Saturday, January 14, 2017

A Proposal: One Defined Contribution Account (NIRA) To Rule Them All

As I've written before, some regulation - such as the DOL fiduciary rule - is simple, elegant and possesses substantial benefits not only for individual Americans but for corporations and the U.S. economy.

But, at times, undue complexity reigns in our statutory law and the regulations that follow. Often this is due to a mishmash of legislation adopted over time, amplified by the regulations that follow.

A perfect example is defined contribution plans. Look at what we have today for defined contribution plans ... 401(k) plans, 403(b) plans, 457 plans, Thrift Savings Plan, SIMPLE 401(k), SIMPLE IRAs, Individual IRAs (traditional), SEP IRAs, Keoughs, and many more.

Each type of plan is similar, as to its ability to contribute funds to a "retirement account" and receive a tax deduction for same, ongoing tax deferral, followed by required minimum distributions. Yet, each plan also has its unique features. Often these create tax traps for the unwary.

And, at times, they create unnecessary administrative costs for employers. An example is "plan administration" fees - often thousands of dollars a year, at a minimum, even for small plans.

So, here is my proposal ... ONE DEFINED CONTRIBUTION RETIREMENT ACCOUNT TO RULE THEM ALL.

Call it the "New Individual Retirement Account" or "New IRA" or "NIRA."

All existing defined contribution accounts to be rolled over into NIRAs within 24 months of enactment of legislation.

Who can establish?
   - Any person with earned income, or who desires rollover into a NIRA.
       - One-page form to establish.
   - A company, on behalf of its employees. One-page form to "adopt a NIRA for employees."
       - No annual filings, tax or otherwise.
       - Plan sponsor is fiduciary. Any provider of recommendations to plan sponsor must be a fiduciary, as well.

Corporate stock permitted in NIRAs?
   - Yes, but not to exceed 15% in value of any participant's account.
   - If corporate stock permitted and it exceeds 15% in value, participant has 6 months to reduce down to 15% level.
   - ESOPs not permitted any longer.

Who is custodian of the NIRA accounts?
   - Bank or brokerage firm (qualification standards exist)
   - Selected by employer, if the employer desires
   - Otherwise, selected by employee

Payroll deduction:
   - Must be permitted, by all employers (large or small)
   - Auto-enrollment, unless employee "opts out"
   - Auto-escalation, unless employee "opts out," wherein 1/2 of any wage/salary increase is dedicated to increasing the contribution to the NIRA account (employee may select 0% to 100% of wage/salary increases to go to NIRA account)
   - Default investment option is age-appropriate target date fund (employee may select other investments)

Advice providers to NIRAs as to investment recommendations - requirements:
   - Advice-providers must always possess fiduciary status. (No waivers, disclaimers.)
        - Fiduciary status, once acquired for NIRA, extends to all accounts of the client upon which advice is provided (qualified or non-qualified accounts)
   - Prudent investor rule applies to all advice provided.
   - Fees are paid directly by client. Must be reasonable fee. No commissions or other third-party compensation of any kind permitted to be paid to fiduciary advisers or their firms. Fee methods include:
        - Fixed fee for discrete (one-time) advice
        - Subscription fees (monthly)
        - Annual flat fee
        - Asset management fee (AUM fees)
   - Advisory fees can be deducted directly from the NIRA account, with client consent. Includes fees paid for investment management advice, as well as for financial planning advice.
   - Self-directed NIRAs permitted, in which no advice is provided. Information on products is permitted, with disclaimers that no advice is provided. General education about investments and financial planning is permitted, but no specific investment recommendations may be provided, nor may specific asset allocation recommendations be provided (other than through the use of target-date funds)
   - No proprietary products are permitted to be recommended by advice providers.

Vesting?
  - 100% immediate, for both employer and employee contributions.

Employer match?
  - Whatever the employer wants to do, maximum of 25% of salary.
  - Can do zero.
  - Can vary from year to year, based on profitability.
  - Can do through "bonuses" each year, as opposed to each pay period.

Maximum contribution?
  - Up to lesser of: (a) 35% of wage/salary income that year; and (b) $60,000 a year, to be adjusted for inflation.
  - No "nondeductible contributions" permitted

Ability to take loans against?
  - None. See loosening of early distribution provisions, below.

Early distributions permitted without any penalty?
  - 4% maximum per year, at any age. Regardless of whether working or not working.
  - May "turn on" and "turn off" early distributions at any time.
  - Distributions above 4% permitted, but subject to 5% additional tax (penalty) on top of regular income tax due for such distribution.

Required minimum distributions for owner:
  - Starting the year you turn age 75, and each year thereafter: 4% per year minimum, no maximum
  - If owner continues to work, the 4% per year minimum may be reduced by the amount of the salary/wage income that year.
  - Alternatively, at age 55 or thereafter, a NIRA owner - regardless of whether employment continues or not - may annuitize all or a portion of the NIRA over the owner's lifetime, or (if married) over lifetime of owner and owner's spouse (with ability to designate that spouse receives a lesser percentage annuity payment, or 100% of the primary NIRA's benefit amount). Any amount of the NIRA not annuitized remains subject to new RMD rules.

Required minimum distributions for heirs:
  - Spouse may rollover into his/her own NIRA, if done within 12 months of death of the IRA owner.
  - If spouse does not rollover, must be distributed within 5 years of death of NIRA owner. At any time during that period of time.
  - For all other heirs, must be distributed all within 5 years of death of NIRA owner. Up to heir when this is done.
  - If not an individual heir (such as a charity), must distribute all within 12 months of death of the NIRA owner.
  - Inherited NIRAs are subject to claims of creditors.
  - Use of irrevocable trusts for distributions of inherited NIRAs permitted, but distributions to same must all occur within 5 years of death of NIRA owner.

Protection from creditor claims:
  - For U.S. bankruptcy law purposes, up to $2,000,000 total for all accounts (to be adjusted for inflation), regardless of whether "contributory" or "rollover"
  - For state law purposes (outside of bankruptcy context)), exemptions are dependent upon state law

Roth IRA option:
  - None. U.S. Treasury loses far too much money by providing the Roth IRA tax benefit. We need to "balance the budget."
  - Existing Roth IRAs grandfathered during life of participant, but must be fully distributed to heirs within 12 months of death of the participant.

Transfers (rollovers):
  - Permitted at any time, into any NIRA account established by NIRA owner (or by NIRA owner's employer)
  - No limits on how many transfers/rollovers may be done in any year.
  - Must be done via direct custodian-to-custodian transfers
      - Custodian-to-custodian transfers, electronically; or
      - If check issued by prior custodian, must be payable to new custodian

Fee disclosures:
  - Required quarterly.
  - Each investment must have ongoing annual fees estimated, and provided in the statement for the account. Such as in one-line summary following the listing of each specific investment.'
  - Since no third-party compensation to brokers, custodians, permitted, there will be no commissions, payment for shelf space, soft dollar compensation, etc. to disclose.
  - The annual expense ratio must include an estimate of the anticipated brokerage costs for transactions within the mutual fund or ETF or other pooled investment. And anticipated (estimated) securities lending revenue must also be included in the annual expense ratio.
  - Advisory fees must also be included - either in custodial statement, or in separate statement, quarterly.
  - Fee disclosures must include this statement (or something similar): "Academic research has revealed that, for highly similar investments, higher fees and costs translate to lower returns for investors. You should always ascertain if a lower-fee-and-cost investment option is available, as to investments that are substantially similar to each other."

Plan administrator fees.
  - None, because plan administrators are no longer needed.

Recordkeeper and custodian fees:
  - Per account basis, only. Flat fee per year, per account. No percentage fees.
  - May be deducted from the account, or paid by the employer (if an employer-sponsored NIRA)
  - Fee must be disclosed on custodial statements (quarterly minimum), or on separate quarterly document furnished by record keeper
  - Negotiated by the account owner, or in the case of an employer-sponsored NIRA by the employer (aided by the investment adviser, if one exists)

SOUNDS COMPLEX? NOT REALLY - WHEN COMPARED TO THE MAZE OF STATUTES AND REGULATIONS WE POSSESS, CURRENTLY.

This proposal for "New IRAs" or "NIRAs" will substantially lower the fees and costs of employer-associated retirement plans. It will eliminate tax traps for the unwary. It will prevent employees from taking loans from their NIRA accounts except when absolutely necessary. It will protect employers from undue liability, since only fiduciary investment advisers may provide recommendations to employers, and these fiduciary advisers can be held to account.





Friday, January 6, 2017

@realDonaldTrump: Support Corporations, U.S. Economic Growth & Jobs - The Fiduciary Rule



If President-elect Trump wants to supercharge the American economy, protect American business, create more small businesses, and create more jobs, he will support the U.S. Department of Labor's "Conflicts of Interest" (Fiduciary) Rule.

Let's face it. There is some over-regulation by government in our economy. However, some regulations are well-deserved, and can aid business and the economy. As related in the Federalist Papers #51, James Madison famously wrote: "[W]hat is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary."


Wall Street and the insurance companies have shown that they are no angels. They continue to tout their role, in commercials and other advertisements, as trusted "financial advisors" and "wealth managers." Yet, in reality, much of Wall Street just uses these masks to deceive and to sell highly expensive, often inappropriate investments to individuals who are working hard to save and invest for their retirement and other personal financial needs.


Wall Street is currently not required to act in the best interests of their clients. Hundreds of millions of Americans see their retirement nest eggs impaired by excessive intermediation - high fees, costs. And, as the trust of individual Americans is destroyed, they withdraw from participation in America's capital markets, altogether. 


Yet, there is a solution.


The 237 words that form the U.S. Department of Labor's (DOL's) "impartial conduct standards" is at the heart of the DOL's "Conflict of Interest" (Fiduciary) Rule. Like Madison, the DOL recognizes that some government is necessary. And it imposes upon financial advisers to retirement accounts a simple, elegant solution - adhere to the fiduciary principle, and act in the best interests of your clients. (The remaining parts of the rule just serve to accommodate some of Wall Street's business practices, at Wall Street's request; hence the length of the rule releases.)

The harm imposed by Wall Street's current "sell expensive investment products to everyone" is detrimental to the American economy, and detrimental to American business.

  • As the returns of the capital markets are diverted away from individual Americans - the owners of capital - to Wall Street, the accumulation of capital falls. This results in less accumulated capital for investment purposes - an effect that compounds over time with severe negative consequences for the long-term health of the U.S. economy. The cost of capital to corporations increases. Innovation, without capital, equates to missed opportunities for economic growth.
    • (Indeed, Wall Street hurts itself, in the long run. If Wall Street's greed - in the form of high fees and costs from expensive products pushed upon our fellow Americans - was constrained, much great capital would exist in later years to manage. In essence, Wall Street extracts high fees today, preventing greater accumulations of savings and investment accounts. If the fiduciary standard were imposed and Wall Street's fees had to be simply "reasonable," greater accumulations would occur in investment accounts. Within years Wall Street would have much more to manage, albeit at at lower fees. Yet, Wall Street would be making just as much money. And America would be far better off.)
  • American business owners prudently provide retirement plans for their employees. These plan sponsors receive advice from "retirement consultants" (Wall Street firms, insurance companies) on what funds to choose. Later, when plan sponsors are sued for including expensive mutual funds in their plans, the "retirement consultants" are often relieved of liability (hiding behind the low standard of "suitability"), while the business owner remains on the hook. 
  • Many studies have demonstrated that Wall Street's excesses impair U.S. economic growth and the formation of new businesses and jobs. As just one example: "[F]inancialization depresses entrepreneurship. Paul Kedrosky and Dane Stangler of the Kauffman Foundation find that as financialization increases, startups per capita decrease, in part because the growth in the financial sector has distorted the allocation of talent. They estimate that if the sector were to shrink as a share of GDP back to the levels of the 1980s, new business formation would increase by two to three percentage points. We have substantial circumstantial evidence to show that these trends have had negative consequences at the macro level: 'the influence of finance sector size on economic growth turns negative when financial services become too large a share of an economy and that high levels of financial activity crowd out investment and R&D in the non-finance sector.'" (Emphasis added.) From a Brookings Institute report by William A. Galston and Elaine C. Kamarck. (The Brookings Institute is a conservative think tank.)
All Americans deserve expert fiduciary financial investment advice, delivered for reasonable, professional-level compensation. But Americans don't deserve to continue to be victimized by conflict-ridden, deceptive sales practices. Similar to Wells Fargo's recent egregious practices for which they received so much disdain, Wall Street does not need to continue to use the perverse incentives within their firms that drive the sale of high-cost, inappropriate investment products.

President-elect Trump ... are you just another politician, who will take Wall Street's money and betray the faith of the individual American voters who elected you? Or are you, truly, a man who wants to make America great again - by encouraging greater capital formation, by assisting American business owners who desire to provide retirement security for their employees, and by encouraging the formation of new American businesses?


President-elect Trump - support the DOL's fiduciary rule. At its core, it is an elegant, 237-word solution to a longstanding problem. It will put America's economic growth back on the right path, both now and for the long term.


Supporting the DOL's fiduciary rule will help define your legacy as the champion of American business, and as the restorer of U.S. economic growth.


Ron A. Rhoades, JD, CFP is an attorney, financial planner, investment adviser, professor of finance, and author. (This post represents his views only, and are not necessarily those of any institution, organization, firm or group with whom he may be associated.) Ron may be reached at: ron.rhoades@wku.edu.

2017 Firm Visits, Presentations, Consulting

Louisville, Lexington, Nashville Firms: Are You Up for a Short Visit? Each year Prof. Rhoades takes 5 to 9 of his top B.S. Finance (Financial Planning track) students to visit financial planning and investment advisory, and investment services firms. The goal of these 1-2 hour visits is to introduce the students into the types of environments in which they might work and different practice models, and to provide them with ideas on different career paths in financial services. Visits typically include a brief tour of the firm, a discussion of the firm's mission, and then either a "Day in the Life of .... (a position in the firm)" and/or "Advice for Your First Year" and/or "Q&A." In the Spring of 2017 visits will be scheduled for the following dates / locations:

  • Tuesday, Feb. 14th: Louisville, KY (visits to be scheduled after Kentuckiana meeting which lasts from 9am-1:30pm that day)
  • Thursday, March 2nd: Nashville, TN
  • Thursday, March 30th: Lexington, KY

If you can contribute and host a visit, please e-mail Prof. Rhoades: Ron.Rhoades@WKU.edu. Thank you!

Meet Top Students from WKU at Upcoming Conferences/Symposia. Some of Ron's top students from Western Kentucky University's renowned Financial Planning Program (B.S. Finance) will join him at the following conferences and symposia. Hope to see you there!

Scheduled 2017 Presentations.  Join Prof. Ron A. Rhoades as he presents at the following conferences/symposia in 2017:
Desire a Speaker? To inquire about Ron speaking at your conference, symposium, or FPA Chapter meeting, please contact him at: Ron.Rhoades@wku.edu. Ron's suggested presentation topics for 2017:
  • Due Diligence for IRA Rollovers under SEC, FINRA and DOL Scrutiny
  • The Prudent Investor Rule: Exploring Its (Tough) Duties
  • Fiduciary Due Diligence: Investment Strategy and Investment Product Selection
Consulting Engagements. Ron also undertakes consulting to broker-dealers / RIA firms on compliance with the DOL Conflict of Interest (Fiduciary) regulations, including whether to utilize the Best Interests Contract Exemption, determining reasonableness of fees, and due diligence requirements under the DOL rules.

Sunday, January 1, 2017

My Financial Services Regulation Wish List for the Trump Administration

Dec. 22, 2016


1. Keep the U.S. Department of Labor "Conflicts of Interest" Rule. Why?
  • The core of the rule is principles-based. Only 237 words ... that's the Impartial Conduct Standards it applies.
  • It has already led to decreased asset management fees.
  • It has been shown that small investors can, and will be served, under a fiduciary standard.
  • Businesses large and small want the fiduciary standard - so they can rely upon the advisers to their retirement plans, and hold them accountable. No more plan sponsors left "holding the bag" as "retirement plan consultants" escape liability for their really poor recommendations under the inherently weak and ineffective suitability standard.
  • Many, many investment advisers are able and willing to provide such services, often aided by technology.
  • It will accelerate the trend away from arms-length product sales, and toward fiduciary-client relationships. Fiduciary status is justified given the high degree of information asymmetry, the necessary reliance by individual Americans on financial and investment advisers.
  • As trust in financial advisers grows, under a fiduciary standard, so does the rate of utilization of financial advisers. This is a good thing - as Americans need help to save more and invest more wisely.
  • It provides a foundation for financial and investment advisers to, eventually, become a true profession.
  • Greater accumulations of capital will result, as investment fees/costs come way down. In turn, this results in:
    • Greater financial security for Americans, as they enter and are in retirement.
    • Greater capital accumulation by Americans. And a lower cost of capital for corporations.
    • In essence, this "supercharges" U.S. economic growth. Greater capital accumulation provides the fuel necessary to transform innovations into new products and services.
2. Sunset B.I.C.E. after three years.
  • The DOL's Best Interests Contract Exemption is complex. Trying to accommodate commissions and other inherently conflicted sales practices, and fit them into a fiduciary-client relationship, is what causes the complexity.
  • As the years go by, B.I.C.E. may be interpreted so that its very tough requirements become weakened.
  • The industry is moving toward fee-based accounts. Good firms that understand how the fiduciary standard truly operates (e.g., Merrill Lynch, etc.) already have rejected the use of B.I.C.E.
  • It's best to permit B.I.C.E. for a limited period as a means of transition, then to sunset it.
3. Have the SEC alter how it enforces the Advisers Act.
  • If a person or firm holds out as a "financial adviser" or "wealth manager" or "retirement consultant" or "financial planner" or otherwise uses a title that evokes an adviser-client relationship, they should be held to the fiduciary requirements of the Advisers Act - at all times and without exception.
  • If the primary role of the person is to provide investment advice, rather than to execute transactions, the "solely incidental" exclusion to the definition of investment adviser should be applied properly and that person should be required to register as an investment adviser and to comply with the fiduciary duties arising from the Advisers Act.
    • Large amounts of broker-dealer advertisements suggest that advice is the primary component of the broker-customer relationship, and it is certainly understood that way from the standpoint of the customer.
    • The process of executing trades no longer requires the skill it took in the 1930's, due to the involvement of automated systems, and the improvements in market liquidity.
    • Registered representatives have been provided education on "trust-based sales techniques," without understanding that the formation of a relationship of trust and confidence with a client leads to fiduciary status under state common law.
    • The recommendation of another investment adviser should be subject to the fiduciary standard of the Advisers Act. This includes recommendations of separate account managers, as well as recommendations of mutual funds. (The doctrine of suitability was originally intended to shield brokers from liability when their primary role was in executing a trade for a customer; the doctrine should have never been extended to the recommendation of pooled investments.)
  • No more wearing of two hats. No ability to switch hats. Once you are a fiduciary to a client, your status as a fiduciary continues, and it extends to all aspects of the adviser-client relationship.
  • Estoppel and waiver have limited applicability to fiduciary relationships. Sect. 215 of the Advisers Act needs to be properly applied to prevent both "disclaimers" of core fiduciary duties and seeking client "waivers" of them.
  • The SEC must realize that, although the securities laws generally are based upon disclosures, the Advisers Act went much further. We have fiduciary standards because disclosures are largely ineffective. A huge body of academic research supports this conclusion.
  • Say what you do. Do what you say. A fiduciary steps into the shoes of the client, and acts - with all of the expertise required of a professional adviser - with total loyalty to the client's interests.
  • Let's not keep permitting "particular exceptions" (as the late Justice Benjamin Cardozo opined) to erode the fiduciary standard of conduct. Let's conform the industry to the standard, and not the standard to the industry.
4. Clean up mutual fund regulation.
  • Europe and Canada have stronger disclosures of mutual fund / ETF fees and costs than the U.S. possesses. We lag behind, again, instead of leading the way.
  • "Portfolio turnover" is measured incorrectly. It should not be the lower of sales or purchases divided by the fund's net assets, but the average of them. This important statistic - as the SEC now permits it to be calculated - can often mislead investors.
  • Require in all mutual fund / ETF advertising truthful comparisons to broad-based indexes. No more comparing active funds only against indexes that exclude index funds in their computations.
  • Do away with state-based and municipality-based retirement accounts. This is not the essential role of government.
5. Work to reduce regulatory overkill.
  • Every regulation on the books should be reviewed. Does it work? What is the burden of the regulation, versus its benefit?
  • Increase the number of RIA exams for verification of assets (i.e., custody); but decrease substantially the number of RIA exams for everything else. Investment advisers are professionals - treat us like such. And use the SEC's limited resources to combat the most egregious frauds.
  • Take a good hard look at FINRA. With hundreds of pages of rules, it still has utterly failed the vision of its creators - Senator Maloney and others - who sought to create an organization that would raise the securities industry's conduct to the highest levels. In fact, FINRA has opposed raising standards at every turn. FINRA embraces conflicts of interest at every turn, rather than seek to minimize them - even broker-dealer fines levied by FINRA become part of FINRA's budget (thereby lessening the fees assessed against broker-dealer firms!). Consider whether FINRA's oversight of market conduct regulation should be transferred back to the SEC, or snapped altogether.
Lastly, permit me to include an economic imperative in my "wish list." Invest in people - through education. The most effective intervention to promote long-term economic growth is that of expanding educational opportunities for all. Yet, financial support for higher education has diminished over time. This, along with increased federal regulatory mandates (requiring more administrative staff to comply with all the regulations), has led to high tuition costs and, as a result, huge student loan debt burdens.

Additionally, interference in primary and secondary education (mandatory testing, etc.) has created the perverse incentives ("teach to the test," etc.) that have diminished the quality of the education provided by dedicated teachers in our schools. Multiple-choice test questions encourage a focus on recognition via cramming for tests and exams. Students now focus more on the acquisition of test-taking skills for multiple-choice exam questions, rather than the acquisition of true understanding of concepts and long-term memory formation. From the standpoint of a college professor, students entering college lack critical thinking, writing, and verbal communication skills one would expect from a college freshman. While I willingly tackle the challenge of increasing these skills in my students, a better foundation in these skills before students enter college would lead to a better overall college learning experience.

As technological progress destroys many jobs, our society is in need of a more educated workforce - especially graduates of high-quality vocational educational programs. Let's invest in education, and reduce regulatory burdens imposed from above upon colleges, high schools, and primary schools. In so doing, empower America to meet the demand for the skilled jobs of tomorrow.

Ron A. Rhoades, J.D., CFP® is an Asst. Professor of Finance at Western Kentucky University's Gordon Ford College of Business, where he serves as Director of its Financial Planning program. This article represents his views, alone, and are not those of any institution, organization or firm with whom he may be associated. Follow Ron on Twitter: @140ltd. To contact him, please email: Ron.Rhoades@wku.edu.

Tuesday, December 27, 2016

Expand Your Comfort Zone


EXPAND YOUR COMFORT ZONE


(This is by far my most viewed post. I now revise and expand it. - DaBear, 12/27/16)

For several years now I have challenged my students to expand their comfort zones.

In this post I first describe the importance of stepping outside of one's comfort zone. Then I describe the concept of the “comfort zone.” I then detail the assignment provided to my college students. Thereafter follows a sampling of the student responses.


WHY IS STEPPING OUTSIDE ONE'S "COMFORT ZONE" SO IMPORTANT?

I suggest you watch this short video: Measuring Your Comfort Zone (Marcus Taylor at TedX / Melbourne) (5:50). As seen, continually expanding your own comfort zone leads simply to this - success, in all aspects of your life.

Here are some comments from my students who undertook these "Expand Your Comfort Zone" activities:

  • “Some students don’t really understand the point of these exercises. But, it’s teaching the confidence that you need to survive in the business world.”
  • “I never realized how much you could be missing out on when you stay within your safe day-to-day routine. Although not every experience was a pleasant one I still enjoyed all of these exercises.”
  • “I feel that doing things which are uncomfortable can make life more worthwhile.”
  • “I know some of these tasks might come by easy to some people, but they were hard ones for me. I realize that stepping outside your comfort zone not only builds strength, but it also helps you realize things about yourself you would have never known if you didn’t do the unusual.”
  • “I would do this project one hundred times over again.”

Here's a more immediate reason to tackle these challenges - for college students. Become an attractive graduate to potential employers! Strengthen your interpersonal skills – so that you will be more successful in securing jobs and internships, and more successful in your career (and in life, generally).

Taking action to step outside of your comfort zone distinguishes between those individuals that continually learn, develop and stretch themselves, ultimately leading to a more successful and fulfilling life, in comparison to those that don’t. Realize that college is not just about acquiring knowledge. Rather, college is also a time to learn or enhance social skills, overcome artificial barriers, obtain confidence, and learn to embrace all that life has to offer.


In summary, you will become a better person as a result of these activities; you will learn skills and adopt traits that will propel you to success in all aspects of your life.

WHAT IS YOUR "COMFORT ZONE"?
A person’s “comfort zone” is a behavioral state within which a person operates in an anxiety-neutral condition, using a limited set of behaviors to deliver a steady level of performance, usually without a sense of risk. Highly successful persons often routinely step outside their comfort zones, to accomplish what they wish.
Yet, for many persons, their own “comfort zone” serves as a limitation on experiencing all that life, and relationships, have to offer. Indeed, a comfort zone is a type of mental conditioning that causes a person to create and observe various mental boundaries. Such boundaries create a sense of security. Like inertia, a person who has established a comfort zone in a particular axis of his or her life will tend to stay within that zone without stepping outside of it.
To step outside a comfort zone, a person must experiment with new and different behaviors, and then experience the new and different responses that then occur within their environment. Those that expand their comfort zones grow as persons to fill out the new boundaries of their expanded comfort zone.
Persons who possess a larger comfort zone, and who continue to “push out” the edges of their comfort zone, really do enjoy life more and they grow as an individual. They have more experiences, undertake more learning, possess deeper relationships with others, and acquire more wisdom.

EXPAND YOUR COMFORT ZONE: THE DISCUSSION BOARD POSTINGS
I request that each of my students choose several activities that "expand their comfort zone.”   Students are asked to complete one activity every other week during the semester.
Each student then posts their results to a Discussion Board via a short essay that answers these questions:

  1. What activity did you do?
  2. How did you feel about the chosen activity, before you undertook it?
  3. What was the result of the activity? And, did the activity truly challenge you?
  4. How did you feel about the activity, after you undertook it?
  5. Would your recommend the activity to others?
  6. Is there anything you would do to change the activity?
Students also are required to comment upon (in a supportive or constructive manner) another student's Discussion Board post. Because we learn not to judge others, but rather to support each other as we tackle these challenges.


THE EYCZ EXERCISES

(Over time, new activities have been suggested by students, and as a result the list has expanded from its original 20 activities. Here's the current list:)

1. Create Your Own “EYCZ” Activity. It must be an activity that scares you. (It does not matter if the activity is something that would not scare anyone else.

  • For example: Some students have never driven on the interstate highway before, or driven on a highway in a large city (such as Nashville); they accept the challenge to overcome that fear.

2. Attend the PEAK “Etiquette Dinner.”  Students really, really enjoyed this, last semester. It’s a fun time, and you’ll learn important skills that will give you confidence when a future employer asks you out to lunch or dinner. Usually held in April of each year.

3. Attend the PEAK “Perfect Your Interview” Program. Professionals from the Bowling Green community will come to campus to conduct mock interview sessions, providing feedback on your answers as well as nonverbal behaviors. Students will need to make appointments for the 30-minute sessions.


4. Undertake to Possess a “PERFECT” Resume.  Have 10 family members or friends review it. Then schedule an appointment (30 minutes) to have it reviewed by the Gordon Ford College of Business Professional Development Specialist. Then submit your “Perfect” resume to Dr. Rhoades (and also do a blog post about this activity, and comment on another student’s post).

5. Schedule an Appointment to Discuss Internship and/or Job Shadowing Possibilities with the Gordon Ford College of Business Internship Coordinator.

6. Attend the Gordon Ford College of Business Job Fair. 

  • Date: February 15, 2017 from 1PM to 4PM CST
  • Location: Downing Student Union 3rd Floor, WKU's Bowling Green Campus
  • Details: Students and Alumni from the College of Business will be in attendance, as well as employers
  • Dress up!
  • Have your resume with you! Preferably, have a “portfolio” (leather bound pad) with you.
  • ATTEND THE JOB FAIR EVEN IF YOU ARE NOT YET LOOKING FOR AN INTERNSHIP OR JOB. Interview employers. Find out what employers are looking for, when they come to a Job Fair. Ask them what makes candidates “stand out.” Ask them what they would recommend to college juniors/seniors, in terms of preparing for a career.

7. Review Your Career Path. Most persons do best in (and enjoy) careers for which they possess an aptitude. Each of us has different strengths. As a result, some career choices better “fit” each person.

  • FIRST: Take the free online Myers Briggs test, found at: http://www.humanmetrics.com/cgi-win/jtypes2.asp. What is your personality type (4 letters, such as “ENFP”). Now Google search for your four letters plus the word “careers.”  (Ex: ISTJ careers).  Look at several different web pages. Write down a list of various careers that you find appealing, and that match your personality type.
  • SECOND: Since no personality test is 100% accurate, it is best – especially with the important decision of choosing (or confirming) a career path – to further delve into your strengths and aptitudes. Fortunately, WKU has the free resources for you.  MyPlan is a website that helps you narrow your career options. By taking a few assessments that'll take in your preferences, personality, skills, and interests a quick and awesome list of suggestions will be the result that'll guide you to a successful career. Visit http://www.wku.edu/career/services/myplan.php - sign in and complete the assessment, and print and review the report. 
  • NOTE: If you remain uncertain about your choice of career, you might:
    • Consult with a WKU Career Counselor. To schedule an appointment, visit http://www.wku.edu/career/services/talk_to_a_counselor.php.
    • Speak to a professor in a major associated with one or more of your possible careers.
    • Reach out to WKU alumni, or others, who work in the fields you are interested in. Ask to interview them about their experiences, what a “day in the life” of their job is like, what they enjoy most (and least) about their jobs, and seek out advice they would have for a college student.
  • To gain points, now write a post on the Discussion Board. (See instructions, above.) And review and comment on other students’ posts.

8. Join a Club or Organization; Attend At Least One Meeting. Your goal here is to join a club or organization to which you currently don’t belong, and attend the entirety of one meeting. You are NOT required to continue membership, but if you like the club or organization you should do so. It’s a great way to make contacts, and membership in organizations helps to “complete” your résumé. For more information on student organizations, visit https://www.wku.edu/sao/registered-student-orgs.php.

9. Take a Professor to Lunch. The “Dutch Treat” rule applies – i.e., each person pays for his or her own lunch. Agree to meet at the professor’s office, and/or at a WKU eating facility.

  • Hint: Da Bear likes to eat lunch at RedZone, in the Downing Student Union. Just email him and suggest dates/times.

When scheduling a lunch meeting with a professor, have in your mind several questions to ask. For example, ask questions relating to careers, or advice on how to best find an internship or job, for example. Ask about the professor’s background.

  • Further hint: Read the professor’s bio, as posted to his/her WKU web page. For example, https://www.wku.edu/business/staff/ron_rhoades. Also do a “Google search” about anyone you will be meeting with. This is a good tip for the business world, as well. Find out about those who you interview with, or who are prospects that you will be meeting with.

10. Establish 3-5 “S.M.A.R.T. Goals” for this Semester. After adopting them, schedule a reminder on your smart phone to record, each week, your progress toward them. Then post to the Discussion Board a brief essay about the goals you adopted, and your progress toward achieving these S.M.A.R.T. Goals.

11. Participate in a Field Trip. This might include attending an industry conference or symposium, visiting a firm (with a group of other students), or some other field trip that is sponsored by any of the Departments in the Gordon Ford College of Business. During the field trip you must have a conversation with someone you don’t know, and learn about them.

12. Apply for a Nationally Competitive Scholarship through WKU’s Office of Scholar Development (OSD). Visit http://www.wku.edu/osd/. You need not win, but you must undertake a good faith effort to complete and submit the application for a competitive scholarship. Describe the process of applying for the scholarship, and the assistance you received from OSD, in your essay.

13. Give at least three people compliments on any day, when you normally would not (counts as one activity). At least one compliment must be given to a person of each gender.

14. Smile at (all) strangers, and say “Good morning” or “Good afternoon” or “Hi” to all the people you pass by, for one entire day – and wherever you are!

  • Better yet – the Gordon Ford College of Business sponsors “Smile, Greet & Engage Days” this Spring. Participate by following the instructions for this event.

15. Get to sleep (bed) one hour earlier for four nights straight, and at the same time each night (this counts as one activity). Document how you feel each of the following days.

As a suggestion, on your smart phone schedule a reminder for your “bed time” – i.e., to remind you to begin preparation to go to bed.

Also, consider downloading a “sleep aid” app for your smart phone. Search the app store for your type of phone by just putting the word “sleep” in the search function.

16. Speak up in a class – when you normally would not. Ask a question or comment upon a statement made by another, or answer a question, voluntarily. (If you are required by your professor to answer a question, give a presentation, or if you are given an assignment that requires your participation, this does not count for points in this class. However, if you are not required to speak up or give a presentation or answer a question, this will count – even if general “class participation” points may result in your other class.)

17. Thank a friend or family member for their ongoing support. Call them up, or see them, and express gratitude for all they have done for you. Warning … this is a powerful exercise! The results will likely surprise you!

18. Tell a friend they are loved. The person you tell should be a friend, but must not be your boyfriend/girlfriend/spouse, or someone you hope will become one of the foregoing.

19. Let go of your self-judgment for a day. And do something others would never think you would do. Feel good about yourself. If others think ill of you – they do not matter; they are no longer part of your personal universe.

20. Perform on Karaoke night. It’s not that hard! “Just do it!”

21. Join a new organization in the Bowling Green community, and/or undertake volunteering in our community.

22. Show three friends or acquaintances a YouTube or other video (such as a TedX presentation) on some aspect of self-improvement.

23. Attend a Gordon Ford College of Business guest lecture or presentation. This should be a presentation you are not required to attend, nor are seeking credit for, in any other class. The speaker must be an “outside speaker” – i.e., not a faculty member nor anyone else employed by WKU.

24. Find someone who is sitting alone for lunch or dinner or breakfast one day, and ask to sit with him or her. Interview him or her. Find out who they are. Do they like WKU? What do they like most? What would they change, if they could? Are they involved in any organizations? (If they are not – suggest one or more organizations to them.) Also, possibly (but not required): Explain to them the “Expand Your Comfort Zone” activities. Follow-up with an email or social media post to them, with a link to a video, or an event, or just a “thank you.” Or, better yet – ask the person to join you and a group of friends in going to an event or undertaking an activity.

25. Sign up for, and participate in, WKU's Dynamic Leadership Institute. Known to many as DLI, this program is designed to teach students the interpersonal skills and knowledge needed to engage in various leadership roles on campus, within the community, and in their futures.  Each of the four phases allows the student to view leadership from different perspectives and provides opportunities to examine and enhance their skills. DLI is not for academic credit, but rather for self-exploration and personal development.  DLI is a 6-week, 1-hour per week commitment per semester. Submit your essay to the Discussion Board on Blackboard within 1 week of your completion of the DLI program, and you will receive up to the maximum extra credit for this two-week period. (Also, comment upon another person’s submission, as set forth above.)

26. Attend “Project Affect” and Join in Undertaking Community Service. The WKU ALIVE Center for Community Partnerships and the WKU Student Activities' Leadership & Volunteerism sponsor an awareness event called Project Affect. Project Affect is a campus and community engagement fair that offers information on how to get involved through service, as well as engages visitors in hands-on activities reflective of different causes. Approximately 600 students participated last year. Visit http://www.wku.edu/alive/meaningful-service/project_affect.php to learn more. Choose a community organization or campus organization to participate in. After providing service, write a 250 word or greater essay about your experience.

27. Unplug your t.v. and video games for one entire week. Many, many of my students choose to undertake this activity during the semester. The results are often very, very surprising!

28. Turn off your “smart” phone for one entire day. Before doing this, let your family and friends know that you will be “disconnected” for an entire day, so that they don’t worry about you.

29. Disconnect from Facebook and all other social media for two entire days.

  • Hint: To do this well, delete your social media apps from your smart phone during this period of time.
  • Hint: Post to others that you are disconnecting from social media for two days, first!

30. Use the Writing Center on-campus (or online) for assistance in reviewing the draft of an essay or paper. Make an appointment before you go!

31. Do your math homework in the Math Lab, seeking assistance when needed.

32. See a professor, in-person or via a Skype call, for guidance on “how to do better” in a particular class, or on a particular assignment or test or exam.

33. See a professor, in-person or via a Skype call, for tips on career paths and/or “how to best network to find jobs or internships.”

34. Obtain counseling at the student health center - to talk through a problem, or to seek ideas on how to relieve stress. (If you do this and don’t want to post to the Discussion Board, just send an e-mail to Dr. Rhoades setting forth that you attended a counseling session, and just indicate whether or not the session helped you. Dr. Rhoades will then provide you with credit for this activity. You don’t need to provide any details.)

35. Apologize to someone you have done wrong to, and/or admit to another that you were wrong – in person or over the phone or via Skype.

36. Write a “personal log entry” in which you forgive someone for a wrong done to you. Let go of bitterness and anger. Let go of a grudge. (Whether you choose to communicate your forgiveness to the other person is up to you, and dependent upon the circumstances.) Warning: This can be a powerful activity!

37. Undertake a new activity to “get in shape” – for two weeks straight. For example, the activity might involve a 1-3 mile walk or run every other day, or going to the gym for 3-4 days a week.

38. Change your eating habits for the better – for one solid week.  To do this well, keep a personal log of everything you eat, each day, for seven days straight.

39. Perform three “random acts of kindness” in one day (counts as one activity). For ideas on random acts of kindness you might undertake, Google search the term “random acts of kindness.” There are many random acts of kindness you can undertake that don’t involve you spending money on someone else!

40. Change your group of friends (i.e., don’t “lie down with dogs, or you will get up with fleas”). Or disassociate yourself over time from one friend who tends to drag you down.

41. Post a “success tip” once a day, each day, on your dorm room door or another place on campus, or at your place of work, or on your social media page, for five straight days. Make certain you indicate in your identity, such as: “This success tip provided courtesy of (your name).” Describe in your essay the reactions you received, and how each posting (or the reactions to it) made you feel.

42. Say “YES” to an activity another person, or group of persons, invites you to join in. Don’t be a “no” person all of your life. Say “yes” to going to an event, or engaging in an activity, that you otherwise would not do. “JUST DO IT!” (Of course, be safe!)

43. Interview a role model. Interview an elder or role model (parent, grandparent, neighbor, professor, academic advisor, etc.) about their life at your age, the decisions and struggles they faced, key success tips that helped them to get through their challenges, what they would do differently, etc.

44. Run for an office in WKU student government.

45. Seek out a leadership role within a student organization.

46. Download a “gratitude” app, and record what you are grateful for, daily. Just five minutes daily is all it takes to rewire your brain and unleash everything great in your life – and it starts with Gratitude! By practicing awareness of the positive things in life, we fight off the brain’s natural tendency to scan for and spot the negatives. As a result, we train our brains to be more positive and thus happier. A “gratitude app” – or just keep a “gratitude journal” – can change your life! Do this for seven days straight, and see what happens!

47. Create your own … “My Book of Possibilities.”
      The Book of Possibilities is inspired by the movie "Last Holiday" starring Queen Latifah, in which the protagonist owns a "Book of Possibilities."
       The purpose of this project is to have a binder filled with one's motivations and passions. You could bring this binder to job interviews. This show of initiative and creativity brings a unique impression to potential employers.
      Elements of the book might include:
             • Your biography
             • Your vision statement. In formulating your personal vision statement, you might seek to answer the following questions.
                    o Imagine you are in an elevator, headed for the 5th floor. The person riding the elevator with you asks: “Tell me a little bit about yourself.” In the space below. write down a 20-second speech that describes who you are, presently, and/or what you hope to achieve. (For more guidance as to what you might say, Google “elevator speech”.)
                   o Describe your desired last job in your career. Where will you work (geographically, type of firm or company)? What is the job’s title? What are the job’s functions? How many hours a week do you work? How many vacation days do you take each year? What do you most like about the job?
                   o Describe the job you desire to possess five to ten years after you graduate from college. Answer the same questions as above. Also, how does this job prepare you for the desired last job in your career?
                   o Imagine you just started your first job in your choice of career.  On your first day, your manager asks you, over lunch: “If we were sitting here five years from now, what would have had to occur, in both your professional and personal life, for you to have considered those five years a success?” (This is known in business circles as the “R-factor” question.)
            • Your personal characteristics and qualities - what separates you from everyone else.
            • Your own "bucket list" – a personal story that you and sets forth what you want out of life.
                   o TO ASCERTAIN YOUR OWN BUCKET LIST, ANSWER “THE FIVE-YEAR QUESTION”: “If a doctor told me that I had five years to live, and during that time I would be as healthy as I am now, what would you want to do or accomplish so that – at the end of your life – you had no regrets?”
                   o (For purposes of this question, assume – if you have or are planning to have children – that your children are fully grown, on their own, and financially stable.)

STUDENTS’ ESSAYS - EXCERPTS.  The following are quotes from real student essays about these exercises:
Attend an Event. “I went to the basketball game on campus Thursday night. I usually don’t go to games; it turned out, however, to be a lot of fun. I went with some friends and we were cheering and getting loud. It was a very good experience.”
Compliments. “I gave several people compliments. A lot of people would smile back and say thank you, and others also responded with a compliment. I’m glad that I actually gave people compliments, rather than just keeping them to myself like I usually would. I’m going to start doing it more often, because it’s a ‘win-win’ situation that makes everyone a bit happier.”
Compliments.  “This exercise made me realize that giving someone a compliment can change a person’s whole mood for the day – and mine as well.”
Eat Something Different. “I am a very picky eater, so this one was a big one for me. My friends were constantly trying to get me to eat different things, but I never did. So I let my friends pick what I had to eat for dinner one day. I ended up hating it, but I am now open to trying different things. I have agreed to let my friends pick one new food item a week that I will have to try.”
Forgive a Person for a Wrong Done to You.  “In middle school I was bullied very badly. Oddly enough I became very close friends with the girls in high school, but I never forgave them for the way they treated me. I decided to finally forgive them. I didn’t actually say anything to them, but it gave me peace knowing that I can put behind me the things they did. This is a lot of the reason I have problems with self-judgment. The fact that I have forgiven them has given me more confidence. I am very proud of myself, as I have let go of something that has been eating away at me for years.”
Forgive a Person for a Wrong Done to You. “I wrote an entry in my journal forgiving someone for doing me wrong. This was probably the hardest of the seven activities for me to do. I wrote a note to my ex-boyfriend, who completely ruined my life for a good month or so. I felt relieved once I wrote it, though. Now it is just something in the past.”
Join a Club or Organization.  “A friend asked me if I would like to be part of the Outdoor Recreational Club on campus. I have never done the things they don on their trips, so I was thinking in my head that it would be a bad idea. But then I realized that I needed to do it for exactly that reason. I am now a part of the club and I learned how to do some indoor rock climbing. Although I am not extremely good at it, I am glad that I went out of my comfort zone. I am going to get to experience some great trips with a great group of people and I am very excited.”
Karaoke.  “On Wednesday night my girlfriend’s family took out their karaoke machine after we all had dinner. I am normally very nervous and do not sing. However, this time was different. I picked up the microphone and sang ‘Love Me Do’ by The Beatles. This was definitely out of my comfort zone, but it was accepted and we all had a great time.”
Let Go of My Self-Judgment.  “Today I decided to let go of my self-judgment. This was actually pretty hard for me, because I tend to care a lot about what everyone else thinks of me. I decided not to put makeup on and to wear sweatpants (which others would never think I would do). Everyone seemed to look at me differently because they were not used to it, but on this day I just didn’t care what people thought (which was pretty tough). At the end of the day nothing changed in my life. I still had the same friends. I no longer feel I have to be anybody else besides myself, just to impress someone.”
Random Acts of Kindness. “Today I ran into my friend while she was working behind the help desk at the student activity center. She was complaining that she was hungry. I then went down to the vending machines outside the weight room and bought her a bag of combos to surprise her. She was so excited.”
Random Acts of Kindness. “Over the past three days I have held the door open for multiple people, helped someone pick up things that they dropped, and assisted a friend with homework. I found that after each time I helped someone else, that person seemed to really appreciate my help and kindness. This also helped me talk to new people.”
Seek Out Assistance.  “One day this past week I had trouble with my homework, so I decide to go to the math lab. I have never been there before, and I was kind of scared. I don’t like to ask for people to help me, even if I really need it. When I went there I was actually surprised I went in (and it didn’t even kill me). I was proud of myself for going outside of my boundaries to do something I would have never thought of doing before.”
Sleep. “On three nights, I went home and got ready to go to sleep a couple of hours before I normally go to sleep. I decided to leave early instead of staying on at my friend’s townhouse handing out. Going to sleep earlier made me feel very good the next day because I felt well-rested and had a lot of energy. It felt good.”
Sleep. “Going to bed an hour earlier was probably one of the harder things I chose to do. As it is I tend to be in bed by 11pm every night. But I did it, and the extra hour made me more alert in class, at work, and also made me happier and more hyper! I believe if I were able to do this every night, at least during week nights, I could end up with better grades and accomplish more within each day.”
Sleep. “I always seem to be tired during my classes and tend not to focus that much. So I went to bed an hour earlier, for four days straight. This helped after a couple of days. It felt great not to feel so gloomy each day from being overly tired.”
Smile and Say ‘Hello’ to Strangers.  “Wednesday I decided that I would greet everyone I walked past in the hallway. I mostly just said a simple ‘Hello’ to most people, but I think just that alone can brighten up someone’s day and make it better. This also made me feel better because I felt like I was meeting more people on campus.”
Speak Up in Class.  “I spoke up today in class, when normally I would not. I don’t tend to answer questions in class, just in case I get the answer wrong or in case someone doesn’t like what I have to say. Finally speaking up made me realize that it is o.k. to get the wrong answer, and if you do then your professor will likely explain it more fully to you. I realized also that I don’t always have to try to figure out everything on my own; when I get stuck, it’s o.k. to ask for help.”
Speak Up in Class.  “I did this, and I then found myself much more interested in what my professor was saying to us. It forced me to listen to what he was saying and enabled me to understand more of the material he was going over. It made me feel very accomplished and gave me some extra self-confidence. For once I wasn’t the student in class everyone thought was just there because attending class was mandatory; I was there learning.”
Speak Up in Class.  “Today for the first time all semester I was talking and answering questions during my macroeconomics class. This actually made me feel really good, because I answered most of the questions correctly. That gave me confidence for the rest of the day.”
Study Group.  “I spoke to a few of my peers bout not understanding the material in class and gathered three people to join in with me to start a study group. We read over the chapters and studied for tests together. We recently had a test and we all did fairly well on it. I enjoy being in a study group rather than studying alone.”
Tell Someone They are Loved.  “One of my friends has been in a tough relationship for a few years now. I’ve been with her through all of her ‘ups’ and ‘downs.’ So this week I went to visit her and told her how much she was loved and by so many people. We both got very emotional, and she said to me: ‘Thank you. No one has ever said that to me, and I think I really needed to hear that.” This made me pleased, with the knowledge that I helped a friend.”
Tell Someone They are Loved. “I’m not the type of person to express my feelings, so this activity was a hard one for me to accomplish. A friend of mine has really helped me out a lot with college. This week I told him how much I appreciate it, and that he means a lot to me and is a great friend. He appreciated it, and it made us closer as friends. It was awkward and hard to say, but in the end it was a great thing to do.”
Thank a Family Member or Friend for their Ongoing Support. “Tonight I decided to thank my mother for her ongoing support. She raised me and my three brothers by herself, and I know it was not easy (especially with her disability in her back). She always put us first though. I called her and thanked her for this, and told her how much I love and appreciate her. She was so blessed and caught off guard. It felt good to make her smile and be happy. This makes me feel loved, but it is more the knowing that it made my mother feel appreciated that made saying it all worthwhile.”
Thank a Family Member or Friend for their Ongoing Support.  “For as long as I can remember my grandmother has been my only source of real support. No matter what my dreams were, my grandma would always tell me I can do it, that she believes in me. This week I decided to thank her for that. Even though I have thanked her more times than I can count I decided to come up with something elaborate to say to show her how much it has truly meant for me. I called her and thanked her by reading what I had prepared and she started to cry; then I started to cry. That was not really the reaction I had anticipated, but it showed me that I truly conveyed to her how much she has done for me and how much she means to me. I felt so relieved and happy afterward. She is my best friend and it means the world to me when I make her proud.”
Unplug the T.V.  “I did not watch t.v. for an entire week. I have to admit I thought it was weird, but after the week I realized that not watching t.v. gave me more time for school work and ‘me time.’ My t.v. is still unplugged and probably will be for awhile.”
Some Closing Thoughts from Students.
“I have realized that the only thing stopping me from engaging in new experiences was me. I tend to judge things without even knowing that I am judging them. I’m glad that I got a chance to leave my comfort zone, and I plan on doing many other things that I don’t usually do.  These activities were very beneficial to me.”
“I have realized that if you go out of your way to do at least one nice thing for another, you accomplish a lot and feel even better about yourself. I also found that asking for help is o.k., even if you feel uncomfortable doing so; in the end it will help you out – trust me on this.”
“I’ve realized that I, personally, am capable of achieving a lot on my own. And that’s worth embracing.”
“I have realized that there is a lot I can do in my everyday life to make others happier and for them to have better days. I get a better day too! It’s just a big ‘win-win.’”
“I have realized that probably three of the most important things are to try new things, let people know you appreciate the things they do, and to let go of grudges.”

MY OWN CLOSING THOUGHTS.
The students’ essays demonstrated that these exercises can change students’ lives for the better – including possibly increasing their attention to their studies. I continue to believe that we must not just speak to our students about developing good habits in all aspects of their lives, but actually permit them to expand their horizons through a series of exercises designed for this purpose.
From my observations many of the basic skills which seem to be so self-evident to us, as professors – such as the ability to greet others we pass by every day, give compliments to others, express gratitude to others, and to forgive others – are just not part of the vocabulary of these students. And many students, at least at first, do not fully understand that college is the perfect place to expand their comfort zones and to improve as an individual. This is particularly so for students who are shy – and a good proportion of the student population displays tendencies of shyness.
At Western Kentucky University's Gordon Ford College of Business, we have launched "Smile, Greet & Engage Days" each semester. Because learning how to better connect with others is just as important as the theories and knowledge instilled from other lessons.


Dr. Ron A. Rhoades serves as Director of the Financial Planning Program at Western Kentucky University's Gordon Ford College of Business. He may be reached via e-mail: ron.rhoades@wku.edu.

For more of Professor Rhoades' writings on how to succeed in college (and in life), visit www.triumphincollege.blogspot.com

Monday, December 26, 2016

How to Choose a Financial/Investment Adviser: A Checklist for Consumers

The following is one of my most popular blog posts, updated 12/26/2016 to emphasize the necessity for thorough diligence in one's search for an advisor and to provide further insights.

BE AWARE that there are many, many advisers who profess to offer "objective" or "trusted" advice, but who don't operate as fiduciaries. And - due in large part to a weak U.S. Securities and Exchange Commission application of the fiduciary requirements of the Investment Advisers Act - even those who are required to be "fiduciaries" by law often "disclaim away" their fiduciary obligations, or seek client "waivers" of core fiduciary obligations.

In other words, even if your adviser says "I am a fiduciary" and/or "I act in your best interests" - you need to DIG DEEPER!

This article, and checklist, can be utilized by consumers to TEST their current financial or investment adviser. Or, it can be utilized as consumers shop for an adviser. Good luck with your search!

NOT ALL "FIDUCIARY" INVESTMENT ADVISERS, FINANCIAL ADVISORS, WEALTH MANAGERS, AND/OR FINANCIAL PLANNERS PRACTICE AS TRUSTED ADVISORS

Several readers have asked me for a list of questions which consumers can ask, when interviewing a financial or investment adviser. In forming this checklist, I emphasize that the chosen adviser should, at all times:

  • function in a fiduciary capacity, AND
  • without any waiver or disclaimer of their fiduciary obligations, AND
  • possess the requisite knowledge to provide financial planning and/or investment advice as a true expert.
Consumers should realize that some who call themselves “fiduciaries” don’t actually practice in such manner. For example, they may take additional compensation from third-parties, in situations where client harm results – an indefensible practice in my view. (The academic research is clear - all things being equal, higher product costs result in lower returns for investors. And additional compensation paid to product salespersons - whether it be from 12b-1 fees, payment for shelf space, soft dollar compensation, or other revenue-sharing practices - results in higher product costs.)

Other advisers "disclaim" away their core fiduciary duties. Fore example, many "fiduciary" advisors state that they don't provide tax advice in any form - even though a tax-efficient investment portfolio is one of the many keys to long-term success for their clients.

Hence, I suggest additional questions consumers can, and should, ask of their current or prospective financial and/or investment adviser.

[Preliminary note: The term “adviser” and “advisor” are used interchangeably. Technically a “registered investment adviser” is spelled that way, while in current United States English the spelling “advisor” is more often seen. Over the last decade the American usage has been migrating to "adviser."]

CONSUMERS - ASK YOUR PROSPECTIVE OR CURRENT ADVISOR THESE QUESTIONS!

With the increased availability of bona fide fiduciary investment advisers and financial planners available today, I urge consumers to choose only those “financial advisors” (also called “financial consultants” or “financial planners” or “investment advisers” or “wealth managers” – and similar terms) who can answer ALL of the following questions correctly.

Moreover, consumers should ask their current adviser these questions. Many, many consumers falsely believe that their current financial adviser is acting in their best interests, and as a fiduciary, when such is not the case. In fact, nearly a third of consumers in the SEC’s 2008 Rand Study thought that their advisor received no compensation at all when in fact the advisor was receiving generous compensation from third parties, undisclosed to the client!

BUT FIRST, UNDERSTAND THE IMPORTANCE OF THE REASONABLENESS OF THE TOTAL FEES AND COSTS PAID

I emphasize attention to fees in this checklist. Why? First, because fees and costs are, to a large degree, controllable. Second, a tremendous body of academic research compels the conclusion that the higher the fees and costs, the lower the returns for the investor. Moreover, over a long period of time even paying 1% a year more than necessary can result in an accumulation of wealth far below that of other investors not burdened by such an incremental fee.

This does not mean, however, that knowledgeable, expert financial and investment advisers shouldn't be well-paid. It takes years and a great deal of study to acquire the knowledge and skill possessed to assist clients to identify, prioritize, and achieve their financial goals. Navigating the intricacies of the capital markets is difficult and requires substantial expertise. Expert fiduciary advisers should be rewarded with professional-level compensation. And truly expert fiduciary advisers can add value.

SECOND, READ AND UNDERSTAND THE ADVISOR'S INVESTMENT STRATEGY DISCLOSURES

It is important for each investor to be completely comfortable with the investment strategy recommended by the adviser. That investment strategy is disclosed in a registered investment adviser's Form ADV, Part 2A (which is often available on the web site of the investment adviser, or is available upon request, or which can be obtained via the Investment Adviser Public Disclosure web site.

I believe most individual (and institutional) clients possess a reasonable expectation that the investment strategy which is recommended satisfies the due diligence requirements under the “prudent investor rule.” In this regard, the adviser should submit to the client, upon request, the evidence (either academic research, summarized, or back-testing in an objective manner) which supports the proof that the requirements of the prudent investor rule are met.
  • NOTE: The prudent investor rule (PIR) is a very tough standard. It requires the construction of a portfolio that emphasizes diversification in order to minimize idiosyncratic risk (also termed "diversifiable risk" or "non-systemic risk"). The PIR also requires that the investment adviser not waste the client's assets; in general, a lower-cost investment product that achieves the same objectives is required to be chosen over a similar higher-cost investment product. In this author's experience, many financial advisers either do not understand the requirements of the prudent investor rule, or they simply don't undertake the requisite due diligence (on both investment strategies, and investment products) to adhere to it.
This does not mean, however, that all investment strategies must meet the prudent investor rule.
  • The Department of Labor applies the PIR to ERISA-covered accounts, such as 401(k) and a few 403(b) accounts. Effective April 10, 2017, the PIR also applies (in most instances) to all types of individual retirement accounts (IRAs); however, challenges to such rule exist in both the courts and in Washington, D.C.
  • It is possible that a client may desire a more aggressive, or less aggressive, investment strategy be utilized - that does not meet the requirements of the PIR. Or a speculative strategy; perhaps one based upon the adviser's qualitative macro-economic analysis. Investment strategies flowing from qualitative analysis are difficult to "back-test" - and nearly always cannot be supported by quantitative academic research.
In fact, only a few specific investment strategies for an overall portfolio (or for the equity or fixed income or other parts of a portfolio) likely currently meet the prudent investor rule – at least to level of the Daubert standard under which an expert witness would be able to testify to that effect in court.

Hence, when a strategy is utilized which does not meet the dictates of the prudent investor rule, the additional risks inherent in such strategy should be disclosed to the client, and the potential rewards also explained. Such an explanation should be thorough, in my view, given the importance of this issue.

THIRD - MAKE CERTAIN TO OBTAIN THE ANSWERS TO THE QUESTIONS BELOW IN WRITING.

Don’t take any excuses here. As a consumer, it is very difficult to later prove what is not in writing. Require your (prospective or current) financial adviser to place his or her answers to these questions in writing. If they don’t or won’t, chances are they have something to hide, and don't want to reveal the truth about their practices.


If you cannot obtain the answers to these questions in writing, then just walk away!


CONSUMER CHECKLIST: EIGHT QUESTIONS TO ASSIST YOU IN FINANCIAL AND/OR INVESTMENT ADVISOR SELECTION (WITH COMMENTARY)
  1.  Are you a fiduciary under the law, and will you continue to be my fiduciary at all times during the adviser-client relationship we will enter into, and with respect to all of my accounts with you and all of the advice you provide to me?
Mandatory response – “Yes.”  

If the adviser is unwilling to act as a fiduciary to you – i.e., meeting the standard of due care as an expert adviser, acting with the highest degree of loyalty to you and in your best interests at all time, and with complete candor and truthfulness – this adviser does not deserve your consideration. Period. End of story.

Explanation.  There are two types of relationships under the law:
  • Fiduciary relationship, in which the adviser acts on your behalf, “stepping into your shoes” and always acting in your best interests; or
  • Salesperson/customer relationship - the person before you  seeks to use planning, education or advice as a means of selling products to you. In this instance the person is not a fiduciary. While “suitability” applies (“everything recommended to you will be ‘suitable’ for you”), this is a very low standard that does not require that the best investment products are recommended for you (in fact, many very expensive, poor products are recommended under the suitability standard).
There are many in the legal community who believe that “financial advisors” should not seek to act as both a “fiduciary” in some aspects of the relationship with the client, while not in other aspects of the relationship. This is called the “wearing of two hats.” Indeed, many a jurist has opined that a true fiduciary cannot wear two hats. The roles of "seller" and "purchaser's representative" are simply diametrically opposed.

Nor should a fiduciary try to remove the “fiduciary hat” once it is placed on. Can you just imagine this conversation: “I am now a fiduciary, required to act in your best interests. I want your permission to not be a fiduciary anymore, so I am no longer required to act in your best interests.” WHY WOULD ANY CONSUMER (who is informed about the necessity of fiduciary status) EVER PERMIT THEIR ADVISER TO TAKE OFF THEIR FIDUCIARY HAT - AND NO LONGER OPERATE IN THE CONSUMER'S BEST INTERESTS?

Please note that many a salesperson will try to convince you – the consumer – that “requiring me as your adviser to act as a fiduciary will be more expensive for you.” Don’t buy this false argument. In fact, only fiduciaries have the requirement to ensure that all of the fees and costs you pay are reasonable. In my experience, nearly always (99% of the time) the total fees and costs paid by clients relating to their investments and the advice they receive are substantially lower when a fiduciary adviser is utilized. In contrast, the fees and costs present when a non-fiduciary adviser is utilized are often hidden and often clearly excessive.

Another argument sometimes made by non-fiduciary "advisers" is: “The only way this product can be obtained is through a sales process, not as a fiduciary.” This excuse is often asserted when life insurance, long-term care insurance, or other forms of insurance are sold.

Beware cash value life insurance. Yet, cash value life insurance (i.e., "permanent life insurance" should ONLY be sold when a permanent insurance need exists, in this author's view. Whole life, universal life, equity-indexed universal life, and variable universal life are simply too costly to warrant consideration as investment vehicles. In the absence of a permanent estate tax liquidity problem (rare today, given the nearly $6m per person estate tax equivalent exemption, and spousal portability), cash value life insurance should NOT be obtained by consumers. Term life insurance (with a conversion feature) is much more appropriate.

Beware annuities! Another product that is often sold on a commission basis are annuities. Yet, there do exist low-cost variable annuities and low-cost immediate fixed annuities, that pay no commissions. (Equity index annuities, also called fixed index annuities, are nearly always sold on a commission basis; however, as of the time of this writing - Dec. 2016 - this author has not yet encountered any equity index annuity product that meets the author's due diligence test. The problem with equity indexed annuities is not the concept behind the product; rather, the problems include the design of the annuity product that puts far too much control in the insurance company, imbeds too high a cost structure within the annuity, and in many cases the relatively low financial strength of the insurance company).

A lot of other excuses will often be provided, which don’t hold water. Such as, “I am a bound to represent the interests of my firm, to whom I possess a fiduciary duty. That may be true, but it is possible to order fiduciary relationships. In other words, there is NO REASON both the firm and the individual adviser cannot possess a fiduciary duty to act in your best interests, and any duty owed by the individual adviser to the firm can be subservient. Many, many advisers already operate this way!

If your adviser asserts any other “reasons” for why he or she cannot act at all times as a fiduciary to you and bound to act in your best interests, you as a consumer should realize this … there are many, many other investment and financial advisers out there who will promise to be a fiduciary to you at all times. In essence, don’t fall for any rationale a non-fiduciary adviser gives for not adhering to the fiduciary standard – there simply is no good reason for an adviser to not act in a fiduciary capacity to you at all times. Any “explanation” for why he or she cannot – while it may sound plausible to you – will not hold up under expert scrutiny.

2. What services will you provide?  Can “financial planning” advice be separated out from your “investment advisory” services?

Mandatory Answer:  Get the list of services provided in writing. These are usually set forth in the written advisory contract you are required to sign.

Review that contract carefully – and make certain you understand all of the services you are receiving (or not receiving). Discuss each service with your advisor. Have your advisor revise the written agreement to reflect any detail, as to services provided, which might not yet be in the document.

If you are receiving advice relating to financial planning issues (e.g., tax planning, how much to contribute to various types of accounts, how much to withdraw from various accounts, retirement planning, estate planning, insurance planning, etc.), ask if you can pay for such services separately – through a negotiated flat project fee, or an annual retainer, or for hourly fees. Compare the fees for the financial planning services you require to those of other firms.

For investment advisory fees – where an advisor undertakes an “asset allocation” for you, chooses asset classes to invest in, recommends specific securities or investment products to you, and/or monitors your investments and undertakes periodic or targeted rebalancing and/or tax loss harvesting – fees can vary tremendously. Find out how much the investment advisory fees are, and compare fees for similar services offered by other firms.

While many firms choose to “bundle” their fees for financial planning and investment advice, in the view of some industry observers a better approach is to charge for these two types of services separately. Although financial planning and investment advice are inherently related, they can also be “unbundled” – at least to a large degree.

Often a financial plan is a prerequisite to the design and management of an investment portfolio. The adviser cannot really know how to design an investment portfolio for you until after other issues have been addressed, such as: “Should you pay down debt instead of investing?” or “Do you have an adequate cash reserve?” Hence, at least some financial planning is, in my view, required prior to designing an investment portfolio.

Yet, more comprehensive financial planning services can usually be "unbundled" or separated from investment advisory services.

More comprehensive financial planning can also be undertaken in a variety of different ways:
  • For clients with greater planning needs, realize that the financial planning process, for a new client, can take time. It may be a “comprehensive financial plan” presented all at once, or the financial planning recommendations may be presented and reviewed in a series of meetings in which certain specific issues are addressed at each meeting.
  • After an initial financial planning is undertaken, for some clients revisions to that plan may not be required for several years (absent some change in your circumstances). In such a circumstance, expect to pay more for financial planning in the first year, and less in subsequent years.
  • For most clients, however, financial planning needs are ongoing. In this sense, financial planning is not an "event" or a "plan" - but rather a "process." Financial life coaching is often provided under these types of arrangements. Ongoing tax advice is also likely to be provided.
In contrast to financial planning, investment advice is easier to compare. In essence, investment advisory fees reflect the same approximate level of service each year to most clients. Some advisers believe that every client, large and small in terms of size of the client's portfolio, should be charged the same amount, as the time spent on investment advice does not vary tremendously from one client to another. I would argue that, since an investment adviser bears more responsibility for larger accounts, some increase in fees is merited as the account size grows larger.


3. What conflicts of interest do you, your firms, or any affiliated firms possess with respect to the advice you may provide to me? Do you or your firm receive any material third-party compensation when I choose your investment advisory services or invest in investment or insurance products recommended by you?

Mandatory Answer – “Neither our firm, nor any affiliates of our firm, nor any of our individual advisers, receive any material compensation from third parties. All advisers may possess a conflict of interest that arises from time to time, but we seek to keep our conflicts of interest to a minimum.”

Explanation: If your adviser receives payments from a mutual fund, brokerage firm, or other source, whether called a 12b-1 fee, "revenue-sharing payment," or otherwise, when recommending an investment to you, this represents an insidious conflict of interest.

True fiduciary advisers know that the mere receipt of material compensation from anyone else, other than the client, could influence them (consciously or unconsciously) when they make a recommendation to you. This means that the adviser may not be acting in your best interests, but rather in the adviser’s interests. And, as explained below, fees and costs matter.

Your investment adviser’s Form ADV, Part 2A sets forth any conflicts of interest your adviser may possess. Nearly all financial and investment advisers possess some conflicts of interest. For example:
  • Should you invest funds you possess, or pay down debt instead?
  • Should you make lifetime gifts to others, and if so how much?
  • Should you purchase a lifetime immediate annuity?
Decisions resulting from these and other questions might affect the level of investment assets managed by your adviser, and hence the compensation your adviser receives. The proper way for an adviser to manage such unavoidable conflicts of interest is to ask himself or herself: "What advice would I give to my mother, father, brother, sister, children, nieces or nephews, if one of them were the client in this instance?" Additionally, advisers can check with other advisers, when a conflict of interest occurs, to seek confirmation that the advice they are providing is not skewed by any unavoided conflict of interest.

Note that educational and other services or software are often provided to advisers by custodians (brokerage firms your adviser may work for, or with) or mutual fund or other companies. Your adviser should fully disclose these conflicts, in writing, as well as whether in the adviser’s view the amount of benefits received by the adviser might skew the advice provided to the client. Typically the amount of non-monetary benefits received is very minor, compared to the revenue of the adviser or his or her firm.

There are some forms of third-party compensation which, in my view, should be avoided at all costs by fiduciary advisers (and their firms, and any affiliated firms).  These include:
·     12b-1 fees;
·     Payment for shelf space;
·     Soft-dollar compensation;
·     Sponsored trips to educational or other conferences;
·     Payment toward the costs of client marketing seminars; and
·     Any prizes or awards provided by custodians (typically, brokerage firms at which client assets are held) or product manufacturers.

4. Will you be recommending any “proprietary products” to me?  Will you be engaging in any “principal trade” with me?

Mandatory answer – “No.”

Explanation. A proprietary investment or insurance product is one that is manufactured by the firm you are dealing with, or affiliated firms. While all of these products are not necessarily “bad,” in my estimation at least 95% of proprietary products are not the best products available in the marketplace today.

Moreover, the simple truth is that proprietary products result in additional compensation to the adviser or his/her firm. While some fiduciary advisers credit all or part of the management fees of proprietary mutual funds to the client’s account, often the administrative fees (which are not credited to the client’s account) paid to other affiliates of the fund complex are excessively high.

The truth of the matter is that fiduciary regulation in the United States has not yet evolved sufficiently to place strict and proper limits on the utilization of proprietary investment products by fiduciary advisers. There is no requirement, for example, that a fiduciary adviser demonstrate that there is no other product better or as good as the firm’s proprietary product prior to recommending same.

Hence, at the current time the recommendation of proprietary products is another insidious conflict of interest which can, and should be, avoided. With thousands and thousands of mutual funds, ETFs, and other investment products available today, it is likewise hard to imagine that any one firm’s products are all “best-in-class” investments – or for that matter than even one such product is likely to be the “best-in-class” investment.

Likewise, it is difficult to imagine, when thousands of dealers in securities exist, and with such a broad selection of products to choose from, that any firm needs to sell you investment products out of their own “inventory.” Even in the fairly illiquid municipal bond market there are normally many, many sources of bond inventory. The fact is that broker-dealer firms make a lot of money from “principal trades” – much more so than acting as your agent to secure the best possible price for you. And “dumping” of unwanted securities by a firm is, unfortunately, far too common an occurrence. Again, this is an area where enforcement of securities laws has been far too lax when the advisor acts in a fiduciary capacity. The U.S. Securities and Exchange Commission and state securities regulators permit far too much abuse to occur – to the harm of tens (if not hundreds) of thousands of individual investors.

There is only very rarely (less than 1%, if that) any valid reason for a fiduciary adviser to engage in the sale of proprietary products or recommend a trade between you and her or his firm. “Just say no” to proprietary products and principal trading.

5. What are the “total fees and costs” I will pay with regard to my investment portfolio – including the fees and costs charged by the products you recommend, as well as your own advisory fees – on an annual basis?

Answer:  A very thoughtful, well-researched presentation of the “total fees and costs” of the advisory services, and of the products recommended to you, should be presented to you, in writing. You should be able utilize this "total fees and costs" analysis as a comparison tool to other service providers.

Here’s a suggested maximum amount of the total fees and costs for investment advisory services for different sizes of an investment portfolio. There are many investment advisers who provides investment supervisory services for less than the TOTAL FEES AND COSTS shown below:

Size of the Portfolio
Maximum Total Fees and Costs: Includes the Investment Adviser's Fees, and Product Fees (both the Annual Expense Ratio as well as estimated transaction and opportunity costs that exist within pooled investments such as mutual funds and ETFs)
Under $75,000
2.00% or less
$75,000 to $200,000
1.75% or less
$200,000 to $500,000
1.25% or less
$500,000 to $1,000,000
1.20% or less
$1,000,000 to $2,000,000
1.10% or less
$2,000,000 to $3,000,000
0.95% or less
$3,000,000 to $5,000,000
0.80% or less
Over $5,000,000
0.75% or less

NOTE: The following should be included in any "total fees and costs" analysis provided to you:
  • The effect of sales loads (commissions) for the holding period of the investment product (or, for a maximum of 10 years);
  • The annual expenses, as shown in any disclosure of "annual expense ratio" or similar. For a mutual fund, these might include:
    • fund management fees;
    • fund administration costs;
    • 12b-1 fees;
  • The "implementation shortfall" costs of management of any pooled investment fund, which can be estimated by a firm or adviser for each fund the firm/adviser recommends. These might include:
    • Market impact costs;
    • Bid-ask spreads and/or principal markups/markdowns;
    • Opportunity costs due to delayed or canceled trades;
    • Brokerage commissions paid for effecting securities transactions within the pooled investment fund;
  • Opportunity costs due to maintenance of cash holdings within a fund;
  • Offsets to fees occurring due to securities lending ratios;
  • Costs of hedging the portfolio, if hedges are utilized; and
  • Costs likely to be incurred if redemption fees apply.
NOTE: The above fee table does not include fees for extensive financial planning services, which services - if provided - might be "unbundled" and charged separately.

Explanation. Fees and costs matter. As the founder of Vanguard Funds and consumer advocate John Bogle recently stated, “the magic of compound returns is overwhelmed by the tyranny of compounding cost. It’s a mathematical fact.” In his article, "The Tyranny of Compounding Costs," John Bogle used the following illustration. If an individual made a $1,000 investment at age 20 and received 8% annualized returns, the account balance would grow to $109,358 by age 80. If a 2.5% annual management fee was added into the equation, the ending account balance would only be $26,206. Over the 60 years, these annual management fees eat up a staggering 76 percent of what the investor would have earned with no management costs.

Many investment advisers would argue that the “total fees and costs” I propose in the table above are far too low. Yet, there are many investment advisers out there who offer good investment advice and who utilize low-cost products for “total fees and costs” within the levels set forth above, and often for far less.

What is included in the “total fees and costs”? Every fee or cost present, whether "disclosed" or "hidden," and whether quantifiable or which is subject to estimation. For example, with respect to stock mutual funds and stock exchange-traded funds these fees and costs include:
  • The advisor’s separate advisory fee (whether paid as a percentage-of-assets managed fee, as a flat annual retainer, as a project fee, or on an hourly basis);
  • The mutual fund’s annual expense ratio – which is the sum of the fund’s management (investment advisory) fee, administrative fees, and 12b-1 fees (which, as I’ve noted above, should be avoided);
  •  The mutual fund’s brokerage commissions resulting from trading within the fund (these can be discerned and quantified by an expert advisor) - an up-front commission might be divided by 10 to determine the long-term impact of the commission (i.e., in determining the annual impact of the commission); a higher denominator might be utilized if the mutual funds sold are not typically held for 12 years or longer).
    • What greater annual rate of return must a 5.75% load fund earn, ali other things being equal, if the benchmark earns a level 10% annually, to break even with the benchmark?
      • If the fund is held for only 5 years, the fund must earn 1.20% more, each year, over that period, to "break even."
      • If the fund is held for 10 years, the fund must earn 0.59% more, each year, over that period, to "break even."
      • If the fund is held for 15 years, the fund must earn 0.43% more, each year, over that period, to "break even."
      • If the fund is held for 20 years, the fund must earn 0.32% more, each year, over that period, to "break even."
      • If the fund is held for 25 years, the fund must earn 0.26% more, each year, over that period, to "break even."
    • Note that the average holding period for stock mutual funds is about 4 years, and for bond mutual funds less than 3 years, according to the Investment Company Institute.
    • Since rebalancing of an investment portfolio requires selling asset classes (and funds within them) that go up in value, while purchasing those asset classes that have lagged, even a "buy-and-hold" strategy requires some sales of mutual funds, over time.
    • In essence, in this author's view, commission-based product sales are inconsistent with the prudent investor rule, specifically, and inconsistent with Modern Portfolio Theory in general.
  • The mutual funds’ transaction and opportunity costs, relating to trading within the fund. Market impact and transaction costs can be estimated by an expert advisor, based upon the level of trading volume actually occurring within the fund and based upon the asset class in which those stocks are located. Opportunity costs due to cash holdings within the fund can likewise be estimated.
Consumers should request that their advisor provide to them, for each investment product recommended, a break-down of all of the estimated fees and costs. This “point-of-recommendation” document should not just be the prospectus, but rather a one-page summary detailing not only the disclosed fees and costs associated with the advisor and the investment product, but also an estimate of any hidden fees and costs.

Note that all consumers should avoid any investment in a product in which fees are presented as either a “commission,” “sales load,” “contingent deferred sales charge,” “surrender fee,” “12b-1 fee,” or “marketing fee.” Fiduciary advisers simply avoid products that incur such forms of fees, as they create otherwise avoidable conflicts of interest and/or result in unnecessary fees or costs incurred by the investor and/or restrictions on liquidity.

Many consumers assume that higher-cost products mean higher returns. THIS IS A FALSE ASSUMPTION. Substantial economic research reveals that the higher the fees and costs the lower the returns to the investors. When an adviser says, “Yes, it’s expensive, but it’s good,” or if the adviser says, "Overlook the (high) fees and costs, and consider the benefits," don’t believe it. Every investment adviser worth her or his salt knows of the overwhelming academic evidence demonstrating that higher fees and costs generally result in lower returns for the investor.

By way of further explanation, suppose your horse (investment product, with any adviser fees attached) is running in the Kentucky Derby. Shortly before the race begins, your jockey is required to wear a vest containing lead weights, so that the weight of your jockey (and clothing) now exceeds the weight of the other jockeys (and their clothing) by fifty pounds. Does this mean that your horse cannot win the race? No. Perhaps, occasionally, an exceptional horse so saddled with the extra weight will rise to the occasion and win. But, nearly always, this makes the horse with the heavier burden extremely likely to run in the back of the pack, especially as the horse race get longer. Don’t hire heavy jockeys, or saddle them with extra weight!

In summary, don’t let Wall Street siphon off a huge portion of your returns. Keep your total fees and costs reasonable, and reap the substantial rewards of a low-cost, prudent investment strategy over time. Require your advisor’s fees for investment advice to be reasonable, and further require your investment adviser to choose only those investment products which possess low total fees and costs.

6. What are your qualifications?

Answer: A list of the adviser's qualifications.

I recommend that consumers receive advice from only expert financial advisors and/or investment advisers. How can a consumer judge this? It’s difficult.

One way to assure at least a baseline level of competency is to seek out certain certifications or designations. There are hundreds of financial services designations out there, but in my view at the present time there are only three baseline designations or certifications that a consumer should seriously consider:

  1. Certified Financial Planner™ (CFP®). This certification indicates a broad base of foundational knowledge in all areas of financial planning. The minimum requirements to attain the certification include a 4-year college degree (in any field), six foundational courses (each a 3-semester-credit hour equivalent) in financial planning and investment topics, the passage of a tough 6-hour national exam, and adherence to the CFP Board's conduct standards. This is the most well-known (from the standpoint of consumers) of the various designations in financial services.
  2. Certified Public Accountant / Personal Financial Specialist (CPA/PFS). Roughly equivalent to the CFP® certification in terms of the required knowledge of financial planning subjects. But, the designee must also be a Certified Public Accountant. This typically indicates a solid knowledge of finance and individual income taxes - both areas that often propel CPA/PFS holders to be some of the best financial planners out there, on average.
  3. Chartered Financial Analyst (CFA). This designation is the toughest to obtain. Recently more "wealth management" topics have been embedded into the course of study, which requires significant study over the course of 1.5 to several years and three day-long tests along the way. However, the focus of the course of study remains on investment theory and principles. Nevertheless, for those within the investment advisory industry, this is generally the most respected designation - even though consumer recognition of the designation lags.
Again, each of these programs requires a rigorous course of study, usually involving thousands of hours of work for an advisor who completes the program.

However, please note - rely upon these designations ONLY for their indication of competency. Not all holders of these designations practice as "bona fide fiduciaries" in my view.

This is not to say that there are not some fine – and exceptional – financial planners and investment advisers out there who don’t possess any of the foregoing marks. For example, there are some older advisors who began practice while these designations were of much less import than they are today.

Nor do I say that other designations and certifications are unimportant. Yet, far too often designations can be obtained after passing a course of study in which the time commitment is measured in terms of “two days” or “fifty hours of study” or just a few hundred hours of study. If an advisor touts a designation not on the list above, as a “comprehensive” knowledge base, research the designation and see if it requires thousands of hours for completion of the required course of study, as the foregoing designations likely require of most applicants.

7.  Have you ever been cited by a professional or regulatory governing body for disciplinary reasons?

Mandatory answer: Here is my record, which includes any disciplinary history by any professional oversight regulator or organization.

Disclosures of disciplinary history can be found in Form ADV, Part 2B (the “Biography” disclosure document of an investment adviser), and on the advisor’s Form U-4. Ask for and review both of these documents.

A consumer can conduct an online check of an advisor’s disciplinary history through the FINRA BrokerCheck® at http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/. This provides the information found on an individual adviser's U-4. (Note: those individuals licensed solely as insurance agents do not appear in this database.)

There has existed ongoing controversy over the number of "expungements" of complaint history which are permitted by the broker-dealer self-regulatory organization, FINRA. Hence, the absence of the indication of a complaint in the database does not ensure that no complaint was ever filed against the person. Perhaps one way to counter excessive expungements is to do a Google search of the adviser's name (perhaps with the name of her or his firm, and/or her or his location - such as town or city - of her or his office). However, since many firms have mandatory arbitration agreements, and seek to keep arbitration awards "secret" (i.e., non-disclosed to the public), a Google search is not a guarantee, either.


8. Will you sign this fiduciary oath?

I believe in placing your best interests first. Therefore, I am proud to commit to the following five fiduciary principles:

      (1)  I will always put your best interests first.

(2)  I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional.

(3)  I will not mislead you, and I will provide conspicuous, full and fair disclosure of all important facts.

(4)  I will avoid conflicts of interest.

(5)  I will fully disclose and fairly manage, in your favor, any unavoidable conflicts.

                Advisor:                            ____________________________
                Firm Affiliation:              ____________________________
                Date:                                 ____________________________

Mandatory answer: “Yes.”  If not – walk away.

Explanation: This Fiduciary Oath is from The Committee for the Fiduciary Standard, a volunteer group of individuals who advocate for the fiduciary standard of conduct before Congress, the U.S. Securities and Exchange Commission, U.S. Department of Labor, and other agencies. There is not a single word in this document which any fiduciary advisor should find objectionable.

(By way of disclosure, I currently serve on the Steering Group for The Committee for the Fiduciary Standard. I receive no compensation for performing this role, nor any ownership interest in the organization, which is composed solely of volunteer members.)

OTHER QUESTIONS CONSUMERS SHOULD ASK.

There are other obvious questions any consumer would want the answer to.  These include:
  • How long have you been in business?
  • How many clients do you possess?
  • Do you engage in any other business activities?
  • In what accounts (i.e., with what custodian) will my investments be held? What safeguards exist to ensure my funds are not stolen?
  • Who in your firm will be working with me? You? A junior advisor? A team of advisors? Others?
Since each of these answers has no clear “yes” or “now” or other quantitative answer, the consumer should take any responses provided and compare them to answers other advisors provide.

Again, I stress that these answers should be obtained in writing from your financial/investment adviser and/or her or his firm. Far too often in arbitration proceedings verbal statements made by advisers, to their clients, are not admitted into evidence, as the contract (client services agreement) signed by the client contained a "merger" clause. More often than not, in arbitration proceedings verbal statements made by the advisor are also denied. Get it in writing!

ARE THERE MEMBERSHIP ORGANIZATIONS WHICH REQUIRE ALL OF THEIR ADVISER MEMBERS TO BE TRUE FIDUCIARIES AT ALL TIMES?

There are now five industry organizations which, in my view, have established and maintained high standards of competence and ethics for their members - i.e., their members are obligated to act as bona fide fiduciaries, and in practice the members of these group seek to avoid most major conflicts of interest. 

Consumers searching for an adviser are much more likely to find advisors who correctly answer all of the questions above by visiting these web sites:
               
National Association of Personal Financial Advisors (www.napfa.org) – and specifically its “Find An Advisor” search function located at http://findanadvisor.napfa.org/Home.aspx.  (By way of disclosure, I am a NAPFA academic member, previously served on its National Board of Directors, and currently serve on its South Region Board of Directors. NAPFA has over 2,500 advisers around the U.S.))

Garrett Planning Network (www.garrettplanningnetwork.com) – and specifically its “Search For Advisors” search function located at http://garrettplanningnetwork.com/search-for-advisors-by-clicking-on-a-state/. (By way of disclosure, I serve as a consultant to, and as a member of, this organization, which has over 300 advisers around the U.S. as of March 2016.)

Garrett Investment Advisers (http://garrettinvestmentadvisors.com) - and its "Find An Advisor" search tool. (By way of disclosure, in March 2016 I transitioned by own practice into this firm, which has a few dozen advisers around the U.S. as of March 2016.)

XY Planning Network (http://www.xyplanningnetwork.com) - and its "Find An Advisor" search tool. This organization has grown rapidly, and has over 200 firms as of March 2016.

Alliance of Comprehensive Planners - http://www.acplanners.org/home, and specifically to its "Find an Advisor" search function located at http://www.acplanners.org/findanadvisor. The Alliance has a few hundred advisers, I believe, as members as of March 2016.

What About the CFP Board and the Financial Planning Association? Be aware that being a certificant (with the Certified Financial Planning Board of Standards, Inc.) may guarantee a baseline level of competence, but does not ensure that the advisor follows a bona fide fiduciary standard at all times.

Nor does membership in the Financial Planning Association ensure that the advisor follows a bona fide fiduciary standard at all times.

While both of these organizations provide valuable benefits to their members, and both organizations promote adherence to high professional standards of conduct, in this author's view consumers should not rely upon the "find an advisor" tools of these organizations.

Likewise, several other organizations often tout the "fiduciary status" of their members, or state that their members are required to act "in the best interests" of the member's clients. As indicated earlier in this post, there has been a denigration of the fiduciary standard over time - some would say an evisceration. Hence, it is important to not assume that just because someone calls themself a "fiduciary" or states that they will "act in your best interests" does not necessarily mean that they adhere to the highest standards of prpfoessional conduct. Use the questions above to determine if the person is a true, bona fide fiduciary who avoids (rather than just discloses) conflicts of interest, and who is a true expert, and not a mere "pretender."

IN CONCLUSION

The most important financial decision an individual investor can undertake is in selecting the right financial and investment advisor.

I hope that the checklist above, and other information provided, can serve to guide consumers in the right direction - toward true fiduciary advisors who are both experts and keep their clients' best interests paramount at all times.

All consumers should interview several advisers before deciding. Fees and costs are a primary determinant, but not the only one. Expertise should be ascertained. And the adviser's investment philosophy should be aligned with your beliefs and comfort level.

GOOD LUCK WITH YOUR SEARCH!