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!

Financial Advisers Keep Their Clients From Procrastinating

Well, all know this isn't true.

But it isn't your fault.  This last year Gary Duell was the procrastinator.  None of the smartest people in the room (not including yours truly) could agree on what was going to happen and what to do about it.

 

Now that a major source of craziness will largely be out of the picture, I'm more comfortable with recommendations for this year:

 

1. Focus on Goals and Cash Flow-  block out the massive media intrusions into your lizard brain, the eat, lust, fight, flight instincts.  Focus on your goals and the plans in place- or that we're working on -to achieve them.  Review your budgets and determine which expenses are in your control and which don't contribute to your goals.  Then eliminate them.
2. Manage Risk- note that I don't say avoid risk, commonly defined as volatility.  As I say repeatedly in my classes, when you're accumulating savings volatility is your friend due to dollar cost averaging.  When you're spending, or on the cusp of spending, your retirement funds then volatility is your enemy.  Manage where and to what degree you allow volatility in your portfolio.  This usually consists of either algorithm-based risk managed ETF and/or third party backed guarantees.
3. Remember Taxes!  Taxes, not healthcare, will be your largest retirement expenditure (on average).  Do you have a plan for future [higher] taxation?
   
4. Be a perpetual student.  Recent studies have shown investors procrastinate 5-10 years before implementing our advice.  That hasn't been my experience.  But I get chagrined if my clients wait 5-10 months!  Especially now.  So never stop listening and learning.
   
5. Seek good returns but follow evidence and ethics.  As data becomes easier and easier to collect and analyze, the bad actors in our economy will be taken out of the game.  It's inevitable.  I am really encouraged by the surge in ESG, SR & Impact investing.  Most of us know without being told that lying, cheating and stealing never work out well in the end.  Companies that foist their costs onto the environment or other people will either evolve or die.  Don't invest in them.
   
6. Take care of your physical, mental and social health.  Without a mind and body it's tough to enjoy anything.  Keeping connected to others, to nature and things outside yourself, your odds are improved!
   

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!

6 Financial Steps You Should Consider NOW

Would you like to know why I've gotten zero freaked-out calls or emails from my clients because of the coronavirus, political upheaval or [insert your own freak-out factor]?  It's because we've already tested even worse scenarios (like the 2001-2003 recession) in their written retirement financial plans and they know they will be OK. 

However, that doesn't mean there aren't new opportunities and cautions:

1. If we have not developed your written retirement financial plan then get yourself on my schedule immediately.  I've opened my calendar up as much as possible for the next three weeks.  Call me at my mobile at 503-698-1110 or simply schedule yourself here:  https://calendly.com/g---5

Key Takeaway:  No matter what is happening in the world and in your life, there are risks to avoid and opportunities to acquire.  These risks and opportunities should be tested and executed carefully, as part of an overall plan, not by running out and buying four thousand rolls of toilet paper.

2. To make up for losses in the market-based portion of your portfolio, don't settle for inflation losses in your cash.  You should be getting at least 2.0% on your two-year money.  I've seen savings accounts paying as little as 0.07%.  Yes, seven hundreths of a percent. Increasing earnings and other benefits on your safe money will help offset these short-term fluctuations in the market and make dramatic long-term differences in your future cash flow. 

3. Does it make sense to refinance debt?  Probably.  Interest rates have tumbled with the market & I doubt they will increase this year.  Refinancing may be a great way to reduce your budget and preserve your savings. 

4. Is funding for your lifetime budget locked in?  If not, wouldn't that be worth finishing up?  Then you can ignore market hysteria.  Cash flow solves all other financial problems.

5. Do you need to put off that expected retirement date this or next year?  I won't sugar coat it; maybe you do.  But how do you figure out when you can retire?

6. Finally, taxes will probably shrink your money more this year than will the market.  What tax planning have you done?  Did you know the tax issue will become even more concerning in 2026 when the Tax Cuts and Jobs Act expires?  I don’t see any of my peers doing tax planning.  Maybe this is the perfect time to do Roth conversions or in-kind conversions of poor performing stocks.  When the market recovers, all the gains can be tax-free.  This video is pending my review of the three “stimulus” packages.  Lots of little- and not so little -goodies for everyone.

Warm wishes during these trying times,
and get yourself on my calendar!: 
https://calendly.com/g---5
Gary
 

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!