Dear Friends and Colleagues ... My Market Predictions for 2016

I hereby commence the first of what I hope will be an annual tradition ... providing my colleagues and friends with my market predictions for the upcoming year. Whether it be U.S. equities, foreign developed markets, emerging markets, or bond prices and yields, I hope you will find wisdom in these predictions.

So, here goes ...

1. The economy will be driven by a complex set of factors, including new economic developments as yet largely unforeseen, in the year ahead.

2. This, in turn, will affect the capital markets. As will the inevitable, yet often irrational collective reaction to economic events by hordes of market participants.

3. As a result, I predict that no one has any 2016 market predictions worthy of your attention.

I hope you feel illuminated. Thank you.

Dear Politicians ... I Forgive You

As we enter a most contentious year in Presidential politics, I express my forgiveness, reflect upon our shared values, and then ask a question.

In the heat of a political campaign, operating many times without a script, you say things that are hurtful – to women, to minorities, to those of certain religious faiths.

I forgive you.

I hope what you say does not reflect your actual views. But you elaborate, and you repeat prior statements made, and you at times refuse to apologize or retreat. Hence, I get the sense that it is most likely that your statements do, in fact, reflect your view of the world.

I forgive you.

Perhaps you do not know the long-forgotten wounds you are opening, the fears you are stoking, and the divisions you are creating.

I forgive you.

Do you embrace the worldly values of wealth, power, pleasure, revenge, fame, vanity and status, above all else?

If so, I forgive you.

For I embrace the Christian values of kindness and respect for all people instead of power, of humility instead of status, of honesty and generosity instead of wealth, of self-control instead of self-indulgence, and of forgiveness instead of revenge

And I also embrace the Muslin values that teach us that person cannot be a complete believer unless he loves for his brother what he loves for himself, that one should not harm himself or others, and that self-control should be exercised to overcome temptation.

And I also embrace the Jewish values, including the need to treat others with kindness regardless of their beliefs, the commitment to justice and social equality, and the need for acts of kindness in order that others may live life with dignity.

And I also embrace the universal values of love and peace, and I embrace the Golden Rule. Expressed in Christianity as “Therefore all things whatsoever ye would that men should do to you, do ye even so to them: for this is the law and the prophets.” (Matthew 7:12, King James Version.) Expressed in Islam as: “None of you [truly] believes until he wishes for his brother what he wishes for himself.” Number 13 of Imam “Al-Nawawi's Forty Hadiths.” Expressed in Judaism as “...thou shalt love thy neighbor as thyself” (Leviticus 19:18) and as “What is hateful to you, do not to your fellow man. This is the law: all the rest is commentary.” (Talmud, Shabbat 31a.)

And I also embrace the Golden Rule as it is also portrayed in Buddhism: “Hurt not others in ways that you yourself would find hurtful.” (Udana-Varga 5:18.) And in Hinduism: “This is the sum of duty: do not do to others what would cause pain if done to you.” (Mahabharata 5:1517).

I embrace as well our American values – freedom of speech, freedom of religion, equality, our openness to new ideas, our tolerance of others and their beliefs, and our ability to forgive one another.

Do you?

Are We Moving Toward a Profession? Recent Developments re: DOL Rule, CFS, IFS, SEC, and CFP Board

Dec. 17, 2015

This week has been monumental in the evolution of financial planning toward a true profession.

U.S. DEPARTMENT OF LABOR'S "CONFLICT OF INTEREST" RULE & THE U.S. CONGRESS. On the regulatory front, the U.S. Department of Labor's "Conflict of Interest" proposed rule has survived several challenges in the U.S. Congress this Fall. In what some on Capitol Hill have called the most intensive, coordinated lobbying effort in many years, most of the major broker-dealers, and nearly all of the insurance companies, together with their industry organizations (SIFMA, FSI, NAIFA, and others), have extensively lobbied Congress to enact legislation that would either stop or delay the U.S. Department of Labor's fiduciary rulemaking.

Despite what you may have read in the industry press, only a few Democrats succumbed to this pressure and were willing to vote with Wall Street and against Main Street. (Others were willing to sing letters to the DOL, but were not willing to endorse legislation.) Still, the efforts of the anti-fiduciary crowd persisted, culminating in a huge effort these past several weeks by Wall Street to attach legislation (a "policy rider") to the appropriations bill. Yet, despite Wall Street and the insurance companies spending - literally - hundreds of millions of dollars via lobbyists, campaign contributions, and advertising, this effort was defeated.

How so? First and foremost, there was strong support from President Obama, his Council of Economic Advisors, and the U.S. Secretary of Labor Tom Perez. The Administration, recognizing the dramatic positive impact that the DOL Rule will possess on the retirement security of tens (if not hundreds) of millions of Americans, made the DOL Rule a "priority" in the negotiations over the appropriations bills. These negotiations represented the best chance for Wall Street and the insurance companies to stop the DOL's rule-making.

Additionally, a broad coalition of consumer and other groups coordinated there efforts, through the "Save Our Retirement" coalition. AARP, Consumer Federation of America, Better Markets, Americans for Financial Reform, Pension Rights Center, AFL-CIO, AFSCME, and over 70 other groups, contributed funds and huge commitments of time. The passion of these groups in support of the fiduciary standard for financial and investment advisers was felt throughout the halls of the U.S. Congress, despite the fact that for every visit by a member of this coalition there were likely 20-50 visits by Wall Street and insurance company lobbyists.

In addition, the Financial Planning Coalition (FPC) played a signficant role. Through timely letters of support, testimony to the DOL and Congress, and visits to Congress, and by the leadership of the CFP Board, FPA and NAPFA, the Financial Planning Coalition informed Congress that a significant portion of the financial planning community was already operating under a fiduciary standard - and serving the smaller clients.

Lastly, there was support from you, my fellow professionals. Your letters, faxes, and emails in support of the fiduciary standard played a major role in communicating the emerging profession's support for the DOL's rule-making. While I hesitate to single out specific individuals or groups, given the major contributions of so many practitioners, two advocates deserve special recognition. Kate McBride, who assumed the Chair of the Steering Committee for The Committee for the Fiduciary Standard, devoted her time and treasure to this effort, making numerous trips to Washington, D.C. over the past year and coordinating the efforts of many others. Sheryl Garrett and the members of the Garrett Planning Network contributed their tremendous support, especially at key moments over the past year.

Certainly, there will be future efforts to derail the DOL's final rule over the next year. I suspect several bills will be introduced in the U.S. Congress over the next year, as the DOL's final rule is promulgated. Already a bill has been drafted to promote a new "best interests" standard, in lieu of a fiduciary standard. If the bill is anything like what SIFMA proposed and FINRA endorsed, then Wall Street and the insurance companies would have been successful in proposing that the U.S Congress commit a fraud on the American people by redefining the legal term, "best interests," as something far less than equivalent to the fiduciary duty of loyalty. Let's hope the U.S Congress is wiser than Wall Street seems to think they are.

Despite additional upcoming efforts in Congress to derail the DOL's rule by Wall Street firms and the insurance companies, look for an early 2016 delivery of the final rule to the Office of Management and Budget (OMB). While the OMB has 90 days to review the rule, given the extensive review it already undertook of the proposed rule, and the strong Administration support, I suspect that the OMB will only require several weeks. This would result in the DOL's final rule being issued sometime late in the first quarter of 2016. With an effective date likely to be set eight months later, full implementation of the final rule would occur at the end of 2016.

I'm not saying the DOL's final rule will be perfect. But - I am hopeful that it will remain a fairly strong rule. I am somewhat hopeful that the "Best Interests Contract Exemption" ("BIC exemption"), as well as the education exemption, will be sunset after a period of years, in realization that these exemptions only facilitate the movement of the retail investment industry away from product sales and toward a service provider (fiduciary)-client relationship. Additionally, as I've written before about both the BIC exemption and the education exemption, there is a danger that these exemptions could (as a result of industry pressure) be misinterpreted, over time - another reason to sunset these exemptions after a period of 5-7 years or so. In any event, the finalization of the DOL's Rule (should it occur, which is now far more likely) provides a significant impetus for the advancement of the financial planning profession.

THE COMMITTEE FOR THE FIDUCIARY STANDARD. Spreading through the industry and consumer press has been The Committee for the Fiduciary Standard's "Fiduciary Oath." Consumers are now beginning to ask financial planning and investment practitioners to sign the Fiduciary Oath, a succinct statement of fiduciary principles, in greater numbers. And practitioners are reporting that the cover letter they send to their current clients, accompanying the signed oath, leads to an extraordinary amount of referrals. Never before has there been such a simple, yet effective, means to confirm fiduciary status to a client or prospective client, nor to differentiate the fiduciary from non-fiduciary actors.

INSTITUTE FOR THE FIDUCIARY STANDARD. Another major development this Fall, and extending back for a full year, has been the development of "Best Practices" for all those providing investment advice by the Institute for the Fiduciary Standard. This set of ethical guidelines largely "got it right" - especially regarding the all-important requirements imposed on fiduciaries when an unavoidable conflict of interest is present. In succinct terms, amplified by explanations, these Best Practices, devised by a committee of practitioners, can serve to guide the profession forward.

Hats off to the Institute for the Fiduciary Standard and to the many members of the profession who have responded, and continue to respond, to the Institute's call to "Get Involved." Through their ongoing promotion of their Best Practices, the Institute appears poised to heavily influence financial planning and investment advice as it evolves into a true profession.

SECURITIES AND EXCHANGE COMMISSION (SEC). Surprised I listed the SEC discussed in this list of recent developments? So am I. As I expressed in a recent interview with FiduciaryNews, the SEC's failure to apply the Investment Advisers Act of 1940 properly, and to enforce it, is the heart of the problem today.

In 2016 the SEC is set to embark on two rule-makings. The first, expected by March (per the SEC, although it has a habit of never meeting any deadlines, self-imposed or otherwise), would provide for third-party exams of SEC-registered investment advisers. What will this mean? Higher costs for most larger RIA firms, for certain. And - much more draconian - a greatly expanded role for FINRA (which, I have opined, should not be rewarded for its long-standing efforts to hold standards of conduct for broker-dealers low, but which instead should be disbanded).

The SEC has also announced that it desires to promulgate, under the authority granted it by Section 913 of the Dodd-Frank Act, a fiduciary standard for broker-dealers.

Frankly, I'm not very hopeful that the SEC will reverse its course of dismal rule-making, as seen over the past four decades. In and out of the SEC's revolving door between its offices next to Union Station and Wall Street flow its senior staff. The influence of Wall Street in the halls of the SEC is overpowering. It would take extremely strong leadership from the SEC Chair and the Commissioners to correct the SEC's past transgressions and move the SEC toward the adoption and enforcement of non-waivable, non-disclaimable fiduciary standards of conduct for all providers of financial and investment advice.

Still, with the DOL's rule likely to become effective, the SEC has some "political cover" in conforming its very weak view of the fiduciary standard to the stronger view possessed by the DOL. Let's only hope that the SEC can get it right.

CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC. ("CFP BOARD"). Yesterday the CFP Board announced the formation of a 13-person Commission to review its standards of conduct.

As I acknowledged in prior posts, the CFP Board took a courageous stand in 2007 when it came out with the current standards, with their inclusion of the fiduciary standard of conduct and its application to the entirety of a relationship (i.e., once the fiduciary hat is in place, it cannot be removed). And the CFP Board, to their credit, has graciously made some changes in the way it promotes itself and its certificants, in response to my suggestions.

Yet, I have struggled with the fact that many CFP Certificants don't always practice as fiduciaries. And, in my view, the CFP Board's Standards of Conduct are not as clearly written as they could be, nor do they provide adequate guidance to practitioners. While the CFP Board has provided extensive commentary and education around its standards of conduct, confusion on many important aspects of the standards still reign.

As the CFP Board has now stated, in just the past eight years there have been tremendous changes in the regulatory landscape. Hence, it is time that the CFP Board re-visit its standards. This is the right moment for the CFP Board to seek input from its stakeholders and consider revisions to its standards. The DOL's Conflict of Interest final rule, the CFS' Fiduciary Oath, and the IFS's Best Practices can all serve as resources in this highly important endeavor.

I have been approached, increasingly often, by practitioners (including many past and current leaders of our organizations) with the idea of forming a new professional organization, which would promulgate true professional, fiduciary standards of conduct. While starting small, this organization would seek to promote its standards, seek to work with state securities administrators and the SEC to initiate one or more forms of peer review, and thereafter (hopefully) serve as the backbone of a future Professional Regulatory Organization (PRO).

Instead of pursuing such an initiative and the formation of a new organization, I am hopeful that the CFP Board, through its Commission to re-visit and revise its Standards of Conduct, will "get it right." And I hope, following the CFP Board's Commission recommendations and their subsequent (following more input) adoption, that the formation of some new organization will not be viewed as necessary, nor any longer even considered by others.

The CFP Board's win the Carmada lawsuit (although the case is currently on appeal) was huge, in establishing the rights of the organization to enforce professional rules of conduct against its members. The language of the court's decision, as to the deference provided to the CFP Board in the enforcement of its standards, should not be overlooked.

The CFP Board's educational requirements and exam process (despite recent changes to the testing process being criticized by some) remain exemplary. The next step for the CFP Board, in order to truly become the representative of a true profession of financial and investment advisers, is the adoption of comprehensively applied, non-waivable, non-disclaimable fiduciary standards of conduct for all providers of financial and investment advice, and for all those who use the mark, Certified Financial Planner(tm).

IN CONCLUSION.

Today we still sit in the shadow of the Great Recession. Financial institutions are not trusted. Nor do the majority of Americans trust financial advisors. But all this can change. Together, and with strong effort and perseverance we can make 2016 the year for the restoration of trust in financial services.

• For the benefit of our family, friends, and neighbors - our fellow Americans.
• For the benefit of our emerging profession, so that we may call ourselves "true professionals."
• For the benefit of the future economic growth of our country, fostered by a new era of trust and capital formation arising from the adoption of fiduciary standards of conduct for all those who provide investment and financial advice.
• For the future of the United States of America, itself, a nation founded upon principles of devotion, trust, and service to others. 

The year 2015 may be viewed as establishing more foundations upon which a true profession of financial planners and investment advisers can be built. As we move forward into 2016, your contributions will be needed:

• to stop ongoing efforts in Congress to derail the DOL rule-making;
• to provide input to the SEC on its proposal for third-party exams;
• to provide input to the SEC on its application of fiduciary standards to broker-dealers, and to correct its prior actions in which it failed to properly apply and/or enforce fiduciary standards;
• to promote, to consumers, the distribution of The Committee for the Fiduciary Standard's "Fiduciary Oath";
• to get involved with the Institute for the Fiduciary Standard, as it seeks greater recognition and promulgation and adoption by practitioners of its "Best Practices"; and
• to contribute to the discussion of the work of the CFP Board's Commission exploring changes to the CFP Board's standards, either directly or via your involvement in the Financial Planning Association or the National Association of Personal Financial Advisors or other industry organizations.

Let us make 2016 the year in which we progress - intentionally, substantially, and with fortitude - toward a true profession.

Let us make 2016 the year in which financial planning finally sheds its "product sales" roots.

Let us make 2016 the year in which we can, for the first time, call all of our fellow CFP(r) practitioners "our fellow professionals" and "fiduciaries at all times."

Let us make 2016 the year of evolution, change, and monumental achievement - so that we can hold ourselves out proud, as true professionals, bound together by non-waivable, strong fiduciary principles governing our conduct and guiding our lives.

2016, more than any year before, will be the time for YOU to make an impact. As the Institute for the Fiduciary Standard suggests, just do it - "Get Involved."

Please Contact Congress Today Re: DOL Rulemaking

As the December 11, 2015 deadline for a budget bill in the U.S. Congress approaches, Wall Street firms and the insurance companies are seeking a "policy rider" to the budget bill that would effectively kill the U.S. Department of Labor's Conflict of Interest Rule, by instituting a substantial delay. Please join me, TODAY, in contacting your U.S. Senators and Member of Congress to indicate your support for the position that the DOL rule-making process should not be unnecessarily delayed.

You can easily do this by the e-mail device found at www.saveourretirement.org. (While this is set up for submitting comments to the DOL, you can still use it to contact your Senators/Member of Congress).

[Better yet, also call the Legislative Counsel to your Senators and Member of Congress, and follow up with an e-mail of your letter of support.]

Here is my own letter to Congress, sent out today:

I write to urge you to opposed any policy riders to the budget bill which would delay the U.S. Department of Labor's finalization of its "Conflicts of Interest" rule.

The DOL's Conflict of Interest Rule has already proceeded through a re-proposal, two comment periods this year, and days of public hearings in August. Any further delay is not only completely unnecessary, but also will only serve to thwart finalization of this rule during the upcoming year - as opponents of the rule well know. Do not let Wall Street and the insurance companies succeed in their mission to delay and kill this important rule.

The DOL's Conflict of Interest Rule will substantially reduce the conflicts of interest currently present in providing advice to plan sponsors, plan participants, and IRA account owners. The Rule contains provisions which permit commission-based, reasonable compensation, while ensuring that recommendations are made in the bests interests of the client. Moreover, the Rule will lead to increased accumulations of capital, better securing the retirements of our fellow citizens while also leading to a new era of substantial U.S. economic growth.

The DOL's Rule is great for individual Americans, extremely beneficial for owners of business both large and small, and will lead to a new era of U.S. economic growth as capital is better accumulated.

Below I contrast the situation present today with the situation that will result following the rule's effective date:

The Landscape Today

•    Today, most small investors' primary retirement savings are undertaken in defined contribution (DC) accounts.

•    Most small investors don't seek out investment advice, because they don't trust financial advisors.

•    Most small investors receive educational presentations from non-fiduciary DC plan "consultants" - but because providing specific investment recommendations would trigger fiduciary status they leave such presentations with two thoughts: "I really don't understand what was said" and "what do I do now."

•    Most small investors do not receive investment advice from non-fiduciaries currently – they either do not meet the non-fiduciaries’ minimum investment requirements, or they are steered into the highest commission or highest fee products – (good for the seller, not for the investor).

•    When smaller investors do receive investment advice, which is most commonly associated at the time of a rollover to an IRA, current pitfalls include:

•  Such advice does not address whether an IRA rollover is appropriate (versus staying in the DC plan, which could be more appropriate due to differences in conditions for early withdrawals, loan features, better investment options, etc.).

•  Is usually limited to which investments to buy, and does not address many of the tax considerations present (such as planning options around company stock, Roth IRA conversions, tax-efficient portfolio design and/or drawdown strategies, coordination with decisions on when to take social security retirement benefits, annuitization of all or a portion of plan assets, etc.). In fact, most brokers, insurance agents and dual registrants disclaim the provision of this all-important financial and tax advice, often leading to irreparable harm.

•  Most of the larger Wall Street broker-dealer firms don't serve small investors - they don't compensate registered representatives on any clients who possess less than $100,000 - $250,000 of investment assets.

•  20% to 40% of the returns of the capital markets are diverted through costly intermediation - the sale of highly expensive products. The academic research is clear: higher fees and costs result in lower returns.

•  Most Americans are sold produces, and don’t receive objective investment advice. As a result, most Americans don't invest well, thereby accumulating far less than they need for a secure and comfortable retirement.

•  Excessive financialization of the U.S. economy results in decrease of U.S. GDP by 2% per year (“Wall Street is a macro-economic problem of the first order.” (Forbes, 5/31/2015, citing NY Times article IMF Staff Discussion Note: “Rethinking Financial Deepening, May 2015).

•  Lower GDP growth and individuals ill-prepared for retirement increases burdens on federal, state and local governments to provide for needs of the elderly.

How the DOL Rule Will Change the Landscape

•    DC plan advisors, as fiduciaries, can innovate and provide what plan participants need and want: cost-effective, specific investment recommendations in group presentations.

•    DC plan participants receive objective, comprehensive, expert advice regarding the IRA rollover decision.

•    The movement toward fiduciary investment advice and away from product sales accelerates, following trends already seen in the marketplace over the last decade or longer.

•   Increased competition among fiduciary advisors occurs, placing further downward pressure on fees for investment advice.

•   Low-cost, fiduciary financial and investment advice, already available to small investors through independent fee-only advisors, becomes far more widespread.

•    As more fiduciary advisors act as purchaser's representatives, more asset management firms (who provide mutual funds, ETFs, REITs, annuities, and other investments at far less cost. Controlling investors’ fees and costs is part of their fiduciary duty.

•   Total fees and costs relating to financial and investment advice fall dramatically.

•    Increased use of technology leads to innovation in advisory firms and better, and low-fee solutions for all individual investors.

•    As majority of advisers become "trustworthy'" the demand for financial advice soars - leading to much better individual decisions on saving, smart expenditure planning, taking advantage of tax-saving opportunities, and better investment advice.

•    Americans save, plan and invest far better for retirement and other needs.

•    Far greater capital accumulation provide the fuel for innovations to be developed and deployed, super-charging U.S. economic growth - and enabling federal debt to be addressed quicker and better (leading to lower future interest rates, even better economic growth).

•    As many more Americans become prosperous, government funding of needs declines, leading to lower income tax rates and less pressure to cut benefits.

•    An increased number of college graduates entering into the financial services profession results - these grads desire to provide expert advice, not sell products.

•    Plan sponsors (employers both large and small), who currently are often sued for being steered into choosing high-cost investments in their DC plans, in reliance on recommendations from non-fiduciary retirement plan consultants operating behind the low "suitability" shield, receive far better advice from fiduciary advisers who now share responsibility for plan menu choices.

Again, I urge you to oppose any rider which would delay this important rule making initiative. I urge you to support the DOL's finalization of the rule, which will empower your constituents to better secure their own financial futures.

Yours truly,

Ron A. Rhoades, JD, CFP(r)

Asst. Professor - Finance

Director, Financial Planning Program

Western Kentucky University, Gordon Ford College of Business

Contact via e-mail: ron.rhoades@wku.edu.

More information on this topic can be found at: www.scholarfp.blogspot.com.

(This correspondence represents my personal views, and not the views of any institution or organization with whom I may be associated.)

Congress Needs to Support Business Owners - Who Are Often At Risk in Excessive Fee Litigation

I increasingly wonder why Republicans in Congress - long seen as the protectors of business owners both large and small - are largely against the DOL's attempt to update its rules. Especially since these rules substantially benefit business owners, both large and small.

What Congress does not realize is the current exposure of plan sponsors - i.e., BUSINESSES LARGE AND SMALL - to excessive fee litigation. Several cases have worked there way through the courts. More than a dozen large cases have been settled. And many more are pending. This liability exposure for business owners results from plan sponsor's reliance upon non-fiduciary "retirement plan consultants."

In essence, these "consultants" - many of whom are associated with Wall Street firms and insurance companies - advise plan sponsors to fill up the fund choices with high-priced offerings. Why? Because the consultants make more money - either from their proprietary funds that become part of the menu of plans, or from compensation received from fund providers.

Yet, these consultants are able to hide behind the shield of "suitability" and not be liable for the recommendations they have made. This is because the outdated suitability doctrine is actually a substantial lessening of the duty of due care virtually every other provider of services in America must adhere to. Originally designed to protect brokers and dealers for liability resulting from executing stock and bond trades, by lowering the duty of care, the suitability doctrine was inexplicably extended (by the SEC) to the selection of investment managers (i.e., mutual funds) in the mid-1970's - a decision that has cost our fellow Americans hundreds of billions of dollars in lost retirement savings over the past several decades.

And, under current DOL rules (adopted before the commencement of 401k plans and IRAs), since the consultant is often not a fiduciary, the consultant usually escapes any liability - leaving the business owner to hold the bag.

This is part of the problem the DOL's proposed Conflict of Interest Rule is designed to stop. It updates the definition of fiduciary to extend to virtually all providers of investment advice. In so doing, those who provide investment advice to business owners, such as consultants to 401(k) plans, will be held liable for any bad recommendations. The plan sponsor (business) will no longer be solely liable, and without any recourse against the consultant for the investment advice which was provided and received. And ... this seems only fair.

Of course, no one can stop Wall Street and the insurance companies from harming their own employees. Fortunately, in the instance below, the insurance company / broker-dealer was a fiduciary, as the plan sponsor - and could not escape potential liability for recommending high-cost products that served to undermine its own employees' retirement security, because of higher fees.

Another Excessive Fee Suit Settled
NAPA.NET - 11/30/15

"A federal district court judge has approved what plaintiffs’ attorneys have called an $11 million settlement in another so-called excessive fees case, though the actual cash outlay will be significantly less.

Under the terms of the settlement of the class action lawsuit, approved by U.S. District Judge John Jarvey, Principal has agreed to pay $3 million into a settlement fund (which also includes payment for attorneys’ fees), as well as agreeing to reduce plan fees going forward by at least $8.1 million. 

Pensions & Investments reports that Principal will reduce administrative expenses of the plans to seven basis points from 14 basis points, and has also agreed to add a self-directed brokerage window to its defined contribution plans. Participants will also be able to invest in non-Principal funds.

The class action lawsuit claimed that employees of Principal only had the option of investing in Principal-branded funds for their company-sponsored retirement plans, “whereby the plans paid, directly or indirectly, higher than reasonable fees.” The participants alleged that the retirement plans used Principal investments and administrative services “because Principal, its subsidiaries and its officers benefited financially from the fees,” according to P&I, citing court documents...

Principal denied wrongdoing, according to the settlement agreement. “The company states that it is entering into the agreement solely to eliminate the burden and expense of further litigation,” the agreement document said, according to the report by P&I."

Whose Side Are You On? Wall Street or Retirement Savers?

I Believe In A Bona Fide Fiduciary Standard

I believe in a bona fide Fiduciary Standard.

I believe when you say, "I act in my client's best interests," it means never placing your interests above that of the client. No caveats. No disclaimers.

(I reject the "Best Interests" standard proposed by SIFMA, endorsed by FINRA, and now finding its way in legislation in the U.S. House of Representatives. This "best interests" standard does not require loyalty by the financial or investment adviser. It does not require the continued duty to keep the client's best interest paramount at all times. It permits waivers of fiduciary standards, via mere disclosure. As I've explained before, it is nothing more than "suitability." Worse - it's fraud by rule-making or legislation.)

I believe that core fiduciary duties cannot be waived by clients, nor can disclaimers of fiduciary duties be upheld as legitimate.

I believe that when a person or firm states: "I/We provide objective advice" - It should mean that conflicts of interest are avoided, and that the firm should be held to a nonwaivable fiduciary standard of conduct.

I believe conflicts of interest cannot just be "disclosed away," and that if a conflict of interest is unavoidable then full and complete disclosure of all material facts (including the ramification of the disclosure) must be affirmatively undertaken in a manner to ensure client understanding and to secure the client's informed consent, and even then that the suggested course of action remain substantively fair to the client. For no client would ever consent to be harmed.

I believe when you say, "I am a fiduciary," it means that you cannot push proprietary products, engage in principal trading, receive additional compensation for recommending one product over another, receive revenue sharing payments (including payments for shelf space or 12b-1 fees), or even receive soft dollar compensation.

I believe when you hold out as an advisor (as opposed to a salesperson), whether by use of the terms "financial consultant" or "financial advisor" or "financial planner" or "wealth manager" or any other similar terms, or by using designations such as CFP(r) or ChFC, you represent yourself as a trusted advisor, and should accordingly act as such at all times.

I believe that holding yourself out as a trusted advisor, and not accepting fiduciary status and its burdens and restraints upon conduct, is tantamount to fraud.

I believe that each person should honestly, and forthrightly, say what he or she does, and then should do what he or she says.

I believe that once you accept fiduciary status toward a client, it extends to all aspects of your professional relationship of the client, and that the fiduciary hat cannot be removed.

I believe it is not possible to wear two hats at one time. (And a lot of jurists agree with me.)

I believe that, by either holding out as a trusted financial advisor, or acting as same, you are bound to exercise a professional level of due care, requiring expertise and experience and sound judgment.

I believe, to paraphrase the late Justice Benjamin Cardoza, that the fiduciary standard should not be diminished by "particularized exceptions" which are developed over time.

I believe that I am a steward of my clients' wealth. It is not there for me to play with. I must deal with it prudently, and wisely, applying my vast knowledge of the workings of the capital markets to seek to achieve my client's lifetime financial goals.

I believe that as a financial and investment adviser, I am a professional.

I believe that we, as professionals, should always place the interests of the public ahead of our own.

I believe as a trusted, expert advisor I am entitled to professional-level compensation - not more, and not less.

I believe that promotion of the fiduciary standard will continue, as advocates (such as those in The Committee for the Fiduciary Standard) continue to seek to aid our fellow Americans to receive the honest, trusted advice they all so richly deserve.

I believe that, following the imposition of a bona fide fiduciary standard for all providers of financial and investment advice, the demand for financial planning and investment advice will soar, Americans will become more trusting of the capital markets, the cost of capital will decline, and fuel will be provided to propel America's economy forward.

I believe in The Fiduciary Oath. I believe every single consumer of financial and investment advice should absolutely insist upon the signature of his or her financial or investment advisor to such Oath.

I believe that the best financial planners and investment advisers will migrate to professional associations that seek to minimize all conflicts of interest, by not engaging in third-party compensation schemes. These associations include NAPFA (of which I am a member), Garrett Planning Network (of which I am a member), the Alliance of Comprehensive Planners, and XY Planning Network.

I believe that, over time, consumers will migrate to professional financial and investment advisers that eschew conflicts of interest, whenever possible, and that the media will continue to play an important role in directing consumers to the organizations listed above.

I believe that the time has come to shed the "product sales" roots of the financial planning profession, for once and all.

I believe that we should regulate ourselves. For regulators will usually not understand how to properly evaluate our adherence to our fiduciary duty of due care, nor to our fiduciary duties of loyalty and good faith.

I believe in peer review.

I believe that many of the regulations imposed upon investment advisers over the past 15 years result in time-consuming dotting of the "i's" and crossing of the "t's" - with little impact on deferring fraud or assisting consumers.

I believe that the application of a bona fide fiduciary standard to personalized investment advice, in this ever-more complex financial world, is inevitable. Perhaps not this year, or even this decade. Perhaps not even in my lifetime. But some day.

I believe that government has a role, in setting professional standards, but that government resources are and should be limited, and that government oversight should be reserved for necessary interventions that detect and punish actual fraud and other severe violations.

I believe professional standards of conduct can, and should be, promulgated in such a manner as to provide the professionals with adequate guidance on their activities.

I believe that most advisors would prefer to practice under a bona fide fiduciary standard of conduct, if their firms would let them.

I believe that nearly all consumers would prefer to work with trusted, professional advisers, rather than with product salespersons.

I believe the demise of Wall Street and insurance firms, dedicated to the formulation and distribution of expensive products, is inevitable.

I believe that, even if the huge lobbying efforts by Wall Street and the insurance companies prevent the DOL and the SEC from applying fiduciary standards, that professionals who desire the bona fide fiduciary standard will, nevertheless, prevail in the marketplace over time.

I believe that fees and costs matter, as so much academic research has confirmed.

I believe that, as stewards of our clients' wealth, professional financial and investment advisers possess the duty to ensure that only such fees and costs as are reasonable and necessary are incurred by the client.

I believe that, on average, 90% of the returns offered by the capital markets should flow to individual investors, rather than intermediation consuming 30% to 50% (on average) of those returns.

I believe that capital accumulation is thwarted by our current conflict-ridden financial services system, in which there exist a huge extraction of rents by Wall Street firms, insurance companies, and some others.

I believe that the application of the fiduciary standard will result in a new era of capital accumulation and capital formation, lower costs of capital for firms, and an expanding U.S. economy.

I believe that trust will prevail over betrayals of trust.

I believe that fairness will prevail over greed.

I believe that right will prevail over wrong.I believe.

And - I will continue to believe.

Ron A. Rhoades, JD, CFP(r) serves as Director of the Financial Planning Program at Western Kentucky University. The views expressed herein are his own, and are not necessarily representative of those institutions, organizations and firms of which he is a member.

Third-Party Exams for RIAs Proposed; Is It Time to Embrace a True Profession?

As the SEC moves toward proposing a rule for third-party exams of registered investment adviser (RIAs), it seems appropriate to ask - "As professionals, what would we like to be?"

The answer is clear, in the minds of many - a true profession. In which we are proud to call ourselves by the titles that denote those within the profession. In which we practice with high degrees of skill, with singular devotion and determination to assisting our clients to attain their lifetime financial goals.

A true profession - in which the leaders of the profession maintain the highest levels of professional conduct for its members. For these leaders will know, that in so doing, the public will trust the members of the profession, and demand for the professional services of its members will soar, and then remain high.

How do we lead the profession? Through a professional organization.

A professional organization, composed of individual members, that is committed to serving the public interest.

Of course, this organization would not be FINRA (formerly known as NASD). As Tamar Frankel, America’s leading scholar on fiduciary law as applied to the securities industry, wrote in 1965:  “NASD … [does] not, as do the professions, consider the public interest as one of [its] goals … Let us consider the attitude of the professions toward the public interest. The goal of public service is embedded in the definition of a profession. (Pound, The Lawyer from antiquity to modern times 5 1963). A profession performs a unique service; it requires a long period of academic training. Service to the community rather than economic gain is the dominant motive. We may measure the broker-dealer’s activities against these criteria … Although at least part of his trade is to give service, profit is his goal. The public interest is stated in negative terms: he should refrain from wrongdoing because it does not pay. This attitude is the crux of the matter, the heart of the difference between a profession and the broker-dealer’s activity … The industry emphasizes its merchandising aspect, and argues that the broker-dealer is subject to the duties of a merchandiser even when he is also acting is his advisory capacity … the NASD [has] proved incapable of establishing accepted standards of behavior for the activities of the trade … Past experience has proved that it is unrealistic to expect the NASD to regulate in the public interest ….” (Tamar Frankel, f/k/a Tamar Hed-Hoffman, “The Maloney Act Experiment,” 6 Boston College L.R. 186, 217 1965).

Sadly, fifty years later, the words of Tamar Frankel are still true, with respect to FINRA.

But another professional organization, other than FINRA, can reach the lofty heights resulting from a true profession. And, by maintaining and enhancing the professional standards of its members over time, the services of its members become more attractive to the public, fueling demand for the services of its members.  The key ingredient, in this regard, is that the needs of the client always come first – i.e., a bona fide fiduciary standard is maintained.

In other words, conflicts of interest are avoided, wherever possible. And, where not possible to avoid a conflict of interest, a multi-step process is followed to strictly and properly manage the conflict of interest to insure that the client is not harmed.

And, the organization must have as it members individuals (who are more likely to keep professional standards at high levels), not firms (who tend to promote their commercial interests).

Where to begin?

First, we must look to our current organizations.

Are any of them willing to step up to the table and adopt high Standards of Professional Conduct to which there members must adhere? These Standards of Professional Conduct should carefully, and deliberately, spell out the fiduciary duties to which the members should adhere. Commentary should follow each enunciated principle, providing insights into how the principle is to be properly applied.

The fiduciary standard should be applied at all times, to members of this organization, when providing any information, education or advice regarding financial or investment matters to clients or prospective clients. No "fine lines" should be drawn (such as when "material elements of financial planning" are taking place).

All members should be required to abide by the Rules of Professional Conduct. A "Fiduciary Oath" (perhaps of the type promoted by The Committee for the Fiduciary Standard) might be undertaken.

If third-party exams are required, the non-profit organization should be positioned to offer such exams, both to satisfy regulatory requirements for exams as well as ensuring that its members adhere to the organization's Standards of Professional Conduct.

If one of the current organizations is not willing to step up to accept this challenge, then (as Bob Veres has recently opined may be necessary) a new non-profit professional organization might be formed.

This new professional organization could start small, and slowly build. It would offer a meaningful designation, enabling members to clearly differentiate themselves from those who won't subscribe to the organization's Standards of Professional Conduct. Members should possess a high degree of expertise, evidenced by passing one of 3 or 4 certification exams - and perhaps more.

Then, if the SEC moves forward with third-party exams, this professional organization can step in to serve - perhaps as one of several competing organizations in the third-party exam space. The existence of this organization might, over time, result in a "rush to the top" as to standards of conduct, as other organizations seek to emulate it.

And, as a non-profit organization, the fees for third-party exams would be driven down to be as low as possible.

Additionally, the organization might work with the SEC and state securities administrators to foster the promulgation of education surrounding compliance with laws, regulations and standards. The organization could seek to reduce the (costly) compliance burdens of its members by providing up-to-date compliance policies and procedures. And the organization may well advocate to reduce some of the "dot the 'i', cross the 't'" burdens that investment advisers are subject to (unlike CPAs and attorneys), and to reduce the frequency of exams for low-risk firms (always, however, undertaking limited-scope and frequent exams regarding asset verification - custody - of client assets, as a means to deter and detect actual fraud).

Additionally, the organization could promote, through education, higher levels of due diligence as to investment and insurance product and investment manager selection. Academic research regarding MPT, asset allocation, asset class selection, portfolio design and construction, portfolio management, retirement rates of withdrawal, and behavioral finance could be much more heavily emphasized in educational sessions - which could be produced and made available at lower costs to its members.

The organization could provide real-life examples of how to comply with the Standards of Professional Conduct so adopted, by maintaining an online, searchable library of actual cases, commentary, and advisory opinions.

The organization might issue advisory opinions, when called upon. So that members who confront situations can find out the proper course of action, rather than guess.

The organization might work with the SEC and state securities administrators to foster peer review. The first form of peer review would be of a voluntary manner, designed to examine and improve the processes of a firm. This peer review process would be informative, and proactive, and helpful - and not requiring any report to a securities regulator (unless theft of client funds was discovered, or some other similarly egregious violation).

The second form of peer review should be of a mandatory nature, so that whenever a member's conduct is called into question by the filing of a complaint, a panel of his or her peers determines whether there is probable cause to proceed with a hearing, and then, later, determines whether a violation has occurred. Because, except in cases involving actual fraud (and certain other clear violations), only expert professionals can opine on whether another professional's conduct adheres to the duties that exist. It is far better for professionals to judge the conduct of other professionals.

Is it time?

As an emerging profession, is it time to shed the "sales" roots of financial planning?

Is it time to become trusted advisers to our clients through non-waivable core fiduciary duties?

Is it time for each and every financial and investment adviser to train to become a true expert, and then to maintain that high degree of expertise through ongoing education?

Is it time for every financial and investment adviser to be, at all times, completely candid and honest with their clients. Even at the risk of termination of the adviser-client relationship?

Is it time for every "financial consultant" or "financial advisor" or "wealth manager" or "investment advisor" or "estate planner" or "financial planner" or "Certified Financial Planner(tm)" or "Chartered Financial Consultant" or "Personal Financial Specialist" (or whatever other term is utilized that, by its very nature, denotes a relationship of trust and confidence) to use those terms only if they agree to act as fiduciaries at all time?

Is it time for financial planners and all who provide investment advice to act, at all times, not as representatives of some investment product manufacturer, or product distribution company, but rather as a representative of the client?

Is it time for us to treat each and every client as if that client were our parent, sibling, child, or aunt, uncle, niece of nephew? To keep the best interests of our clients paramount at all times.

Is it time for our profession to move to fully embrace business models which avoid conflicts of interest wherever possible. Because mere disclosure of a conflict of interest does not fulfill the fiduciary duties of due care, loyalty, and utmost good faith?

Is it time for us to embrace the call for a true profession?

What do you think?

Fiduciary Duties Conform to the Level of Protection Required

It is time for financial planners and investment advisers to become part of a true profession.

There are many different types of fiduciary relationships. The duty of loyalty itself, and the ability to waive the fiduciary standard, is adjusted to fit the varied types of relationships. In some fiduciary relationships, less protection is required; in others, a much stronger degree of protection required. Generally, the greater the disparity in knowledge and skill between the fiduciary and the entrusted (agent, or business partner, or client), the more strictly the fiduciary standard of loyalty is applied.

Employer-employee relationships. For example, suppose you are an employer, and your employee acts as your agent to purchase some goods for you. The employee has a fiduciary duty to you. Under the best interests fiduciary standard applicable to principal-agent relationships, any conflicts of interest which exist or which may arise must be disclosed by the employee, and the employer must provide consent. For example, if the employee earns a commission upon the purchase of goods, the employer may consent to the employee’s receipt of that commission. In essence, the employer may waive this non-adherence to the fiduciary duty of loyalty that the employee possesses. Of course, in this type of relationship the employer nearly always has greater power and greater knowledge of the subject matter, than the employee. Hence, we don’t feel a great need to protect the employer, as long as there is affirmative disclosure of the conflict of interest and informed consent.

Business Partners. Then there are fiduciary relationships applicable to partners, or members of a limited liability company, with respect to each other. Most state laws permit the parties, at least to some degree, to contract out of fiduciary duties that might otherwise apply. In these situations the law recognizes that the partners likely possess equivalent knowledge and fairly equal bargaining positions, at least when the partnership or limited liability company relationship is entered into.

Attorney-Client Relationships. In contrast, look at the fiduciary relationship between an attorney and her or his client. The law recognizes that, in such a relationship, the attorney has vastly superior knowledge than the client possesses of the law and how the law might be applied. Hence, the lawyer cannot ask a client to waive compliance with a lawyer’s duty of care, nor can the lawyer ask a client to simply waive a conflict of interest where the lawyer is likely to secure a monetary benefit.

For example, under Rule 1.8(a) of the American Bar Association’s Model Rules of Professional Conduct, a “lawyer shall not enter into a business transaction with a client or knowingly acquire an ownership, possessory, security or other pecuniary interest adverse to a client unless: (1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client; (2) the client is advised in writing of the desirability of seeking and is given a reasonable opportunity to seek the advice of independent legal counsel on the transaction; and (3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer's role in the transaction, including whether the lawyer is representing the client in the transaction.”

Hence, the ethics rules governing attorneys require multiple steps when a lawyer might acquire a pecuniary interest that is adverse to that of the client. The transaction must remain fair and reasonable. The lawyer must advise the client that the client should seek out independent legal counsel. And the client must provide informed consent to the transaction.

But, it is self-evident, that consent is not “informed” – nor is the transaction “fair and reasonable” – if the client might be harmed. The ABA’s comment to Rule 1.8 provides this example: “[I]f a lawyer learns that a client intends to purchase and develop several parcels of land, the lawyer may not use that information to purchase one of the parcels in competition with the client or to recommend that another client make such a purchase. The Rule does not prohibit uses that do not disadvantage the client. For example, a lawyer who learns a government agency's interpretation of trade legislation during the representation of one client may properly use that information to benefit other clients.

Investment Adviser - Client Relationships. So now we turn to investment advisers. Are investment advisers more like employers, or more like partners, or more like lawyers, in terms of the stature and abilities and knowledge of the entrustor - employer, other partners, or client? One can only conclude that clients of financial and investment advisers are much more like clients of attorneys, and not at all like partners entering into a partnership agreement (who presumably have fairly equal knowledge and expertise). Clients of investment advisers certainly don't possess the superior knowledge and skill that most employers possess with respect to their employees.

Clients of investment advisers simply lack the knowledge of the financial markets that financial advisors do. And clients are not likely to gain such knowledge without a very substantial investment of time and effort, and even then many clients won’t possess the aptitude for matters of finance.

Hence, between investment advisers and their clients there exists this huge gap of information. This gap is what allows the clients of a fiduciary to be taken advantage of. The academic research in support of this is absolutely clear. We are no more likely to turn the average consumer into a skilled consumer of investment advice, armed with all the knowledge required to protect himself or herself, than we are to turn the patient of a doctor into a brain surgeon.

Many Clients of "Financial Advisors" Believe Their Advisor Doesn't Get Paid - Anything! The SEC knows this. The 2008 Rand Report, commissioned by the SEC, revealed that 35% (75 of 214) clients of professionals who were able to answer a question on fees thought that were paying no fees to their financial advisor. Many more clients couldn’t answer the question posed by Rand, in their survey.

I have personally seen this lack of knowledge over and over again. I have talked to many potential clients who, upon inquiry, thought that their broker was a "good guy" who "was not charging us, because he is a friend."

Second Opinions Reveal the Harm Often Caused.  A couple of years ago I did a portfolio review for a highly educated retired engineer and executive. This person, despite spending time reading much of the information that was provided, had no idea that she was paying total fees and costs which approached 2.5% on a portfolio which was well over $1.5 million. For another couple, for whom I did a portfolio review about a year ago, the couple had no idea that the dual registrant who was serving them was, in addition to receipt of investment advisory fees, also getting 12b-1 fees and payments for shelf space.

I often provide second opinions on portfolios. When I do my analysis, and reveal these fees and costs to the clients of these “financial advisors,” these individual investors often get very angry. Not just at brokers, but at the entire financial services system.

Disclosures Are Ineffective. It is just absolutely clear that investment disclosures are not read. Even if read, these disclosures are not understood. No amount of simplification of disclosures is going to fix this. For even if high fees are revealed, many clients believe that high-cost products are better investments. Of course, the academic research is clear that higher-cost products, on average, directly correlate with lower returns to investors.

In Conclusion.

There currently exists a "battle for the soul of the profession." On one side are those who desire to adhere to the old ways - trust-based selling leading to product sales. On the other side are those who recognize that the fiduciary standard is needed - both to protect our fellow Americans but also to bring the delivery of financial planning and investment advice to the level of a true profession.

Which side are you on?