Do You Trust The Wall Street Bullies?

During conversations with potential clients I continue to be amazed that these people believe that the Wall Street bullies can and will help them. They believe that Wall Street firms like Merrill Lynch, et al, can and will be able to give them earn above average returns with little or no risk. They continue to believe that their investment money is ‘safer’ with these Wall Street bullies.

These investors appear to have very short memories. Back in 2001 Merrill Lynch had Enron on their Strong Buy list just days before the scandal broke. Their investors lost hundreds of billions of dollars. And yet investors continue to believe that these bullies have their best interest in mind when recommending investments.

Remember this, these bullies are held to a suitability standard while the fee only registered investment advisory firms are held to a fiduciary standard.

A suitability standard means that the recommended investment need only be suitable. There is no requirement that the recommended investment be in the best interest of the client. Conversely, those held to a fiduciary standard must make recommendations that are only in the best interest of the client.

One question I ask is why is the financial services industry fighting so hard to not follow the fiduciary standard? Do these bullies have something to hide? These bullies have been profiting off investors for a long time. And they want to continue to profit off these gullible investors.

Where do you want your investment dollars? With someone who must make recommendations based on your best interests or theirs.

As to ‘beating’ the market Mark Matson wrote in Mind Over Money

“The critical element to outwit, outsmart and out invest the Wall Street Bullies is to know that it’s not that hard. All you’ve got to do is diversify, get market rates of return, and stay the course over long periods of time.”

An investor coach/fiduciary adviser will help you avoid the three signs that you are gambling and speculating with your investment money. When you follow these signs you are helping the Wall Street bullies profit at YOUR expense.

  • Stock picking.
  • Market timing.
  • Track record investing.

When you are ready to stop empowering the Wall Street bullies and invest with less anxiety with greater long term returns. You must fire your broker/agent (Wall Street bully) and hire an investor coach/fiduciary adviser.

Are You Seeking Advice or Validation??

In my previous message I discussed process and superstitions. Now I would like to expound on that discussion. Many of us continue to believe that the investment manager makes the difference between a good return and poor returns. These investors believe that they can find the manager that will help them ‘beat’ the market. Or more importantly ‘beat’ their neighbor, friend, relative……….

Barclays Global Investors headquarters on Howa...
Barclays Global Investors headquarters on Howard Street in San Francisco, California. (Photo credit: Wikipedia)

As I mentioned previously people that go to a casino believe they have a system but it ends up they have thinly veiled superstitions. Many investors are lured by ‘experts’ with a system. These typically include a ‘system’ to predict when to get into and out of the market or a particular asset class or a particular hot stock. Somehow these ‘experts’ have determined a particular indicator or indicator(s) that can predict what the markets will do next.

What these ‘experts’ forgot or more likely don’t know to tell investors is that there is NO correlation between past events and future results. The markets are random and unpredictable. These ‘experts’ actually believe they have found the ‘holy’ grail or at least they want to convince investors that they have found the grail. These ‘experts’ fall into one of two groups, group one does not know what will happen next and group two does not know that they do not know what will happen next.

Some ‘experts’ will lead you to believe that they have watched and studied the markets for so long that they can ‘feel’ the pulse of the market. These ‘feelings’ are nothing more than thinly veiled superstitions.

Any adviser that cannot tell you the expected return and expected volatility (risk) of the recommended portfolio is speculating and gambling with your money and not investing.

Many of these ‘experts’ made a correct prediction once or twice and have convinced themselves and potential investors that they can do it again and again. Well these predictions were a matter of luck and not skill. The academics have proven time and again that the markets are random and unpredictable.

Sure some of these ‘experts’ get lucky but do you want to invest your money based on someone’s luck or based on academic research? Investing is a long term process ideally a lifelong process that has its ups and downs.

To reach your long term financial goals you need the assistance of an investor coach/fiduciary adviser. Your coach will help you build the right portfolio for you and your family. Most importantly your coach will keep you disciplined during market extremes, both up and down.

Keep in mind your coach will, at times, ask you to do something you do not want to do. Your coach may ask you to sell a good performing asset class and buy a poor performing asset class. This is called rebalancing and at times this requires discipline to go against the financial media.

If your adviser does whatever you tell them to do, what good are they? What are you really paying them for? You need to ask yourself if you are seeking advice or validation. An investor coach/fiduciary adviser is just that your coach not your facilitator.

For Investors The Enemy Is Within…

During discussions with people at networking events or social events or just hanging out one question remains constant. What do you do? When I respond, investor coach or investment adviser or fiduciary adviser the reaction is predictable. You can see it in their faces, OMG stocks. Fear, is etched on their faces. This of course is not always the case but it happens often enough to address here.

English: Albert Einstein Français : Portrait d...
English: Albert Einstein Français : Portrait d’Albert Einstein (Photo credit: Wikipedia)

Many of these investors have been through the tech crash of 2000-3 as well as the housing crisis of 2008. These investors during a time of crisis, when acting on their own or even when they have a financial adviser will panic and sell at the bottom. Thereby locking in their losses. This happens at nearly every ‘crisis’. They continue the trend by re-entering the market AFTER the run up. This is just the opposite of what they should do.

If you have a financial adviser who allows you to perform the destructive behavior of selling low and buying high, fire them. If your current adviser allows you to panic during down turns and buy the hot asset class or stock during times of hype, fire them. If you do not follow your adviser’s advice during times of crisis as well as times of hype, fire them.

A true fiduciary adviser provides you with the prudent portfolio at YOUR level of risk and keeps you disciplined during market extremes.

If you haven’t guessed the problem with most investors is not the stock market volatility but rather the problem is the enemy is within YOU. Most of us without the proper guidance or leadership will allow our emotions to guide our decisions. This is true not only of investment decisions but any important decision we need to make in life.

I could discuss all the evidence on why investing in the equity markets is one of the greatest wealth creation tools on the planet. And when I am done you will follow your emotions and listen the Wall Street bullies and your friends and family. Each will give you a number of reasons to panic or buy the hype.

The question becomes WHY? Why do we continue to repeat this destructive behavior? Einstein has a quote that might be relevant here. The definition of insanity is doing the same thing over and over again expecting different results.

A great solution to this problem is to hire an investor coach/fiduciary adviser to help you develop a plan and remain disciplined. This is the true value of any competent adviser. You can take advantage of the great wealth creating opportunity of the equity markets. However, doing it alone will typically lead to poor results and a lot of anxiety.

Fire your broker/agent and hire an investor coach/fiduciary adviser.

Secrets to a Successful 401(k) Plan

The Wall Street bullies will promote actively traded funds whenever possible. Not because it will help you earn a better return but because they will earn trading fees. Since the 401(k) plan has become the sole source of retirement for most Americans it should be offered more like a pension fund. Each employees will be automatically enrolled in an age appropriate portfolio. From there the employee can change their risk level. Studies have proven that less choice will result in better performance.

Fiduciary Trust Building
Fiduciary Trust Building (Photo credit: ToastyKen)

The fiduciary duty of prudence requires plans and plan fiduciaries to always out the interests of the plan participants and their beneficiaries first. The duty of prudence consists of various responsibilities, including the duty to avoid unnecessary expenses and the duty to provide participants with a selection of investment options that allows them to minimize the risk of significant losses and “sufficient information to allow plan participants to make an informed decision.”I recently released a white paper on the Active Management Value Ratio,  proprietary metric that allows investors and fiduciaries to analyze the cost efficiency of actively managed funds.  The white paper clearly shows that a number of the leading mutual funds used by pension plans are not cost efficient, in some cases even reducing a plan participant’s return. It could be argued that such inefficiency could constitute a breach of fiduciary duty, clearly not a sign of a successful plan.

Plans and their fiduciaries are required to provide plan participants with a sufficient selection of investment options to reduce the risk of large losses and sufficient information to evaluate such investment options and make informed investment decisions. In short, in most cases this simply is not happening.

In  most cases plans are primarily an assortment of expensive, highly correlated equity-based mutual funds that unnecessarily expose plans and plan fiduciaries to unlimited personal liability. Furthermore, in many cases plans fail to provide plan participants with all of the information they need to make informed decisions, resulting in liability exposure for both the plan and its fiduciaries.

Many plans and plan fiduciaries mistakenly believe that they do not face any personal liability by virtue of their mistaken belief that they have complied with ERISA Section 404(c). However, Fred Reish, one of the nation’s leading ERISA attorneys, has testified that over his twenty plus years of ERISA practice, he has never seen a plan properly comply with all of Section 404(c)’s requirements. Consequently, there are a lot of plans and plan fiduciaries that do not realize the risk exposure that they actually have.

The Wall Street bullies have convinced everyone that they know what’s best for your 401(k) plan and your employees. These bullies do not have your best interest in mind.

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

Posted via email from Curated 401k Plan Content

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Is There a “Mini-Me” ERISA Section 3(38) Investment Manager?

401(k) plan providers are excellent marketers. They will use the ERISA 3(38) Investment Manager provision to sell more plans. Unfortunately for plan sponsors and participants the devil is in the details. In most cases most of this is marketing hype and they have no intention of assuming this liability.

English: Metropolitan Life Bldg., Manhattan, N...
English: Metropolitan Life Bldg., Manhattan, New York City, in 1911. (Photo credit: Wikipedia)

Certain providers also assert that they can be a 3(38) fiduciary at the level of a plan’s trading platform. In this kind of arrangement, it’s typical, for example, that a registered investment company (RIA) or a trust company offers 3(38) investment manager services to a plan sponsor via a tri-party agreement among the RIA/trust company, the plan sponsor, and the plan’s record-keeper. At the platform level, the plan sponsor agrees to use the services of a 3(38) to prescreen and assess the investment universe, sharply narrowing the list of prudent investment options to be made available to the plan. However, a 3(38) at the platform level doesn’t select the investment options that will actually appear on the plan’s investment menu. That duty is still left to the plan sponsor (or possibly another ERISA 3(38) that’s charged specifically with selecting, monitoring, and replacing the investment options on the plan menu). Many major record-keepers provide this kind of arrangement.But such providers ordinarily would not agree to be a 3(38) investment manager at the plan level (although some of these providers do carry out the discretionary selection/monitoring/replacing duties concerning the specific investment options on a plan’s investment menu). They assert in their agreements with plan sponsors that the sponsors retain the ultimate fiduciary responsibility to determine what particular investment options will actually be offered on a plan’s investment menu. As such, the sponsor would retain fiduciary responsibility (and liability) for the selection, monitoring, and replacement of the plan’s investment options. For example, if a plan sponsor placed an S&P 500 Index fund and a money market fund on the platform, a provider such as a trust company would retain fiduciary responsibility for the underlying holdings in the S&P 500 fund, but it wouldn’t be responsible for, say, the failure of the plan sponsor to provide sufficient investment options to permit participants to create a diversified portfolio.

Be careful what you ask for, you might get it. Many selling retirement plans will tell you what you want to hear. In most cases the devil is in the details.

Please comment or call to discuss what is really in your 401(k) plan contract.

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Don’t Overlook Advice for Your 401(k)s and IRAs

The need for a fiduciary adviser has never been more important to reaching your financial goals. Left on your own you will allow fear and emotions to guide your investment strategy. To succeed you must own equities, gloablly diversify, rebalance and most importantly remain disciplined.

English: The U.S. Securities and Exchange Comm...
English: The U.S. Securities and Exchange Commission headquarters located at 100 F Street, NE in the Near Northeast neighborhood of Washington, D.C. (Photo credit: Wikipedia)

Big Picture Needed

Yet, retirement planning should not involve solely relying on your 401(k).

“A comprehensive financial adviser should be looking at all of your accounts,” including a 401(k), said Peggy Cabaniss, a certified financial planner at California-based HC Financial Advisors and past chair of the National Association of Personal Financial Advisers.

Make sure you ask the adviser to look over all of your accounts or at least inform the adviser of the balances in the accounts that you own.

“A lot of times clients don’t know they should ask their adviser to review it,” Cabaniss said. “We may not charge for (401(k) advice), but at least we’ll review it once a year and make sure your 401(k) is invested in the best way possible given the limited choices the company offers.”

Diversification is still key. If you’re risk averse, you may not be taking on enough risk with your assets — and that’s one reason why you may need financial advice.

“How diversified are you in different sectors? How much homework are you willing to do and how much time are you willing to spend on it?” said Lori Schock, director of the office for investor education and advocacy at the Securities and Exchange Commission.

These are some of the key questions to ask yourself, said Schock. “If you’re not willing to do this, it may be worth having a financial professional at least give you a check up every three years or so.”

Just make sure you don’t overpay for the advice.

“If you’re just dealing with a 401(k), I would look for an adviser who would charge me hourly or a one time fee,” said Schock. “You don’t want to pay an exorbitant amount for stock picking advice, when there are only 10 mutual funds to choose from in the 401(k) plan.”

Investors need the guidance of a fiduciary advisor to control their emotions and stay disciplined to a prudent strategy. Reaching your long term goals requires the objective advice of a fiduciary adviser.

Please comment or call to discuss how this affects you and your financial future.

Posted via email from Curated 401k Plan Content

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Suitability or Fiduciary Standard? – It’s a Big Deal!

The Wall Street bullies continue to take advantage of both plan sponsors and plan participants. Eventually plan sponsors will realize the importance of hiring a fiduciary adviser for their plan. The 401(k) plan has become the sole source of retirement for most Americans. Therefore, the focus of the plan must become that of a prudent investment platform.

Fiduciary Trust Building
Fiduciary Trust Building (Photo credit: ToastyKen)

Reducing plan costs and increasing account performance can greatly increase the future retirement income from the 401k, which is the objective in the first place. A professional fiduciary can also assume some of the plan sponsor’s ERISA responsibilities, which decreases the plan sponsor liability.With increased awareness of the fiduciary standard and the obvious benefits, this approach is becoming more popular. To try to maintain their profit margins and stem the movement to the use of fiduciaries, some financial services companies are trying to convince plan sponsors that they operate as a co-fiduciary or under the fiduciary rules.

Again, take Hancock for example. In 2005 they claimed to offer a “Fiduciary Warranty” but when sued in court, they changed their tone. “Hancock argue(d) that it is not an ERISA fiduciary because it does not exercise discretionary authority or control over the disposition of Plan assets.” They settled out of court for an undisclosed amount. It remains very apparent that these big companies operate under the suitability standard which continues to allow plan participants to be taken advantage of with high fees and questionable investment options.

It boils down to one question. “Do I want the highest standard of care regarding my investment advice or retirement plan?” If so, you want the Fiduciary Standard.

Since the Supreme Court ruling, LaRue vs. DeWolff, the answer to this question may be even more important. The court ruled that plan participants could sue the plan sponsors and others for fiduciary breaches. If breaches occurred and caused financial losses, those persons are PERSONALLY financially liable. When plan sponsors opt for the lower standard of protections of the suitability standard it could be argued it is a breach in itself since the plan sponsor had the option of a higher standard of safeguard, but failed to act in the best interest of the plan participants. Why would a plan sponsor gamble when the fiduciary standard is clearly the best option?

Many brokers sell 401(k) plans as a lead generation tool. These brokers/agents are not accountable for the quality of the plan. To increase your plan’s effectiveness you should hire a fiduciary adviser.

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

Posted via email from Curated 401k Plan Content

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5 steps to accommodate major 401(k) compliance deadline looming August 30

New regulations are becoming effective soon and there will be more coming. Please take the time to review your 401(k) plan periodically to protect yourself and your employees.

English: Logo of the German Internet Service P...
English: Logo of the German Internet Service Provider 1&1, subcontrator of United Internet Deutsch: Logo des Internet Servie Providers 1&1, Unternehmen in der United-Internet-Gruppe (Photo credit: Wikipedia)

To deal with these challenges: 1. If you haven’t done so already, get to work pronto on the fee disclosures due August 30. The first step is to determine whether your service providers have fulfilled their regulatory obligations by supplying the fee information – including the specific services being provided for each amount – to your company.

2. If you’ve received this information, set to work interpreting these documents. This can be a lot tougher than it sounds, as some plan providers are burying pertinent information in lengthy documents. If, at the outset, this task seems too difficult or time-consuming, consider hiring an independent fiduciary advisor to assist you with this, as well as with benchmarking your fees against the market. Using a fiduciary can significantly reduce your company’s liability.

3. If service providers have failed to supply the required fee information, document this by writing to them and requesting speedy submission. This can insulate you from liability for not disclosing the information to employees on time. If these providers don’t respond immediately (after all, the deadline is fast approaching), protect your company by blowing the whistle on them with the DOL.

4. Prior to making the fee disclosures this month to employees, notify them in meetings and/or in emails of what is coming their way. Tell them this is the first step in a process to review – and, possibly, to lower – fees and to improve service, including the provision of better plan education. Again, an independent advisor can help with this.

5. Throughout this notification/disclosure process, document all questions that employees ask and the answers they receive. This helps manage your legal and regulatory liability, and it helps you develop the best answers to give when the same questions come up again.

Your service provider may have buried the necessary information in mounds of paper work. If this is the case, please seek the assistance of an independent fiduciary. These regulations may seem daunting and very confusing, but with the proper help easily accomplished.

Please comment or call to discuss.

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Business owners … keep an eye on your 401(k) administrator

Many plan sponsors of small to mid sized plans do ont realize the fiduciary risks and responsibilities they assume. They may even believe their service provider protects them. This is far from the truth. As a plan sponsor you typically stand alone with your fiduciary risks and responsibilities. We live in a very litigious society and you should not assume any unnecessary risks.

The seal of the United States Department of Labor
The seal of the United States Department of Labor (Photo credit: Wikipedia)

Many small business owners give little thought to their company’s 401(k) plans. Often, employers use third party administrators to administer the plan, and once it is in place, they forget about it. This can be a costly mistake.Here are five of the most common mistakes small business owners should consider:

1. Failure to deposit contributions on time.

This mistake has the potential to be a double whammy, because the employer will hear from both the IRS and the Department of Labor. Employers must deposit amounts withheld from an employee “as soon as it’s administratively possible to segregate the funds.” For most, this is a matter of days. Correcting this failure will include paying interest on the late contribution.

2. Failure to properly include employees as participants.

The plan spells out when employees become eligible to participate, but entry dates can be confusing and employers need to review them for new employees to ensure they are able to participate in a timely manner. The employer will be required to make up contributions the employee was unable to make because they weren’t properly included.

3. Failure to properly follow an employee’s deferral election form.

With a 401(k) plan, employers must allow employees to make an election to defer a portion of their income into the plan. If this election is not timely made or, if it is not correctly followed, the employer is responsible for making up missed deferrals.

4. Failure to obtain spousal consent of plan distributions.

Some plans require that the distribution be in the form of a Qualified Joint and Survivor Annuity (QJSA) unless the participant’s spouse consents to an alternative form of distribution. This requirement can be overlooked if the participant is single but subsequently marries. Failure to obtain necessary consent can result in the employer being required to pay benefits twice.

5. Loan provision mistakes.

Many 401(k) plans allow participants to borrow from the amounts they deferred into the plan. Rules regarding plan loans are precise as to how much can be borrowed and the length of time a loan can be outstanding. Employers often run into problems when participants request multiple loans. Correction of this mistake may require the participant to take a premature distribution thereby incurring a penalty.

Most plan sponsors believe that their service providers are responsible for the management of their 401(k) plan. You and you alone are responsible and liable, as a fiduciary. In most contracts, the service provider takes direction from the plan sponsor.

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

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The Role and Responsibilities of the Individual Trustee

Being the fiduciary to your company 401(k) plan is a vitally important function. Your employees and their beneficiaries depend on you to make the best decisions possible. This responsibility also carries with it the associated risks and liability.

Reach Skilled Volunteering
Reach Skilled Volunteering (Photo credit: Wikipedia)

Fiduciary responsibility covers a well-defined set of assets. These assets must be managed for the ultimate benefit of someone else. As a fiduciary, you may be responsible for any one of many types of assets. You, as a corporate director or officer, may be the trustee of an employee benefit plan. You, as a Board member or officer, may be a trustee for a college endowment or the endowment of any other not-for-profit institution. You may be the trustee for the estate or foundation of a family member or close friend. In all these situations, the buck stops with you. And it’s not even your buck.Ironically, you may have this same fiduciary responsibility to manage your own possessions. These assets may include your residence and your career as well as your taxable and tax deferred investment portfolios. Even if you own the assets today and will own them in the future, you must act as a trustee. Why? Because the beneficiary of your personal assets is not the you of today, but the you of tomorrow. With this in mind, the you of today must manage your possessions for the sole benefit of the you of tomorrow. This requires great discipline. The good news is you can’t sue yourself for a breach of fiduciary duty. Still, this doesn’t mean your liability vanishes, it just shows us in a different way. For example, rather than taking your younger self to court for mishandling your own retirement funds, you’re merely punished by not living the retirement lifestyle you had dreamt of – or by living in your kid’s basement, which may or may not be the same thing.

Plan sponsors are, by default, fiduciaries to the plan participants and their beneficiaries. Many plan sponsors believe that their service providers have taken care of everything. Case law is full of examples that this assumptions is false.

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

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