conversation you want to have. Your Monte Carlo simulation and low-fee argument won't stand up in court. And folks, there's no doubt that as many retirees start running out of money, some attorney will dig into their portfolio to find where an advisor failed to recommend some kind of safety and a guaranteed income. We haven't seen the panic yet, but just look at the demographics...it's coming like a freight train!

Why is now the right time?
In my new book, 40 Tips for the Under 40 Advisor, Tip #35 states: 

In really good or bad times...prepare clients for the opposite!

The markets have been strong and I'm not predicting a downturn here. But none of us needs a massive loss to convince us to protect some of our client's retirement savings. It's just common sense.
An annuity puts client assets into the hands of very large, very solvent and historically conservative companies who are much more tightly controlled than any bank. There is no better way to stabilize the retirement ship in a stormy sea and to take some of that longevity risk off the table! 

“The AGE of the Annuity!”
So the new era is upon us. I wrote about "The Year of the Annuity" in early 2016, but I think we are going to be in this protection business for the next 30 years. And whatever happens with the DOL rule, the F-word will likely be with us forever. Truly acting in a client's best interests transcends the trivia of commissions and fees.

• It demands that we protect them from the greatest threat to their future…outliving their money. 
• It mandates that we instill and insure some kind of guarantee and peace of mind in what will be for most a long retirement. 
• It says that if you haven't done so already, it's time to open your mind to new financial instruments that help people safely DOWN the mountain...not up.  
• It puts annuities front and center, standing tall in the line-up of solutions we offer. 

In the end we will all be judged on how well we got our people through to their goals.
Annuities used to be one simple product choice among many…but not anymore. 

They are now a core fiduciary responsibility!

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Your Constructive Comments are Welcome!

Propaganda is Obvious

Because it is excellent, I've cut and pasted from a fascinating- and chilling -article by Berit Anderson and Brett Horvath from scout.ai  If you wanted reasons to spend less time on line, well here you go.  The full article is at https://scout.ai/story/the-rise-of-the-weaponized-ai-propaganda-machine  This is a must read.  Thanks Tom Civiletti for your post.
The upshot:  political, social and economic propagandizers now have the capacity to customize their message to every single individual with an online presence.  They can build a total experience for you, complete with a large group of fake friends, that is emotionally addicting and intellectually manipulative.  They can construct a complete world just for you, solely for the purpose of contolling your decisions.  Which doesn't feel like control at all.
This is why I believe people who run face-to-face businesses like I do will never become extinct.  In fact, now is our time.  We must counteract this powerful, pervasive and unConstitutional manipulation of one another.

At Scout, we’ve been speaking with political strategists, technologists, and machine learning experts about how AI propaganda will spread through society in the near future. We want to work with you, the Scout community, to scenario plan what happens next. Here are some implications to get the conversation started.

IMPLICATION #1:

Public Sentiment Turns Into High-Frequency Trading

Thanks to stock-trading algorithms, large portions of public stock and commodity markets no longer resemble a human system and, some would argue, no longer serve their purpose as a signal of value. Instead they’re a battleground for high-frequency trading algorithms attempting to influence price or find nano-leverage in price position.

In the near future, we may see a similar process unfold in our public debates. Instead of battling press conferences and opinion articles, public opinion about companies and politicians may turn into multi-billion dollar battles between competing algorithms, each deployed to sway public sentiment. Stock trading algorithms already exist that analyze millions of Tweets and online posts in real-time and make trades in a matter of milliseconds based on changes in public sentiment. Algorithmic trading and ‘algorithmic public opinion’ are already connected. It’s likely they will continue to converge.

IMPLICATION #2: 

Personalized, Automated Propaganda That Adapts to Your Weaknesses

What if President Trump’s 2020 re-election campaign didn’t just have the best political messaging, but 250 million algorithmic versions of their political message all updating in real-time, personalized to precisely fit the worldview and attack the insecurities of their targets? Instead of having to deal with misleading politicians, we may soon witness a cambrian explosion of pathologically-lying political and corporate bots that constantly improve at manipulating us.

IMPLICATION #3: 

Not Just a Bubble, But Trapped in Your Own Ideological Matrix

Imagine that in 2020 you found out that your favorite politics page or group on Facebook didn’t actually have any other human members, but was filled with dozens or hundreds of bots that made you feel at home and your opinions validated? Is it possible that you might never find out?

Your Constructive Comments are Welcome!

Trump's delay of Fiduciary rules is a good thing.

Well, no, it isn't. But it could be. To get up to speed, here's a good summary of the rules: https://www.dol.gov/ProtectYourSavings/FactSheet.htm Yeah, that is a many thousands of words summary.  You should see the whole thing!

In a nutshell, the Dept. of Labor's new rules would have required anyone who gives advice about retirement plans to be held to a fiduciary standard: the investor's welfare must be placed above the interests of both the adviser and his firm. What, you say? Don't they do this already? Um, no.

So how could reversal of this rule possibly be "good"? At least two reasons.

1. Because it will be a great differentiator between those of us who already submit ourselves to a ficudiary standard and those who do not. And all you have to do is ask, "Are you a legal fiduciary, and, do you hold yourself to a fiduciary standard in all areas of your practice?"
2. Laws and regulations are great but the #1 most effective consumer protection is smarter more careful consumers.  Spend some time at the Investor Protection Trust (while it still exists).

Your Constructive Comments are Welcome! To leave the first comment, click on the "No Comments" link below.

Interview with The Suit Magazine

1. Gary Duell, you are the Owner and Founder of Duell Wealth Preservation. What sparked your interest in this line of work and what were you doing professionally prior to this firm? What is the history of this firm?
* I began my career as an agent for Farmers Insurance. 
*After 15 years I was bored with selling house and car insurance.  I enjoyed learning about my clients and wanted to provide more value to them. 
*So, I got all the licenses needed in order to give financial advice.  But after working through several broker-dealers I found intolerable their restrictions on what I could say to my clients.  For example, we were forbidden to send follow-up letters to clients after a meeting to summarize what we discussed 
*So I formed my own RIA firm in 2007.


2. What qualities do you seek in your potential clients and on the flip side, what qualities do you and the firm possess that prompts potential clients to select your services?
THEM
*Lifetime students
*Sense of humor, affability
*Financially successful but not convinced of their success
*Open minded
*Connected- good referral sources
ME
*Also a lifetime student & generous teacher/consultant/collaborator
*Legal fiduciary
*Totally transparent
*Clean conduct

3. The paradigm suggests that the conversation has shifted away from the alpha approach [supposedly measurable gains attributable to the adviser] to a more conservative approach which provides a more customized solution. Do you agree with the premise?
*Alpha is problematic- 2 reasons:  Can you trust their past measurement of it?  And how do you justify projecting that into the future?
*Sheer computing power makes the latter approach- customized solutions -not only possible but necessary in order to claim to be a true fiduciary.
*Avoiding mistakes & losses is more important than chasing alpha.  This is something that can be promised.

4. Financial literacy among clients remains to be a problem. Planners say kids who grew up watching their parents go into debt want to avoid the same fate. Will we see more online tools to help "gamify" that financial planning experience while creating a more savvy relationship? 
*Absolutely.  So-called roboadvisers are appearing all over the place. 
*Initially these struck fear into the hearts of advisers but now most of us realize such software frees us to do the most important task:  connecting with and guiding our clients.
*These tools will most certainly become more prolific and powerful.

5. What does being a fiduciary mean to you and to your clients?
*I’m not sure it means much of anything to my clients until after I define it for them.  And even then the looks are skeptical.  We all know that legal obligations don’t guarantee good behavior.
*What I hope it means to my clients is that there are resources for verifying the fiduciary history of their advisers. 
*Which there are:  brokercheck.finra.com, for example, and each state’s regulatory agencies. 

6. Communicating with clients can be a challenging task, how do you insure plans stay on track, level set client expectations and most importantly handle unforeseen circumstances?
*We contact all clients no less than quarterly by phone or email.
*We issue a quarterly newsletter
*Annual review appointments are set a year in advance
*Special notices go out as need for topical or timely advice

7. With Americans enjoying increased longevity, what methods are you using to help clients create enough savings to last through what could be a retirement lasting as long as their working years while still maintaining their desired standard of living? What methods are you using to combat the potentially draining effects of long-term care?
*Virtually all of my clients are at or near the end of their asset accumulation phases.
*The moving parts that are available to work with at this point are Social Security benefits, pension timing & options, when to retire.
*Avoiding sequence of returns risk is task #1
*For long term care risk- which is substantial for couples -we explore three options, depending on level of assets:  LTCi insurance, asset-based solutions, Medicaid planning.

8. Do you think the current 401(k) fee disclosures are enough to fully inform savers or retirees of what they are paying for their accounts?
*Yes.

9. What has been your greatest success in this industry and what has been the failure or challenge that you learned the most from?
*My greatest personal success has been to teach classes and seminars.  Like the average person, I was more afraid of public speaking than death.  This has changed the quality of clients I acquire and also made my practice more fun and challenging.
*Biggest failure was dinner seminars.  It was hard to admit that I just don’t have the bright, magnetic personality for that to work for me.  Plus I think they have kind of a sleazy reputation. 

10. Goals for 2016 / 2017?
*Triple my business volume
*Settle on a roboadviser and asset custodian
*Figure out how to fairly charge for AUM
*Ramp up social media exposure
*Begin podcasting