Sunday, July 16, 2017

Ideas for Engagement with WKU's Financial Planning Program

Ideas for Engagement with

Western Kentucky University's

Financial Planning Program

CONTENTS:
A. Ron's visits to firms, early August 2017.
B. Ideas for engaging with WKU's students.
C. Upcoming events Ron will be attending.
D. How to engage Ron for speaking/consulting.

A. Ron to Visit Firms/Practitioners in Kentucky, Tennessee, Southern Ohio, Indiana, Illinois and St. Louis, During the Week of August 7-11, 2017. 

As part of my ongoing outreach to firms and practitioners, I visit practitioners and firms each summer in order to share ideas and information. This assists me in delivering great and up-to-date content to students, and I'm pleased to share whatever insights I possess with practitioners and firms.

While each visit is unique, possible discussion topics for these short (typically 1-1.5 hour) visits this year include:
  • How is your firm adapting to the DOL's fiduciary standard?
  • What are your thoughts about the CFP Board's proposed revisions to its Standards of Professional Conduct?
  • Do you have questions for me about compliance with the fiduciary standards, either under ERISA, DOL prohibited transaction exemptions, as they relate to IRA rollovers, under the CFP Board's proposed rules, under the Investment Advisers Act of 1940 and/or similar state statutes, and/or under state common law?
  • What is your personal (or your firm's) business strategy for growth in the coming years?
  • How does your firm conduct investment strategy and investment product due diligence?
  • What software is your firm utilizing?
  • How do you typically engage with new clients, and/or present financial plans?
  • What financial planning issues are becoming more prevalent today?
  • What skills would you like to see graduates of undergraduate programs possess, or enhance?
  • Will you be looking for either interns or graduates in the coming years?
  • Would you be interested in having an undergraduate student "shadow" you for a day, or for longer?
  • Would you be interested in serving as a mentor for a student? (Mentoring often involves monthly phone calls or Skype calls with your mentee, offering them advice on professionalism, career choices, and generally making good decisions.)
  • If Western Kentucky University were to host a one-day Personal Financial Planning Conference in the Spring of 2018:
    • Would you be interested in attending?
    • What dates would be best?
    • What speakers would you like to see?
    • Would you consider sponsoring or co-sponsoring a speaker?
B. Assist Students To Engage with the Financial Planning Community: Would you be interested in:

B.1. Tours of Financial Services Firms with Students. During the Fall 2017 semester, and again during the Spring 2018 semester, I'll be undertaking "day trips" (typically on Fridays) with my students to visit financial services firms in Kentucky and in/around Nashville, Tennessee. Up to 12 students join me on these visits, which typically involve a 1-2 hour visit to a firm. We typically visit 3-5 firms per day, and often one firm hosts lunch for the students. Firm members often provide a tour of the firm's offices, discuss their business model, provide an overview of a "day in the life of" various positions in the firm, and/or "tips" for students and/or first-year financial advisers. Visits to practitioners provide huge benefits to students.
  • Student become much more deeply committed to becoming future personal financial advisers.
  • They get a real sense of the environment they will likely work within. (Some students have only infrequently visited professional offices.)
  • Students get exposure to different business models, which assists them to further define their own career paths.
  • And, students become more serious about their studies when they return.
B.2. Assisting Students Financially. In these times where there is a significant "gap" between grants/scholarships and the actual costs of attending college, nearly all students need help. In order that students can better engage with the financial planning community, please consider a contribution to WKU's Financial Planning Program, directed at one of the following purposes:
  • The Oct. 2-3, 2017 FPA BE Conference is Our Key Priority for This Fall ... The Location of a National Conference One Hour From WKU Presents a Unique Opportunity. 
    • Can you sponsor one or more students to attend the Financial Planning Association's BE National Conference, Nashville, FL, Oct. 2-3, 2017, by paying registration fees ($199 per student).
    • We desire to take up to 60 students to this conference, given its location one hour south of our campus. This means many more of our students can attend, instead of the only 6-8 we can afford to take to conferences that are further away.
      • Can you assist one or more students to attend this conference?
      • Only $199 per student - can have a TREMENDOUS IMPACT upon the student.
        • Students report that attending a major conference is often the highlight of their college career.
        • And we, as professors, see students become more engaged in their classes and serious about their studies, after they attend a conference!
  • Please Consider Sponsoring the Student Chapter of the Western Kentucky University Financial Planning Association:
    • Provide scholarships for student members' dues ($35 each); or
    • Provide $250, $500, $750, $1,000, $1,500 or $2,000 to reduce the annual dues for all students who desire to join the WKU Student Chapter;
  • Please Consider Sponsoring One or More Students to Attend the NAPFA South Region Symposium (Atlanta, GA) in the Spring of 2018 (typically $150 per student to handle travel via shared travel (via van) and shared hotel room fees, plus the pre-conference and conference registration fee of about $175)
B.3. Seeking a future hire - for either a permanent position or an internship?Speaking to the Financial Planning Association Student Chapter at Western Kentucky University (meetings are typically 5pm CT, on a weekday, in Grise Hall). Please suggest a topic - often centered around careers, career development, etc. Please note that the choice of speakers is determined by the students themselves. (Hint: Offering to sponsor pizza - available from Papa John's on-campus, and picked up by students - for the meeting is usually a good way to get to the top of the list!)

B.4. Become a guest speaker at one of Ron's classes: I usually have one guest speaker to each of my classes, each term. Speakers address the topic of the class.
  • Applied Investments (this introductory-level class teaches business students to better save and to better manage their 401k, and reviews asset classes, mutual fund selection, and multi-factor investment concepts) (Fall 2017 and Spring 2018);
  • Retirement Planning (a broad range of topics, from Social Security to Medicare to Medicaid to use of immediate annuities to use of MoneyGuidePro software, and employee benefits) (Fall 2017); 
  • Estate Planning (Spring 2018); or
  • Personal Financial Planning Practice Management (new course beginning Fall 2018, emphasizing counseling techniques, prospecting and networking, and the use of various types of software in financial planning firms). 
B.5. Sponsor and/or Assist WKU's Center for Financial Success. Our innovative Center for Financial Success hires students to provide presentations to, and one-on-one financial counseling to, WKU's students. This provides real counseling and presentation experience for our graduates.
  • In addition to cash contributions to assist us in hiring more students, we are in need of your expertise for training of the Center's staff on personal budgeting (from a university student's perspective), seeking out college scholarships and grants, and how to manage student loans - especially where multiple loans exist, of different types.
  • For more information about engaging with WKU's Center for Financial Success, please contact its Director, Prof. Andrew Head: Andrew.Head@WKU.edu. Thank you!
B.6. Inviting/sponsoring one or more students to your FPA Chapter event (if within driving range of Bowling Green, KY) and/or NAPFA Study Group or other conference or event? Students receive as much a benefit from networking with practitioners, and hearing their insights and wisdom, as practitioners do themselves.

If you are interested in one of the foregoing sponsorships, please contact me at Ron.Rhoades@WKU.edu.

C. Join students from Western Kentucky University and/or me at the following events:

CFP Board of Standards, Inc.'s July 24th Tampa, FL Public Forum on its Proposed Code of Ethics and Standard of Conduct, Monday, July 24, 8:00 - 10:00 a.m., Renaissance Tampa International Plaza. I will be in attendance at the Public Forum and will then be part of a panel discussion, hosted by FPA of the Suncoast, following the Forum from 10:15am-Noon. Hope to see you there! (Note: CFP Board is hosting 10 public forums, around the country, the week of July 24-28.)

FPA of Southwestern Ohio Annual Symposium, Friday, Sept. 29, 2017, 8:00am – 5:00pm, at Miami University – West Chester, Voice of America Learning Center. I'll be presenting on "Due Diligence for IRA Rollovers Under the Leas of Regulators." (See description under FPA of Minnesota, below.) For more information about the Symposium, please visit http://chapters.onefpa.org/southwesternohio/chapter-meetingsevents/.

FPA BE National Conference, Nashville, TN, Oct. 2-4, 2017. Prof. Andrew Head and I will be bring many students from Western Kentucky University's B.S. Finance (Personal Financial Planning) Program to the national conference. Our campus, in Bowling Green, KY, is just an hour north of Nashville. We hope to see you at FPA BE! And - can you considering sponsoring one or more students to attend? (See above)

FPA of Minnesota 2017 Annual Symposium, Oct. 16-17, 2017. Visit http://www.fpamn.org/financial-professionals/symposium/ for more details. My presentations include:
  • Exploring Fiduciary Issues: Fiduciary law is not uniform. Different legal standards may apply to fiduciary financial advisors as they engage in investment strategy selection, investment product selection, evaluating the benefits and costs of investment and insurance products, and in establishing their own fees. Integrating concepts from fiduciary common law, statutes and regulations, was well as from academic research into investment strategies and due diligence, Dr. Rhoades provides practical guidance on these issues for financial advisers.
  • Due Diligence for IRA Rollovers Under the Lens of Regulators: The SEC, state securities administrators, and other regulators have paid increased attention in the past few years at investment advisers’ determinations of whether a rollover of a client’s defined contribution plan account into an advised-upon IRA account is in the client’s best interests. Dr. Ron Rhoades provides practical considerations for advisors relating to data gathering, a checklist of financial planning and tax considerations that may be considered in connection with the rollover, and the methods to demonstrate the adviser’s value proposition.
D. Contact Ron for Future Speaking Engagements and/or Consulting Engagements.

I address topics on the application of fiduciary duties to investment advisers and financial planners.

   (A) I request payment for travel costs: (1) mileage to/from Bowling Green, KY to your location, and/or airfare from Nashville plus $69-$87 mileage to/from airport and airport parking; (2) hotel costs; and (3) conference registration fees.

   (B) I also request an honorarium as follows:
         (1) For-profit conferences, CE meetings, and consulting engagements at for-profit firms: $3,000 per presentation (or 6 hours consulting);
         (2) FPA Chapters, NAPFA Study Groups, and Webinars, and other Not-For-Profit Groups: $500 for one presentation; or $750 for two presentations at same conference.  [However, for FPA Chapters and groups within a four-hour drive of Bowling Green, KY, travel costs are requested but honorariums are waived, provided a "student rate" is available for undergraduate students to attend your event.]

Contact information: Ron.Rhoades@wku.edu

Thank you!         

Saturday, July 8, 2017

CFPs to Become "F.A.A.T."? - "Fiduciaries At All Times"

(An earlier version of this blog post can be found at RIABiz.)

In a dramatic evolution that is certain to reverberate throughout the financial services industry, the Certified Financial Planner Board of Standards, Inc. released on June 20, 2017 its proposed revised “Code of Ethics and Standards of Conduct” that, essentially, would require all CFP® certificants to be “fiduciaries at all times.”

There is certain to be heavy pushback upon this proposal, especially by insurance companies. However, I believe it is likely that the CFP Board’s proposal is likely to proceed to implementation given recent developments.

Why? Momentum.

For example, on June 9th the U.S. Department of Labor in implemented its “best interest” standard for IRA accounts with a fairly strict duty of loyalty and the application of the prudent investor rule.

In addition, increased support for fiduciary standards at the state level exists (including their recent adoption in Nevada for all financial planners - except insurance agents who don't "hold out" as financial planners).

Also, the Financial Planning Coalition (which includes the CFP Board, the Financial Planning Association, and the National Association of Personal Financial Advisors) have long supported SEC adoption of fiduciary standards for all those providing personalized investment advice.

The June 20th proposal by the CFP Board is likely to be viewed as a significant step in the path toward a true profession for investment and financial advisers.

With the CFP Board engaging in the seventh year of its public awareness campaign, the recognition of the Certified Financial Planner™ certification by the public has grown tremendously and far outpaces the recognition of competing designations.

The vast majority of the over 77,000 professionals licensed to use the CFP Board’s marks in the United States will likely strongly support the adoption of the “fiduciary at all times” standards, given that their adoption will likely further the trust and confidence placed by consumers in Certified Financial Planners™. In turn, this will lead to even greater utilization of financial advisors, which numerous studies have shown is altogether necessary in order for individual Americans to navigate today’s increasingly complex financial world.

While some insurance companies and a few broker-dealer firms may resist the new proposals, should such firms not permit the continued use of the marks by their advisers these firms possess huge risks. Given the substantial educational and experience qualifications required of certificants, together with passage of the difficult CFP® exam, insurance agents and registered representatives may choose to exit firms that do not follow the CFP Board’s lead. Moreover, advisers at such a firm would be at a significant marketing disadvantage.

The 60-day comment period on the CFP Board’s proposal begins today and ends of on Monday, August 21, 2017. Public forums will then be held in eight cities during late July. A final version of the revised Code of Ethics and Standards of Conduct is likely by year-end, with an implementation date sometime in 2018.

Understanding One's Fiduciary Obligations.

It is one thing to say "I am a fiduciary." It is altogether another to fully understand the obligations assumed as a result. The difficulty is even greater given the different fiduciary standards that exist - from ERISA's "sole interests" standard, to the DOL's B.I.C.E. and its "best interests" standard (and the impartial conduct standards found therein), to the Advisers Act fiduciary standard (as applied by the SEC), to state statutory and common law standards, and now the CFP Board's standards.

The challenge for us, as a profession, as we further study the language of the CFP Board's standards, is to more fully understand the implications of the fiduciary standard, come together on how to correctly apply the fiduciary standard of conduct to various common situations that financial and investment advisers face.

In so doing, we must endeavor to not create - as the late Justice Benjamin Cardoza so aptly stated some 89 years ago, "particular exceptions" that would result in a "disintegrating erosion" of the fiduciary principle.

Ron A. Rhoades, JD, CFP® serves as Program Director of the Financial Planning Program at Western Kentucky University. He is a frequent commentator and speaker on the application of fiduciary standards to investment and financial advice. This article represents his own views and are not necessarily those of any institution or organization with whom he may be affiliated.

ADDENDUM: EXCERPTS FROM PROPOSED CFP BOARD'S STANDARDS

The broad application of fiduciary duties can be found in Paragraph D.1. of the CFP Board’s proposed Standards of Conduct, which provides in pertinent part:

1. A CFP® professional shall at all times serve as a fiduciary when providing financial advice to a Client. As a fiduciary, a CFP® professional must always act in the best interest of the Client. In this regard:

     a. Duty of Care. A CFP® professional must act with the care, skill, prudence, and diligence that a prudent professional would exercise based on the Client’s goals, risk tolerance, objectives, and financial and personal circumstances.

     b. Duty of Loyalty. A CFP® professional shall place the Client’s interest above the interest of the CFP® professional and the CFP® professional’s firm. A CFP® professional must seek to avoid conflicts of interest. Material conflicts of interest that are not avoided must be disclosed and managed. A CFP® professional must act without regard to the financial or other interests of the CFP® professional, the CFP® professional’s firm, or any individual or entity other than the Client, which means that a CFP® professional acting under a conflict of interest continues to have a duty to act in the best interest of the Client and place the Client’s interest above the CFP® professional’s.

In the Terminology section of the proposal, the CFP Board provides the following all-inclusive definition of “Financial Advice”:

   (a) A communication, based on the financial needs of a Client, that based on its content, context, and presentation, would reasonably be viewed as a suggestion that the Client engage in or refrain from taking a particular course of action with respect to:
       1. the development or implementation of a financial plan addressing retirement, insurance, taxes, education, employee benefits, estate planning, charitable giving, or other financial matters;
       2. the value of or the advisability of investing in, purchasing, holding, or selling Financial Assets;
       3. investment policies or strategies, portfolio composition, the management of Financial Assets, or other financial matters;

       4. the selection and retention of other persons to provide financial or professional services to the Client ….

Sunday, July 2, 2017

July 2017: Time to Take Action to Assist Your Profession

Momentum Exists for the Fiduciary Standard, But Much Work Remains to Be Done.

Despite the anti-regulatory environment, momentum has grown for the implementation of fiduciary standards of conduct upon financial and investment professionals. With the support of industry organizations (CFP Board, Financial Planning Association, NAPFA, IAA, CFA Institute, CPA PFP division, and many others), significant progress has been made.

  • The DOL "Conflicts of Interest Rule" and related prohibited transaction exemptions are partially implemented (as of June 9, 2017).
  • The CFP Board has proposed a "Fiduciary At All Times" ("F.A.A.T.") requirement for its Certificants.
  • The State of Nevada amended (effective July 1, 2017) its financial planner law so that both RIAs and BDs and their representatives will be subject to broad fiduciary duties. Other states are considering similar legislation.
  • The SEC, under its new Chair, is considering again whether to impose fiduciary duties upon broker-dealers (although whether a bona fide fiduciary duty would be imposed, as opposed to a version of suitability, remains a big "IF").
Much work remains to be done. There are many, many fiduciary "battlegrounds." As discussed below, there are many particular battles in which fiduciary advocates are engaged currently - and your valued input is also needed.

Yet, beyond public policy initiatives (i.e., expressing support for various laws, regulations, and/or association imposition of fiduciary standards), there also exists another need for the development of the financial planning / investment advisory profession. We need to raise the bar - both as to defining our standards and in educating the members of our profession.

We Need to Earn the Right to Possess Our Own Professional Regulatory Organization (PRO).

We need to take charge of our own professional standards of conduct. So that the fiduciary standard will not be lowered or "particular exceptions" created by varying winds of politics. And so that the definition of "what is right" and "what is wrong" is not established by non-practitioners, but rather in a highly contemplative manner by experienced professionals.

"Taking charge" will only happen via a true "professional regulatory organization" (such as that which exists for attorneys, or for accountants in a sense). Such a professional regulatory organization would be granted rights (subject to governmental oversight) to define the requirements for entry into the profession, the right to sanction or otherwise expel bad actors from the profession, and the ability to define educational and continuing educational standards.

Why do we need to take charge, ourselves, of our own professional standards of conduct, and how they are applied? For two primary reasons:
  1. To protect both the public interest (as any true profession will do). A professional regulatory organization serves the public interest - via a bona fide fiduciary standard that imposes restraints on the conduct of its members, and via other requirements imposed upon its members.
  2. To protect the profession itself. By ensuring that the profession's high standards remain high, this enhances trust from the consumer, and this in turn leads to greater use of the profession's valuable services.

But, a professional regulatory organization for financial and investment advisers will not come easily. We need to earn the right to become a true profession. How? In the balance of this post, I present two ways for you to get involved, and in so doing to advance our profession.

(1) Promote the Adoption of Bona Fide Fiduciary Standards Via Your Own Participation in Public Advocacy.

Granted, our professional organizations have already made great strides in this area. The CFP Board has its new proposed Code of Ethics and Standards of Conduct, the Financial Planning Association has its ongoing support of the Certified Financial Planner(tm) certification), and NAPFA has its longstanding Fiduciary Oath and a strict adherence to fee-only practice.

But we must take great care to ensure that the fiduciary standard of conduct, and its requirements of due care, loyalty, and utmost good faith, remain principles-based and are not subsumed by - as the late Benjamin Cardozo warned against so long ago - "particular exceptions."

But, can we do more in this area? Yes. Primarily through education of policy makers and through advocacy.

So many opportunities exist at present for those who care about our emerging profession. These include:

  • Commenting upon, and generally supporting, the CFP Board's proposed revisions to its Code of Ethics and Standards of Professional Conduct.
  • Submitting comments to the U.S. Department of Labor on its recent Request for Information.
  • Submitting comments to the U.S. Securities and Exchange Commission on Chair Clayton's request for comments.
  • Participate in the public policy initiatives of the various professional organizations.
    • Seek to join the various public policy member committees of each organization, to have your voice heard.
    • Participate in state-level initiatives to influence state/local legislation and rule-making. This is highly important!
    • Participate in national-level initiatives, such as visits to your U.S. Senators and your U.S. Representative (either via meeting them in your home state, or on Capitol Hill during national advocacy days that various associations sponsor). [I participated for the first time in FPA's National Advocacy Days in June 2017, and it was a very rewarding experience. A real impact can be made. But instead of 77 participants (as the FPA had in 2017), we need 770 next year - 10x the number. Mark your calendars for a June 2018 visit to Capitol Hill. It will involve your own commitment of time (2-3 days) and money (small registration fee, plus travel costs). But, the result will impress you. For you can have a real impact!

(2) Contribute to the Discussion ... Should a Committee Be Formed to Help Define What Works, and What Does Not Work, To Comply With Fiduciary Standards of Conduct?

As I travel around my region, and around the country, I often hear from practitioners that they are uncertain on how to apply the fiduciary standard of conduct. There is a lot of uncertainty - and a certain amount of frustration, among many of our fellow colleagues.

And, as I meet with, and consult with, financial planning and/or investment firms, I find that many firms lack sufficient understanding of just what fiduciary duties apply to them, or how to apply (under DOL rules, and in certain other contexts) the prudent investor rule. When I point out my own views to these firms, the result is again - frustration in not knowing, and at times disillusionment.

The truth of the matter is that many, many in our emerging profession don't understand why it is important to avoid conflicts of interest, how to properly manage an unavoided conflict of interest, how to comply with the prudent investor rule's duties to minimize idiosyncratic risk and non-waste of client assets, and how to undertake proper due diligence on various types of investments. Nor do some of our colleagues know, more generally, what is required of them under the various fiduciary standards of conduct, nor what is prohibited.

How can we fix this? How can we eliminate - or at least alleviate - the frustrations many of our professional colleagues are feeling at present?

Do we turn to lawyers to help us? I hope not. While I am an attorney (and also a financial advisor practitioner, and an academic), and while attorneys have important contributions to make in providing guidance, few attorneys truly understand what financial planners do. Nor do they possess particular expertise in analyzing investment strategies or investment products or insurance products.

Do we permit "rule making via enforcement"? In which we define what is permitted, and what is not permitted, via the results of enforcement actions - whether they be by federal or state regulators, or by  the CFP Board? While enforcement actions have the benefit of judging real controversies - and this often leads to more careful consideration of the issues presented - the downside is that, alone, learning "how to stay out of trouble" by waiting on enforcement actions for guidance poses risks to each and every practitioner out there. None of us desires to be the "guinea pig" whose conduct is judged. In essence, waiting for a huge body of enforcement actions creates high personal costs for those whose conduct is first judged under fiduciary standards of conduct. And the lack of guidance creates risks for us all. (One might assume that decades of personal investment advice and financial planning would have generated a body of knowledge already. But mandatory arbitration with little in the way of reported decisions deters such a result. As do differences in fiduciary standards over time, and as does the changed nature of the capital markets, new insights from academic research, and the increased complexity of consumers' financial lives).

Is This A Better Solution: Proactive Guidance to All. The proper solution might be to at least partially seek to provide either hypotheticals, or advisory opinions, from a committee of experienced practitioners. Not to establish "rules." But rather to apply the fiduciary principle, and in so applying provide a greater level of guidance to us all.

This, in turn, would lead to better education of us all. Not just in the abstract (i.e., "here's the law or regulation, here's what it says, and here's when in applies). But, rather, education via more concrete case studies, that serve to illuminate the application of the fiduciary principles. So that our fellow colleagues can "up their game" - and their understanding of what is acceptable, and what is not.

How Should We Proceed, If At All, to Form a "Fiduciary Compliance Advisory Committee."

I seek your input and advice.

I submit that the task of serving on such a committee, if it were to be formed, is a daunting one.

Part of the problem is that we have many different fiduciary standards of conduct. ERISA's statutory "sole interests" standard (which incorporates the prudent investor rule). The DOL's "best interest" standard found in its new prohibited transaction class exemptions (B.I.C.E. and 84-24, in particular), which incorporate the tough "impartial conduct standards" and, within them, the prudent investor rule. State common law fiduciary standards of conduct. State legislative / rules applying fiduciary standards. The SEC's application of the "best interests" fiduciary standard found in the Investment Advisers Act. And the CFP Board's and other association standards (to the extent they apply a fiduciary standard of conduct). Hence, anyone serving on such a Committee has a lot of work to do, since any request or advice on a real situation that might arise, or any hypothetical situation, may result in varied conclusions depending upon which fiduciary standard of conduct is applied.

Part of the problem also rests with our own personal biases. Each of us have them. We are a product of our own education, training, and past associations. Setting to the side these personal biases can be difficult, and the best way to ensure this happens is by having at a minimum a committee of say, seven or more members, each with different perspectives and backgrounds, to debate the issues at hand. But all of such committee members must be committed to the profession and its development, committed to the public interest, and committed to and understanding of a bona fide fiduciary standard of conduct. And all of such committee members must possess the ability to be open-minded, and to seek to understand opposing points of view, prior to reaching any conclusions.

So, here are my questions to you:

  1. Would such a "Fiduciary Compliance Advisory Committee" be worthwhile?

  2. If so, should it be formed under the auspices of one or more of our existing professional organizations, and if so, which one? Or should this be an "independent" and "all-volunteer" committee - which by its nature would then possess more limited resources?

  3. What would you like to see the Committee do? Are there specific issues you would like to see addressed? Are there hypothetical situations you would like to submit for consideration? Should the Committee be accepting of requests for advisory opinions?

  4. How would this Committee's work (assuming it is formed) best be accumulated and disseminated? In other words, how would the lessons learned from this Committee's consideration of various issues best be communicated to practitioners, and/or utilized in more formal educational efforts?

  5. Do you have any other thoughts, relating to how to best provide guidance and education to our professional colleagues around the many issues presented by the fiduciary standard?

I look forward to hearing from you.

To submit comments for public viewing, please use the comment function on this blog. (I review all comments before publishing them, primarily as a means of deterring commercial postings.)

Or, please share your thoughts with me, privately, via email to: ron.rhoades@wku.edu.

Thank you.









Saturday, July 1, 2017

Issues of Public Policy I Often Wonder About ....

While I blog, otherwise write and speak about fiduciary issues, I have other thoughts about many of the public policy issues of today.

Lacking the depth of knowledge in any particular area, these are more like questions, rather than viewpoints I have adopted. On this July 4th weekend, I thought I might share a few of these questions with those who dare to read this post.

I Wonder About ... Dysfunction in the U.S. Congress.

  • There seem to be a lot of hard-working, dedicated U.S. Senators and U.S. Representatives. Why don't these individuals get more credit for at least trying?
  • There seems to be far too much allegiance to political parties, and too little allegiance to personal values and the pursuit of the "truth" and "better solutions."
    • Why should a Senator or Representative vote her or his conscience on every vote - not just when the "leadership" says it's "o.k. to vote your conscience on this one"?
  • I've always thought of the U.S. Congress as a weighing mechanism. The views of conservatives vs. liberals (and other contrasting points of view) are all taken into account, compromises are made, and a moderate, more middle-of-the road solution is achieved as a result. But this seems to have broken down in recent decades.
    • Was the past in Congress, decades ago, truly different, and more as I described?
    • And, if so, how do we get back to a Congress that works?
I Wonder About ... "It's Just Politics"
  • When did it become semi-acceptable to lie, then have the person who made the lie (or an observer) state "it's just politics"?
  • I was taught to never be critical of another person - by gossip, by calling names, or by otherwise being critical of the person or her/his motives. Saying something bad about a person just comes back to haunt you - whether in one's personal life, the world of business, or the world of public policy. I've not always been successful in my allegiance to this principle. But I try.
    • One can question a person's policy position, without questioning his or her integrity.
    • Why doesn't our press call those who unnecessarily call others names, or question their motives, to task?
  • Is it possible for any person to be - honest, well-reasoned, and hence not "newsworthy" - and still get elected nowadays? Or do only those who make headlines - through outrageous statements, falsehood after falsehood, or extreme positions - have a chance of getting elected to national office today?
  • Is it possible for any person to run for state or national office and refuse all contributions from organizations (be they corporations, unions, political parties, political action committees, etc.), and only accept contributions from individuals - and even then only up to a certain amount (such as $100 or less)? Would that person ever stand a chance?
  • Why do Presidential inaugurations cost so much (and lead to large corporate contributions, as a result)? Seems like those who want to party should pay for it - not by encouraging more money in politics.
  • For that matter, how can we get the "money" out of "politics"? Is a Constitutional amendment our only option at this point? And what would such an amendment state?
  • Why can't Congress be better stewards of our tax dollars?
    • The cost to produce the one-cent coin increased to 1.5 cents during 2016, for example. Time to eliminate the penny.
    • Small changes to save money, made repeatedly, add up. Especially over time.
I Wonder About ... The Size of Government.
  • Dear Republicans, government is not inherently "evil." Government does have a role to play in establishing standards (through law and regulation), and proper means for enforcement of standards (through private rights of action, primarily, and through government enforcement when private rights of action are wholly insufficient to deter improper conduct).
  • Dear Democrats, government should not be large. Government is not the proper solution to every problem. Nor do we, as a nation, possess unlimited resources.
  • Dear Members of Both Parties ... Look for ways to make government regulation simpler.
    • A prime example is our system of defined benefit and defined contribution plans. A huge number of different types of plans. A huge number of options, that just create costs for employers and employees who participate in the plans. As I've written about previously - simplify, simplify, simplify. It's possible!
  • Dear Republicans and Democrats ... Let's not "layer" government, by having different levels of government involved.
    • How can we remove federal "oversight" of states and municipalities, in their various government programs? Can we recognize that many times the costs of multiple layers of government outweigh the benefits?
    • How can we encourage states to consolidate various jurisdictions? For example, can we consolidate county and city/town governments, for greater efficiencies, in many areas? How about school districts, in other areas?
I Wonder About ... Technology and Jobs.
  • Technological innovation is likely to displace tens of millions of jobs in the next couple of decades. Will new jobs be sufficiently created?
  • We have a big educational gap, at present. We need many more skilled workers. Our colleges and universities are not providing sufficient number of graduates - especially those with technical skills (2-year degree, or certificate, holders). How can we address this better?
  • Apprenticeships do appear to be part of the solution. But are current proposals likely to end the needed greater support of technical skills training by other means?
  • Disintermediation is a powerful force. It is often resisted by enacting laws and regulations that, in effect, prevent change from occurring. Can we be more cautious about "protecting industries" from disintermediation and/or other changes?

I Wonder About ... Some Tax Reform Issues.
  • Many, if not most, income tax deductions today favor those who are high-earners. Few deductions matter much to those who pay no income tax, due to low incomes, or who are in only 10% or 15% marginal federal income tax brackets. Fair?
  • We need to abolish double taxation of corporate profits - once at the corporate level, then at the personal level (when dividends are received in taxable accounts, or when stock buybacks are received in taxable accounts). What's the best way to do this?
  • Democrats ... eliminate most corporate tax deductions. Restore depreciation expenses to occur over the projected lives of property (with only some acceleration of deprecation, if only to reflect the time value of money). Eliminate most tax credits. And then reduce corporate income tax rates, to enable a lower cost of capital for U.S. corporate activities. This will likely bring more jobs back to the U.S., as well.
  • Should not everyone pay some federal income tax, even if only 1%? Paying tax is participating in the funding of our country's needs. This leads to persons having a feeling of contributing - i.e., greater dignity.
  • Abolish the AMT. Abolish deductions and special tax treatments, first, where possible. Then you won't need to have the AMT system. It's really, really complicated, and leads to some perverse tax-driven moves by individuals.
  • Should the federal government apply a 2% flat income tax rate, on top of existing federal income tax rates, which 2% collected would then go to the states from which the 2% would be collected? Would this deter states from seeking to compete with each other through tax policy?
    • States could lower other taxes, as this new federal revenue comes in.
    • Why do some states permit new corporate (and even individual) taxpayers to pay less (or no) state income taxes, for a period of time, to attract new jobs? Seems unfair to existing taxpayers.
    • Should a federal law prohibit states and localities from providing tax breaks (from state income taxes, sales taxes, property taxes, etc.) to corporations, as a way of preventing states from showering benefits on a few, at the expense of the many?
  • In some states, state income tax rates are actually regressive, not progressive. Why? The deduction (when itemizing) of state income taxes paid on the federal income tax return.
    • For example, a person paying a 39.6% marginal federal tax rate (and that's not even the highest marginal tax rate, due to the net investment income tax and the phase-out of certain deductions), paying Kentucky's 6% maximum personal individual state income tax rate, effectively only pays 3.624% marginal taxes after taking into account the itemized deduction (assuming fully deductible, due to other itemized deductions, such as real estate taxes, etc.). In contrast, a Kentucky resident with $15,000 of taxable income in Kentucky pays at a 5.8% tax rate; such a person (or couple) is likely to have higher actual income due to personal exemptions and the standard deduction; but the 5.8% income tax paid likely results in no deduction for federal income tax purposes (as the person does not itemize).
      • Even if the income is a bit higher, and there are other itemized deductions that add up to exceed the standard deduction, the Kentucky resident is likely in only a 10%, 15% or 25% marginal federal tax bracket - making the effective state income tax rate - based on 5.8%, less federal income tax deduction taken - either:
        • 5.22% (for 10% federal marginal tax bracket);
        • 4.93% (for 15% federal marginal tax bracket); or
        • 4.25% (for 25% federal marginal tax bracket).
      • In each example above, the lower income tax earner pays a significantly higher tax rate than the higher income tax earner - for purposes of state income tax. Does the fact that this state's income tax brackets are so regressive, after taking into account the deduction of state income taxes - bother anyone else other than me?
  • As a long-time estate tax planning attorney, I applaud some recent changes in estate tax law.
    • Spousal portability was long overdue. It really simplifies estate tax planning for most married couples. Should we keep it? (In my mind, absolutely.)
    • A $5.5 million (approximate) exemption this year, per person (effectively, close to $11 million for a married couple) on its face seems about right. Especially since the exemption now increases each year with inflation.
      • But, is this a sufficient exemption amount to protect most "small businesses" and "family farms"?
      • How do you define "small"? What does a "family farm" look like today?
    • The 40% federal estate tax rate imposed on assets exceeding the exemption seems like a quite high percentage. Is the rate too high? Should the rate be brought back down to 30% - especially if the exemption amount remains as it exists under current law?
    • Should we eliminate the use of family limited partnerships and similar strategies by bringing back family attribution rules.
    • Should we keep the federal estate tax, but with a lower rate applied lessen its burdens on the very few to whom it still applies?
      • We have great wealth disparity, and income disparity, in this country. We enacted the federal estate tax to minimize the risks of wealthy families owning most of America, through "dynasties."
      • Oh, by the way, should we eliminate the continuation of dynasties through generation-skipping trusts (which is a way around the federal estate tax)?
I Wonder About ... The Future of Democracy.
  • Democracy is a great experiment, that will continue to be tested. We have to always support it, and work to make it better.
  • Democracy is hard. In fact, it's very hard. I may spend decades of my life advocating for a certain position. Then, standing next to me tomorrow, or the next day, may be a person who publicly advocates for the exact opposite position, at the top of her or his lungs. This obviously would troubles me, as it would anyone. But, freedom of speech must be preserved.
    • I may fervently disagree with what you have to day, but I will always defend - to my utmost ability - your right to say it.
  • We have a republican form of government, not a pure democratic form of government. (I don't refer to our current political parties with this terminology. If you are unfamiliar with these terms as they are utilized, look them up.) Regardless, essential to our democracy is participation by as many as possible in the political process. Primarily this is done via voting.
    • Throughout our history we has disenfranchised persons from voting - those not owning property, those who were slaves, those who were women, those who were minorities, etc. In today's modern society, we continue to see efforts to reduce participation in the voting process. This seems troubling to me, and an abuse of the rights of each individual.
    • Why don't we hold elections over the weekend, when more persons can vote?
    • Why don't we make it easier to vote early, or via absentee ballots, than it is now?
    • Why don't we investigate why some voting precincts have long lines, time after time (which deters voting), while other precincts in the same county (or other jurisdiction) consistently have much smaller lines?
I Wonder About ... The Regulation of Financial Services.
  • How will we move, steadily forward, toward a profession for financial and investment advisers that:
    • Has, at its foundation, adherence to a bona fide fiduciary standard of conduct.
    • Has, at its foundation, the requirement for greater financial and investment education than required to obtain licensure today?
    • Provides effective rule making and oversight by the professionals themselves via one or more "professional regulatory organizations" - and which controls (subject to some government oversight, in order to avoid the formation of guilds) the regulation of those who are permitted to practice, and the right to sanction or expel those who do wrong - via a peer review process?
    • Undertakes a "light touch" to oversight, respecting of our status as professionals (and not treating us as criminals)?
      • But which undertakes frequent inspections on assets custodian, i.e., "asset verification" - in order to deter and detect actual fraud, and to prevent Ponzi schemes (which start small and usually due to financial pressures on advisors) from becoming larger?
    • Lessens regulatory burdens that currently exist, some of which just provide things for securities examiners to examine? Examiners tend to focus on documentation requirements, and disclosures, because they are usually not competent to address issues of due care; private rights of action, and peer review, are the answers in these areas.
    • Provides appropriate advice to members of the profession, so that we don't engage in the dreaded "regulation by enforcement." (See my recent post posing some questions about this.)
  • Can we recognize that pure capitalism is not appropriate - and that standards of conduct are properly applied (through principles-based regulation), in today's complex financial world where such a great disparity of knowledge and expertise exists as between investment and financial advisers and individual consumers? 
  • Why do we permit those who argue against the fiduciary standard to frame the debate as one in which "choice should not be restricted"? At its core, the fiduciary standard restrains conduct - it prohibits certain conduct, and it mandates certain responsibilities. These, in turn, restrict choice - by eliminating bad choices. It's disconcerting to hear from the new SEC Chair that a fiduciary standard should be adopted that "does not restrict consumer choice" (to paraphrase) - when that's exactly what the fiduciary standard is all about.
  • Why does the SEC permit mutual funds to report "portfolio turnover" as the lower of sales or purchases (divided by net assets), rather than the average of the two? Seems misleading, especially for funds that have a high percentage of inflows and/or outflows during a period. (I know why; I just don't think it's fair.)
  • Why was "suitability" - a concept that actually reduces the standard of "ordinary care" applicable to most service providers, and a standard that may have been correct when stockbrokers main functions was undertaking trades for clients - ever extended to the selection of mutual fund managers (i.e., investment managers)? The result seems to be lack of accountability of broker-dealer firms for giving investment advice.
  • Why are titles not appropriately regulated in financial services? If you call yourself a "financial / investment / wealth / estate" + "planner / advisor / consultant / manager" - should you not be held to account for holding yourself out in that manner. (Via the application of the fiduciary standard.)
  • Why did the SEC permit brokers to provide so much "advice" while not being held to the fiduciary standard? It really goes against the plain meaning of the requirements for the exclusion from investment adviser registration.
  • Why does the SEC permit dual registrants to disclaim away (or have clients waive) core fiduciary duties, especially given the anti-waiver provision contained in Section 215 of the Advisers Act?
  • Why don't we just do away with most of the disclosure requirements (in the new DOL rules) found in BICE, and 84-24? Let's just rely on the Impartial Conduct Standards.
    • Disclosures are largely ineffective, in the financial services world. That's why we go to the trouble of imposing fiduciary standards.
    • Disclosures never, alone and without much more, defeat the requirement to act in the client's best interests.
    • Informed consent is required, when a conflict of interest is present. And no client would ever consent to be harmed.
  • Why don't we just acknowledge that you cannot serve two masters at the same time?
    • Bona fide fiduciaries represent the client, and only the client.
    • Bona fide fiduciaries don't represent their firm (by selling proprietary products), nor do they represent other product manufacturers (by receiving product-based compensation).
  • Why do certain financial industry participants refuse to recognize this plain truth: fees and costs matter. The higher the product-based fees, however, paid, the lower the returns to investors, all other things being the same.
  • Why don't we realize that ... economic incentives matter?
  • Why do we ever allow the provision of tax-efficient investing advice, when constructing an investment portfolio for a client and choosing proper investments, to be disclaimed by any investment adviser, financial planner, broker-dealer, or others providing advice on such issues? Tax drag matters - a great deal.
  • How can we more effectively stop the revolving door between the SEC and Wall Street (and the law firms that serve Wall Street firms and insurance companies)?
  • Is the Volcker Rule too complex? Are the regulatory structures in place too costly? Would it be simpler, and better for our economy, to reinstate Glass-Steagull?
  • How can we better educate those who provide investment advice and portfolio management about ...
    • the requirements of the fiduciary standard of conduct?
    • the requirements of the prudent investor rule? (When it is applicable.)
    • what "works" in investing?
    • what does not "work" in investing?
    • why "investing" as a fiduciary advisor, on behalf of a client, should not involve "speculation" - except in those rare instances when the client desires speculative strategies be employed (and, assuming the prudent investor rule application is not mandated).
I Wonder About ... Health Care. (A lot of questions here. Do you dare to read?)
  • Is health care a "right"? Is food? Is housing?
    • We subsidize the provision of food a great deal, through government programs.
    • We subsidize the provision of low-income housing a great deal, through government programs.
    • But we don't "guarantee" either food or housing to all. Charitable organizations may be better suited to "fill in the gaps."
    • Yet, charitable organizations seem ill-equipped to provide substantial health care assistance to those who fall in the gaps. Hence, we indirectly provide for health care assistance through obligations imposed on hospitals to provide care to the indigent - at least some amount of care. Is this fair?
    • Am I comfortable with, according to some estimates, 20,000 more Americans dying each year if the current proposals pass, due to lack of access to health care?
      • Is such a statistic accurate? Does it overestimate or underestimate? Who knows. But, there would be more deaths.
      • Such a statistic seems abstract. Let me try to put it in terms that are more local to me. If there are 100,000 who live in my city of Bowling Green, that means (on average) there would be 6 more deaths in my city, each year, as a result of this legislation.
      • I regard myself as a moral person. I am greatly troubled by this statistic. Should I not be troubled by it?
  • There is no question that the Affordable Care Act created some perverse disincentives.
    • Small employers are disincentivized from crossing the "50 full time employee threshold."
      • Why are small employers treated so unequally from large employers? Is this fair?
    • All employers are disincentivized from hiring more full-time workers, in favor of hiring part-time workers (no more than a certain number of hours worked per week).
    • At least some of those on Medicaid, due to low incomes, may possess a disincentive to seek employment.
  • The Affordable Care Act had some very positive reforms to insurance regulation.
    • The new legislation would appear to permit states to opt out of covering preexisting conditions - for some plans.
    • If you know anything about insurance, this violates the principles of insurance. Set up different rules for coverage, for different types of plans, and the healthy will migrate to the cheaper, less costly plan (or opt out of coverage altogether). This leads the unhealthy stuck in the more expensive plan - which then gets more and more expensive, leading to more persons dropping out. Yes, this is an insurance policy death spiral.
      • I have taught a course in principles of risk management and insurance. The proposed legislation would permit states to essentially violate the principle of insurance, if they so choose. Those with pre-existing conditions would, in the end, lose coverage as their insurance policies collapsed.
  • The Affordable Care Act was never titled "Obamacare" by the way. Nor is the new legislation titled "Trumpcare." Why does the press use what are clearly political terms for these bills / laws, thereby exacerbating the feelings of those who participate in debating these issues? Can't we hold the press to a higher standard?
  • Yes, health care legislation is complicated. But why are we not addressing efficiency in the delivery of health care coverage, as a means of bringing costs down?
    • The major problem with health care remains its costs and how to fund its costs.
    • Should we not endorse the greater use of community health care clinics?
    • The Affordable Care Act increased the availability of patient's electronic records, leading to certain efficiencies in coordination of care (and, hence, better patient outcomes). Let's preserve this initiative.
    • I'm not a fan of "big government." But, is health care appropriate for for-profit businesses? Or should we turn to another solution?
      • Depending upon how you define them, non-profit businesses are a significant portion of the U.S. economy.
      • Should only "mutual insurance companies" (essentially, not-for-profit companies, owned by policy holders) be permitted to be the "payers" in health care systems in the United States?
      • Can we fashion not a "single-payer system," but markets (perhaps by state) in which mutual insurance companies or other types of not-for-profits compete to provide comprehensive health care coverage? And, in so doing, can we eliminate much of the billing and associated paperwork, and hence make health care more efficient?
  • As the richest nation in the world, why are we the only (or one of the few, depending on who you listen to) nation(s) who don't provide comprehensive health care coverage for all of its citizens?
  • Why should U.S. corporations shoulder the burden of group health care insurance premiums. Corporations in other countries generally don't. Does this make U.S. corporations less competitive?
    • If we remove the huge burden of health care costs from American business, would it make U.S. corporations more competitive, and/or bring more jobs back to the U.S.?
    • Why does the focus on the low wage growth of the past 4 decades not include, as part of the statistics often utilized, the "total compensation" (including the employer portion of health care insurance premiums paid, etc.) provided to employees. If this were done, would the statistics look substantially different?
    • If we remove the requirement that large corporations provide health care coverage, and move to a system in which health care coverage for all is provided via some other means, would not wages go up substantially?
    • Again, I don't like the disparity in government regulation, as between large employers and small employers. Why should small employers not bear the burdens of health care costs, when large employers are required to bear such costs, under the Affordable Care Act? And, as stated above, these regulations create some interesting distortions in our employment markets.
  • Why not adopt a new funding means for health care costs?
    • Tied to a combination of the annual income and net worth of each individual (or family).
    • Net worth seems to be necessary to include. As the current tax law permits a lot of "income" to not be reported (through tax-deferred or tax-free accumulations, such as 401k, traditional IRAs, Roth IRAs, non-qualified annuities, life insurance cash values, non-realization of capital gains and losses, etc.).
      • A certain amount of net worth would be excluded, from computations done each year. For example, at age 20 a person might be able to exclude $100,000 of net worth, by age 30 this would have risen to $200,000 of net worth, etc., etc.
      • Values for real estate would be "market values" as undertaken by property appraisers.
      • Most assets would be valued as of December 31st, for purposes of the next year's computation.
      • Tax returns would include a page for calculation of net worth.
      • Perhaps a small percentage of net worth, above and above the excluded amounts, would be required to be devoted to health insurance premiums - as part of the total contribution an individual makes to premium contributions.
    • Annual income would be based upon an estimate provided by each person. This estimate could be changed, online, each month - as a person's employment and income changes.
      • As a person's income increases, so does their contribution to health care insurance premiums.
      • If the amount of income, upon filing of a person's federal income tax return for that year, is lower, a "refund" of insurance premiums paid would occur for that year.
      • If the amount is higher, an extra payment would be paid (with a person's tax return) for that year, plus a fixed rate of interest.
    • Each person's contribution to premiums would go up with each $1,000 increase in either net worth (above excluded amounts) or income. No huge increases once certain thresholds are crossed, as often occurs under current tax laws. In this way, there is no huge disincentive to accumulate more assets, nor to have more income.
    • The government steps in to subsidize premiums for those who are the poorest - in terms of a combination of net worth and income.
I Wonder About ... Religion. (Now, this is a touchy subject.)
  • Can we recognize that while religion is a very powerful and mostly positive contributor to our society, at times religion has been used incorrectly?
  • Should we never say we are doing an action because "God has said it is right." How do we know this? Isn't it better to say that our values and our view of what is right, and wrong, are provided to us in large measure by our religious beliefs. But our actions are determined by what we view as right. (We should not presume to speak for God.)
  • Can we recognize that humans have certain inalienable rights ... rights that cannot be defeated even by religious beliefs? Religion should not be used to oppress, such as by defining that women must be subordinate to men (in some religions).
  • How strongly can we advocate against religious oppression, without questioning ...
    • Why women can't be priests in certain religions?
    • Why a woman cannot become Pope?
  • Can we question, without being disrespectful, those who advocate for "tradition" even though their arguments have some type of discriminatory effect?
  • Can we recognize that change in our society at times occurs gradually, and at other times occurs more rapidly. Can we at times we respect gradualness, while at other times - such as when core fundamental rights are at issue - respect that we must act to embrace more rapid change, even though disruption occurs?