Free Markets Work!

Each day the media focuses on a new prediction. Their audience is continually searching for new predictions. What will happen next? What is the new hot asset class? Where is the best place to put my money?

Everyone wants to have the best investments, only making money and avoiding all losses. This futile exercise will only add anxiety to your life.

What investors are looking for is stock market returns with Treasury bill risk. What they receive is Treasury bill returns with stock market risk.

No one can consistently predict the future. When someone is right on a prediction it is a matter of luck and not skill or knowledge.

Free markets are random and unpredictable.

Free markets left to their own devices set prices better than any individual or committee. They incorporate all of the knowable and predictable information in the present, as well as knowable information about the future.

Only unknowable future news and information can change prices going forward.

Many people believe that the executives at the large brokerage firms, banks and insurance companies have special insider’s knowledge. These same people also believe these ‘privileged’ executives make money buying and selling the right stocks at the right time. This is how they become ‘filthy’ rich.

This is not true. In most cases these executives make the bulk of their incomes off of the fees and commissions they charge you.

Rather than attempting to predict the future.  Use your time and resources to improve your skills, either career or life.

Your investments are best allocated by owning equities, globally diversify and rebalance. Follow these three simple rules and you will succeed in reaching your long term goals.

Allowing the free markets to works requires a substantial amount of discipline. Most if not all of investors are far too emotional to remain disciplined during times of market extremes.

A case in point is the recent downturn during the month of January 2016. Many investors forgot about allowing the free markets to work and sold out of their equity positions.

To guide you through the inevitable volatility you need to fire your broker/agent and hire an investor coach/fiduciary adviser.

When Is The Best Time To Be Prudent?

When is the best time to be prudent? Most investors respond, “It is always the right time to be prudent.” And they’re exactly right.

 

If imprudent risk-taking and speculation has cost you money, the worst thing that you could do is participate in imprudent, speculative, and risk-taking activities going into the future.

An assortment of United States coins, includin...
An assortment of United States coins, including quarters, dimes, nickels and pennies. (Photo credit: Wikipedia)

If you are using an adviser or you do it yourself these three activities you are speculating and imprudent.

 

  • Stock picking
  • Market timing
  • Track record investing (picking fund managers based on past performance.)

 

We as investors have been taught these three activities are what investing is about. The financial media and the large brokerage firms and even insurance companies have convinced investors this is investing.

 

There are numerous studies proving that the above activities do not benefit the investor. But rather benefit the large brokerage firms, banks and insurance companies.

 

 

So why do people often insist on continuing with the imprudent behavior? Because to admit that there’s a better way, they, in effect, have to admit that they were originally wrong.

 

To admit that our own behavior or decisions were ill-founded in the past is threatening to the personal ego. This realization can be extremely painful to deal with.

 

For many people, it is easier to make a bad decision even worse by continuing the destructive process than to face it head on.

 

There is a better way. A prudent process that incorporates academic and scientific research. Some of which have won the Nobel Prize in economics.

 

 

The opportunity, here, is to realize that you are not your decisions, and just because you made an improper, or imprudent decision in the past, does not mean that you are less of a person, or less intelligent.

 

As a matter of fact, it’s a sign of intelligence and growth to solve and put an end to a destructive process when you become aware that it exists.

 

To succeed in investing you must own equities…..globally diversify……rebalance.

Should I Wait To Invest?

Last week there were horrible attacks in Paris, France by terrorists. Or should I say by cowards? There has been and will continue to be speculation that attacks will occur here in the U.S. as well as other parts of the world. There are those that believe that the markets will go down as a result and we should exit the market. At least until things calm down.

Since there are over six billion people on this planet. There is always conflict somewhere. And there always will.

During these times of crisis we have a tendency to make emotional decisions. Decisions that are NOT in our own best interests.

Ideally, we should all just time the market cycles and only buy when the market is low and sell when the market is high. Unfortunately, few, if any investors are able to do this with any consistency.

We tend to make our investment decisions based on recent past events and how we feel about those events.

If the market has done well lately, we wish, we are comfortable buying stocks. If the market has done poorly, however, we avoid them. Unfortunately, this is the exact opposite of what we should do if our goal is to maximize our long term return.

Once we feel “comfortable” with the market, we have usually already passed up large potential gains. The stock market is forward looking and usually starts trending upwards between 6 to 9 months ahead of the economy actually recovering from a down cycle.

There is an unholy alliance between the media and the large financial institutions to convince the investing public to continue trading by spreading fear and panic.

Many investors mistakenly believe that the big brokerage firms make money by trading in and out of the ‘right’ investments

The large financial institutions make money when YOU trade in and out, making money on every trade.

You should own equities…globally diversify…rebalance and believe that America and the capital markets will recover and prosper. We as a country have been thru much worse and we recovered and became stronger.

The problem is no one can consistently predict what will happen and when.

During times of crisis should we cut and run or should we stand and fight? Historically the fighters are the ones that profit and prosper. Those that cut and run grasp unto their ‘guarantees’ and wonder why they are always behind.

America was built by those that stood and fought.

To best deal with the inevitable ‘bad’ times fire your broker/agent and hire an investor coach/fiduciary adviser.

To Be or Not To Be A Fiduciary!!

The debate continues on setting the fiduciary standard for all advisers working with retirement plan participants.

Perhaps a little background on the fiduciary standard vs the suitability standard is in order.  The suitability standard which applies to all brokers of brokerage firms and insurance agents. This standard is one that allows the advisor to make recommendations to the client that may or may not be in the client’s best interest.

What this really means is the broker/agent only needs to determine if the product is suitable to the client. These broker/agents are not accountable for these recommendations.

As an example, the broker/agent is selling a U.S. Large Cap Growth Fund to the investor. That fund can be their firms’ proprietary fund which may have a higher cost and poor performance. There are better alternatives, but because the U.S. Large Cap Growth Fund is suitable for the client. The broker/agent can sell the higher priced, lower quality fund to the client. Thereby, providing more fees to the broker/agent and their brokerage/insurance company.

As you might guess the fiduciary standard requires the adviser to use the fund which is in the best interest of the client. This would include all solutions recommended by the fiduciary adviser.

Registered Investment Advisory firms follow the fiduciary standard.

All solutions must be in the best interests of the client. This however is not a guarantee of performance.

Another example, if someone age 55 to 59 is leaving their company. The adviser should not rollover the 401k to an IRA. Because when in a 401k and unemployed 55- 59 year old can take a withdrawal without the penalty for withdrawal before age 59 ½. If you rollover to an IRA you lose this privilege.

The broker/agent would gladly perform the rollover now, without regard to penalty.

The Department of Labor has recommended a fiduciary standard for everyone dealing with retirement plan assets. This has met with substantial opposition from Wall Street and insurance companies.

The question becomes, why is Wall Street and insurance companies dead set against being held to the fiduciary standard? Shouldn’t/isn’t all financial products recommended be in the best interest of the client? What are they hiding from the consumer?

There are a number of potential answers to this and many other questions. It would require extensive training of all representative. Along with a substantial increase in supervision by the firms. Some products generate substantial fees, though suitable, are not in the best interest of the client.

Many brokerage/insurance firms hire a large amount of people knowing that only a small percentage will succeed in reaching sales goals.

With the fiduciary standard this strategy would put the firms at a high level of liability. They would be required to train and screen much more carefully. This in turn would reduce sales.

Their argument is that with this screening there would be less brokers/agents and less people would be ‘helped’.

I believe that the fiduciary standard would result in the lower quality products being dropped. More attention would be paid to quality rather than quantity.

Unfortunately, our Congress has decided to defund the DOL with regard to establishing the fiduciary standard. Remember Wall Street and the insurance companies have a vested interest in avoiding the fiduciary standard. These groups will pay dearly to prevent a true fiduciary standard.

Regardless, of the outcome, I believe investors should seek out advisers willing to agree in writing, to serve the client based on the fiduciary standard. And not a watered down version.

Your financial future may depend on it.

More Oversight for 401(k) Brokerage Windows

Many plan sponsors have indulged some of their employees by offering a brokerage window. Some sponsors believe that with the help of their broker they can beat the market with a brokerage window. This option like all others must be available to all with exclusivity allowed. This opens the plan sponsor to fidcuairy risks they may or may not be aware. The plan sponsor has a duty to monitor the accounts and avoid any imprudent investments.

NEW YORK, NY - NOVEMBER 01:  A man walks throu...
NEW YORK, NY - NOVEMBER 01: A man walks through the office building where MF Global Holdings Ltd have offices in Manhattan on November 1, 2011 in New York City. The brokerage firm, run by former New Jersey governor and Goldman Sachs boss Jon Corzine, has filed for bankruptcy in another developing financial scandal. (Image credit: Getty Images via @daylife)

The DOL’s recent guidance discussing brokerage windows also suggests that failing to designate a “manageable” number of alternatives may be imprudent and raises questions about the extent to which an employer must monitor window alternatives to fulfill its legal obligations. This has ignited a debate over whether employers must monitor only the availability of a brokerage window or some actual investment alternatives available through the window. For now, the DOL simply says, you can’t “set it and forget it.”Given the practical challenges of obtaining information about window alternatives, it’s questionable whether employers can continue to offer a brokerage window without substantial risk unless the DOL changes or clarifies its position. Until then, if you have a brokerage window it’s important to consult your ERISA counsel to determine how and when to start collecting fee information and to understand the fiduciary implications of continuing to offer the window.In many cases, it will be appropriate to start gathering information now and formulating a plan for the eventual additional disclosures required. If you’re contemplating adding a brokerage window arrangement, you may want to consider delaying that decision until the DOL position on these issues becomes more clear.

Posted via email from Curated 401k Plan Content

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Labor Department stands firm on self-directed brokerage account guidance

It appears the regulators are intent on ensuring that plan participants are using prudent portfolios when investing for retirement. Investors have been conned by the financial institutions into believing that someone can consistently beat the market. This belief has hurt all investors investing for a long term goal.

Investment Frontiers Symposia
Investment Frontiers Symposia (Photo credit: apec2011ceosummit)

The May 7 guidance document enumerated conditions in which investments in self-directed brokerage accounts or brokerage windows could be considered designated investment alternatives under ERISA. If so, such investments would be subject to greater monitoring of the investments and greater fiduciary responsibility for the investments by plan executives.

If this rule becomes law plan sponsors will need to rethink their position on offering the brokerage window option in their plan. It will increase plan sponsors responsibilities and liabilities. If the owner wants this option for himself/herself they must offer it to all plan participants.

Please comment or call to discuss how this affects you and your company sponsored retirement plan.

Posted via email from Curated 401k Plan Content

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Steps Every Boomer Should Take Before Leaving the Workforce

The best advice I can give to boomers is to seek and pay for the advice of an objective professional adviser. A fee only financial advisor will most likely follow the fiduciary standard. In other words an adviser who puts the interest of the client first.

FORTUNE Brainstorm
FORTUNE Brainstorm (Photo credit: jurvetson)

5. Know the difference between a brokerage firm and an advisory firm.A lot of baby boomers don’t understand the difference between a broker and an advisor. A broker is someone who sells something for a commission,  and sells products like  mutual funds, variable annuities, etc. An advisor provides investment recommendations.

Brokers and brokerage firms don’t have a fiduciary standard to the client, they only have a suitability standard to the client. That means whatever they recommend must be suitable for you, but it doesn’t have to be in your best interest.

On the other side, an advisor has a fiduciary standard to the client. What an advisor recommends to the client has to be in their best interest.

When anyone is preparing to retire they should seek the advice of an adviser following the fiduciary standard. Most people do not understand the difference. By working with a brokerage firm you will have to wonder if there is a conflict of interest.

Please comment or call to discuss.

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Broker-dealers up in arms 401(k) fee disclosure

Industry Skyline
Image by Rhys Asplundh via Flickr

This cash cow is about to end for many broker dealers. The writer of ERISA never intended for the 401(k) plan to be utilized as it is today. It is used more as a specualtion tool rather than a retirement savings vehicle.

Some industry observers say the brokerageindustry only has itself to blame for the fact that its compensation arrangements are so complicated.”This is a reflection of the broker-dealers choosing to operate in an environment where they charge everyone differently for identical services,” said Mercer Bullard, an associate professor of law at the University of Mississippi. “The industry… created the complexity and now they are complaining about having to disclose it.”

Revenue sharing agreements, by which mutual funds share revenue with broker-dealers, are just a part of doing business, said Brian Graff, CEO and executive director of ASPPA.

“If everyone paid the same amount of compensation for everything, it would be less complicated but… that’s now how the free market operates,” Graff said.

Brokers are also reluctant to disclose how much different fund families are paying them to be on their platforms. “No one wants to air their dirty laundry,” said one brokerage executive, who declined to be identified because the issue is sensitive for his firm. “There is a lot of vulnerability.”

Right now, each broker-dealer is taking a different approach in its efforts to comply, officials said.

Some firms are opting for a “phone book approach” to the disclosure, which means they are listing the fee they receive for any investment option available to investors with self-directed accounts.

Other firms are disclosing a possible range of compensation for each fund the firm offers.

Confusion is the brokerage industry’s most powerful weapon. They are able to generate huge amounts of cash flow at the investors expense. This must stop particularly in retirement accounts.

Please comment or call to discuss how this affects you and your investment accounts..

  • Brokerages may have to change business practices: DOL (401kplanadvisors.com)
  • Spotlight on 401(k) fees may help many saving for retirement (401kplanadvisors.com)
  • How Small Business Owners Can Fine Tune Their Company 401(k) Plans (401kplanadvisors.com)
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