401(k) Investors: Avoid These 20 Mistakes

Mistakes involving 401(k) accounts can be very costly, a some mistakes require IRS approval to correct, and there is no guarantee that such permission will be granted. This article provides some sound advice.

401(k) Investors: Avoid These 20 Mistakes.

Posted in Uncategorized

Does Your Financial Advisor Owe You Money?

Happy New Year! As I mentioned in my last post, I write for four blogs, including two in connection with my association with the Paladin Registry, a pro-investor organization that provides advice to help investors protect themselves against investment scams and other questionable practices used by the financial services industry to exploit investors. I recently wrote a two-part post on techniques investors can use to determine if their financial advisor is truly acting in their best interests. The two posts can be found at http://iwd.paladinregistry.com/advisors-2/financial-advisor-owe-money-standards-care/ and http://iwd.paladinregistry.com/advisors-2/financial-advisor-owe-money-breaches-care/

Posted in Asset Protection, Investment Advice, Investment Advisors, Investment Fraud, Investment Portfolios, Investor Protection, pension plans, Portfolio Construction, portfolio planning, Portfolio Planning, Retirement, Retirement Planning, Wealth Accumulation, Wealth Management, Wealth Preservation | Tagged , , , , , , , , , , , , , , , , , , , ,

Does Your 401k Owe You Money?

In addition to this blog, I also write for the Paladin Registry. I just posted a new article on excessive fees within 401k plans. The article is available at  http://iwd.paladinregistry.com/products/401k-plan-owe-money/

Posted in Asset Protection, ERISA, Investment Advice, Investment Advisors, Investment Fraud, Investment Portfolios, Investor Protection, IRA, pension plans, Portfolio Construction, portfolio planning, Portfolio Planning, Retirement, Retirement Plan Participants, Wealth Accumulation, Wealth Management, Wealth Preservation | Tagged , , , , , , , , , , , , , , , , , , ,

Advisor Advertising Disguised as an Award

From time to time I run across articles that share my concern about certain issues in the financial planning and investment industries. This article from Russ Thornton, a friend and a colleague, addresses an issue that I have also written about (http://investsense.com/2013/05/29/special-alert-questions-about-new-barrons-advisors/) and (http://investsense.com/2012/02/21/special-alert-barrons-americas-top-1000-financial-advisors/) due to both its prevalence and its potential to mislead the public.

I was recently reading an article by Allan Roth, a Colorado-based financial planner and advisor.

In his article on the CBS MoneyWatch site, Mr. Roth shares an entertaining story about his pet dachshund, Max.

Max – Allan’s dog – received an award in 2009 for being one of America’s Top Financial Planners. What makes this feat even more amazing is that Max was only a puppy at the time. For more on the background of this story, you can read Allan’s May, 2009, account here.

Maybe this makes you laugh.

It makes me cringe.

As if finding a trustworthy financial advisor wasn’t already difficult enough for many of you, these advertising firms are dishing out fake awards as fast as advisors will pay for them.

I even have some experience with this, though it doesn’t involve one of my dogs . . .
Award or Advertisement?

A few years ago, I received a call from some outfit informing me that I may be eligible to be listed as a “Five Star Professional” in Atlanta Magazine as one of Atlanta’s Top Wealth Managers.

At the time, I was a few years younger and perhaps a bit more naive, and as a result, I was excited about what sounded like a great marketing opportunity.

However, as I learned what was involved – along with what wasn’t involved – my naiveté was quickly replaced by skepticism.

There appeared to be no research or due diligence to determine one “top wealth manager” from another. In fact, the real qualification seemed to be whether you might be willing to pay them several hundred to several thousand dollars for an “enhanced” profile listing in the special section of the magazine.

I quickly said thanks, but no thanks.

A few months later I received a call from a client congratulating me on my award listing in Atlanta magazine. I said thanks but was quick to point out that it wasn’t really an award. It was an advertisement, but one that I didn’t pay for.

I went and got a copy of the magazine at the time and found my name listed alongside several hundred other “top” Atlanta financial professionals.

The Song Remains The Same

A couple of weeks ago, I started receiving emails about my upcoming listing in Atlanta magazine as – you guessed it – one of Atlanta’s top wealth managers.

For all I know, I’ve been listed each of the past several years despite not paying them a dime.

If you happen to have a copy of the October issue of Atlanta Magazine, you’ll find my name listed toward the back in the *Special Advertising Section.*

C’mon. The fact that “Special Advertising Section” is printed at the top of each page should be your first hint that this may not be such a prestigious award.

Another reason you should be skeptical?

There are over 500 “top professionals” listed. Sure, Atlanta is a big city, but how discerning can this award be if over 500 people can “win” it in Atlanta alone?

And from the “Determination of Award Winners” in the Atlanta Magazine insert, the only real “required” hurdles for this so-called award are that you’re employed as a financial advisor, insurance agent, attorney or CPA, and you’re not a crook.

And perhaps more interesting is something in their “research disclosures” which says “The inclusion of a wealth manager on the Five Star Wealth Manager list should not be construed as an endorsement of the wealth manager by Five Star Professional or Atlanta magazine.”

In other words, we think these wealth managers are worthy of our bogus award, but we’re not endorsing them. Or to put it more bluntly, if you read this list and hire one of these wealth managers, you’re on your own.

Not exactly a ringing endorsement from an organization that confers awards to top wealth managers about its award winners.

But hey, if you’d like to order your very own plaque to commemorate my special award, you can do so here. I’m kidding of course . . . I’m not ordering any of this crap, and you shouldn’t either.

And if your financial advisor does? Well, I’ll let you be the judge.

But Wait, There’s More

As if these so-called awards couldn’t get any more ridiculous, I have another quick story for you.

On October 3rd, I received an email from a woman named Margaret. It was sent to my personal email address and was addressed to “Russell.”

No one calls me “Russell” unless I’m in big trouble for something.

Anyway, this email goes on to inform me that Thornton Wealth Management LLC has been recognized as a ” 2013 Georgia Excellence Award recipient.” The award comes from the Small Business Institute for Excellence in Commerce. They even have a website, but it seems very vague to me.

It goes on to tell me how special I should feel about being selected and has a link where I can order a press release, a certificate of my award as well as a “crystal award.” You can see for yourself right here.

But you want to hear something funny?

I closed “Thornton Wealth Management LLC” in 2009 when I joined Wealthcare Capital Management. The organization no longer exists, yet I won an award. Hmmmm.

So the good news is that I won a fake award that is really just an advertisement for an entity that I closed 4 years ago.

The bad news is that you have even more reason to be wary and skeptical when carefully choosing the right financial advisor for you. And FYI, I always encourage you to have a healthy dose of skepticism when hiring or interacting with any financial professional, including myself.

It’s your money and your life and you need to be damn sure you’re confident about anyone
that you’re entrusting to look out for you. If you’re not comfortable and confident, keep interviewing until you are comfortable and confident.

Russ Thornton is the founder of Wealthcare for Women, an independent wealth management firm located in Atlanta, Georgia. Wealthcare for Women specializes in providing financial advice to women, especially recently divorced or widowed women seeking sound, objective advice during their period of transition and beyond. Russ has over twenty years of experience in providing financial advice to the public. For more information about Wealthcare for Women and Russ, visit the firm’s web site (http://wealthcareforwomen.com/) or contact Russ at 404.254.6993 or rthornton@wealthcarecapital.com. You can also follow Russ on Twitter (https://twitter.com/RussThornton) or LinkedIn (http://www.linkedin.com/in/russthornton/).  

Posted in Common Sense, Investment Advice, Investment Advisors, Investor Protection, Wealth Management, Wealth Preservation | Tagged , , , , , , , ,

Faux Wealth Management: The Need for Integrated Estate Planning

A fellow estate planning colleague of mine called the other day and asked me to review a client’s investment portfolio for legal issues. I had previously reviewed my colleague’s portfolio and had pointed out some issues that were not consistent with his estate plan. When I met with his client, I found similar consistency issues and advised him accordingly.

Far too often I see excellent estate plans jeopardized by “questionable,” investment recommendations. Since the effectiveness of an estate plan generally depends on preserving the assets needed to implement the estate plan’s objectives, effective wealth management should integrate a number of legal areas, including wealth management, asset protection and tax law.

Far too often the wealth management process disintegrates into various experts concerned about defending their particular “silo,” with little or no consideration for the best interests of client. Ironically, in addition to reducing potential malpractice claims, professionals who work together to develop an effective integrated estate plan could potentially benefit from future referrals and other networking opportunities.

Asset protection has become a hot topic, especially for high net worth clients. Yet there are still estate planning attorneys who do not even discuss the topic with their clients. The area of special needs planning has become a more relevant issue in today’s society. Yet there are attorneys and financial advisers who do more harm than good due to their lack of understanding about the special legal issues and requirements involved in this field.

There has been a significant increase in attorneys practicing in the area of elder law. Elder law involves a number of legal issues, including Social Security, estate planning and general legal rights of the elderly. Unfortunately, there has not been as much attention financial fraud and its impact on the elderly. What makes this more confusing and disappointing is the fact that studies have shown that financial fraud is the number one crime against the elderly.

Investment fraud can often be very subtle and difficult to detect for a non-attorney. Studies have shown that cognitive biases, internal beliefs and opinions, may often prevent someone from acting even when they have suspicions of wrongdoing.

Wealth management is an ongoing process that requires constant vigilance. Perfectly designed estate plans can quickly become an expensive lesson in futility if needed asset protection measures are not implemented and/or unsuitable investments are avoided or removed in order to protect the needed asset base for a client’s estate planning goals.

Fiduciaries have a legal duty to always put a put a client’s interest first. Attorneys and, in many cases, financial advisers are legally fiduciaries. Therefore, adopting an integrated process would seem to benefit both client and fiduciary. However, clients should also be proactive in protecting themselves against “questionable” practices. Steps to consider include:

(1) Bringing up the issues of asset protection and integrated estate planning with your attorney.
(2) Reviewing your investments with your financial adviser for issues such as excessive fees and lack of effective correlation within your investment portfolio.
(3) Reviewing your estate plan and your investment portfolio on an annual basis to ensure that both are still consistent with your personal goals and personal situation.

I created a simple, straightforward metric, the Active Management Value Ratio™ that investors can use to evaluate the efficiency of a mutual fund in terms of both cost and performance. The information required for using the metric can be found online at sites such as morningstar.com. The metric itself only requires the ability to subtract and divide. For more information about the Active Management Value Ratio™, see http://investsense.com/the-active-management-value-ratio/. A worksheet is provided at http://investsense.com/the-active-management-value-ratio-worksheet/.


This article is for informational purposes only, and is not designed or intended to provide legal, investment, or other professional advice since such advice always requires consideration of individual circumstances. If legal, investment, or other professional assistance is needed, the services of an attorney or other professional adviser should be sought.




Posted in Estate Planning, Integrated Estate Planning, Investment Advice, Investment Advisors, Investment Fraud, Investor Protection, Portfolio Construction, portfolio planning, Retirement, Retirement Planning, Wealth Management | Tagged , , , , , , , , , , , , , , , , ,

Throwing 404(c) Participants (And Sponsors) Under the Bus: ERISA Section 404(c) False Promise of “Sufficient Information”

The Supreme Court’s decision in LaRue v. DeWolff, Boberg & Associates(1) in 2008 started a trend recognizing the need for greater protection of participants in defined contribution pension plans. The LaRue decision signaled the long overdue recognition by the judicial branch that, unlike defined benefit pension plans, defined contribution plans shift investment risk to the plan’s participants and beneficiaries.

Recent cases such as Braden(2), Tibble(3) and Tussey(4) have continued the trend in protecting plan participants. Recent participant-centric cases have focused on the issue of unnecessary costs associated with a plan’s investment options. While this is an important issue, this paper focuses on yet another issue which should be pursued, that being the fact that key promises provided by ERISA, namely the promises of a “broad range” of investment options and “sufficient information to make informed investment decisions,” are not being kept.

ERISA’s Promise of Disclosure
In discussing the importance of disclosing investment information to 401(k) participants, the preamble to the final 404(c) regulations (“Preamble”) stressed the need

to ensure that participants and beneficiaries in ERISA section 404(c) plans have sufficient information to make informed investment decisions….[as] the investment decisions made by participants and beneficiaries in ERISA 404(c) plans will directly affect the funds available to such individuals at retirement. For this reason, participants and beneficiaries should be assured of having access to that information necessary to make meaningful investment decisions.(5)

However, ERISA has totally failed to ensure that participants and beneficiaries actually receive such meaningful investment information. As a result, participants and beneficiaries in 401(k) and 404(c) suffered significant losses in the 2000 and 2008 bear markets, losses which could have been reduced had plan participants actually had the information necessary to implement strategies to reduce or avoid such losses.

Modern Portfolio Theory and 401(k)/404(c) Plans
Defined contribution pension plans have emerged as the primary form of private pension plans. The popularity of 401(k) plans lies in the fact that defined contribution plans allow employers to shift the burden and risk of investment loss to the plan participants by electing so-called 404(c) status. If a plan meets all of the requirements for 404(c) status, then a plan is not responsible for any losses incurred as a result of a participant’s investment choices.(6)

In reviewing both the statute and relevant regulations governing 401(k) plans, the language clearly references the applicable principles of modern portfolio theory, especially the importance of effectively diversifying one’s investment portfolio. The ERISA fiduciary is required to give

appropriate consideration to those facts and circumstances, given the scope of such fiduciary’s investment duties, the fiduciary knows or should know, are relevant to the particular investment or investment course of action, including the role that the investment plays in the plan’s investment portfolio, and has acted accordingly.(emphasis added)(7)

Appropriate consideration by a fiduciary requires him to determine that an investment is reasonably designed, as part of the plan’s portfolio, to further the purposes of the plan, taking into consideration the risk of loss, the opportunity for gain, the extent of the portfolio’s diversification, the portfolio’s liquidity and the investment’s projected return.(8)

Modern Portfolio Theory (MPT) was introduced in 1952 by Dr. Harry Markowitz.(9) The cornerstone of MPT was the introduction of the correlation of returns among investments as a factor in creating investment portfolios. Prior to the introduction of MPT, portfolios were constructed largely using only an investment’s returns and standard deviation. The theory behind including MPT in the portfolio process was to combine investments that behaved differently in various economic conditions in order to avoid large losses.

While Markowitz’s concept of MPT has been fairly criticized due to the questionable assumptions behind the theory and its calculation process, the validity in factoring in correlation of returns among investments remains a valid and valuable approach to portfolio construction and risk management. Both the Department of Labor (DOL) and the courts have adopted modern portfolio theory, and the value of effective diversification, as the standard in evaluating the prudence of ERISA fiduciaries’ actions.(10)

The cornerstone of modern portfolio theory is diversification based on the correlation of returns among the investments being considered. Therefore, it can be argued that plan sponsors must factor in correlations of returns of the investments chosen for their plan in order to ensure ERISA’s promise of a “broad range” of investment options. Likewise, it can be argued that plan participants should be given the same information in order to exercise the same prudence with their own plan accounts.

Diversification and Risk Management
Proper risk management through the use of effective diversification depends on using the correlation of returns of investment. As Markowitz stated in his seminal book, “Portfolio Selection: Efficient Diversification of Investments,”

To reduce risk it is necessary to avoid a portfolio whose securities are all highly correlated with each other. One hundred securities whose returns rise and fall in unison afford little protection than the uncertain return of a single security(11)

Markowitz’s position on effective diversification has been adopted by the Restatement (Third) Trusts.(12) And yet, courts and various commentators, while admitting the values of effective diversification, often continue to analyze diversification solely on the basis of the number of investment options offered by a pension plan.

There is a popular investment saying that says that “amateurs chase returns, while professionals manage risk.” That sentiment is seconded by two legends in investment management, Ben Graham and Charles Ellis, to wit:

The essence of investment management is the management of risk, not the management of returns.(13)

Managing market risk is the primary objective of investment management.(14)

Factoring in the correlation of returns of various investments allows investors, including plan sponsors and plan participants, to manage risk by avoiding a portfolio made up entirely or largely of highly correlated investments. It also allows investors to avoid being confused by the “diversification by asset category” scam often perpetrated by dishonest and unethical plan service providers and other financial advisers, a scam which leaves unsuspecting investors without the benefits of effective diversification, particularly downside risk protection.

ERISA’s “Broad Range” and “Sufficient Information” Promises
ERISA section 404(c) sets out various requirements that must be met in order for a plan to effectively shift the risk of investment losses to the plan’s participants. One of the sections main requirements  is that a plan provide its participants with a “broad range” of investment options.(15) Section 404(c) requires that a plan offer at least three types of diversified investment options-a broad equity-based investment option, a broad fixed income-based investment option, and a cash/money market based investment option.(16) Each category of investment option offered by a plan must have materially different risk and return characteristics.(17)

The other main 404(c) requirement is that the plan must provide participants with “sufficient information in order to make informed investment decisions” in order to allow participants to minimize the risk of large investment losses.(18) The courts have recognized the importance of ERISA’s promise of “sufficient information.” As one court noted

courts must look to the evidence and determine whether the plan provided the participants ample information, including adequate information to understand and evaluate the risks and consequences of alternative investment options.(19)

Building on the importance of the provision of “sufficient information,” at least two courts have suggested that if participants are not provided with the material information necessary to protect their interests, then the participants cannot be said to have exercised the control over their 404(c) account as required by ERISA for 404(c) status.(20)

Section 404(c) incorporates the information disclosure requirements of 401(k) plans. Sadly, neither requires the disclosure of correlation of returns data for the investment options offered by the plan.

The DOL has released a bulletin outlining various types of investment information that may be provided to plan participants without incurring any additional fiduciary liability. Interestingly enough, the bulletin states that plan sponsors can provide generic information on general investment topics such as historical investment returns, historical investment risk and correlation of returns.(21)

So the DOL says plans can educate plan participants on the importance and benefits of correlation of returns information, but they do not allow plans to provide plan participants with the correlation of returns data for the plan’s actual investment options, thereby denying participants the opportunity to effectively diversify their retirement accounts and minimize the risk of large losses. This would seem to be totally inconsistent with ERISA’s stated purpose, to help protect pension plan participants and their beneficiaries.(22)

It can, and should, be argued that correlation of return data is analogous to the historic return and risk data allowed under the DOL’s release, as such data does not advise plan participants as to which investments to choose. Correlation of returns data simply gives investors material information on which investments not to choose in order to minimize their investment risk. This would seem to be totally consistent with both ERISA’s promise of “sufficient information” to allow “meaningful control over the assets in their account, as well as ERISA’s stated purpose to help protect pension plan participants and their beneficiaries.

Time For Change

404(c) is not working. It does not provide participants with the information they need to make informed and reasoned investment decisions.(23)

That was the testimony of Fred Reish, one of the nation’s leading ERISA attorney, before the Department of Labor’s Advisory Council. Mr. Reish was simply stating what many ERISA experts already know, especially with regard to information needed by plan participants to implement effective risk management strategies.

Fiduciary law is derived from the common law of trusts and agency. Both trust law and agency law emphasize the importance of a fiduciary’s duty of loyalty, which includes a duty to disclose material information to a fiduciary’s beneficiaries and principals, especially when silence may result in harm to such beneficiaries and principals.(24) Under ERISA, a plan sponsor is a fiduciary.

Given the obvious significance of correlation or returns data in the risk management process and ERISA’s admitted goal of providing plan participants with “sufficient information to make informed decisions” to effectively manage their retirement accounts and avoid large losses, one would wonder why the DOL does not seek a change to require the disclosure of such data to plan participants. When this issue is brought up, opponents often claim that plan participants would not understand the data and/or would not know how to properly use such data.

That objection is an education issue and has nothing to do with the value of such information protecting plan participants and in furthering ERISA’s goals. Sadly, ERISA does not require plans to provide education to plan participants. The ability of 404(c) plans to transfer investment risk to plan participants, without requiring both the disclosure with such material information and education program on how to properly use such information, effectively allows plans and plan sponsors to throw 404(c) plan participants “under the bus.”

It has been suggested that the failure to provide investment education to plan participants could be deemed to be a breach of the plan sponsor’s fiduciary duty of loyalty to the plan participants.(25) This argument is even more persuasive given the Securities and Exchange Commission’s recent study which concluded that most Americans are functionally illiterate with regard to investing.(26)

The real resistance to providing correlation of return information to plan participants, and for that matter plan sponsors, could be that disclosure of such information would reveal a conflict of interest between plan service providers and pension plans. Forensic analyses of pension plans often show that the majority of investments recommended by plan service providers, especially with regard to equity-based investments, are highly correlated and, therefore, are not compliant with ERISA’s “broad range” requirement. This can result in unwanted potential liability for plan sponsors and improper risk exposure for plan participants, as they cannot effectively diversify their plan accounts.

The denial of such material information is both unnecessary and inequitable given a 404(c) plan’s ability to shift the risk of investing onto the plan’s participants. Both Congress and the DOL need to amend ERISA by requiring that plan participants and their beneficiaries be provided with correlation of returns data on the investments offered by their 401(k) and 404(c) plans, as well as educated on the proper usage of said data so they can properly manage their plan accounts to minimize the risk of large losses.


1. LaRue v. DeWolff, Boberg & Associates, 128 S.Ct. 1020 (2008)
2. Braden v. Wal-Mart Stores, Inc , 588 F.3d 585 (8th Cir. 2009)
3. Tibble v. Edison International, 711 F.3d 1061 (9th Cir. 2013)
4. Tussey v. ABB, Inc., 54 WL 1113921 (W.D. Mo., March 31, 2012)
5. Preamble to 404(c) Final Regulations, 57 Fed. Reg. 46906, 46909-46910
6. 29 C.F.R. § 2550.404c-1(d)(2)(i)
7. 29 C.F.R. § 2550.404a-1(b)(1)
8. 29 C.F.R. § 2550.404a-1(b)(2)
9. Harry M. Markowitz, Portfolio Selection: Efficient Diversification of Investments”, 2d ed., (Malden, MA: Basil Blackwell Publishers, Inc., 1991)
10. DiFelice v. U.S. Airways, Inc., 497 F.3d 410, 423 (4th Cir. 2007); Laborer’s Nat’l Pension Fund v. N. Trust Quantitative Advisors, Inc., 173 F.3d 313, 317 (5th Cir. 1999)
11. Markowitz, 5
12. Restatement Third, Trusts, § 90 (Prudent Investor Rule), cmt f. Copyright © 2007 by The American Law Institute. Reprinted with permission. All rights reserved. (“Effective diversification, then, depends not only on the number of investments but also on the ways and degrees in which their responses to economic events tend to cancel or neutralize one another through negative or slight ‘covariance’.”)
13. Ben Graham quote
14. Charles D. Ellis, “Winning the Loser’s Game: Timeless Strategies for Successful Investing,” 6th ed. (New York, NY: McGraw/Hill 2010), 103-104
15. 29 C.F.R. §2550.404c-1(b)(1)(ii)
16 .29 C.F.R. §2550.404c-1(b)(3)(i)(B)
17. 29 C.F.R. §2550.404c-1(b)(3)(i)(B)(2)
18. 29 §2550.404c-1(b)(2)(i)(B)
20. In re Regions Morgan Keegan ERISA Litigation, 692 F.Supp.2d 944, 957 (W.D. Tenn. 2010); In re Sprint Corp. ERISA Litigation, 388 F. Supp. 2d 1207 (D. Kansas 2004)
21. Department of Labor Interpretive Bulletin 96-1
22. 29 U.S.C. § 1001(b); In re Unisys Sav. Plan Litigation, 74 F.3d 420, 434 (3d Cir. 1996)
23. Available online at http://www.drinkerbiddle.com/publications/ Detail.aspx?pub=2592
24. Restatement Third, Trusts, § 78. Copyright © 2007 by The American Law Institute. Reprinted with permission. All rights reserved. (“Whether acting in a fiduciary capacity or personal capacity, a trustee has a duty in dealing with a beneficiary to deal fairly and to communicate to the beneficiary all material facts the trustee knows or should know in connection with the matter.” (emphasis added)
26. Ary Rosenbaum, “Why 404(k) Plan Sponsors Should Make Sure Education and Advice is Offered to Their Participants,” http://www.jdsupra.com/legalnews/why-401k-plan-sponsors-should-make-sur-30437/
27. “Study Regarding Financial Illiteracy Among Investors,” available online at http://www.sec.gov/ news/studies/2012/917-financial-literacy-study-part1.pdf


Posted in ERISA, Investment Advice, Investment Portfolios, Investor Protection, pension plans, Portfolio Construction, portfolio planning, Retirement, Retirement Plan Participants, Retirement Planning, Wealth Management, Wealth Preservation | Tagged , , , , , , , , , , , , , , , ,

Put Up or Shut Up!

The Securities and Exchange Commission (SEC) continues to delay action on a proposed universal fiduciary standard that would require anyone providing investment advice to always put a customer’s best interests first. While investment advisers are currently required to put a customer’s interests first, stockbrokers and other financial advisers are allowed to put their own financial interests first.

This disparity obviously makes no sense. Yet, the SEC continues to say that it is studying the issue. This issue could be resolved simply if the SEC would simply let the public decide. The SEC would probably rejects such an idea, saying the potential costs involved must be considered.

My response – What additional costs? Most broker-dealers already have their own in-house investment adviser division, which supposedly would be reviewing traded according to the fiduciary standard applicable to investment advisers. FINRA, the primary regulator for the financial services industry, has clearly stated that brokers and broker-dealers are required to always put a customer’s best interests first. Adopting a universal fiduciary standard would simply be in accordance with FINRA’s position.

The SEC recently reported that they received a poor response from the financial services industry from their request for information regarding the additional costs that would result from a universal fiduciary standard. The SEC should not be surprised. As mentioned above, there is no legitimate evidence to support such a claim.

The financial services industry also claims that a universal fiduciary standard would result in people being unable to receive adequate investment advice. Legally speaking, evidence which is based on pure speculation is admissible. The financial services industry has no substantive evidence to support their claim because they cannot do so.

As a former compliance officer who worked with brokers, I find it hard to believe that a good, honest broker is going to refuse to provide advice to anyone and walk away from potential compensation, whether a fee or commission. Why would they? If they are providing advice that is in the best interests of the customer, they are entitled to make a living. As for those who might refuse to provide advice unless they can put their own financial interests first, I say good riddance.

Its time for the SEC and the Department of Labor to tell the financial services industry to “put up or shut up.” Enough of the empty, unsubstantiated rhetoric. Its time for the various agencies whose expressed missions are to protect the public to actually do so or come clean and tell the public the real reason they refuse to do so. As former Supreme Court Justice Louis Brandeis once said, “sunlight is the best disinfectant.” Continue reading

Posted in Fiduciary, Investment Advice, Investment Fraud, Investor Protection, pension plans, Portfolio Construction, Retirement Planning, Wealth Accumulation, Wealth Management, Wealth Preservation | Tagged , , , , , , , , , , , , , , , ,