My 2015 Wish List for DOL, SEC, States, CFP Board, NAPFA & You

As we approach 2015, I share with my "wish list' for the DOL, SEC, state securities regulators, and the various voluntary professional associations.

And I encourage YOU to undertake simple act, involving just a few minutes of your time, which may well serve to put us back on the path toward a true profession.

THE MANY VARIED PATHS TOWARD A MORE UNIFORM, ROBUST FIDUCIARY STANDARD OF CONDUCT FOR ALL PROVIDERS OF INVESTMENT AND FINANCIAL ADVICE.

Fiduciary duties are applied to those who provide personalized investment and financial advice under different sources of law – federal statutory law (ERISA and the Advisers Act), state statutory law (state investment adviser statutes), federal common law, and state common law. Uniformity is currently lacking as to both when fiduciary duties are applied and, when they are applied, as to the specific fiduciary duties that are applied (or not applied).

While perfect uniformity cannot exist, the U.S. Department of Labor (DOL) and the U.S. Securities and Exchange Commission (SEC) and state securities regulators can achieve a much higher degree of uniformity in fiduciary law through close collaboration and via the adoption of the fiduciary principle for all providers of financial and investment advice.

Even in the absence of action by the DOL, SEC, and/or state securities administrators, professional organizations can lead the way to a better future for all those who desire a true profession for financial/investment advisors. Who will lead? Who will merely follow? Which organizations will embrace bona fide fiduciary standards of conduct for its members? Which organizations will be "fiduciary pretenders" without such a commitment?

Each of us can act now to move our professional organizations down the path toward a true profession, toward a better future for our fellow Americans who are the recipients our professional advice, and toward brighter economic future for America itself.

ERISA AND THE DODD-FRANK ACT OF 2010 EMPOWER THE DOL AND THE SEC, RESPECTIVELY, TO BRING A HIGH DEGREE OF UNIFORMITY AS TO WHEN FIDUCIARY STANDARDS APPLY.

• The DOL should apply fiduciary duties upon all who provide advice to all retirement plan sponsors and plan participants. Exemptions from the "sole interests" standard should be limited and used only where plan sponsors and participants are truly benefitted by the exemption.
• The SEC should apply nonwaivable fiduciary duties to all registered investment advisers, even dual registrants.
• When any investment advisory account exists for a client, or when fiduciary duties otherwise attach to the relationship, these fiduciary duties should extend to the entirety of the relationship, and any fiduciary-client relationship should not be capable of being switched to an arms-length relationship.
• In order to prevent actual fraud (i.e., “bait-and-switch”) and to eliminate widespread consumer confusion, dual registrants who utilize titles denoting relationships of trust and confidence, such as “financial advisor,” “financial consultant,” “financial planner,” “wealth manager,” or “estate planner,” or who use designations which incorporate such terms, should be held to the fiduciary standard at all times, for all clients.
• The SEC should also apply fiduciary duties to all providers of personalized investment and financial advice, regardless of registration of the advisor, when a relationship of trust and confidence exists between the advisor and the client.
• In so doing, the SEC is merely restoring the principle - followed by the SEC and even the NASD (precursor to FINRA) prior to the 1970's.
• The various states should then follow the SEC’s lead, modifying state statutes and regulations to apply fiduciary duties to all providers of personalized investment and financial advice, regardless of registration of the advisor, when a relationship of trust and confidence exists between the advisor and the client, and providing individual investors the right to bring claims under state law.
• “Advice” should be broadly defined to include any circumstance in which the advisor states whether an investment strategy or investment product is recommended to a client. Mere descriptions of an investment product should not, without more, trigger application of the fiduciary standard; i.e., product seller-customer arms-length relationships should still exist under the law, provided that the arms-length nature of the relationship is laid bare and not obscured.

THE DOL AND SEC SHOULD ADOPT BONA FIDE FIDUCIARY PRINCIPLES THROUGH MANDATORY STANDARDS OF CONDUCT.

In the different applications of fiduciary law (such as trustee-beneficiary, employer-employee, partner-partner, director-corporation, etc.), the actual extent of the fiduciary’s duties are necessarily calibrated to meet the needs of the entrustor (client). Stricter fiduciary duties are applied in those circumstances where public policy recognizes the importance of non-conflicted advice and where great information asymmetry exists. The delivery of personalized investment and/or financial advice is one of these circumstances.

The DOL and the SEC should exercise their authority to require all fiduciaries who provide personalized investment and financial advice to adhere to a strict ethical code of conduct. The parameters of this ethical code of conduct remain principles-based, and hence adaptable over time to new developments in the delivery of financial and investment advice. Yet, more specific principles can be elicited to provide necessary guidance to fiduciaries, their clients, the courts and arbitrators. See my prior blog posts: Apply the Fiduciary Standard to Reduce the Number of Regulations, the Size of Government, and the Need for Wall Street Oversight and Proposed Professional Standards of Conduct for the Delivery of Personalized Investment Advice.

THE SEC SHOULD MOVE MOST RIA OVERSIGHT TO STATE SECURITIES REGULATORS. 

The SEC Chair, Commissioners and staff have limited resources. It remains highly unlikely, within the next two years, that a Republican Congress will permit the SEC to have "user fees" to finance more inspections of investment advisers. We must recognize that most RIA firms (those which provide personalized investment advice, not running their own mutual funds, hedge funds, or other pooled investment vehicles) don't pose such huge risks that they should be under the purview of the SEC. Inspections and enforcement actions take time, and in today's complex and ever-changing world of financial services there are simply a great deal of other matters (derivatives, credit rating agencies, crowdfunding, etc.) that are more deserving of the SEC's attention - given the risks to the financial system as a whole.

The obvious answer is to gradually move oversight of many more RIA firms to the states, over 5-15 years. Perhaps establish a goal that the SEC monitors investment companies / hedge funds (and their investment advisers), along with the very, very large RIA firms (for example, those with $1-2 billion or greater under management. (Such a numerical standard should be tied to inflation, as well, to avoid "SEC Oversight Creep.") Then, over a multiyear period, in incremental steps, oversight of many RIAs can be transferred from the SEC to the states.

This will necessitate more state resources. To a large extent several states are ahead of the SEC in terms of their authority to collect fees, as they impose fees for examinations as well as greater fees/costs when enforcement actions occur. 

Not all states will move as quickly as desired; hence, the SEC must be prepared to retain oversight of RIA firms where state oversight is not deemed to yet be robust and sufficient.

MORE SEC WISH LIST ITEMS.

• Understand the substantial public policy reasons which support the broad application of fiduciary principles to the delivery of personalized investment advice. If you don't understand the rationale, you'll never understand the fiduciary duties themselves, nor how they should be applied and enforced. 

• As alluded to above, don't permit fiduciary duties to be "waived" by clients, as often inappropriately occurs (just look at the Form ADV, Part 2A, and client services agreements, of many dual registrant firms). Realize that estoppel plays a much more limited role in fiduciary law than it does in arms-length relationships.

• Correct the inappropriate rule in which "portfolio turnover" is reported by mutual funds as the lower of purchases or sales of securities, relative to net assets of the fund, rather than their average.

• Eliminate 12b-1 fees, for all the reasons I have previously written about.

• Eliminate sharing of securities lending revenue by mutual funds and ETFs. Securities lending revenue belongs to fund shareholders. If the investment adviser to the fund desires additional compensation for undertaking revenue sharing activities, this should be reflected in the funds' management fees. If affliates are utilized to effect securities lending, then benchmarking of the fees of those affiliates should be utilized, with compensation paid to affiliates not to exceed average levels.

• As mentioned above, ensure that those who promote themselves with the use of titles or designations which denote a relationship of trust and confidence don't then seek to absolve themselves of their fiduciary obligations. Compelling reasons exist for the distinctions to be made.

• Don't permit any securities firm to use client testimonials. Or permit them all to. Just be consistent (and fair) about the rule. Of course, continue to prohibit misleading ads.

• Repeal the "two hats" and "switching hats" temporary rule of Sept. 2007. Don't condone consumer confusion, nor encourage misrepresentation and fraud, via SEC rules.

• Don't permit any securities firm to state "we act in the best interests of our client" or "we provide objective advice" (in any communication, including its Code of Ethics unless the firm and its advisors are willing to practice as bona fide fiduciaries to each and every client, at all times. Otherwise, bait-and-switch (via intentional misrepresentations) occur. And don't permit language which couches such obligations with language such as "we seek to" or "our advisors aspire to" act objectively and/or in the best interests of clients - as the fine distinction between actually doing vs. aspiring to are the source of much client confusion about broker's obligations to the client. As the SEC alluded to long ago, arms-length relationships should never be disguised.

• Don't permit FINRA to state that all brokers and their registered representatives are required to act in their client's "best interests" unless all of these brokers and registered representatives are willing to accept bona fide fiduciary duties at all times. Otherwise, FINRA just continue to obfuscate by attempting to re-define "best interests," the common expression of the fiduciary duty of loyalty, as something less than what it means. This just creates more confusion for consumers, as well. Require FINRA to modify its previous statement (in "guidance" provided to its members), in this regard.

• Further restrict soft dollar compensation. Inspect soft dollar arrangements, to ensure that any payments for research are comparable to the cost of research which could be obtained through other means, and ensure that the research is actually utilized.

• Eliminate payments for shelf space and other revenue-sharing.

• Eliminate payment for order flow. You can't achieve true best execution when such huge economic levers exist in opposition to the requirement for best execution. 

• Investigate proprietary mutual funds when used by institutions (banks, investment advisory firms). Are all management fees and 12b-1 fees being rebated to the client of the fiduciary, to avoid double dipping? Are the administrative fees of the fund artificially high (seen in some banks' proprietary funds, when management fees are rebated but administrative fees are not).

• Eliminate any and all "secrecy" clauses with regard to settlements; require public disclosure of all settlements through regulatory filings for same

• When arbitration is agreed to by a client, require all arbitration in securities matters to be undertaken in independent (non-FINRA) forums. It is extremely important that tribunals be perceived by the public to be fair; as long as they exist under FINRA, that perception will not exist.

• End the "revolving door" between the SEC and Wall Street (and the law firms that serve Wall Street firms). Ban any compensation bonuses to Wall Street executives that go to work for the SEC. Ban SEC staffers from any direct contact with SEC commissioners and staff for three years after they leave.

• Eliminate inspections of custody arrangements by private auditors. Seek "inspection fees" or "examination fees" from Congress for taking these inspections in-house. A more focused fee, the amount of which is statutorily determined and which is tied to assets under advisement for which custody is assumed, would likely be more palatable to Congress than broad "user fees.") Properly undertaken, government inspections (whether by SEC or state securities examiners) are far more effective in uncovering fraud than private audits will ever be. Firms that don't possess custody would remain exempt from such fees.

• Become again what the SEC once was - one of the most respected agencies of government.

• Let the SEC once again steer our capital markets system to become the grease for the wheels of capitalism, not the sludge it is currently in which a major portion of corporate profits are siphoned off and never reach the hands of individual investors.

STATE SECURITIES REGULATORS - 2015 WISH LIST ITEMS.

I encourage state securities regulators to actively lobby to oversee a larger percentage of RIA firms, following the suggestions set forth above.

I encourage state securities regulators to adopt non-waivable fiduciary standards of conduct for investment advisers, regardless of whether the DOL and/or SEC take the lead in this regard.

I encourage state securities regulators to clearly state that disclosure of a conflict of interest does not "cure" same, and that much more is required of a fiduciary providing personalized investment advice. Disclosure of all material facts, affirmatively made, and client understanding subjectively assured by the advisor. Informed consent - and with the realization that no client would consent to be harmed. And even then, the transaction proposed must be substantively fair to the client.

I encourage state securities regulators to compel all fiduciary advisors to adopt a fiduciary professional code of conduct, similar to the one I have previously suggested. This will guide the advisors on their fiduciary obligations, as well as provide insights for clients of advisors and examiners.

I encourage state securities regulators to pursue the other corrections to lax SEC oversight, set forth in my wish list above. The states play a vital role in protecting Main Street, and time and again over the last couple of decades the states have stepped up to protect individual investors when the SEC failed to timely act.

I encourage the states to adopt a single registration, effective for all states in which registration occurs, which RIA firms can pursue - in lieu of separate registrations at present. And a single registration fee for multi-state registration, with the bulk of that fee being paid to the state of the RIA firm's home office registration. Similar treatment can be accorded for individual investment adviser representative registrations. While the issues involved in splitting of fees and where oversight best occurs are sometimes complex, the need for simplicity in registration is important as a means of relieving compliance burdens, especially so if the states assume greater oversight of larger RIA firms.

I encourage state securities administrators to establish peer review panels for purposes of determining whether probable cause exists for certain violations, and to adjudicate certain actions brought against investment advisers. Experts are needed to judge adherence to a fiduciary's duty of care, and certain types of action involving a fiduciary's duty of loyalty and/or utmost good faith.

I encourage state securities regulators to inspect for custody more frequently. Asset verification is the essential government function.

I encourage state securities regulators to provide compliance policies and procedures, including codes of ethics, which investment advisory firms can adopt and follow - without the necessity for paying for costly compliance consultants.

I encourage both federal and state securities regulators to treat investment advisors as professionals, not as criminals. While the issue of asset verification requires frequent inspections, other inspections need not be frequent nor intrusive. Let the state securities regulators fight actual fraud (Ponzi schemes detected before they become large) and unregistered advisors. Investigate complaints when filed by consumers. But, otherwise, don't camp out for days at investment adviser's offices to ensure every "i" is dotted and every "t" is crossed. Government does not possess unlimited resources to inspect everything, and investment advisory firms (especially the smaller ones) don't possess unlimited resources to devote to compliance and inspections.

THE CERTIFIED FINANCIAL PLANNER BOARD OF STANDARDS, INC. - LEAD, DON'T FOLLOW; REQUIRE A FIDUCIARY OATH.

My wish list for the CFP Board is similar to that set forth above for the SEC. It's time to move the ball forward, by effecting a marketplace solution. But is the CFP Board up to the task?

First, recognize that the term "Certified Financial Planner(tm)" denotes a advisor, and misleads consumers that a relationship of trust and confidence exists if the CFP(r) Certificate does not adhere to fiduciary duties at all times. Hence, adopt the rule that all certificants are fiduciaries at all times when providing personalized investment or financial advice.

Second, adopt a similar definition of "advice" to that set forth above. Abandon the nonsensical multiple-part test currently utilized. In other words, define "advice" very broadly. If a CFP certificant is involved in the deliver of financial/investment products and/or services, make it mandatory that fiduciary duties apply. It's that simple.

Third, rather than watching the developments at the DOL and SEC, lead the way toward the bona fide fiduciary standard - an essential prerequisite for the establishment of a true profession. Require every CFP certificant to sign onto, and follow, a fiduciary oath. (See, e.g., The SEC's Failures, the Fiduciary Standard, and the Role of a Fiduciary Oath for Consumers and Professionals and also see The Committee for the Fiduciary Standard's Fiduciary Oath. And undertake substantial changes to your Standards of Professional Conduct to ensure a bona fide fiduciary standard is set forth therein (see recommendations to the DOL and SEC, above).

Fourth, end your costly advertising campaign. After you make the changes noted above, the media will do your advertising for you - they will direct consumers to seek out Certified Financial Planners(tm). Right now members of the media often don't suggest to consumers that they visit the CFP Board's web site, which is understandable given that not all Certified Financial Planners(tm) practice as fiduciaries at all times.

Fifth, if you don't change, realize that the CFP Board risks becoming irrelevant as a professional organization. While the CFP Board has done a great job in raising the educational standards for financial planners, and has the financial strength to become the true leader of a true profession, without adopting a bona fide fiduciary standard for all CFP certificants at all times the CFP Board will increasingly become irrelevant - at least to the growing number of advisors who desire to practice financial planning as bona fide fiduciaries and, as well, to the all-powerful members of the consumer media.

[I wonder if the CFP Board's long-standing cry of "one designation, one profession" as a means of advancing the CFP certification among financial planners might turn into "one designation, one non-profession (trade group)."]

Sixth, never undertake any initiative unless you closely collaborate with the Financial Planning Association (FPA). Collaborate, coordinate, and communicate. There should be very, very few initiatives undertaken by the CFP Board which don't receive the support of the FPA. Enough said.

NATIONAL ASSOCIATION OF PERSONAL FINANCIAL ADVISORS - LEAD, LEAD, LEAD - CONTINUE AS THE STANDARD BEARER.

If (as is likely) the CFP Board continues its current path, NAPFA must continue its leadership role for the emerging profession of financial advisors.

If the CFP Board continues down its current path, toward a future in which many CFP certificants are not fiduciaries and continue to provide conflicted advice (especially, as now occurs, when relationships of trust and confidence exist), NAPFA must re-consider the support of the "one designation" policy it adopted several years ago. Other designations, including CFA and CPA/PFS, should be considered as supportive of application for membership.

It appears to have been a couple of decades since NAPFA's fiduciary oath and its Code of Ethics received a good makeover. The news this year that NAPFA is working with the Institute for the Fiduciary Standard on "best practices" is a welcome one, yet "best practices" are not enough. It's time to step up to the table and initiate a wholesale review of its standards. (I hope such is already underway, but if it is not it's prime time for this to begin.)

NAPFA should not be timid. NAPFA has and will serve as the standard bearer for the profession. History has shown that each time NAPFA and its members have moved in a direction (embracing AUM fees as a permissible and more client-aligned business model, or its Fiduciary Focus campaign), other organizations and other advisors have followed, at least to a substantial degree.

NAPFA may be relatively small as an organization, but it possesses influence far beyond its size (a few thousand NAPFA-Registered Financial Advisors). The consumer media already knows of NAPFA and its members, and new initiatives from NAPFA to lead the profession will only solidify the reputation of NAPFA and its members.

NAPFA should also consider a trial of voluntary peer review, by members of other members, for purpose of determining whether best practices are being adhered to.

OTHER ORGANIZATIONS. 

There are many other non-profit and profit organizations which support the application of bona fide fiduciary standards. I encourage them to test themselves, as follows:

• Would the organization be willing to have all of their members be required to sign a non-waivable, always-applicable "Fiduciary Oath"; and

• Would the organization be willing to adopt, for its members, these bona fide fiduciary principles as suggested in these Standards of Professional Conduct.

Why this test? It has always struck me that many organizations say they support a true fiduciary standard. In reality this is may be a marketing ploy for the organization, an attempt to punt the issue to a later time, or a wholly different view of what the fiduciary standard is all about. It's time we know where each organization really stands. Let them state what principles they agree with, and let them state with particularity principles with which they disagree (or are unwilling to adopt), so that we know where each organization really stands.

ALL OF US - LET US EARN THE RIGHT TO BECOME A TRUE PROFESSION. REACH OUT TO THE LEADERS OF YOUR PROFESSIONAL ORGANIZATION.

Lastly, my wish list involves each and every one of us. If we want to become a true profession, we must earn that right.

If we desire to become a true profession, bound together by a bona fide fiduciary standard and professional service in the public interest, let each one of us advocate for such, loudly and clearly. Starting with outreach to our various professional organizations.

Find a leader in your organization. Find her or his e-mail address. Or, better yet, e-mail several leaders of your organization. And then send this simple message:

"I desire to be part of a recognized profession, in which my professional colleagues and I serve the public interest as expert, trusted financial advisors. Accordingly, I desire that my professional organization adopt an up-to-date and robust Fiduciary Oath and Standards of Professional Conduct for all of its members during 2015. For additional guidance on these initiatives, please refer to Ron Rhoades' blog of December 9, 2014, located at www.scholarfp.blogspot.com. Please advise me if (Name of Professional Organization) is committed to moving in this direction during 2015."

Ron A. Rhoades serves as 2013-14 Chair of the Steering Group of The Committee for the Fiduciary Standard. A frequent writer and speaker on issues confronting the financial planning and investment advisory professions, he also serves as Asst. Prof. of Business and Chair of the Financial Planning Program at Alfred State College, Alfred, New York. This blog represents the personal views of Ron A. Rhoades, JD, CFP(r), and are not necessarily representative of any organization with whom the author is associated. Ron may be reached via e-mail at: RhoadeRA@AlfredState.edu.

The Recent Rise in the U.S. Dollar: What Should U.S. Investors Do Now?

2/14/2015

The Recent Rise of the U.S. Dollar

The U.S. currency gained in 2014 against all 31 of its major peers. The broad trade-weighted U.S. Dollar Index gained about 10% in just the last seven months (mid-2014 through January 2015). However, even with the recent surge, the dollar is only coming off historical lows, which occurred as the Federal Reserve kept interest rates extremely low for the past several years.

A different U.S. Dollar Index (which the Intercontinental Exchange Inc. uses to track the greenback against currencies of six trade partners) traded at about 94 last Friday. Still, this was lower than in 1985, when it exceeded 160, or even in 2001 when the index level topped 120.

Looking at even more long-term data from January 1973 to present, we find that the Federal Reserve’s Trade Weighted U.S. Dollar Index: Major Currencies, the Jan. 31, 2015 reading was 88.9, still below the long-term median of 94.0 and its long-term average of 94.5.

However, another Federal Reserve Index, Trade Weighted U.S. Dollar Index: Broad, with more limited data from early 1995 through early 2015, indicates a 2/4/2105 level of 114.2, above its median of 107.0.

Effect on U.S. Investors in Foreign Stocks

For U.S. investors in foreign stocks, the dollar’s rise contributes to a decline in the value of foreign equities (or, at least, contributes to a more modest rise in value than occurs for U.S. stocks, on average). While many other factors are at play which drive investor's returns, the dollar’s recent rise shows up as a factor affecting the comparable the returns of broadly diversified index funds:

• Vanguard Developed Markets Index Fund, Admiral Shares (VTMGX): 1-year return of -0.25%; 5-year average annual return of 6.51% (as of 1/31/15)
• Vanguard Emerging Markets Stock Index Admiral Shares (VEMAX): 1-year return of 9.21%; 5-year average return of 3.37% (as of 1/31/15).
• Vanguard 500 Index Fund, Admiral Shares (VFIAX): 1-year return of 14.18%; 5-year average annual return of 15.56% (as of 1/31/2015)

U.S. vs. Foreign Stock Valuation Levels

Concerns about U.S. stock overvaluations abound. As a result, some analysts predict very low U.S. stock returns (low single digits, typically) over the next 10-year period. (However, most analysts acknowledge that a wide variance in actual returns is possible, depending upon whether mean reversion occurs over the next 10 years.)

Many of these same analysts suggest, often by employing Shiller CAPE data, that slightly greater returns are likely in foreign developed markets stocks (on average). Some also opine that even better returns (albeit still single-digits) are probable in foreign emerging markets stocks (on average).

Yet, except for a few select countries such as Russia, Greece and Italy (all of which are undergoing major political and economic difficulties at present), most developed and emerging markets countries’ stocks don’t appear overly cheap – they are just not “quite as expensive” as U.S. stocks.

Expectations of Future Returns by Major Asset Classes

U.S. Equities. Over the past 88 years, U.S. equity investors have managed to generate real returns (after-inflation, but before taxes) approaching 7%, as measured by the CRSP 1-10 data set (i.e., a broad index of all U.S. publicly traded stocks, market-weighted). Nominal returns over the very long term approach 10%. It is possible that such average annualized returns will occur over the next 10-year period. However, prudent investment advisors are likely lowering the expectations of their clients for U.S. equity returns over the next 5-10 years.

U.S. Real Estate. Overvaluation may have occurred (as a result of speculation, and foreign investor’s cash flows) in real estate markets (particularly in several large U.S. cities). Indications exist that investors are turning toward secondary real estate markets, in search of higher yields. U.S. real estate, while it may have some demand-fueled near-term growth potential, does not appear particularly attractive at these yield levels.

Foreign Developed Markets. With much of Europe facing low economic growth over the coming year, and fears of deflation existing (although I believe such fears are overblown), European stocks appear more reasonably valued than U.S. stocks. But even with the recent rise in the U.S. dollar, I would not rate European stocks as “cheap.” At most I would rate them as "fairly valued."

Foreign Emerging Markets. By contrast, valuations in foreign emerging markets, on average, appear even more reasonably valued. While I would not call foreign emerging markets “cheap” – they do appear to be reasonably valued, both from a fundamentals perspective (various valuation ratios) and taking into account the recent rise in the U.S. dollar. Valuation levels for emerging markets stocks (collectively) appear to be about 10% to 20% below that of foreign developed markets (collectively). Not a huge bargain, but perhaps a slight bargain.

While emerging markets indexes are notorious for their “roller coaster ride” of price increases and decreases, the depth of market capitalization in emerging markets stocks has generally increased, leading to somewhat less susceptibility to wild price swings due to increasing or slacking demand for emerging markets stocks. Still, greater price volatility should be expected, relative to developed markets stocks.

Fixed Income. Rates for both corporate and government debt remain quite low. With a likely moderate increase in rates coming, interest rate risk appears to be large. Given the low yields currently, future returns for fixed income investments over the next ten years appear to be lower than for U.S. equities. Of course, fixed income investments provide not just a (low) contribution to an investor’s overall portfolio’s return, but also can provide stability to the portfolio – especially if shorter-term, high-quality fixed income investments are chosen.

What Should Investors Do?

Each investor’s situation is different, so no one answer is appropriate.

For investors undertaking withdrawals from their portfolio, a 5-year “buffer” – i.e., short-term, high-quality fixed income investments – appears appropriate. For example, if an investor is withdrawing 4% a year from their portfolio, a 20% slice set aside for future withdrawals appears appropriate.
The remainder of the portfolio might contain many different allocations, dependent upon individuals’ needs, preference, and tolerance/capacity/need for risk.

Of the equities portion of a U.S. investor’s portfolio, various investment gurus recommend anywhere from a 20% to 50% allocation to foreign equities, with the balance in U.S. equities. Although U.S. equities account for somewhat less than 50% of world (publicly-traded) stock market capitalization, I believe it is permissible to have such a home bias. I would recommend that somewhere between 25% to 40% of an investor’s overall equity allocation be committed to foreign equities. Of the foreign equities allocation, 25% to 40% could be allocated to emerging markets, with the rest to foreign developed markets.

For example, if an investor has a total investment portfolio of $1,000,000, a prudent allocation for a 60-year old soon-to-be retiree might be:
40% fixed income investments (with an emphasis on shorter-term, high-quality instruments);
40% U.S. equities
14% foreign developed markets equities
  6% foreign emerging markets equities

Again, this strategic asset allocation is not for every investor. Some investors will need, or desire, to take on greater types of risk in their portfolios. Others will need to take on less risk. Investment time horizons need to be taken into account, along with other risks present which might be unique to each investor.

While the use of passive investment vehicles is also recommended, and a small cap and value tilt for the equities portion of the portfolio may be appropriate, these are the subjects for later blog posts.

For those who have already adopted a strategic asset allocation, rebalancing should occur on a targeted and/or periodic basis. In this manner, if the U.S. dollar continues to appreciate against other currencies, and/or if U.S. stock market valuations continue to increase, and/or if foreign stocks decline in value, investors can reap long-term benefits by purchasing at ever-cheaper valuation levels.

Ron A. Rhoades, JD, CFP® is an Asst. Professor of Business, where he teaches courses in investments, financial planning, and law. He is also the President of ScholarFi, Inc., a fee-only investment advisory firm. He can be reached at: ron@scholarfi.com.

Put America to Work: Energy Efficiency Investments for Municipalities

Regardless of what "size of government" you believe is appropriate (large government vs. small government), I think we can all agree that government needs to be as efficient as possible in utilizing our tax dollars. And, if investments can be made which do not raise our tax dollars now, and promise lower taxes for us all in the future, such investments deserve to be rapidly undertaken.

Here's how it works, in simple terms. If I loan you $1,000,000 at 3% interest, with a payback over 10 years, in equal installments, your annual loan payments (paid monthly) would total about $105,000, or 10.5%. But what if taking out the loan results in energy efficiency improvements for you that: (1) save $105,000 to $200,000 in electricity costs each year, for 20 years (varies, depending upon electricity cost per Kwh and installation costs); (2) in some communities, effect a slight drop in crime in your area; (3) save on greenhouse gas emissions; and (4) creates well-paying jobs for members of your community - installers and domestic manufacturers of LED lighting.

Sounds too good to be true? It isn't.

While I'm no expert in LED street lights nor their installation, from reading several articles about past and planned installations of LED street lights (which are said to last for 20 years or more, resulting in lower future maintenance costs as well compared to traditional street lighting), as well as reading articles about how rapidly LED light fixture prices have declined over the past few years, it seems apparent that dramatic cost savings are possible for municipalities where street lighting is widely employed. All that is needed is capital.

What's the solution for municipalities to acquire capital to make these infrastructure improvements? Here are three alternatives:

(1) The first would be the issuance of general revenue municipal bonds. But, such bond issuance has its (often substantial) underwriting costs, and interest rates for many municipalities (due to shaky finances) might be much higher.

(2) A better solution, in my view, is for Congress to authorize a government loan program under which the federal government (U.S. Treasury) issues 10-year government bonds (yields as of 2.8.15 - about 2%), and then loans funds to municipalities at 3%. The spread would easily cover the costs of administering the programs and the costs of any defaults. If administrative and default costs are lower, then perhaps rebates to municipalities could take place. Debt could also be staggered, with the U.S. Treasury authorized to issue 1-year, 2-year, 3-year, 4-year, etc. securities, and loaning to municipalities with principal paybacks over time. (This would lower effective borrowing costs for municipalities even more, and

(3) For those desiring to keep the government's balance sheet smaller, the U.S. government could guarantee municipal loans (thereby ensuring a very high rating), adopt legislation for a shorter prospectus (given the guarantee), and thereby result in possibly lower borrowing costs via 10-year municipal loan obligations (AA-rated 10-year municipal debt yields, as of 2.8.15, are about 1.8%). The federal government could charge 1.0% per year on outstanding debt to the municipalities, to cover the costs of any loan defaults and the costs of administering the program. Again, if the administrative and default costs are lower, then perhaps rebates to municipalities could take place.

Want to make a huge dent? Authorize tens of billions of such loans or loan guarantees to be undertaken, over the next three years.

Of course, interest rates could rise. Then again, costs of LED street lighting could fall over time. Even if interest rates rise moderately, cash flow savings would still likely result over the first 10 years, at least for the vast majority of municipalities. And even if loan repayment amounts rise slightly and equal energy savings over the first 10-year period, the real savings result in years 11-20, when the huge energy cost savings result flow to the bottom line of muncipalities, after the loans are repaid in full.

Other avenues exist for direct loan programs or government loan guarantee programs, for promoting energy efficiency for federal, state and local governments - such as improving energy efficiencies within office and other government buildings (including, as well, the halls in our colleges and universities). Payback times vary, however, and need to be more thoroughly examined to ensure savings actually take place.

Some federal government intiatives in this area already take place, as well as some state programs. What I suggest is that these iniatives be greatly expanded through Congressional authorization. Let's ... PUT AMERICA BACK TO WORK ... and ... SAVE ON OUR OWN FUTURE TAX BURDENS. And let's do it in A BIG WAY.

The future of America is bright. Innovations in materials sciences, health sciences, renewable energy, robotics, and computer applications continue - and the pace of such innovations is even accelerating. Let's together - act smart - and enable our own future prosperity.

Ron A. Rhoades, JD, CFP(r) is an Asst. Professor of Business at Alfred State College, Alfred, NY. This blog post reflects his personal views only, and not those of any organization with which he may be associated. Prof. Rhoades may be contacted at: RhoadeRA@AlfredState.edu. 

Prof. Zigglehoffer - Thank you for the push.

I shuddered. Even though I felt as if all my muscles were frozen, I could feel my body start shaking. My palms were instantly sweaty. Anxiety rose within me.

Professor Zigglehoffer (not his real name) then told me, “Please stand, Mr. Rhoades.” I dutifully obeyed, not certain if my legs would support my trembling body. The professor then asked, “Why did Mr. Jones not have a contract with Mr. Smith.” I cringed.

Here I was, standing in a class of over 100 students, on the first day of Contract Law, a required course in the first semester of law school. My worst fear was happening – I was called upon in class. Two hundred eyes judged me, as well as Professor Zigglehoffer – the tyrant lord of the socratic method.

I replied, with my voice crackling for all to hear, “No contract existed because Mr. Jones did not provide any consideration.” I thought that Professor Zigglehoffer would then permit me to sit down, and that he would move on to question others in the class. But, to my utter dismay, he asked me another question. And another. And another. After what seemed like a decade, the hour had come to a close, and only then did Professor Zigglehoffer permit me to collapse into my chair.

I was bathed in sweat by this point. My mouth was so dry, I was surprised I was even able to speak. My body was exhausted. But, I survived that day. And many others to come. How? Simply this – I persevered. I battled my way through my fear.

As time passed, I came to realize a few things. I uncovered some truths that empowered me to better overcome my fears of speaking in front of others.

I realized that each time I gave a presentation, I then became just a little bit more comfortable with public speaking.

I also realized that at times I would fail. At times I would deliver a poor presentation, or fail to connect with the audience. Perhaps I approached the subject incorrectly. Perhaps my demeanor was not right for the audience. Perhaps I didn’t rehearse enough. Although the times were few, I discovered that I was not perfect. And … I learned that not being perfect was fine.

I also let go of my concern over how others would perceive me. If someone did not like me – did not appreciate me – did not want to do business with me – that was o.k. That person need not be part of MY universe anymore. There were plenty of people who valued me, just the way I was at the time.

Once free of the fear of others judging me, and once free of the chains brought about by my perfectionist nature, with practice I became more and more confident.

And, when thrust into new situations, I pretended to be confident. And, in so doing, I found out that no one knew I was not confident, that time. In fact, by “oozing confidence” (i.e., faking it, to a degree) I actually became more confident.

Today, I give several speeches around the country each year. Often to hundreds of people at a time. And I am not nervous. I have confidence in my own abilities. I prepare well. I rehearse my presentation seven times during the two days before I give it.

While it has been said that 75% of college students (and the general population) fear public speaking, it has been my own experience (from surveys of my students at Alfred State) that about 40% (or a bit higher) possess significant anxiety in class. These students fear being called upon. They fear raising their hand to volunteer to answer a question. They fear being “wrong” in class discussions, or they fear saying something foolish. And they certainly fear getting up in front of the class to give a presentation.

If you suffer from this fear, realize this – you are not alone. Your classmates understand, and nearly all possess compassion. If you stumble, they will help pick you up. They don’t expect you to be perfect. They will admire your courage, as you make progress in overcoming your fears, and as expand your comfort zone ever wider.

What about that student who, on occasion, chooses to demean you? Expresses his or her disapproval of you, in some way. Criticizes you, not constructively. Forget him or her. That person no longer has the privilege of being part of YOUR universe. That person rightfully deserves to be ignored - by you. There are plenty of others in the world - and on campus - that will treasure you for whom you are. Just smile and greet. Sit down beside someone you don't know in a class, and ask that person five questions. Listen. And give that person a chance to get to know you.

Decades later, I suspect Professor Zigglehoffer knew, on that very first day of class, in the very first semester of law school, that I was shy and suffered from social anxiety. And I suspect that he wanted to prove that if I could last an hour under his barrage of questions, utterly nervous the entire time – that anyone could. Or perhaps he was just concentrating on me, alone, knowing that pushing me then would help me later.

I was extremely shy. I had social anxiety, throughout college. I feared being called upon in class. I feared the occassional presentation in front of class. But, I conquered my fears - and you can, too. All you have to do is have courage and dedication to the goal of becoming a better person, a bit each day. With time, you will persevere. As so many students before you have already done. In so doing they acquired new skills which helped them to succeed in their careers in other areas of their lives.

Thank you, Professor Zigglehoffer. For placing me under the spotlight. For the inquisition to which you subjected me that day. For the push.

Ron A. Rhoades, JD, CFP(r) is an Asst. Prof. of Business at Alfred State College, where he now teaches contract law, among other topics in Business Law and financial planning courses. And, he now gives prods and pushes - although (he hopes) not quite as severe as of the variety given by Prof. Zigglehoffer so many years ago.