An Allegation of Misleading "Trust-Based Selling" Against "Dick Van Dyke"

In a previous blog (http://scholarfp.blogspot.com/2013/01/wall-streets-deceptions-brokers-as.html) I noted that “trust-based selling” can get a person into trouble, if they don’t accept fiduciary status and fulfill their fiduciary obligations.  Yet, far too often federal and state securities officials and other enforcement arms fail to take action against these fraudulent practices. Hhowever, in a recent case, arising out of Illinois, a financial advisor faces two separate legal actions involving his trust-based selling practices.

The State of Illinois Attorney General has filed an action seeking civil penalties against Mr. Richard Lee Van Dyke, Jr. (a.k.a. "Dick Van Dyke"), a seller of fixed indexed annuities who, in advertising, stated: “If you want a successful financial plan, you need a financial advisor you can really trust … He believes in principles like full disclosure and transparency and he doesn’t sell investments on commission which means he’s on your side so you get to reach your goals first before he does. When’s the last time an investment advisor put you first?” The basis of the complaint is a violation of Illinois’ Consumer Fraud and Deceptive Business Practices Act. Andy Gluck provides commentary and Advisors4Advisors also provides a copy of the Complaint, at http://advisors4advisors.com/compliance/advertising-compliance/article/17314-financial-advisor-in-illinois-accused-in-lawsuit-by-state-securities-regulators-of-advertising-he-acted-as-a-fiduciary-says-hes-done-nothing-wrong.

In addition, the Division of Securities filed an administrative action against Mr. Van Dyke (in the form of a Notice of Hearing, which can be found at:

http://www.ilsos.gov/adminactionssearch/adminactionssearch) in which it is alleged that Mr. Van Dyke violated his duties to his clients as an investment adviser, during the time that he was registered as such.  One of the sections of the investment adviser state statutes cited has been construed to impose fiduciary duties upon investment advisers.

There are allegations of both actual fraud (in the deceptive trade practices action) and constructive fraud (in the administrative action). In both cases, substantial harm to customers is alleged to have occurred.

From the facts set forth in the two actions, one can only wonder why the state insurance commissioner did not pursue a case of churning (a.k.a. twisting) against this seller of fixed indexed annuities. Then again, under Illinois law, unlike the law of most states, fixed indexed annuities are (at present) regarded as securities. Either that, or this is just more evidence that market conduct regulation and its enforcement by state insurance commissioners remains dismal.

While it is unlikely that a case like this will proceed all the way to a trial, much less become the subject of appeals and subsequent written opinions, this may be a case to watch. Far too long those in arms-length relationships, selling securities and/or insurance products, have engaged in “trust-based selling” techniques. They have held themselves out as experts through the use of titles (many of which lack substance) - an act which is a factor in imposing fiduciary status under state common law. Moreover, many of those in the securities industry have inappropriately touted their “objective” advice.

Will all those who hold out as "putting the best interests of the client first" be held to account, as fiduciaries, for such representations? From Goldman Sachs on Wall Street to small sellers of insurance and investments on Main Street, we can only hope so.

Is the tide beginning to turn? Will our regulators stamp out misrepresentations – both through administrative/court actions and also through prudent regulation? Time will tell.

There are many battlegrounds in the war over fiduciary standards - not just in D.C. Stay tuned.

Thoughts on the Inadequate State Funding of U.S. Undergraduate College Education

TO MY FRIENDS AND COLLEAGUES:

I've grown concerned that the cost of an undergraduate education has grown substantially over the past 15-20 years, primarily due to state budget cuts (thereby forcing tuition and other fees up), but also due to other extrinsic factors. As a result, it appears to me that college is much more expensive for students today, yet at the same time college is so much more necessary to train up our workforce to fit the jobs in this modern economy.

So, please permit me to share some thoughts on the increases seen in college costs. Along the way I set forth a small partial solution - the use of discounted textbooks and/or trade publications instead of costly textbooks. I also suggest a few longer-term solutions, addressing greater revenue (and its use) for colleges.  Yet, greater solutions - especially those which drive down current costs - appear elusive.

STATE BUDGET CUTS AND TUITION INCREASES.  While tuition has increased dramatically at colleges, the cause of these increases has often been debated. This study by two economists demonstrates that the primary cause is decreased state funding of public education. (See
http://libertystreeteconomics.newyorkfed.org/2012/09/soaring-tuitions-are-public-funding-cuts-to-blame.html.

Anecdotally, I have observed this over the past 10-15 years - tuition increases are approved within public college systems in response to state budget cuts which occur, it seems, every 5-10 years.

CLASS SIZE INCREASES.  At many universities over the past 10-20 years, class sizes have also soared. One would think this would have resulted in a lowering of the costs of attending college.

However, I would note that class sizes have not occurred, in any substantial fashion, at Alfred State.  Most of the classes at Alfred State College remain in the 20-35 student range. Moreover, the classes are taught by professors themselves, not teaching assistants. I suspect this is a big part of Alfred State's popularity, although its focus on experiential learning also is likely a factor.

ROOM AND BOARD FEE INCREASES.  While I don't possess statistics for New York State, nationally room and board costs at colleges and universities have seen increases of 2% a year, above and beyond inflation, on average. A good part of this may be attributable to food price increases worldwide over the last decade, attributable to many factors (increased consumption of beef, increased energy prices, etc.). Improvements in the meals served at colleges and universities are also likely a factor - I often hear alumni applaud the substantially improved offerings on the buffet, compared to when they were at the college 10, 15, 20 or more years ago.

MAJOR TEXTBOOK COST INCREASES.  Of course, textbook prices have also soared - much more so than other college costs over the last 20-30 years, according to some studies. What I have not seen is an explanation of "why" these cost increases have occurred, during a time when (overall) book publication costs have generally been trending below the costs of inflation.

The somewhat good news is that this high cost is the one thing I can take action on. Starting next Fall, I'll be using a $25 online textbook (customized by me, through FlatWorldKnowledge) for my Business Law I class. Students may access it only online for $25. If students desire a print version it will cost about $50. This is relatively inexpensive, considering that the current book I'm using costs $260 new (print version), or $90 for online access to the 18 chapters we cover in the course.

I'm also using a trade publication - a 760-page new book, "CFP Board Financial Planning Competency Handbook" (Wiley Finance) by CFP Board (Apr 1, 2013) - which costs $71 through Amazon.com (print edition). (I don't know if a Kindle edition will be available for even less)  I'll be using this one book for two courses - the PFP Capstone Course, and Retirement Planning (supplemented with free outside materials). An added bonus is that this new book will likely be an important resources as students prepare to take the CFP Exam, post-graduation.

In a 2011 study, U.S. PIRG found a majority of students admit to not purchasing at least one textbook required for their classes because the price is too high. I have personally observed this occur. While students borrow textbooks, inevitably there are times when they don't have access to the textbook when they need it, and their education (and grades) suffer. At least I can do something about this, for my own students, starting next Fall.

FOUR PARTIAL SOLUTIONS TO THE HIGH COSTS OF COLLEGE. Other than my personal embrace of lower-cost books for students, where available, I'm not yet possessing of solutions for other reductions in cost, to make college more affordable for students today. Some potential solutions, however, on the revenue side of the equation,  include:

• Restoration of state funding of college and university costs, from the 50% or so it is currently, to 75% (as a target) - as it existed about a decade ago. Undertake tuition rate decreases as this restoration of funding occurs. Of course, with state budgets under pressure, still, this is unlikely to occur - at least anytime in the future.
• The creation and funding of better endowments at colleges and universities - perhaps to target student-paid expenses. Imagine an endowment which subsidizes, for deserving students (or all students), on-campus housing and/or food costs.
• The funding of endowments in the form of general scholarship funds, perhaps with the purpose of lowering tuition costs for all students. In other words, let the 5% annual distributions from such a fund lower tuition fees for all students, across the board. In recent years colleges have tended to award much of their scholarship funds to top applicants, with those without high test scores and GPAs left to wrestle with high costs (and/or large student loan debt).
• Better investment of endowment funds is required. Despite the academic research which demonstrates the long-term benefits of a low-cost, passively managed investment portfolio, and the use of a "layer-cake" approach to leveling distributions when market volatility exists, I still see many endowment funds which are poorly managed. Many endowments do not invest to take into account the Fama-French multi-factor model; quite a surprise given the inherently long-term nature of endowment funds and the extremely high probabilities that value and small cap premia will exist over the very long term. Endowment fund managers also need to employ investment advisers for a flat fee, and get away from the percentage-of-assets-managed model.  In summary, endowment fund managers need to wake up!

ONLINE EDUCATION?  There is a large movement toward the use of online education offerings. The advantage is, of course, flexibility (for students who are working full-time jobs, for example) and reduced costs.  Without a doubt, I'm in favor of this trend - for it increases educational opportunities for Americans and for the world population.

Recent innovations to cut down on cheating in online courses (through the use of proctored online exams) may remove most of one of my potential objections to online education, at least for undergraduates. But I continue to possess other concerns.

We must realize that so much of what college provides students is NOT JUST technical education. Rather, it is hands-on, experiential and/or project based learning. Moreover, it is providing tools and an environment to enable each student to mature and expand their comfort zone. In short, it is developing the "total person" - not just equipping them with knowledge. That is what employers desire (and need) today. Far too often I get the sense that online students "miss out" on an important part of their educational experience, if they mainly take online classes.

(As an extreme example, I see students in dire need of improving their public speaking abilities and confidence take an online course in Public Speaking - precisely to avoid the in-person interactions so necessary in a course like this.)

Hence, I worry that online educational offerings are not able to successfully duplicate the overall residential college experience. I personally believe that most students are better served, at least as undergraduates, in a residential college setting. (Provided, of course, that the class sizes remain small, to facilitate interactive learning. And provided, further, that faculty members are dedicated to developing all of the personal traits of a student, as I see with my fellow Business Department faculty here at Alfred State.)

Please don't get me wrong. I believe online education, both currently and in the future, has a large place in our overall educational system. But I worry that the current techniques I've seen used in online education result in a somewhat diminished overall educational experience. Perhaps there are advantages I'm not seeing, that enable a good "trade-off" to ensue. I'm certain I'll be giving this much more thought, as time goes by.

LARGER CLASS SIZES?  Similarly, perhaps larger class sizes may be required. But at what cost? When a class size gets above 30, interactive learning through class discussion becomes much more difficult. And larger class sizes means greater time spent by professors undertaking grading - and less tie spent on all-important advisement and other student support activities.

THREE YEARS OF COLLEGE, INSTEAD OF FOUR?  There is also a move on to reduce the baccalaureate degree in the U.S. to 3 years, instead of 4 years, as it exists in many other countries. Yet, many of these countries achieve this by reducing the amount of general education, and focusing only on technical education. This does not provide for development of the "whole person" - which employers desire.

IN SUMMARY, I'm in search of solutions. The few solutions I set forth are all designed to alter the revenue sources available, in hopes of lowering costs for students. There are means to make education more "efficient," but I worry that such efforts at efficiency may well undermine the best aspects of a U.S. college education. I remain open to learning more, however, and to exploring new ideas in the area of "efficiency."

All my best.
  - Ron

ADDENDUM: NEW YORK BUDGET CUTS HURT RE: CAPITAL EXPENDITURES. Sadly, New York State is cutting out capital expenditures this year - so necessary to refurbish existing buildings over a reasonable time period.

I can attest that Alfred State College, at least, has used funds for improvements quite wisely. Yet, the process is ongoing, and an interruption in capital funding will impact the quality of the educational environment.

Even on my floor of my academic building, for example, there exists old tiles in need of replacement (which are costly to replace, given the asbestos present and the need for safety during removal). Thankfully over the past winter break the Alfred State Administration was able to cull together some funds to replace tiles on the floor below, and stairwells. But more needs to be done, both to keep these older buildings safe, and to keep the buildings up-to-date and functional for a high-quality learning environment.

The Tension Between Personal Responsibility and Paternalism - and the Issue of Fiduciary Standards

Throughout American society there exists a tension between two fundamental sets of beliefs. On one side is the staunch believe that freedom of contract is fundamental, that persons should take responsibility for their own actions, and if persons act stupidly (and enter "dumb bargains") then so be it.

On the other side is the belief that there are certain things so important to our society, such as the retirement security of our fellow Americans, that individuals with a great disparity in knowledge compared to the purveyors of products they deal with should possess a trusted guide, and that government should enforce this by specifying that such guides should act in a paternalistic manner (i.e., keeping best interests of the client foremost).

Both sides often ignore the fact that there is room for both. Not everyone needs nor wants a trusted advisor. Yet, those who desire a trusted advisor (which I suspect is the vast majority of Americans) want an advisor who truly stands in the shoes of the client, at all times. And they desire to be able to "judge a book by its cover" - i.e., when someone uses a title which denotes a relationship of trust and confidence, they want to be able to have confidence that such person is acting in their best interests.

Yet, due to failings in our government, the role of the trusted advisor versus the product salesperson has blurred.  Those who deal at arms-length (in which caveat emptor is the standard of protection, augmented to some degree by certain required disclosures) have moved into "trust-based selling," in essence disguising themselves as trusted advisors. Despite early warnings from the SEC and FINRA (f/k/a NASD), as evidenced by statements made in 1941 and 1963, salespeople hold themselves out as trusted advisors, yet then deny fiduciary status.

There are many economic interests who desire to continue this morass of confusion (from the standpoint of the consumer). These interests do not desire to accept the higher standard of conduct of a fiduciary. They are fearful of a profession, for with it comes professional-level compensation, a move toward hundreds if not thousands of professional practices, and a move away from the distribution systems of today with their substantial extraction of rents. In essence, the broker-dealer business model of today, an anachronism, is challenged at its very core by these developments.

Hundreds of millions of dollars have flooded into Washington, DC, in recent years, and tens of millions of dollars more each year, as Wall Street firms and insurance companies attempt to wield their influence to prevent the evolution toward a fiduciary model.

At a minimum, Wall Street and the insurance companies seek to prevent common-sense measures which would permit consumers to clearly detect the type of relationship (arms-length, or fiduciary in which they find themselves. They desire to continue their practice of "trust-based selling" - an oxymoron. Wall Street's broker-dealers, investment banks, and the insurance companies desire to perpetuate the great deception of consumers today. To paraphrase Prof. Angel and others, "To hold oneself out as a trusted financial advisor, without accepting the duties which flow from fiduciary status, amounts to fraud."

Far more devious, however, is Wall Street's greater aim -  its desire (via FINRA, aided by SIFMA and FSI and the many broker-dealer firms who are members of these organizations) to take over and kill the independent fiduciary investment advisory profession. While FINRA has recently indicated that its "SRO over RIAs" ambitions is not its key legislative priority today, there is no doubt that it continues to lay the groundwork for another run at Congress in the future.

The battle lines have been drawn. These battles exist, however, along several fronts - DOL/EBSA, SEC possible rule imposing fiduciary standards on brokers who provide personalized investment advice, the regulation and oversight of RIAs, state legislatures and state securities regulators and even in the courts (where state common law fiduciary standards are applied to relationships based upon trust and confidence).

As these battles continue, independent investment advisers and consumer groups must continue to explain the truth of the situation in which consumers find themselves today ... mass confusion, caused in significant part by deceptive marketing practices which regulators (SEC, FINRA) have refused to clamp down upon. Continued education of the SEC Commissioners, their staff, and members of Congress and their staffs is required, especially given the high degree of turnover in D.C.

While this is a challenge, it is also an opportunity. It is the opportunity to correct the misleading sales practices which deceive too many Americans. It is the opportunity to more clearly and correctly draw the line between arms-length investment and insurance product sales and trusted investment advice. It is the opportunity to restore the trust of individual Americans in the providers of investment and financial advice. And it is the opportunity to formalize a profession of true, fiduciary financial and investment advisors.

To my colleagues already engaged in this effort, continue to persevere. To my colleagues who desire to get involved, do so - but with the understanding that these battles will not quickly be won.

Our fellow Americans should be able to tell a product salesperson from a trusted advisor. For those Americans who desire an advisor to act on their behalf, these Americans deserve a profession of trusted financial and investment advisors.

Indeed, America itself deserves all of the benefits - increased savings, greater investment in the capital markets, lowered cost of capital for firms, and greater economic growth - such a development would foretell.

Keep up the good fight. Thank you.

College Educators: Do We Focus on Teaching "The Right Stuff"?

STUDENTS ... DROWSY, NOT MOTIVATED TO GET GOOD GRADES, UNABLE TO COMPLETE THEIR ASSIGNMENTS ON TIME, TOO SHY TO SPEAK UP IN CLASS. POOR STUDY SKILLS. INADEQUATE INSTRUCTION DURING HIGH SCHOOL.

Two years ago I accepted my first teaching position at an undergraduate school. I decided that I would first explore the major challenges of teaching in this environment today, and how to best deal with these challenges.

So, with several months to prepare, I reached out to clients who were active or retired professors and/or teachers, and spoke with soon-to-be colleagues, and even with my own daughters (both in college at the time). Of course, my daughters we surprised (when does a father ever seek their advice), but I actually found their comments extremely informative.

I learned that the major challenges were: (1) sleepy (and hence) inattentive students; (2) lack of adequate preparation for many students in terms of their high school education; (3) lack of motivation; and (4) lack of good communication skills, often exacerbated by shyness.

I quickly adopted a strategy. Tackle each of these challenges head-on, in the classroom environment.  How, you might ask?

First, by addressing the necessity of sleep. Academic studies show that the youth of today sleep a full two hours less per night than the youth a century ago. Dr. James Maas, author of The Power of Sleep (a must-read, for the information gained therein can even assist financial advisors in dealing with their clients), posits that the average college student requires 9 hours 15 minutes of sleep.  Other studies suggest slightly lower amounts, but still far more than the average college student gets today.

So how did I tackle this? Direct education, plain and simple. Showing a YouTube video of an excerpt from Dr. Maas' speech on the subject. As does putting the need for sleep in a catchy slogan: "9 hours, 15 minutes ... need I say more." Repeating this phrase often during the semester, at the beginning of class, then re-enforces the concept. Other opportunities come for repeating the phrase, such as when a student begins to dose off in class, or yawns. [For more, see my prior blog post on this particular subject, "College Students: More Sleep = More Sex" at http://scholarfp.blogspot.com/2012/08/college-students-more-sleep-more-sex.html.]

Second, I knew that I needed to address the motivation of my students. How so? By focusing on success, the development of habits to foster success, and the realization that success requires work. Hence, at the commencement of each class I present one or more "Success Tips." A few minutes is often spent on these tips. These success tips are reinforced, as well. How? By using the reverse side of  quiz paper to lay out previously revealed success tips (any advertiser will tell you to "advertise" to a "captive audience" - such as when some students have finished the quiz and we await others to finish). By posting signs in the halls of my building, with success tips. By offering, at the appropriate time during a semester, extra credit to students for them to write an essay on which success tips were most impactful to them. Lastly, at the end of the semester, by taking a private survey of the success tips, to ascertain which ones were most impactful. (These last two measures have the added benefit of enabling me to discard success tips that did not relate to the students, and finding new ones that may.)

Another technique I use is to ask the "Five-Year Question" (a question I often used in financial planning practice), but modified to fit the students. For example, have students write a short essay outlining what their perfect job would be in five years, and also in 15 years. Have them also write, in the same essay, what they would likely be doing in five years if they do not acquire a college degree. This is all about establishing goals. Then I explore with students the concept of S.M.A.R.T. Goals, as the means of completing building blocks for the foundations of their 5-year and 15-year success.

Third, I knew that "Success Tips" and goals establishment and sleep, combined, were not enough to change student behaviors, especially for the freshmen and sophomores I teach in my Business Law classes. While students are given the opportunity to learn various skills to tackle study habit shortcomings, such as "time management" skills, I feel that too often such training "misses the boat." The real challenge for many students is to improve their "self-control muscle." In fact, as I've written elsewhere in this blog, the ability to exercise self-control is perhaps the major determinant in success in all aspects of one's life.  [For more on this concept, visit my recent blog post, "The Secret of Your Success: Self-Control," at http://scholarfp.blogspot.com/2013/02/the-secret-of-your-success-self-control.html.]

Again, such instruction is re-emphasized throughout the course, and expanded by covering techniques to avoid procrastination (see the YouTube video, "Charlie on Procrastination," for example). The statement we repeat out loud in class all the time is "Just Do It. Do It, Do It, Do It. Do It Now." Students are encouraged to say this statement (or the short form of it, "Just Do It!" - out loud - whenever they possess an inability to get started on an assignment they need to tackle.

Fourth, to address some of the inferior study skills students possess, I instituted the practice of students writing hand-written outlines of each chapter. And I grade a sampling of these outlines. I also permit students to use these hand-written outlines during quizzes and exams. (My exams are structured to stress deductive reasoning skills for my lower-level undergraduate students, and synthesis of the material and application to client situations for my upper-level students.) The outlines are my way of ensuring that students spend time covering the material.

Fifth, I use techniques to "expand each student's comfort zone." For example, students must repeat, loudly, the phrase "Ooze Confidence" in class. [See my prior blog, at http://scholarfp.blogspot.com/2013/01/college-students-ooze-confidence-and-if.html]. We watch, in class, a TedX video on the benefits of a 2-minute "Power Pose." I explore various concepts, such as "Rush Toward Your Fear," in class. [See my prior blog on this subject, at http://scholarfp.blogspot.com/2012/08/rush-toward-your-fear.html.] I also provide instruction on "How to Meet Someone for the First Time."

Of course, just teaching students the principles behind good socialization skills is not enough. Practice is essential. Hence, one class each term my students confront "The Three Challenges of Alfred State." They must shout out a success tip (loudly) in front of the class (and passer-bus) at our bell tower on campus. They must introduce themselves to one of our Vice-Presidents, in the intimidating environment of the executive office suite on campus. And they must go up and introduce themselves to someone they do not know, and gather some information. Other exercises are used, outside of the classroom, and often through extra credit assignments, to get students to further push out their "comfort zones."

I also have instituted "Smile, Greet and Walk Tall" days in the halls of our building, on various days during the semester. This is a pilot program, at present. In a few months I will assess whether this very limited pilot program deserves to be conducted more widely (perhaps campus-wide).

While all of the foregoing is important, the sixth and final strategy utilized was to make class instruction as engaging as possible. For educators reading this, you are no doubt familiar with many of the strategies which can be utilized. For example, introducing short videos into the classroom. Guest speakers on various subjects. "Team Jeopardy" competitions in class. Peer-to-peer instruction to emphasize various important points. Class projects of a collaborative nature, undertaken in part during class under a watchful eye. Heavy use (where appropriate) of online resources which students access in class. And many others. I have not found that a single technique is "best" - rather, I find that a mixture of many instructional techniques works best.

Currently I expect my students to conduct the readings prior to class, so that we can focus our class time on applying the concepts.  But I've found that many students are challenged to sit and read for hours.  Hence, this summer I'll be preparing to more fully "flip" the classroom. I'll be moving to an online book for one or two of more courses, which is editable by me. I'll then add to the online book short 2-3 minute videos to explain various concepts. Other videos will review examples. In this manner, when preparing for class students will be constantly moving back and forth between a few paragraphs of reading and short videos. I'll also use MindMaps to lay out the concepts in class, and to demonstrate connections.

What is the reaction to the foregoing? Very positive, I would say, from the anonymous student surveys conducted of the students in each class at the end of each semester. Many students have added comments on how a particular success tip has changed their attitude toward their education, or how a technique has aided them. Others have thanked me for pushing them out of their "comfort zone."

This is not to say that there is not room for improvement. Indeed, one of the concept I try to instill in my students is the necessity for "continuous improvement."  For example, one of the expectations students possess of me (as discerned when I ask them on the first day of each class) is that I am "humorous." While I have a dry wit, and use humor several times during each class (by design, usually), I find that some students relate more to stories with humor embedded therein. Hence, I take time before each class to ask myself, "What can I do to add a bit more humor, or stories, to today's lesson plan?" Hopefully my future scoring on "humor" at the end of each semester, which has ranked a bit below my otherwise high marks for meeting other expectations of the students, will improve in future surveys.

I have heard from some of my fellow colleagues that we should not "coddle" our students in such ways.  Rather, they are "adults" and should be able to complete their lessons and achieve success without devoting time in class to such techniques to motivate and educate our students. In a way I feel this is a "cop-out." But in some sense, my colleagues may be right. There is a danger - that students will not learn to complete tasks "on their own."

But I don't accept the premise that our current crop of freshmen should not receive some instructional training and motivation to succeed. It seems to me more than appropriate to seek to improve the retention rates at our college, in order that an ever-higher percentage of our entering students are able to actually attain their degrees (and the higher levels of career and financial success that nearly always comes with same).

But the danger of "coddling" is there. Fortunately, students are exposed to a wide variety of teaching styles as they progress through our college. Hence, if I can teach students how to become better students - more motivated to succeed, with better self-control and socialization skills, and possessing of enough sleep, then I'm certain the students will get enough "practice" of these skills - without constant reminder from the professor - in other courses taught by other faculty. (This shows that having a mix of teaching styles is valuable, in every curriculum.)

I would also note that the skills employers desire most - critical thinking, the ability to work in teams, the ability to complete a task without need for supervision, and the ability to relate to colleagues and clients successfully - are the practical skills which some of my instruction in each class seeks to more directly address.

To me each class is an opportunity - to expand our students' minds. To foster their desire to learn. To foster their entrepreneurial spirt.

Each class I teach is also a responsibility. To use the limited time I am granted with each group of students to put them on the path, not just for mastery of the technical subject matter at hand, but to a more successful path in all aspects of their future lives.

Admittedly I, myself, have much to learn. But, for now, I share the foregoing perspectives, in hopes that other educators may find some value in same. And I welcome your comments and suggestions.

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

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

The Secret of Your Success: "Self-Control"

THE SECRET OF YOUR SUCCESS

Studies show that f you possess “self-control” you are far more likely to be wealthy, happy, and well-adjusted.  In fact, self-control is more important than intelligence, SAT scores, or family background.

“Self-control” is the ability to control one's emotions, behavior and desires in order to obtain some reward later.

Yet most persons (including college students) suffer from problems with self-control … whether it be in the achievement of the completion of a common college task (e.g., homework or test preparation) or with regard to matters with huge long-term financial implications (e.g.., not incurring credit card debt you will have difficulty paying off).  During decision-making moments a person often places disproportionate weight on immediate costs and benefits, rather than what is important for the long-term.

The good news is that “practice makes (nearly) perfect.” That’s because self—control is like a muscle … the more you use it, the stronger self-control gets. That’s also why it is hard to “get back in the groove” after a break. At the same time, you may be aware of individuals who, through practicing self-control continually, develop an immense ability to exercise self-control, even when accomplishing many tasks requiring self-control in repetition.

But how does one begin to “practice” self-control? One must first understand that goals and rewards which are abstract and likely to be achieved only in the future, such as “securing a good education, good grades, and landing a good job,” are likely to be de-valued relative to those goals or rewards which can be achieved in the very near-term and more concretely. For example, “play video games now” or “let’s go out” – while neither possesses a great long-term positive effect on one’s development – are much more concrete and near-term (and hence are more motivating) to a person than “outline this chapter in order to do well on the final exam several weeks from now.” Hence, the first step to better self-control is simply being aware that your brain assigns abstract and far-off goals less value.

While externally-imposed deadlines, such as professor-imposed deadlines to submit an assignment, are generally met, life won’t always involve situations in which deadlines are imposed by others upon you. In the real world, you will need to self-impose upon yourself your own deadlines … and learn how to stick with them.

One way to enhance your own self-control is to adopt a near-term reward for a goal: “If I finish outlining this section of the chapter, I will then be able to be on Facebook for 10 minutes.” (It would be best if a timer is then set.)

Another such a technique is a “pre-commitment” device.  Often this is where one puts the wrong choice beyond reach. For example, a student who shops weekly for snacks for her or his dorm room might only purchase a week’s supply of 100-calorie snacks. By eschewing snacks with higher calorie content the student does not have to confront the difficult choice of whether or not to eat an unhealthy snack. And by limiting the number of snacks purchased to a week’s supply (even if a larger quantity purchase would result in discounts), the student becomes more aware that eating the 100-calorie snacks all in the first few evenings results in the prospect of no snacks later in the week.

What are some other pre-commitment techniques?

1. Study in a controlled environment, like the library (better yet, undertake a mutual promise with a friend to study there until a certain time);
2. Turn off your smart phone;
3. Leave your video games at home – don’t bring them to your dorm room (or, if they are already there, disconnect them and put them in a dark corner of your closet);
4. Turn off your internet connection on your computer (unless you need it for the assignment);
5. Plan to reward yourself with a recreational activity – but only after you have completed your assignments; and
6. Make a commitment to meet a friend at a particular time in the gym, in order to exercise.

In the real world few supervisors desire to deal with employees who need to be constantly provided deadlines in order to get projects accomplished. In this regard, your ability to exercise self-control is a key factor affecting your retention and promotion within a firm.

Of course, practice is just that … practice. You won’t always succeed in exercising self-control. No one is perfect. There will be lapses. But, over time, and with continued practice, your capacity to exert self-control can substantially increase, leading to a much more fulfilling and rewarding life.

Do you have 25 minutes to learn more about self-control … In order for you to be more successful for the rest of your life? Watch these videos:

• “'Sesame Street' Tells You How to Get to Sunnier Days Financially” [9:36] at http://www.pbs.org/newshour/bb/business/jan-june11/makingsense_06-03.html
• Charlie explores how to “Stop Procrastinating” [4:17] at http://www.youtube.com/watch?v=qjIsdbBsE8g
• “3 Powerful Techniques To Beat Procrastination” [3:45] at http://www.youtube.com/watch?v=VA8D1cGW5Qk
• “How Bad Do You Want It?” [5:51] found at http://www.youtube.com/watch?v=lsSC2vx7zFQ

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

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

Ron Answers the Question: Must IRAs Be Handled in a Fee-Based Account?

In an article appearing at www.Financial-Planning.com, and specifically at http://www.financial-planning.com/blogs/Ask-Ed-Slott-Do-IRAs-Need-to-Be-in-a-Fee-Based-Wrap-2683302-1.html?ET=financialplanning:e12900:39431a:&st=email&utm_source=editorial&utm_medium=email&utm_campaign=FP_Daily__021513, Ed Slot opined in pertinent part:  "The Department of Labor does not require IRAs to be in a fee-based account, including wrap fees. Wrap fees are fees for investment services where the fee is a percentage of money under management."

While Ed Slott's answer is true, it does not address the potential consequences of the "Definition of Fiduciary" rule, if it is re-proposed (as expected) by the U.S. Dept. of Labor's Employee Benefit Services Administration (EBSA) later this year and subsequently finalized late in 2013 (or more likely in 2014 or 2015).

First, here's the technical explanation as to why the DOL's rules might impact IRA accounts.

• As to the Dept. of Labor and IRA accounts, under the Internal Revenue Code issue: First, section 4975(e)(3) of the Internal Revenue Code of 1986, as amended (Code) provides a similar definition of the term "fiduciary" for purposes of Code section 4975 (IRAs).  However, in 1975, shortly after ERISA was enacted, the Department issued a regulation, at 29 CFR 2510.3-21(c), that defines the circumstances under which a person renders ``investment advice'' to an employee benefit plan within the meaning of section 3(21)(A)(ii) of ERISA. The Department of Treasury issued a virtually identical regulation, at 26 CFR 54.4975-9(c), that interprets Code section 4975(e)(3). 40 FR 50840 (Oct. 31, 1975). Under section 102 of Reorganization Plan No. 4 of 1978, 5 U.S.C. App. 1 (1996), the authority of the Secretary of the Treasury to interpret section 4975 of the Code has been transferred, with certain exceptions not here relevant, to the Secretary of Labor.

Hence, when the DOL/EBSA, as is expected later this year, issues a re-proposal of its "definition of fiduciary" regulation, in essence the broad exemptions previously provided disappear, and virtually any provider of personalized investment advice to a plan sponsor or plan participant would be a "fiduciary" and subject to ERISA's strict "sole interests" fiduciary standard and its prohibited transaction rules.

Does this means commissions would be outlawed for IRA accounts?  Not necessarily.  In my view, the fiduciary standard, whether under ERISA ("sole interests" fiduciary standard) or under the Advisors Act or state common law ("best interests" fiduciary standard), does not outlaw the receipt of commission-based compensation.  However, the receipt of differential compensation (a.k.a. variable compensation) (i.e, if commissions and/or other compensation varies depending upon product recommendation) becomes problematic.

I would also opin that 12b-1 fees, as seen in Class C and Class R shares, are also not likely to be outlawed by EBSA, although some pundits have stated otherwise.  However, 12b-1 fees are already under scrutiny by the SEC (although no action on this issue is likely soon), and some on the Commission would like to see the authorization for 12b-1 fees rescinded.  In addition, some concerns exist that, since 12b-1 fees cannot typically be negotiated (beyond various share classes, such as R-1, R-2, etc. in the retirement plan context), the Sherman Antitrust Act may apply and the practice of 12b-1 fees, especially as to retail investors, may be an unlawful fixing of prices and an unlawful restraint of trade.  Whether the U.S. Department of Justice's Antitrust Division will ever bring an action to stop 12b-1 fees remains an outstanding issue.

Note that there is likely to be an exemption granted to the prohibited transaction rules for brokerage firms who receive brokerage commissions for doing trading for funds.  Whether the exemption will cover higher brokerage commissions paid in the nature of soft dollars is unknown.  And whether mutual funds will have to prove that "best execution" is undertaken by using brokerage firms (who sell the funds to ERISA and IRA accounts) - especially when trading costs can be minimized through the use of electronic crossing networks (and dark pools, a variation of same), is another issue.  There can be a vast disparity between brokerage commissions paid by some mutual funds relative to others, even of the same relative size of fund, type of security, and portfolio turnover characteritics, due to these "back-door" forms of compensation.

I would note that the receipt of "payment for shelf space" by a brokerage firm is very problematic under the ERISA standard.  It is difficult to see how the DOL could issue a blanket exemption for this, where there does not appear to be any benefit to a fund shareholder from same (a requirement for an exemption to be granted). In theory, payment for shelf space payments deter funds from reducing their management (investment advisory) fees, and are contrary to the interests of fund shareholders.

Hence, I suspect that mutual funds and brokerage firms will need to change their business practices.  A good approach would be to only have one method of compensation, with no other forms of compensation provided by the fund to the brokerage firm / registered representative.  This could be commissions, or could be 12b-1 fees (if not otherwise outlawed), or could be AUM-based compensation paid by the plan participants (and deducted from account balances), or could be even flat fees paid by the plan sponsor (and/or deducted from account balances).

In any event, I believe some of the brokerage firm / mutual fund arrangements must change, such as payment for shelf space and soft dollar compensation - and any arrangement in which a fund is granted "preference" (in return for some form of compensation).  Payment of "educaitonal" or "marketing" expenses by fund companies would likewise be outlawed under ERISA's prohibited transaction rules.

Other interesting issues exist, including the sharing of securities lending revenue with distributors of funds, and many issues involving proprietary mutual funds.

We will have to see what EBSA comes up with, if and when their re-proposed regulation emerges. (I hope the DOL/EBSA submits its re-proposed rule soon).  And the EBSA's final rule, if ever adopted, would not likely be effective until 2014 (or later).

So, keep your eyes peeled, and be ready to change certain business practices and compensation methods if necessary.  If you only have a Series 6 or 7 license, you may desire to pursue Series 65 licensure, as a means of providing yourself greaterly flexibility in fee arrangements in the future.  Hope this helps.

More to come.

College Students: OOZE CONFIDENCE! (And if you are not confident, then fake it!)

College Students: “Ooze Confidence” (And if you are not confident … then fake it!)

“Fake it till you make it” is not about faking happiness until you trick yourself into being happy. It’s not about acting like you’re too cool for school until other people also believe you are, and then basing your life around a made-up personality. It is about confidence. It is about meeting situations that you feel intimidated by head-on, telling yourself that you’re ready for them, and putting “I-can-DO-this” intentions out there, until you’ve done such a good job convincing yourself that you suddenly can handle the challenge before you.

Appear confident, in everything you do. And if you are not – fake it!  By appearing to act confident, those around you don’t know of your insecurities – and it actually trains your mind to think confidently!

For a good part of my life, I was overly shy. (I remain a SEVERE introvert, but that’s different from being shy.)  In college I dreaded being called upon in class. I would never approach a girl.  At parties I always stood in the corner of the room. But then, one day, I figured it out - introversion is a strength, but not an excuse to fail to socialize effectively with others.

So, I sought out a little help from friends (the few I had) and read various books. (Of course, nowadays there is all kinds of advice on the Web about dating, small talk, confidence-building skills - just search for videos on YouTube). And I learned that I needed to push out the bubble of my "comfort zone." 

I learned the power of a smile. I learned the power a handshake, a gentle touch on a person's hand or arm. I learned to greet others - even complete strangers - as I passed them by, or sat down in a classroom, etc.

At parties, I learned to pretend (without telling anyone) to be the “host” - and I took it upon myself to make others comfortable, introduce a person to another, etc. I found that fully one-third to one-half of the persons I encountered were also shy – many even more shy than I was (and I found that hard to believe, at first).

I learned that asking questions of others was the best way to keep conversations going, rather than just by continuing to talk myself. I learned the importance of focusing on the other person, as he or she talked. He or she deserves my undivided attention.

And I learned that I constantly needed to push out my “comfort zone” in order to get better and better at socializing and networking, and not revert back to my old habits. Why? Because I’m still an introvert – and I always will be. But being an introvert is a blessing, and a source of my inner strength. In fact, as an introvert I give energy to others. I am also much more contemplative of the world around me than most extroverts. I would never change that. I am proud to be an introvert.

College is that it is the perfect place to push out the boundaries of your own comfort zone - to expand the "bubble" of your ability to socialize with others.  And this is such an important skill, in the world of business, and in life in general.  It’s much better to practice and develop skills in college, than try to build those skills later “in the real world.”

About a year ago we had on campus a dynamic speaker, Adam LaDolce, author of “Being Alone Sucks!” (I would strongly recommend Adam as a speaker for any college or high school.)  Adam LaDolce offered a lot of suggestions to those who were either shy or introverted.

• First, don’t over-exaggerate the importance of certain events in your life.  Think about it – a short conversation with another, of “muffing it” in class, is not that big a deal – if it goes wrong.  It’s just the opportunity to learn to be better.
• Second, realize this truth: “I’d rather regret doing it than regret not doing it.”  This is like the old saying, “A ship in the harbor is safe, but that’s not what ships were built for.”
• Thrid, smile and say “hello” to everyone you pass by.  Try it – for the distance between one class and wherever you are next going.  Try it again and again.  Over time, you will find that people start saying “good morning” or “good afternoon” back to you. And, over time, more people will seek you out to get to know you.
• Fourth, imagine standing on a chair in a room and shouting: “I love all of you very much!” Some people will laugh, and some of these will want to get to know you more.  But a few in the room may look down on you. Guess what? These other people – they don’t exist to you anymore! There are plenty of people who do want to get to know you, who are lonely themselves. All you have to do is take a risk. What's the worst that can happen? You’ll discover that “the worst” is not really all that bad.

Do you always have to "ooze confidence"?  While this is important in my situations (interviews, the world of business, etc.), there are times when it is permitted to show a little vulnerability. For example, here's one way, especially if you are shy, to meet other people. It’s as simple as this - approach other people to seek out a conversation.  If you are shy, use this excuse: “My crazy professor wants me to push myself out my comfort zone, and go out and meet more people. Do you suppose we could chat sometime, perhaps over a drink or lunch at the Central Dining Hall, so I can practice socializing?” It’s o.k. to show a little vulnerability, by the way, in this instance.  (Another great pick up line ... "Hi. My name is ____. I've been told that I'm really shy, but I wanted to ask you if we could chat sometime, so I can get to know you better.")

What’s the worst that can happen? The other person says “NO WAY!” and turns away from you. And, if he or she does, then just move on – that person no longer exists for you, at least within your own universe. But there are hundreds or thousands of others out there who will want to meet you, and who desire to have a conversation with you.

How do you conduct a conversation? Have some questions prepared. The best conversation is where you talk 30% of the time, and the other person talks 70% of the time. (Once a relationship is formed, 50/50 is a better ratio.) A good way to get the other person to speak is for you to ask questions about that other person. First, seek out some basic facts, nothing too personal. For example, where is the person from, are they an only child or from a larger family, why they attended this college, what is their major, and what type of career they desire. Also ask for the other person's opinion - such as what classes to take, what professors are best, or what clubs or organizations to consider joining. As the conversation ensues, more personal questions can follow.

In summary, here's how to OOZE CONFIDENCE every day. First, be certain to smile – always – in the presence of others. Second, say “good morning” or “good afternoon” or "Hello!" or "How are you doing?" as you pass by others. Third, walk tall and with purpose - like it is important for you to get to where you are going, and quickly.  And lastly, imagine the other persons you greet are much more shy than you.

OOZE CONFIDENCE in everything you do, and be more successful in life. And, even if you are not confident in a particular situation, act as though you are. You'll impress others that way, and in so doing you will open doors that you never imagined would exist for you.

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

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

Preliminary Thoughts on the "Fiscal Cliff" "Deal"

Ron's Preliminary Thoughts on the “Fiscal Cliff” “Deal”

There are several reports already regarding the personal financial and tax planning consequences of the fiscal cliff deal.  Rather than discuss all of these provisions in more detail, I’d like to comment about two aspects of the recent “deal” to avoid the “fiscal cliff” – by first discussing “winners and losers.”  I’ll then turn to the “next cliffs,” with some questions about the parties’ strategy, but with greater inquiry as to why certain parts of the puzzle are not being considered more greatly – both as to procedural and substantive issues.

WINNERS AND LOSERS.

RETURN OF FULL MEDICARE TAXES.  The biggest impact for most Americans is the expiration of the 2% cut off Medicare employee contributions.  This was designed to be a temporary two-year cut to aid the economy, paid for by adding to the accumulated national debt.  It is no surprise that this “tax break” expired.  Employees will feel real pain – with lower net paychecks in 2013.  This is our most compelling reminder that pulling back on stimulus to the economy – whether fiscal or monetary – can be most painful.

MARGINAL TAX RATES RISE FOR HIGH EARNERS.  For individuals with greater than $400,000, and married couples with greater than $450,000, of ordinary taxable income – roughly 2% of all Americans – income tax rates will also increase.  But only for income above these previously stated levels.  However, the return of the elimination of certain itemized deductions, for income above certain levels, will also hurt high earners.

THE ASSET RICH – NOT SO HARMED.  Those “wealthy” who derive a lot of income from dividends and/or capital gains should be pleased.  The 20% rate on long-term capital gains was anticipated.  The compromise to permit qualified dividends to be taxed at 20% is the larger surprise, and a real benefit to those Americans who own stock (within taxable accounts) in publicly traded corporations, and to those who own stock mutual funds in taxable accounts.  Additionally, greater certainty in planning for gains (and other tax preference items) will result due to the “permanent” patch to the alternative minimum tax.  The preservation of the $5m federal estate tax exemption ($10m for married couples) is another big "win" for the "asset rich."

FEDERAL GOVERNMENT AGENCIES AND THEIR EMPLOYEES.  By punting on the “sequester” for two months, most federal government agencies – many of them facing 8% to 13% budget cuts – still face similar cuts, if the next “sequester cliff” is not addressed.  The agencies should continue feel constrained in their hiring and expenditures, and employees are left to wonder about probable furloughs (mandatory days off without pay) and/or layoffs.

STRATEGY ... THE ROAD AHEAD IS MORE DIFFICULT FOR THE DEMS.

The “debt ceiling cliff” and the “sequester cliff” still exist, with February and March deadlines.  Here are some thoughts about the road ahead.

Both parties have moved from intransigent positions and have compromised, albeit only with the substantial assistance and intervention of V.P. Biden and Senate Majority Leader Mitch McConnell (again).  While some will opine that the compromises made now will make further compromise less likely, I believe the opposite is true.  The new Congress, with a slightly different make-up, and having finally learned to compromise to accomplish “something,” is more likely to reach deals.

Did the Democrats use up most of their leverage, by focusing on eliminating tax increases for all but the high earners?  What incentives do the Republicans possess to avoid the “sequester” on government spending?  Moreover, Republicans appear to possess the upper hand in demanding cuts to entitlement spending to avoid the debt ceiling – and the sequester.  I wonder if the Democrat’s perceived short-term victory in achieving the recent “deal” will turn out to pose long-term difficulties in negotiations.

If, however, real tax reform is to take place – by simplification, elimination of many deductions, and lowering of tax rates, then the Democrats may be better-positioned to head into such “revenue neutral” discussions with higher marginal rates on high earners already in place.

SOME SUGGESTIONS FOR MEANINGFUL REFORMS.

This is a lousy way to run tax policy.  Here are some better ways, in my view, to go about things in Washington, DC.  (I provide, as well, some thoughts on specific spending cuts and tax increases.)

• We should be focusing first on ways to make American corporations more competitive.  Reforming and lowering corporate income taxes is one key.  And removing the burden of employee health care from larger corporations is another (although this would require massive changes to how health care is funded in this country).  Like it or not, the United States competes with other nations in a global economy.

• Next, let’s focus on tax simplification.  Not just by a bit, but by a lot.  No just by lowering tax rates and eliminating most deductions and credits (a good thing, in my opinion), but also by making our government more efficient and reducing the need for tax and compliance consulting.

• For example, what if all IRAs and defined contribution plans were combined into one type of defined contribution plan – all with the same tax, contribution, and distribution rules (and penalties).  It would be a lot easier to administer (under ERISA), and save a lot of money spent at the Dept. of Labor (EBSA) and by tax attorneys, CPAs and retirement plan administrators across the country.  Imagine if defined benefit plans were simplified, as well.

• Tax increases and spending cuts should be phased in - via a new long-term annual sequester process.  As we’ve seen, from all of the recent economist warnings, huge “cliffs” in either reduced government spending or increased taxes can result in the likelihood of recession.  Common sense informs us that federal debt reduction shouldn’t be – as the fiscal cliff set up to do – a huge precipice of either tax increases or spending cuts.  

•  One of the strategies used to get people to save is to set aside an increased amount (as a percentage of income) for savings (or debt reduction).  Why not do the same for the federal government?  Mandate a reduction (in real, or inflation-adjusted, terms) of some percentage amount in overall spending each year (such as 1%, 1.5% or 2% a year), and revenue increases (i.e., tax increases) also in real terms (such as 1%, 1.5% or 2% a year).  Mandate this for ten years. 

• The difficulty in adopting a ten-year plan for spending cuts and revenue increases lies in determining “how much.” But that’s the real “grand bargain” that needs to be made.

• If done correctly, this phased-in, mandatory annual sequester approach will quiet the concerns about increases in debt-to-GDP levels “forever,” while at the same time providing a more stable tax and spending policy in the near term.  In other words, economic growth can proceed, as business and consumer confidence will be restored.  And with confidence restored will come further impetus for economic growth.

• In summary as to this point, we can make a lot of progress if Congress were to vote to enact rules to force ten years of phased-in spending cuts and tax increases, through an annual sequester process.  We’ve seen this before – and despite the sometimes difficulties it caused in the political process – it worked! 

• [By way of further explanation, the Balanced Budget and Emergency Deficit Control Act of 1985 established an annual sequester as a means to enforce statutory budget limits.  Amendments to this act were designed to use sequesters to control direct spending and revenues (through the pay-as-you-go, or PAYGO, process) and discretionary spending (through spending caps).  (Sadly, those mechanisms expired October 1, 2002.)  Previously, under these mechanisms, the budgetary impact of all legislation was scored by OMB, and reported three times each year (a preview with the President’s budget submission, an update with the Mid-Session Review of the Budget, and a final report after Congress adjourned). If the final report on either the PAYGO or spending caps mechanism indicated that the statutory limitations within that category had been violated, the President was required to issue an order making across-the-board cuts of nonexempt spending programs within that category.]

SOME SPECIFICS.   In order to avoid being labeled as just another pundit fearful of providing specific solutions, I offer several (and many more should be considered):

• The raising of tax revenues in the short-term by encouraging greater conversions to Roth IRAs and Roth accounts is poor long-term tax policy.  The Roth IRA (and other Roth accounts) are huge give-aways to taxpayers, which - in my opinion - the government can ill-afford.  As much as they are long-term beneficial for my clients (and their heirs), they don’t bode well for the long-term financial security of the country.  Sadly, we need to eliminate further contributions and conversions to Roth accounts.

• Reduced Pentagon spending will occur.  Great strides have been made in recent decades in cutting obsolete weapons programs and closing unneeded military bases.  Greater strides still need to be made, still.  The Secretary of Defense’s job will be a tough one, over the next decade, as the Defense Department wrestles with reduced levels of funding.

• Chained CPI will occur.  The door has been opened to its consideration.  But it is not the only solution to entitlement spending.  We must also consider a phase-in of a higher Full Retirement Age for Social Security retirement benefits, a slightly higher age for Medicare eligibility, and higher Medicare taxes (employer and employee contributions) over time.  The longer we wait, the more severe the remedy.

• Let’s simplify Medicare while we are at it.  Eliminate Medicare Part C (which costs the government tens of billions more than it should, anyway).  Combine Parts A, B and D, and make B & D mandatory.  This should greatly reduce administrative costs in the Medicare system.  And, of course, permit Medicare (or non-profit associations acting as payors) to negotiate prescription drug prices.  And let’s open the discussion about reducing the costs of end-of-life care, by having an honest discussion about it (with no “death panels” rhetoric).

CLOSING THOUGHTS.

Let’s get away from the “unified budget” numbers.  It understates our real annual budget deficit.  (I lay some blame with the press, for permitting the politicians to continually referred to the “unified budget” numbers when reciting the size of budget deficits.)

Campaign finance reform is essential (and it may require a Constitutional amendment).  And term limits for those in Congress should be reconsidered.  As we have seen, far too many in Congress cast votes in anticipation of the next primary or general election.  Going to Washington should be viewed as an opportunity to temporarily serve the country, and not as the necessity of preserving one’s permanent seat.

It may take some time to digest all of the “deal” which has been approved.  We can only hope that the process used to achieve tax and spending reform (i.e., deficit reduction) – while never easy – can be undertaken in Washington with a great deal more thought, and courage - in the future, when contrasted to what we have seen over the past two months.

Largely due to Congress’ inability to tackle problems in a sensible way, too many Americans worry that America is in permanent decline.  Let us hope, and pray, that current and new leaders will embrace a more sensible path toward addressing the country’s problems, with a long-term perspective.  Let us hope that statesmen and leaders emerge to guide us toward a prosperous future.

I am optimistic.  America is a great country, and with unbundled enthusiasm, its entrepreneurial spirit, and the promises from continued innovation, we can continue to remain a great country - and a great people.  But, to maintain this greatness, we must demand more from our elected leaders.  Each and every one of us should write to our representatives in Congress and demand statesmanship rather than political posturing.

In conclusion, the recent outcome of the "fiscal cliff" "deal" did little to restore the all-essential business and consumer confidence our country needs to assist in propelling our economic growth.  It did avert the "fiscal cliff" - but not by addressing our long-term fiscal issues, as was intended.  Let us hope that over the next two months we will witness a process, and outcomes, far more satisfactory.

Ron A. Rhoades, JD, CFP(r)

January 1, 2013