The Distribution Problem Part 2 – Sequence of (future) Returns

A few weeks ago, I wrote the first in a series of blogs dedicated to the distribution problem that advisors and retirees are facing today.  Part 1 focused on the clarifying the unique challenge that comes with the distribution stage of investing.  Indeed, as investors begin to start liquidating their accumulated assets as a replacement paycheck after they stop working, the math changes.  Inflation and sequence of returns are two key risks associated with this investor stage.  Today, I am going to zero in on sequence of returns risk and shed some light on how many advisors are inadvertently setting inappropriate expectations for their clients in retirement.

Just in case anyone is wondering how the math changes in the distribution stage, allow me to illustrate.  The first chart that you see shows the growth of $100,000 based on historical returns of the S&P 500 Index (total return) since the beginning of 2000 in blue.  The orange line represents that same $100,000 growing over the last 18 years – except the order of returns have been reversed.  So, although the accumulation path is drastically different, both scenario’s end up with the same exact value today.  In other words, the order of returns does not matter.

Growth of $100k 

Now, take that same scenario but pull out withdrawals of 5% per year (with a 3% cost of living adjustment).  The original order of returns (2000 thru Q2 2018) runs out of money 15 years into the hypothetical.  The reverse order of returns (Q2 2018 – 2000) has a positive balance of $124000 at the end.  The order of returns clearly matters in the distribution stage.  That’s what we mean by sequence of returns risk.

5% Distribution Chart

The primary way that many advisors attempt to mitigate this risk for their clients in the distribution stage is to take some risk off the table and diversify the portfolio.  Here’s what a 60/40 mix of the S&P 500 and the US Aggregate Bond Index would look like in the same distribution scenario:

MS Hypo 60-40 SP500 US Agg 5% Withdrawal

Clearly, the diversification benefits the client in this scenario.  Instead of running out of money 15 years into retirement, the client has a little over $37,000 left after the full 18 years.  The assets won’t last much longer, but at least this is an improvement.  The problem I have with an advisor presenting this as a solution to a client for their income needs is that it’s all based on historical returns.  Yes, I get it – no one knows how stocks will perform over the next 10-20 years, so the next best thing is to use a long historical time period as a reference point.  I don’t have any better idea than the next person as to the performance of stocks going forward.  We could continue to see significant corporate earnings growth and valuation expansion that underpin high returns over the next 10 years,  or we could see a significant downturn due to any number of reasons.

The 40% allocated to fixed income is a different story.  We do have a better understanding of bond returns going forward relative to the past 15-20 years.  Either rates will continue to stay low and bonds will earn the yield they are paying.  On the flip-side, if rates increase that will increase the yield return, but will be partially offset by the decrease in the price of bonds that investors are currently holding.  In either scenario, it’s hard to imagine that the US Aggregrate Bond Index will average the 5% annualized return over the next 18 years that it has since 2000.  A more appropriate rate of return for the 40% fixed income allocation might be 3% going forward.  If we adjust to those expectations for “future” sequence of returns risk, here’s what that impact on the portfolio looks like:

MS Hypo 60-40 SP500 Cash 5% Withdrawal

As you can see, lower interest rates going forward will make it more difficult for portfolios to last through retirement compared to previous generations.  Here’s a quick read from FS Investments that I came across outlining the difficulty of the traditional 60/40 portfolio going forward.

History is a useful guide to the future when examining potential market cycles.  However, when it comes to conservative asset classes, advisors and investors should be careful to not expect the next 20 years to look like the previous 20 years.  Next time, in the final installment of this series, I will discuss some of the prevailing distribution strategies and present a viable alternative that income oriented investors should consider.

June Webinar

If you missed my June webinar, I’ve posted it below. If you prefer to read what I discussed, keep scrolling. For more of my webinar series, join me every third Tuesday of the month and feel free to reach out to me with questions. I enjoy hearing from you!

 

This is not your typical market commentary.  There are plenty of resources out there with all of your asset class performance and economic and market indicators.  This update will normally focus on three segments.  My goal is to highlight a couple of significant overarching themes from all that data in more of an educational format.  I’ll also hit on some of the challenges that every day investors and advisors are facing from a practical standpoint.  And then finally, we’ll wrap up with some things on the horizon to keep an eye on.

Market Highlights: Fed Focus

Many of you may be aware that the Federal Reserve has what’s known as a dual mandate from Congress.  What does that actually mean?  Since 1977, the FOMC, or Federal Open Market Committee, which is the committee within the Federal Reserve that determines US monetary policy and sets the quarterly fed funds rate, has been tasked with maintaining maximum sustainable employment and stable prices.  That committee has lightly indicated that this means a target of 4.5% unemployment rate and 2% rate of inflation.

 “In 1977, Congress amended the Federal Reserve Act, directing the Board of Governors of the Federal Reserve System and the Federal Open Market Committee to “maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.”

Chicago Fed Dual Mandate Bullseye

Source: https://www.chicagofed.org/research/dual-mandate/dual-mandate; Inflation is measured by the core PCE price index.

This is a diagram from the Chicago Fed showing that dual mandate.  So why am I starting with this exciting topic of the Fed?  Well, we’ve had a regime change this year at the Fed in both person and focus.  Jay Powell is the first Fed Chair in over a decade to have to focus on the inflation side of the dual mandate.  With unemployment near 4%, they can check that one off.  But I would say they need to update this diagram slightly, with nearly all inflation measures now firmly in the 2-2.5% range.  The market will certainly be watching if Powell and team can normalize interest rates without removing too much oxygen from this economy.

Market Outlook

Ok, real quick on what’s been going on in the market this year.  Any of you that have worked with my firm, USA Financial, know that we are not big on market predictions.  It’s one of those things you can’t control and yet there’s so much focus on it.  We prefer to look unemotionally at the data as it comes in.  But I will say this – for the last six years price growth has increased faster than earnings growth.  In other words, for the last half dozen years P has grown faster than E.  So it’s no wonder we entered this year with fairly high valuations.  This year has the possibility of snapping that streak.  According to Factset, earning projections for the full year are roughly 19%.  In fact, first quarter earning with nearly all companies in the S&P 500 reporting, actual earnings growth came in at 24.5%.  We are almost half way thru the year with the market up a modest 2 percent.  If the second half of the year mirrors the first half in terms of earnings growth and returns – we would finally get some significant valuation compression and I think that would be very healthy for this bull market to continue on.

Earnings Scorecard: For Q1 2018 (with 93% of the companies in the S&P 500 reporting actual results for the quarter), 78% of S&P 500 companies have reported a positive EPS surprise and 77% have reported a positive sales surprise. If 78% is the final number for the quarter, it will mark the highest percentage since FactSet began tracking this metric in Q3 2008

 Earnings Growth: For Q1 2018, the blended earnings growth rate for the S&P 500 is 24.5%. If 24.5% is the actual growth rate for the quarter, it will mark the highest earnings growth since Q3 2010 (34.0%).

Source: Factset

Nitty Gritty

For this month’s Nitty Gritty, I want to explore some stock market idioms.  These are the popular sayings that get tossed around in conversations as quasi-investing advice.  You’ve likely heard of them:

  • January Effect: Meaning that stocks generally have above average returns in the first month of the year
  • Dogs of the Dow: Basically buying highest dividend yields in the Dow, based on the premise that those stocks are near their business cycle bottom and should rebound.
  • Santa Claus Rally: Which is self explanatory…
  • Super Bowl Indicator: I’m not sure why this one even got started, other than the fact that it’s actually been correct 80% of the time over the last 50 years. In short, it states that if the AFC wins the Superbowl we should expect a down market. If the NFC wins the market should go up.  Statisticians call this type of observation spurious correlation – in other words, correlation alone does not indicate causality.  This is something that we should be careful with in the financial industry.  There can be a tendency to discover some correlation in the past and use that as an investment strategy in the future, when in reality there was never any logical basis for that correlation other than complete random luck.
  • Sell in May and go away: Given the time of year, I’m going to take a deeper look at the “sell in May and go away” notion.  It’s basically the idea that you’d be better off staying on the sidelines from May through October and invest back into the market the other six months of the year.  So what does the data say?

Annualized price returns of S&P 500 (not including reinvestment of dividends), thru April 30, 2018:

Sell in May and go away - chart

I ran the annualized returns of the 2 six-month periods over short, mid, and long term time periods.  And you can see, although the 5-year comparison is close, there is a consistent out-performance of the November thru April time-frame compared to May thru October.

So, does this mean that “Sell in May” has validity?  Well, I’m willing to concede that the data indicates a performance edge to the winter months.  And in fact, I was quite surprised how much of an edge there has been over the last 10 and 30-year periods.  But before you go cashing in your chips right now, there are a couple things to consider:

  • One, all the summer periods still have positive returns. And so, while going to cash would reduce your volatility, you’d also be giving up gains on average.
  • Second, and I think this is the biggest issue with Sell in May, is investor behavior comes into play. Any strategy can go through a long stretch where it doesn’t appear to be working.  In fact, for the last 6 years Sell in May hasn’t worked.  You’d have to go all the way back to 2011 where it worked to your advantage to be completely out of the market.

Making significant portfolio shifts and trying to time the market every 6-months opens the door to negative behavioral alpha (in other words, making emotional decisions that negatively impact your long-term plan).  This line of thinking goes for any strategy that you may be considering.  Even if the numbers look good on paper, how does that translate to practical, real world implementation?  When in doubt, simplicity trumps complexity in most situations.

On the Horizon

  • If you haven’t explored my other posts yet, I’ve been trying to ramp up the content recently.  Those posts have a similar feel to these webinar updates, but with a much wider range of financial topics.
  • Upcoming things to keep an eye on: employment to continue to stay below 4%? Wage growth key. Summit held with North Korea June 12 in Singapore.  Regardless of anyone’s political views, it’s quite a turn of events over the last year considering last summer North Korea was shooting missiles over Japan and just this January the two leaders were comparing the size of their respective nuclear buttons on social media.

Alright, that’s all for this month.  Thanks for being here and make it a great day!

Growing Client Base? Time to Segment… Here’s How

At some point in your career, if you’ve been doing things right, you will run out of time.  Did you catch that?  You can actually run “out” of time by doing all the right things.  These are things we all focus on daily – marketing, referral generation, asset gathering, running a business, etc.  While many of us are very good at doing these things, and doing them the “right” way, we eventually run into a problem:  We’ve had success, we’ve brought on many new clients.  Now, there are so many families that we serve, that delivering the same level of service to each of them becomes impossible, and actually is something you shouldn’t be doing.

Now there is a big difference between “treating people right” and “doing the right thing” versus delivering the same level of service for everyone.  You can deliver a different client experience or service model for every one of your clients and still treat them right, and do the right thing for them.  The problem (or opportunity as I see it) is that you cannot afford to deliver the same client experience everyone.  Your A clients and some B clients need to be treated to a first class client experience.  It will be impossible and not even close to economical to deliver that same experience to ALL clients.

The first thing you need to do is figure out where your clients stand from a revenue standpoint.  Run a report of every household you work with and determine what the annual” revenue from each household is worth.  For advisors using commissionable products as part of a financial plan, you need to assess what theup front commission is worth on an annual basis.  The easy way to look at it is to divide the commission by a number of years and “amortize” it out.  For instance, if your client holds an annuity with a 10 year surrender charge, and you earned a $30,000 commission on the placement, you could stretch that out over 10 years and figure that it is worth $3,000 of annual revenue to your firm.  However you do it, remain consistent for all households in how you assess their annual worth.

Once you have all of the households and revenue numbers figured out, organize them from the top down, with the client that generates the most annual revenue at the top.  From there, you need to divide the book of business into four chunks like this:

A – Top 20% of revenue

B – Next 30% of revenue

C – Next 30% of revenue

D – Bottom 20% of revenue

You then need to assign each revenue chunk with a label.  To keep it easy, I’ll go with A, B, C, and D (as seen above).  This exercise alone will be quite eye opening.  I actually go through this process regularly with successful advisors across the country, and put the analysis together for them.  The first time they see how many clients make up these different revenue chunks, they are shocked.  The 80/20 rule holds true in so many things, especially this.

Next, you will want to go through and “upgrade” a few of your clients to first class.  Here’s what I mean by that:  Say there are a few C or D clients that you have worked with for years.  They don’t represent much revenue themselves, but maybe they continue to send you a number of quality referrals every year.  That person, in my opinion, has just upgraded themselves to first class and need to be treated like an A client.  Also, that means there could be a couple of A or B clients who represent great revenue to the firm, but you cannot stand them.  You wouldn’t want to clone them, and you avoid ever having them around your most special clients.  Those might need to get “downgraded.”  Either way, go through the process of assigning a true label to every client in your book.

Now  you need to create a different client experience and service model for each segment.  The A and most B clients should have the most elevated client experience possible.  Here is an example of how it could look:

“A” Clients – Quarterly review meetings, annual charitable giving meeting, joint meetings with a tax and/or estate planning professional, private social lunch 2x per year, inclusion in partnership program, invitations to ongoing intimate social events, preferred parking at office, invitation to annual client appreciation event, etc.

“B” Clients – Bi-annual review meetings, annual charitable giving meeting,  oint meeting with a tax professional, private social lunch 1x per year, inclusion in partnership program, invitations to ongoing intimate social events, invitation to annual client appreciation event, etc.

“C” Clients – Annual review meetings, 15-minute phone call with a tax professional, invitations to in-office lunch-n-learn events, invitation to annual client appreciation event, etc.

“D” Clients – Annual review meetings, invitations to in-office lunch-n-learn events, invitation to annual client appreciation event, etc.

It is not uncommon for advisors to ask a junior or associate advisor to handle the delivery of the client experience to C and D clients.  Bottom line is this, YOU, the rainmaker, cannot afford to overspend your time with those clients.  Take good care of them, treat them well, but spend more time with the A’s and B’s.  Make their experience first class and try to attract more families just like them.

 

The Conundrum of Socially Responsible Investing

Target Readers:

  1. Investors confused by socially responsible investing.
  2. Advisors considering additional emphasis on socially responsible investing.
  3. Advisors struggling to gain traction with socially responsible investing.

Talking Points:

  1. Is socially responsible investing as popular as the media promotes?
  2. Will millennials finally bring socially responsible investing mainstream?
  3. Should investors consider adding socially responsible investing into their portfolios?

Here’s the Skinny,

Socially responsible investing is great in theory, but lacks in real life traction.

Sad but true.

People talk a good game, but as I’ve always said, “If you really want to know what people think or believe, study their actions, not just their words.”

Nuveen just released a detailed study titled, “Investor interest in responsible investing soars.”  The study/survey includes great detail within its 9-pages of results, but one graphic including the core questions really caught my attention…

I do not question the validity of the verbal responses from those surveyed.  However, in answering questions number 2, 4, 6, 7, and 9…  I can’t help but wonder, do their “actions” really support their “words” in real life?

For example:

  • In questions 2 and 4, would the respondent actually be willing to take a pay cut to work for such an employer, or do they mean they would expect the same pay, but prefer such an employer?
  • In question 6, would the respondent be willing to pay more for a similar quality product, or do they mean given the same price and quality they would prefer such a product?
  • In question 7, I would propose a similar scenario, but then question 9 seems to cut straight to the point, unless they interpreted it as meaning given equal returns, which would you feel better about?

Human nature is tricky.

In real life, our asset management firm, USA Financial Portformulas, offers 30+ investment model strategies, and one of our least popular models (according to assets invested) is our socially responsible model based upon the S&P 500 universe.  Interestingly, investors seem to love knowing that we have such a model even though they may not invest in it themselves.  I find that predictable, but still intriguing.

Similarly, cigarette smoking is the leading cause of preventable disease and death in the United States, yet over 13% of adults age 18-24 still smoke and almost 18% of adults age 25-44 continue to smoke.  In the United States, over 70% of adults age 18+ drank alcohol in the past year (and that’s including ages 18-20, when age 21+ is drinking age).  With a growing trend toward marijuana legalization, 22% of adults admit to current usage (even more than cigarettes).  I believe it’s safe to say, most adults know these things are not good for their health and most would steer their children away from such things…  Yet these industries are all thriving.

Does investing work similarly?

I think, all things being equal, investors prefer the idea of socially responsible portfolios.  But if the socially responsible portfolio does not live up to its “less socially responsible peers” and/or it costs more to return the same or less, then investors generally tend to revert back toward traditional portfolio allocations.  And financial advisors know this, so many do not broach the subject unless the investor makes such a request.

Do I sound cynical or am I just a realist?

I love the idea of socially responsible investing.  And speaking as asset manager, it’s not that difficult to add socially responsible screening mechanisms in order to de-select the socially irresponsible stocks.  But until market demand supports the effort, the effort isn’t worth the price of mass deployment (at least not yet).  Like I said, we promote a socially responsible investment model, yet it is one of the least utilized models we provide.

Additionally, socially responsible investing can become a bit murky.  When does an investment cross the line?  If you wish to invest with social responsibility, but you enjoy craft beer or a nice glass of wine, do you re-include the alcohol industry even though it would normally be excluded?  Or what about a tech firm that has poor data security and/or outright sells data you would deem private – include or exclude?

I’ve read that the socially responsible investing category under professional management is currently as high as 22%, but again, that math is a bit murky as it does not include passive management (only active or professional management).

In the end, many lay claim to millennials being the force behind the ultimate push toward socially responsible investing.  And in many ways that argument makes perfect sense, yet millennials are also credited with the push toward marijuana legalization…  And it may be difficult for those two things to coexist.  Not all that different from previous generations wrestling with ways for socially responsible investing to coexist with the popularity of alcohol.

It’s an emotional subject and a trend to watch closely.  But I contend the trend is probably further off in “action” than it is in “words.”

That’s the Skinny, 

 

 

The 4-Corners of the DOL Fiduciary Rule as things stand TODAY!

Target Readers:

  • Those confused by the DOL Fiduciary Rule and current news.
  • Those in denial and/or not adhering to the current rule status.
  • Those who have received erroneous info from IMOs/FMOs.

Talking Points:

  • Like it or not the DOL rule is already in effect.
  • Advisors are at risk if they are not adhering to the rule.
  • Annuity companies are auditing for PTE 84-24 as of January 2018.
  • The ground has begun shifting again under the DOL rule.

Here’s the Skinny:

As promised, here is my high-level synopsis of what I have been calling “the 4-Corners of DOL status:”

1)  JUNE 2017:  DOL Fiduciary Rule Transitional Relief (currently in effect thru July 1, 2019):

  • Advisors to retirement investors, on all qualified monies and related advice, will be treated as fiduciaries and have an obligation to give advice that adheres to “impartial conduct standards” beginning on June 9, 2017. These fiduciary standards require advisors to adhere to a “best interest standard” when making investment recommendations, charge and/or receive no more than reasonable compensation for their services, refrain from making misleading statements and manage any conflicts.
  • The Best Interest Contract Exemption (BICE) applies only to hierarchies involving a Financial Institution (FI), which the DOL recognizes as a BD, RIA, bank or insurance company. FI’s and their advisors must adhere to that stated above, however, all other remaining conditions are delayed until July 1, 2019, such as requirements to make specific written disclosures and representations of fiduciary compliance in communications with investors (meaning written disclosure and client signature is not required under BICE).
  • The amendments to the Prohibited Transaction Exemption 84-24 (PTE 84-24), which applies only to agents/advisors (not including FIs), relating to insurance and annuities is delayed until July 1, 2019, other than that listed above which is applicable on June 9, 2017. Under the transitional PTE 84-24, the agents/advisors must disclose conflicts of interest plus the sales commission, expressed as a percentage of gross annual premium payments for the first year and for each of the succeeding renewal years, that will be paid to the agent in connection with the purchase of the product. Documentation must be provided to and signed by the client and retained by the agent/advisor for 6 years (meaning written disclosure and client signature is required). NOTE: Many insurance companies announced that they would begin random auditing for PTE 84-24 documentation starting in January 2018.

(for further info and complete footnotes visit https://advisorskinny.com/2017/08/29/did-you-get-abandoned-to-fend-for-yourself-on-dol-pte-84-24/)

Here is a DOL compliance flowchart schematic that may help you visualize the flow and structure that is mandated by the DOL Transitional Relief period under the DOL Fiduciary Rule.

2)  FEBRUARY 2018:  Massachusetts charges Scottrade with the first known enforcement action under the DOL Fiduciary Rule.

“Massachusetts charged Scottrade with dishonest and unethical conduct and failure to supervise, in what is the first known enforcement action under the Department of Labor’s revised fiduciary rule.”

Essentially this was the result of their running two sales contests between June and September 2017.

“The Massachusetts complaint asserts that the Scottrade sales contests encouraged their brokers to put their own interests — winning $285,000 in cash prizes for attaining new assets — ahead of their clients’ interests in building their nest eggs. The complaint seeks an order forcing Scottrade to cease and desist, as well as censuring the firm, requiring it to disgorge ill-gotten profits and imposing a fine.”

DOL officials had previously stated they would not pursue claims against “fiduciaries working diligently and in good faith to comply.”

One would assume, among other allegations, that Massachusetts does not believe that Scottrade was “working diligently and in good faith to comply.”

Massachusetts Secretary of the Commonwealth, William Galvin, further stated, “If the Department of Labor will not enforce its own laws and rules, then the states must do what they can to protect retirees from firms who believe they can play with peoples’ life savings by conducting sophomoric (sales) contests.”[5]

Other States are expected to follow the Massachusetts lead.[6]

Many believe that any (and all) sales contests or sales incentives create a conflict of interest and negate a firm’s ability to comply with the best-interest standard.  The Director of Investor Protection at the Consumer Federation of America said the case “perfectly illustrates the kind of practices that go on behind the scenes at firms that claim to be complying with a best-interest standard.”

(for further info and complete footnotes visit https://advisorskinny.com/2018/02/27/dol-fiduciary-rule-violation-charges-proof-the-dol-rule-is-live/)

3)  MARCH 2018:  The 10th District Court of Appeals upheld the DOL Fiduciary Rule.

It was “argued that the DOL rule treated fixed indexed annuities arbitrarily by forcing the products under the best-interest contract exemption, a provision of the regulation that allows brokers to earn variable compensation as long as they sign a legally binding contract to act in the best interests of their clients.”

Currently, Fixed indexed annuities “operate under the same exemption of federal retirement law as fixed annuities. But the DOL put them under the so-called BICE due to their complexity and the potential conflicts of interest associated with their sales.” 

It was also argued that the “DOL violated rule-making procedures and didn’t do a proper economic impact analysis in promulgating the fiduciary rule.”

“The 10th Circuit judges held that DOL followed appropriate administrative procedure, was fair in its treatment of fixed indexed annuities and that it conducted an appropriate economic analysis.”

(for further info and complete footnotes visit https://advisorskinny.com/2018/03/15/dol-fiduciary-rule-upheld-for-fias/)

4)  MARCH 2018:  The Fifth Circuit Court of Appeals determined the DOL exceeded its statutory authority under ERISA.

The Fifth Circuit Court of Appeals “Held that the agency exceeded its statutory authority under retirement law – the Employee Retirement Income Security Act.

The judges criticized a key provision of the rule, the best-interest-contract exemption. The BICE allows brokers to receive variable compensation for investment products they recommend, creating a potential conflict, as long as they sign a legally binding agreement to act in a client’s best interests.

‘The BICE supplants former exemptions with a web of duties and legal vulnerabilities,” the majority opinion states. “Expanding the scope of DOL regulation in vast and novel ways is valid only if it is authorized by ERISA Titles I and II.’”

(for further info and complete footnotes visit https://advisorskinny.com/2018/03/15/dol-fiduciary-rule-upheld-for-fias/)

What do I think?

My opinion is that the DOL Fiduciary Rule was poorly written, riddled with confusing and fuzzy explanations, entirely underestimated the complexity and economics of the challenge, and shirked regulatory enforcement responsibilities by defaulting to a free-for-all litigious structure.

On the other hand, I believe the industry needs to create a level-playing filed across all licensure so that a customer/investor can understand and expect to experience a professional standard-of-care that does not allow for outlandish claims and sales practices from certain segments of the marketplace as determined by licensure or lack thereof.

Currently, given the existing landscape, I would surmise the odds are in favor of the DOL Fiduciary Rule ultimately being eliminated and/or replaced by a more appropriate ruling from the SEC.  But then again, no one has a crystal ball.

And in the meantime, the DOL Fiduciary Rule Transitional Relief (as described in #1 above) is in force and continues to be the current standard .  As I’ve warned before, advisors must adhere to the DOL rule accordingly (regardless of any ill-conceived advice they may have received elsewhere).

That’s the Skinny,

 

DOL Fiduciary Rule – Violation Charges – Proof the DOL Rule is “Live”

Here’s the Skinny,

As recently stated in the news, “Massachusetts charged Scottrade with dishonest and unethical conduct and failure to supervise, in what is the first known enforcement action under the Department of Labor’s revised fiduciary rule.”[1]

Essentially this was the result of their running two sales contests between June and September 2017.[2]

“The Massachusetts complaint asserts that the Scottrade sales contests encouraged their brokers to put their own interests — winning $285,000 in cash prizes for attaining new assets — ahead of their clients’ interests in building their nest eggs. The complaint seeks an order forcing Scottrade to cease and desist, as well as censuring the firm, requiring it to disgorge ill-gotten profits and imposing a fine.”[3]

DOL officials had previously stated they would not pursue claims against “fiduciaries working diligently and in good faith to comply.”[4]

One would assume, among other allegations, that Massachusetts does not believe that Scottrade was “working diligently and in good faith to comply.”

Massachusetts Secretary of the Commonwealth, William Galvin, further stated, “If the Department of Labor will not enforce its own laws and rules, then the states must do what they can to protect retirees from firms who believe they can play with peoples’ life savings by conducting sophomoric (sales) contests.”[5]

Other States are expected to follow the Massachusetts lead.[6]

Many believe that any (and all) sales contests or sales incentives create a conflict of interest and negate a firm’s ability to comply with the best-interest standard.  The Director of Investor Protection and the Consumer Federation of America said the case “perfectly illustrates the kind of practices that go on behind the scenes at firms that claim to be complying with a best-interest standard.”[7]

No doubt this is a shock to many advisors and institutions, as I’m sure Scottrade was not alone in running sales contests in 2017-18.  Unfortunately, many professionals have been under the false belief that the DOL Fiduciary Rule was delayed in its entirety, rather than only partially, as is the case.

For more information click & refer to these previous Advisor Skinny posts…

That’s the Skinny,

———————————-
    1. February 15, 2018, Financial Planning, “Scottrade charged with fiduciary violations in rebuke to Trump administration.”
    2. February 15, 2018, Investment News, “Galvin charges Scottrade with DOL fiduciary rule violations.”
    3. February 15, 2018, Investment News, “Galvin charges Scottrade with DOL fiduciary rule violations.”
    4. February 15, 2018, Financial Planning, “Scottrade charged with fiduciary violations in rebuke to Trump administration.”
    5. February 15, 2018, Financial Planning, “Scottrade charged with fiduciary violations in rebuke to Trump administration.”
    6. February 21, 2018, Investment News, “Maryland jumps into fiduciary fray with legislation requiring brokers to act in best interests of clients.”
    7. February 15, 2018, Investment News, “Galvin charges Scottrade with DOL fiduciary rule violations.”

Year-End + Sweeping Tax Changes = Donor-Advised Funds Surge

Here’s the Skinny…

It’s tough to beat the simplicity, convenience and benefit of a donor-advised fund – and as you may already know, USA Financial Portformulas enjoys a money management relationship with the National Christian Foundation in order to make things even easier for you and your clients. Other options include Fidelity, Schwab, Vanguard, etc.

If your clients already have a donor-advised fund, it’s time to get those year-end tax-planning contributions submitted. If not, you still have time so set up accounts before year-end, but you better hurry.

Simply put, a donor-advised fund allows an investor/donor to make a contribution today, getting the deduction immediately, even though they may not grant the money to a charity (of their choice) until some entirely flexible future date (instantaneously and/or years from now). Really, it’s that easy. Plus, you can use it as a repository to collect and consolidate 100% of your charitable donations in one convenient reporting mechanism (which is a side benefit I love).

Here are three timely resources providing additional information:

Click below for the National Christian Foundation.

 

 

Click below for USA Financial Portformulas.

Click below for an Investment News article titled, “Interest in donor-advised funds surges in response to tax changes.”

 

 

The clock is ticking. Don’t let 2017 slip away before locking in your year-end contributions and tax deductions.

Merry Christmas & Happy New Year!

That’s the Skinny,

Mayweather vs. McGregor – The Important Business Lesson

Here’s the Skinny…

I’ve included a graphic from today’s news. The brief article was about Mayweather being involved in the top 4 highest-grossing boxing bouts in history… But the real lesson slipped past the columnist when looking at the stats…

Yes, it’s true, Mayweather has been in the top 4 revenue bouts. But way more importantly, it is obvious that Mayweather “learned something” after his 2013 match (remember, from a business perspective, Floyd Mayweather, Jr. started Mayweather Promotions in 2007 to promote his own fights). From 1997 thru 2013 top boxing match revenues increased at the rate of just over 2.5% per year. Pretty normal. Pretty mundane.

But from 2013 thru 2017 the revenues increased by over 35% per year. That’s an increase of 1,400% over the previous growth rate! Somewhere, somehow, between 2013 and 2015 a business breakthrough took place. And that breakthrough led to a crazy sized business BREAKOUT. Whether one likes Mayweather or hates him, psycho or genius, its undeniable that he took “his business” to a level previously considered unattainable and unimaginable (like going from flat-earth to round-earth philosophically)

Breakouts (and the opportunity for breakouts), is what we want to keep our senses open to. They may work, they may not. But breakouts can only occur when a mental shift meets an opportunity. As I often say in our Discovery Days and Coaching Academies, “Luck is being in the right place at the right time, intelligence is knowing what to do about it, hustle is acting upon it. Generally speaking those born in the US have a relatively equal amount of luck – but not everyone has an equal amount of intelligence or hustle.”

Notice the breakout between 2013-2015 in the growth chart below. Let your entrepreneurial wheels spin.

Mayweather McGregor

 

That’s the Skinny,

Mike