Follow Your Heart ... with a Silver Nose

In the summer of 1978 I became the Tin Man at “The Land of Oz,” a small theme park once atop Beech Mountain, North Carolina. I lip-synched and danced in shows, and after each show I thoroughly enjoyed taking pictures with all of the children who gathered around me, the Cowardly Lion, the Scarecrow, and Dorothy.

As the Tin Man I wore a silver fabric body suit, a tin cap, tin armor, a pasted-on nose, and silver dust liberally applied all over my face and hands. This silver dust had to be re-applied frequently, for whatever I touched quickly acquired a silver tint.

Each Wednesday night The Land of Oz loaded its characters onto a bus for the hour-long drive to Boone, NC. There we would tour the restaurants, as a means of promoting the park.

As we visited the restaurants, I would ensure that my hands and fingers were thoroughly coated with the silver dust. And, as we went from table to table, I would bring joy to each child by touching their nose. As the tip of each child’s nose became silver itself, I would say, “Follow your heart.”

Nearly always, the next day, I would see at The Land of Oz children come through who still had their silver-tipped noses. I’m certain many a parent heard their children exclaim “I don’t want to wash it off!” the evening before.

Follow Your Heart" - Career Path Selection.  Now I am teaching undergraduate students at Alfred State College, and as before I try to sprinkle a little dust here, and a little dust there, in hopes that it sticks to my students’ noses. Not silver dust, but rather little tidbits which may assist them to lead a successful life. One of the most important concepts I teach is what I also said to young children so many years before, “Follow your heart.”

Which brings me to a fascinating book recently which explores what truly motivates us in life. In How Will You Measure Your Life, author Clayton Christensen explores the types of satisfaction we can find in careers. Understanding these concepts may have important implications for your choice of career.

Four Possible Career Quadrants You Can Land In.  If I were to paraphrase and re-organize the author’s thoughts, there are four possible career results which can follow:

Low Incentives	High Level of Motivators		High Incentives
	High Motivators BUT Lack of One or More Incentives	High Motivators and  Incentives are Present
	Absent Motivators and Lack of One or More Incentives	Absent Motivators BUT  Incentives are Present
	Poor Level or Absence of Motivators

What quadrant do you desire to be in, during your career? As you will learn – the upper half, and preferably the top right quadrant.

“Motivation” vs. “Incentives”.  Key to understanding the chart above is to understand the differences in what spurs on our happiness as we go through life and various careers.

“Incentives” are those elements of work which, if not present, can cause us to be dissatisfied. These elements (called “hygiene factors” in Christensen’s book include:

      adequate and fair compensation;

      job security;

           status;

      work conditions;

      company policies; and

      supervisory practices.

Yet, realize, that it is the absence of any one or more of this factors which lead to job and career dissatisfaction. However, even if all of these factors are present, it does not mean that you will love your job. You just will not hate your job.

“Motivators” are the things which will truly, deeply satisfy us in our careers.  Motivation factors include:

        challenging work;

        recognition;

        responsibility; and

        personal growth.

In essence, these factors lead to the feeling that you are making a meaningful contribution to your work. Motivation “is much less about external prodding or stimulation, and much more about what’s inside of you, and inside of your work.” [Christiensen, Kindle edition p.34.]

Career Paths and Jobs Focused on Incentives. Many persons choose career paths, and particular jobs, based on incentives as the primary criteria. For example, they seek out a high-paying job, and/or a career path leading to high pay in the future.

There is nothing wrong with this approach. It’s just that – if you pursue a career only for purposes of making an excellent salary – chances are that you will not be doing “something important” or “something you really love.”

Some persons pursue jobs with high incentives (such as high compensation) first, believing that they will later – after financial security is achieved – turn to a different job (or career) that they love. Unfortunately, changing careers in this fashion rarely occurs, as higher pay usually leads to adopting a lifestyle which is difficult to give up. The result is that many highly compensated individuals work in jobs with low motivation factors – and they are dissatisfied.

(Although Alfred State’s business professors may be among the exception – for many, having been highly compensated in their business careers, they chose to eschew continued high compensation in order to turn to their love of teaching.)

Career Paths and Jobs Focused on Motivators.  By contrast, other persons purposely forego jobs or career paths which promise higher levels of compensation or status in order to pursue careers in which motivation factors are present. For example, many persons pursue careers in the military – not for the high level of compensation, but rather because they believe they are making a real difference in the world. Similarly, many individuals work for nonprofit corporations, rather than for-profit corporations, for the same reasons.

In other words, if you love your job – even if you are not making piles of money – you are going to be immensely satisfied.

Can You Have It Both Ways – Incentives PLUS Motivation Factors? Are there jobs, or career paths, in which the ideal exists – not only are you highly incentivized (compensation, status, job security, and good company policies), but they also are in a career in which they find the work is challenging, they are provided with great levels of responsibility, they are encouraged to grow, and (for some) they believe that the work they are doing is “making a difference”?

Yes, such jobs do exist out there. That’s the upper right quadrant of the chart, above. Where are they? It requires you to plan, very well, to secure them.

Implications for Managers.  Many managers default to thinking that external factors – such as compensation and status – are the best motivators. Yet, it is rare to hear of managers of nonprofits complaining about getting their staff motivated.

Understanding the factors that motivate those you supervise is an essential skill for managers of all types. When employees find themselves stuck in unhappy careers – and even unhappy7 lives – it is important to not try to “motivate” them through inappropriate “incentives” – and instead it might be better to focus on the true “motivators.”

Explore Your Career Paths. Go to your college's career development office to seek out information on different careers. Use personality assessments to discover your aptitudes and strengths. Search for careers (and particular job positions) online, and see how they are described in job postings and in various articles. Lastly, see if you can, for a day, "shadow" one or more practitioners in one or more career paths which may interest you.

And always, always, keep in mind this quote from the late Steve Jobs: “Your work is going to fill a large part of your life, and the only way to be truly satisfied is to do what you believe is great work. The only way to do great work is to love what you do. If you haven’t found it yet, keep looking. Don’t settle.”

Follow your heart, and the path that you travel down will be rich in so many ways.

And, from time to time, you may even find yourself sharing a little silver dust with others.

Professor Ron A. Rhoades, JD, CFP(r) teaches Business Law, Retirement Planning, Investment Planning, Employee Benefits Planning, Money & Banking, Insurance & Risk Management, and the Personal Financial Planning Capstone courses at Alfred State College, Alfred, NY. He is an EPLP Mentor, C.R.E.A.T.E. program mentor, serves as advisor to Alfred State's Business Professionals of America club, and serves as academic advisor to dozens of students.

Professor Rhoades is the author of "CHOOSE TO SUCCEED IN COLLEGE AND IN LIFE: Continuously Improve, Persevere, and Enjoy the Journey," a 10-week program for success in college (available for $2.99 in Kindle store at Amazon.com, or in paperback for $6.99). Professor Rhoades may be reached by e-mail at: RhoadeRA@AlfredState.edu.

Observations: Transforming the Firm from a Sales Culture to a Fiduciary Culture

Twice a semester I take a group of students in a 15-passenger van on visits to local financial services firms. My financial planning program (undergraduate) students benefit from exposure to different practice models, learn about "day-in-the-life" of a financial advisor, and some even make connections leading to future internships or jobs. They obtain a real picture of the environments they may join, and upon their return most become more committed to their studies and to joining this emerging profession.

Yesterday I undertook another of these trips, visiting four different firms over the course of six hours. Of interest to me was the apparent transformation of two of these firms from commission-based sales to fee-based businesses over the past few years. Both firms indicated that a primary motivation was to secure recurring revenue. And both firms stressed improved relations with clients.

In one firm I got the real sense that the fiduciary culture was being implemented throughout the firm, from the top down. The firm had long utilized the platform of an independent BD firm, and they had sold a variety of insurance products. Yet, several years ago they formed an RIA firm, owned by the principals of the firm, and began to transition their clients to it.

In so doing, I got the real sense, from the principals of the firm, that a true fiduciary culture had been embraced. From principals of the firm to junior advisors, each spoke of the devotion to act in the client's best interests at all times and to avoid conflicts of interest where possible. This transformation must not have been easy, but it was well underway and, it appeared, was being successfully implemented..

However, in another firm my students and I visited I encountered another firm. This firm also had a BD and RIA, but the RIA was not owned by the principals but was instead an affiliate of an insurance company. While the firm touted its "fee-based" philosophy, and their movement toward AUM fees over the past two years, it became apparent quickly that the firm lacked leadership in instilling a true fiduciary culture.

One indication of this was when a principal of the firm touted how wonderful it was to deliver a life insurance proceeds check into the hands of a surviving spouse. I often hear life insurance salespeople talk of this "moment" with some pride - as if it justified all of their past recommendations (often to buy cash value life insurance).

Yet, as a fee-only advisor, I assisted many a surviving spouse claim life insurance benefits for policies (mostly term life) I had recommended be taken out years before, but I never felt "pride" in that moment. I just felt that the planning had worked out, as it should have.

Other statements made by the principal of the second firm visited led me to believe that no true fiduciary culture was being implemented. Investments recommended in the investment advisory accounts were often proprietary funds, or resulted in additional compensation to the financial services firm and its employees.

I would note that the transition from a sales culture to a fiduciary culture is a difficult one. Even for brokers who seek to move to RIA-only platforms, I've often heard it said: "You can take the advisor out of the brokerage firm, but you can't take the brokerage firm (i.e., sales culture) out of the advisor."

At the firm-wide level, when firms attempt this shift, it appears that many firms will fail to embrace a true fiduciary culture. In all likelihood their leadership fails to understand the breadth and depth of the fiduciary obligation, and/or fails to communicate the new core values of the firm correctly.

While the shift from commission-based compensation to fee-based compensation is a positive one, in my view, abuses will continue (as seen in my article last year about the abuses seen by the client of a dual registrant). [See http://www.riabiz.com/a/23037362/an-x-ray-of-one-affluent-educated-and-sophisticated-investors-portfolio-shows-how-it-was-chewed-up-by-fees.] There are many advisors, thanks to lax oversight by the SEC, who state that they operate as "fiduciaries" to their clients but who, in fact, disclaim away their core fiduciary obligations through disclosure. [See http://www.riabiz.com/a/140682111/how-the-sec-has-pulled-a-vanishing-act-looking-the-other-way-while-brokers-flimsy-pretenses-hold-themselves-out-as-trusted-advisors.]

I have also previously written that I believe large warehouses can undertake the shift to a fiduciary culture, but only if they create separate entities and install certain firewall and other protections. [http://scholarfp.blogspot.com/2012/07/transforming-large-wall-street-firms.html.] Yet, the wirehouses are highly unlikely to move in this direction. Why not? As a recent survey indicates, the firms would become less profitable (although the clients would certainly benefit from such a shift). [See http://www.fpanet.org/journal/SuitabilityVersusFiduciaryStandard/.] In fact, I gave a presentation to the "big firms" at a conference last year; my suggestion that they embrace a fiduciary culture and fiduciary principles, by altering their business methods, was met with incredulity. How, they asked, could they choose their clients interests over those of their shareholders? (My reply was simple and direct - your market share continues to shrink; what will your shareholders think when your firm is but a footnote in history, 20 years from how, if you don't change?)

The shift of the two firms we visited - from mainly commission-based to mainly fee-based compensation over the past few years - is a noteworthy development. I suspect, from the various reports I read from Curulli Associates and others, that the shift to fee-based accounts which has been underway for several years will continue to occur.

Yet, at least in one instance, the shift to a fiduciary culture was far from complete.

To get it done right, a fiduciary culture must be embraced fully by the principals of the firm. The fiduciary duties must be understood. Many systems of the firm, from investment strategy selection, to investment product due diligence, to client intake processes, to documentation needs, and much more, must be re-designed. The fiduciary culture must then filtered down to everyone in the firm through robust education and values leadership.

I can only hope that more firms, as they make the move of their clients from BD platforms onto RIA platforms, move all the way and embrace a true fiduciary culture, rather than only partway.

I hope that financial planners and investment advisers are on the path of becoming a true profession, and not a pseudo-profession composed of "pretend fiduciaries."

MyRA: The Administration Answers FSI's and SIFMA's Whines Via Disintermediation

WHAT IS IT?

The myRA is new type of retirement savings account geared toward new savers, low and middle-income earners, and people who aren’t offered a retirement savings option through their employers. MyRA would make retirement savings accounts available to individuals earning up to $129,000 per year and couples earning up to $191,000 per year. In both instances the workers must be employed by employers don't offer retirement savings plans and who agree to participate in the program. These accounts will be offered through an initial pilot program to employees of employers who choose to participate by the end of 2014. 

The accounts would be structured like Roth IRAs. Contributions can be withdrawn tax-free at any time; in this respect the MyRA account operates more like a tax-free money market account.

Participants could save up to $15,000, or for a maximum of 30 years, in their accounts before being required to transfer their balance to a private sector Roth IRA.

Savers in the account will benefit from principal protection, so the account balance will never go down in value. Each savers’ account is invested solely in the Government Securities Investment Fund (also known as the “G fund”). The G Fund invests exclusively in a nonmarketable short-term U.S. Treasury security that is specially issued to the TSP. The earnings consist entirely of interest income on the security. he G Fund interest rate calculation is based on the weighted average yield of all outstanding Treasury notes and bonds with 4 or more years to maturity. As a result, participants who invest in the G Fund are rewarded with a long-term rate on what is essentially a short-term security.

The G fund is currently available to federal workers enrolled in the Thrift Savings Plan. It has an average annual return 2.24 percent over the past three years according to the funds website, www.TSP.gov. The administrative expenses assessed against this fund (as with all TSP funds) were a low 0.027% in 2011.

Initial investments could be as low as $25 and contributions that are as low as $5 could be made through easy-to-use payroll deductions.  Savers have the option of keeping the same account when they change jobs and can roll the balance into a private-sector retirement account at any time.

WHY WAS IT CREATED?

There is no doubt that there is a substantial shortfall in the retirement savings of individual Americans. The MyRA is being established to make a small dent in this underfunding of retirement needs.

We can speculate, however, that part of the impetus for the establishment of these accounts was Wall Street’s moaning and groaning over the past few years. As fiduciary rule-making has progressed through the U.S. Dept. of Labor, Wall Street has incessantly complained that small individual IRA account holders and 401(k) plan participants will be denied advice if they cannot sell expensive products to them.  As stated by the Financial Services Institute in June 2013: “If the DOL’s proposal were adopted, many broker-dealers and financial advisors would be forced to withdraw from the market of advising Covered Plans, their participants and IRA investors, reducing access to these types of services.” As stated by SIFMA, Wall Street’s other lobbying arm, “SIFMA is concerned that this proposal will limit investment choices and drive up costs for the individuals it is intended to protect.”

Of course, Wall Street’s claims are not true, and they ignore the fact that there are many independent registered investment advisory firms (Wall Street’s ever-growing competition) that currently serve small investors for fees that are remarkably low.

Still, the Administration heard Wall Street’s whines, and must have decided that disintermediation – cutting out financial services firms completely – was the proper thing to do for many small investors.

IS THE MYRA A GOOD THING FOR CONSUMERS?

Yes, from the standpoint of encourage more individuals to save for retirement.

Yes, from the standpoint of ensuring a conservative rate of return with no interest rate risk and no threat to loss of principal.

No, from the standpoint that very small savers will take a long time to reach the $15,000 limit, and their investment returns will likely be much lower, over the long term, than if they had just decided to establish Roth IRA accounts which, in turn, were invested in a stock index fund.

WHAT DOES THE FUTURE HOLD?

It does not take a rocket scientist to see where this is going.

Investors in these accounts will see years when the stock market soars, yet their returns are very low. Before long the U.S. government will likely open the other Thrift Savings Plans investment accounts to MyRA account owners.

And, when investors accumulate $15,000 in the accounts and are forced, by current regulations, to roll the account over into a Roth IRA, they will likely scream. Why abandon an account which apparently has no annual fee and an extremely low annual expense ratio? It won’t be long before the MyRA account limit is raised substantially, or limits are removed completely.

In essence, financial services disintermediation takes place. And it will continue to take place, now that the door has been opened. This may be the beginning of the end of defined contribution plan and IRA accounts managed by private financial services firms.

The government is pressured to reign in the high fees and costs imposed by Wall Street and the insurance companies. The federal government knows that these high fees and costs unnecessarily impair the retirement security of individual Americans. And, given the inadequacy of preparation for retirement (and substantially less accumulated for same, due to high intermediation costs imposed in many retirement accounts), the federal government seeks to reduce the burden which will necessarily result – on both federal and state governments – from retirees ill-equipped to meet their financial needs in retirement.

Thank you, Financial Services Institute, SIFMA, and your members in Wall Street firms and insurance companies. By your misrepresentations and complaints, you’ve begun the process of federal government takeover of all retirement accounts.

IS THERE A BETTER SOLUTION TO OUR RETIREMENT CRISIS?

Yes, there is. The U.S. Dept. of Labor has made great progress on disclosures and benchmarking for plan sponsors, which in turn have driven down retirement plan costs substantially. Participant disclosure of service provider compensation is also leading to increased pressure to cut out unnecessarily high fees. The third act of Phyliss Borzi's well-thought-out play needs to now air - the application of fiduciary standards to all providers of advice to plan sponsors, without exception.

If we really want to improve the retirement plan world, it is Congress which can do more. Through simplification.

Why do we have so many different types of retirement accounts – 401(k) accounts, 457(b) accounts, 403(b) accounts, SIMPLE IRAs, SEP IRAs, IRAs, Roth IRAs, etc.? It makes no sense. Not to mention the several types of defined benefit plans.

Any why do we permit such plan complexity – different vesting schedules, different rules on plan loans, etc. Specialized third-party administrators, actuaries, ERISA specialist attorneys, and many more expensive service providers exist to seek to navigate plan sponsors' retirement plan ships through this maze of complex retirement plan offerings and regulations.

Congress can move to adopt just a few different types of retirement plan accounts!

1) Employer-sponsored retirement plan accounts, with 100% immediate vesting. No complex rules requiring annual testing to ensure high-net worth individuals are not unfairly compensated. Annual contribution limit of $25,000 (tied to CPI-U as to future years, in $1,000 increments) for each and every participant. With an option for employers to contribute up to $12,500 a year (either as a fixed amount or as a percentage of each worker’s pay) to match employee contributions, as determined each calendar quarter by the employer. And the option for the employer to contribute a lump sum or percentage of worker’s pay (up to the entire maximum amount allowed each year), while requiring no employee contributions.

2) Individual retirement plan accounts. Annual contribution limit of $25,000 (tied to CPI-U as to future years, in $1,000 increments) for each and every participant.

For both of the accounts set forth above, no income limits for those who desire to contribute to the above accounts. But, $25,000 maximum (subject to CPI-U increases) combined contributions for all accounts, for each individual. Maximum amount each year is also limited to earned income (salary, wages).

3) Defined benefit plan, of only one type, with reasonable caps on maximum annual benefits that can be provided to any employee. There will still need to be regulations of these types of accounts, but actuarial calculations could be standardized according to government-issued tables.

Let’s cut the costs of maintaining defined contribution and defined benefit plan accounts, by simplifying their costs of administration substantially. Now that’s a way Congress can react to the Administration’s MyRA accounts, which just complicate the existing maze of retirement accounts which both individual workers and financial advisors must master.

As a country with limited resources, we cannot afford inefficient government, nor government which makes private sector employee benefits unnecessarily complex. Simplify, simplify, simplify.

(P.S. - I know I'll be asked why I didn't include Roth IRA options for the accounts above. While the Roth IRA is a great idea for investors in those accounts, it is not a good thing for America itself. It deprives the U.S. government of too much future revenue. I believe existing Roth IRA accounts should be grandfathered in, but Roth IRA and Roth 401(k) accounts not be permitted, nor any additions to existing accounts permitted. This can be undertaken during the upcoming planned overhaul of the U.S. tax system.)