The F-Word (Fiduciary) is Becoming the Antidote

Fiduciary: n. from the Latin fiducia, meaning “trust.”  For Registered Investment Advisers, the legal obligation to always put their clients’ interest first and be proactive in disclosure of any potential conflicts of interest.

Contrast that with a commissioned salesperson.

When you buy a car you know that the salesperson is going to earn a commission.  You know the salesman is there to sell you a car at the highest price you’ll accept and then try to get you to sign up for extras.  It’s your job to do your homework beforehand; know what you need and can afford, and then fight for the best deal you can.  Caveat emptor– buyer beware.

Unfortunately, in the arena of financial services it’s also caveat emptor.  You may think that the commissioned salesperson is there to help you.    They may call themselves “financial consultant,” financial advisor,” or “financial planner,” and may have a business card with some interesting initials or designation as a V.P.  Regardless, if they are paid commission, they are generally focused on selling you products that are best for them and their employer, not you.  There is a fundamental conflict of interest that works against you.  Often the highest commissioned products include large upfront and/or ongoing fees to recoup the big commissions.  The future performance of your investments is diminished dollar for dollar for these excessive fees.

In the 1980s and 1990s, when economic growth and higher inflation pushed equity returns into annual double digit returns, high fees might have been overlooked.  But, when today’s lower growth and inflation produce lower returns, a 1% annual difference in fees, for example, makes a huge difference. Fortunately, astute investors have been moving away from high-cost, conflicted advice and toward low-cost investment advice and total wealth management where the adviser acts in their best interests.  Members of National Association of Personal Financial Advisors (NAPFA), such as DWM, have seen major upticks in business and are helping more and more families reach their financial goals.  NAPFA is the country’s leading professional organization of Fee-Only financial advisors.  Its members sign the NAPFA Fiduciary Oath legally requiring all of us to always put your interests first and disclose any potential conflicts of interest.  See the oath: http://www.napfa.org/consumer/NAPFAFiduciaryOath.asp

Not surprisingly, the big banks and brokerages have tried to limit their continuing losses of business by trying to confuse the issue.   Most have set up a part of their business as “fee-only” and describe their total offering as “fee-based.”  Caveat emptor– “fee based” means the big banks and brokers charge you a fee to begin with and then get commissions on top of that for products they can sell you.

Last summer, the Department of Labor (“DOL”), which is responsible for safeguarding employees, issued a ruling that as of April 1, 2017 all investment professionals who work with retirement plans or provide retirement planning advice would be legally bound to act as fiduciaries, putting the clients’ interests first. This rule would impact trillions of employee retirement dollars and likely save participants billions annually in fees. As expected, Wall Street and the related lobbyists have attacked the ruling.  Their complaint is threefold: 1) it would limit choices to participants (yes, it would reduce many of the toxic overpriced funds currently used), 2) trigger dislocations in the retirement services industry (yes, like modifying the behavior of the bad guys or eliminating them), and 3) causing increased costs for consumers (no, it wouldn’t- this is simply an “alternative fact.”).  Last week, as expected, President Trump issued a presidential memorandum to direct the Labor secretary to begin a new rulemaking process to modify the DOL rule.  Of course, NAPFA, the Financial Planning Association (FPA) and the CFP Board all applaud the new rule and are working diligently to put it in place, keep it there and expand it.  We do too.

We support sensible regulation to protect consumers in the area of financial advice and the requirement of fiduciary responsibility to be in place for all investments.  It is estimated that the shifting of $5 trillion of investments from high-cost, ineffective products to low-cost products could save consumers $50 billion per year, transferring those excess commissions and fees from Wall Street, big banks and brokers to your pocket.

Here’s the best part:  Neither Washington nor Wall Street can stop the movement. The DOL fiduciary rule is not shaping investor behavior, it is simply catching up with it.  Vanguard, the industry leader in low-cost indexing, had $1 trillion in assets before the financial crisis, now it has $4 trillion.  Total Wealth Management firms like DWM, which provide both independent investment advisory services and value-added financial services on a fee-only, fiduciary basis, are working with more and more families.

Consumers know what’s best for them- fee-only fiduciaries who put their interests first. They are voting with their feet and their money away from the old toxic models of the big banks and brokers.  The F-Word (Fiduciary) is becoming the antidote to the sale of commissioned financial products.

European Update: Secession, Tax Evasion, Downgrades, Bailouts

fee-only financial planners, investment managementThe Eurozone continues to struggle. Slow growth, lots of debt and millions of unhappy people. I thought it might be informative and interesting to look at recent anecdotal evidence from four countries. 

Secession is in the air in Spain. Catalonia, the Basque country and other regions are ready to become autonomous nations. The primary issue is… (drum roll)… money. These northern areas don’t want their tax dollars funding poorer regions in southern Spain. Catalonia, the home to Barcelona and millions of Catalans with their own language and culture, held elections Sunday. The results were inconclusive. The pro-independence parties won a majority of seats in Parliament, yet, Catalan President Mas, who has supported independence but also further austerity programs, saw his party lose some power. According to the Wall Street Journal on Monday, Catalans want independence and they don’t want austerity. Sounds like a group of teenagers to me.

Tax evasion has been rampant in Italy, Greece and some other countries for decades. It is estimated that Italy’s underground economy, excluding criminal ones such as drug rings, accounts for $350 billion per year. This is roughly 18% of the GDP. Taxes on that income, estimated at $150 billion, never make it to Rome. Roughly 50% of Italians report an annual income below $25,000, yet hundreds of thousands of these folks have large boats, luxury cars or helicopters. Now, the Italian government is fighting back. They are distributing a “tax-cheat self-test.” This allows people to gauge whether their declared income is in line with what they spend annually. The Italian tax authorities hope people will use this self-assessment tool to voluntarily file correctly in the future. In addition, the government is sponsoring TV ads comparing tax evaders to various animal, fish, wood and intestinal parasites. Two questions: Is it any surprise that Italy has troubles balancing its budget? And, do you think the self-test or calling someone a “tapeworm” in Italian will change their behavior?

France received a bond downgrade last week. Moody’s stripped it of its AAA rating; citing France’s sustained loss of competitiveness, deteriorating economic prospects and its large financial exposure to peripheral Europe. The Economist noted last week, in a special report on France, that the business climate has worsened. French employers pay 30% of labor costs to fund social security. No fewer than 34 laws and regulations start to apply once an enterprise reaches 50 employees. It’s not surprising that researchers are finding that a significant number of French companies have exactly 49 employees. There is now a 75% top income tax rate, unemployment is 10% and over 25% of the young are jobless. Is it any wonder that so many entrepreneurs are leaving the country and/or sending their children somewhere else in the world for a brighter future?

Greece received a bailout on Tuesday. European finance ministers eased the terms on emergency aid for Greece. In fact, Bloomberg reported that the ministers declared that after three years of false starts that “Europe has found the formula for nursing the debt-stricken country back to health.” The ministers cut rates on bailout loans, suspended interest payments for ten years and gave Greece more time to repay the loans. Quite a formula. Greece will get the December loan installment of $45 billion despite the fact that its economy continues to shrink. It is good to see they will make it through 2012 as part of the euro. January will be the next test. Greece needs $12 billion. They will get it only if the EU, ECB and IMF certify that they have implemented a tax reform by that time. Perhaps they can get the Italian tax self-test and the tape worm commercials translated into Greek.

Bonus Blog: My Love Affair with My Laptop is Over

fee-only financial planners, good postureI remember the first time I met a laptop. It just about took my breath away. Instead of the huge tower and monitor, here were all the charms of a computer in one nice, neat package. What a bombshell:  computer, keyboard and monitor all in one.  And, since it was so light, we could travel together all the time and be together endlessly. It was love at first sight.

It wasn’t a monogamous relationship at first. I continued primarily with my tower and monitor at the office. I used the laptop at home. Loved every minute of it. Over time, my tower grew old and clunky. The appearance of the monitor wasn’t what it used to be. I found myself using my laptop more and more.

Ultimately, about five years ago, I started using a laptop exclusively. The two of us were inseparable. Little did I know that this relationship was harmful to my health the more we were together.

It all became clear about a month ago. I was working on some large projects and was with my laptop for 10-12 hours per day for a few weeks. I started feeling back pains. My right shoulder ached. There was numbness in my right arm. Friends suggested I had developed a pinched nerve or herniated or bulging disk

A visit to my doctor confirmed this. Our vertebrae are cushioned by small, spongy discs. When healthy, the discs act as shock absorbers. When a disc is damaged, it may bulge. The bulging disc presses on nerve roots and can cause pain, numbness and weakness in the area of the body where the nerve travels. As you age, the discs dry out and aren’t as flexible. Further, discs can be injured in a number of ways, particularly poor posture over time. Fortunately, my injury wasn’t too severe. I’m on injured reserve now, but rehabbing and hope to better than ever physically in a few months.

I found that the basic reason this occurred was that I was a victim of “laptop-itis.” Don’t laugh. Researchers at UNC-Chapel Hill School of Medicine first coined the term two years ago. After much research they determined that “high use of laptops can lead to a new ailment called laptop-itis:  neck, back and arm issues that can develop from the use of a portable computer”. The health center there says that laptop-itis had become an “epidemic”.  And, remember, these students didn’t have aged, inflexible discs when they came to campus.

Many students use their laptops regularly, for online classes, homework, research and entertainment. For them and us, the laptop often results in the user hunched over the screen in a “scrunched” position. Posture is bad and the body positions are not ergonomically correct. Prolonged use of a laptop is causing headaches, neck aches, carpal tunnel, tendonitis, and back pain in young and old.

So, my love affair with my laptop is over. I have a new adjustable-height desk at which I work standing up half the time. I have my monitor attached to a movable arm that positions it for the perfect eye-level distance. I have a rubber keyboard and an “evoluent” wireless mouse, which operates while my hand is in a vertical position (like shaking hands) not a horizontal position. It’s basically an ergonomic showcase.

I’m sharing this sad story of love, damage and separation, because many of you may be using your laptop too much as well. Here are some pointers for the future if you are using a laptop:

  1. Take a break every 20 minutes. Stand up, walk around and stretch.
  2. If you’re going to use a laptop, don’t cradle it in your lap.
  3. Tilt the screen so you don’t need to bend your neck. 
  4. If you can, use a desktop computer for long durations at the computer.
  5. Switch out your laptop for a desktop or use a docking station.
  6. If you have pain, see a doctor.

Remember, don’t let your laptop seduce you. It may cause you pain in the long run.

Middle East: Muslim Rage Likely to Continue

muslim rageThe attacks on the U.S. Embassy in Benghazi and elsewhere were deplorable. American foreign policy in the Middle East must be clear and firm. Yet, a balance must be struck between supporting democracy and guarding our national interests. It won’t be easy. And Muslim rage is expected to continue.

The violence in Libya, Egypt, and across Arab countries may have looked spontaneous. It wasn’t. Many believe we can expect a new phase of Muslim rage. The Arab Spring replaced hated dictators. These dictators were all about control, including blocking internet access to prevent their people seeing inflammatory material and using their strong security forces to prevent or limit protests. That’s all changed.

Most new governments have fragile mandates, ever changing loyalties and weak security forces. They aren’t quite sure what to do or how to do it. According to the September 24th issue of TIME, “the tendency has been to look the other way and hope the demonstrators run out of steam.”

To be sure, the attacks are more than a reaction to an anti-Islam video. And, the rage isn’t directed only at America. Seven days prior to the killing of Ambassador Stevens in Benghazi, scores of people were killed in Iraq, the defense minister of Yemen survived an assassination attempt, and Syria’s civil war continued, with over 25,000 already dead. Salafists, the second leading vote getters in Egypt, attacked Sufi shrines in Tripoli and other Libyan cities. Small groups of hate mongers are taking advantage of the current situation to promote their religion and their politics, often to a suspicious and ignorant population.

Most Americans know little about the Arabs. And, they know little about us. Coincidentally, two weeks ago I completed a very interesting book entitled The Arabs: A History written by Eugene Rogen. I found it fascinating and highly recommend it. It details the last five hundred years from the rise of the Ottoman Empire until now. It outlines why the Islamic world seems to bear a grudge against the West. In their minds, Western intervention and imperialism, primarily by Britain and France, made many Arabs slaves within their own countries for centuries. And, even with independence, Britain and France still continued to extract economic benefits and support dictators who stifled individual economic and/or religious freedom.

Of course, Muslims resent slights to their religion. Hence, certain Muslim outbursts of rage play well for political parties. The Salafists are fundamentalists. They would like a fusion of government and religion as exists in Iran. Stirring up religious fervor is exactly what they are about. It’s not too difficult to do. Ignorance of the West facilitates rabble-rousing in Muslim countries. Protestors at the American embassy in Cairo erroneously believed that the offensive film was shown on “American state television”, which seemed very likely to those unaccustomed to independent broadcasting. We Americans know we don’t have a “state-run” television system, but many of the protesting Arabs didn’t know that.

The Middle East matters- big time. It’s the world’s energy’s center, at least currently. It is home to Iran, one of our committed enemies. And, it is the heart of Islam, a religion followed by over 2 billion worldwide. The Arab Spring will likely be good for America. However, now that change has come and the genie is out of the bottle, we can expect to see continued rage from a small minority of the Muslims for some time to come.