Focus on Fiduciary

Do you know that only certain financial professionals are subject to a “Fiduciary Standard”. A Fiduciary Standard means an advisor is putting their client’s interests first. In no way do they urge their clients to invest in vehicles that are in the advisor’s best interests.

fi•du•ci•ar•y – A financial advisor held to a Fiduciary Standard occupies a position of special trust and confidence when working with a client. As a Fiduciary, the financial advisor is required to act with undivided loyalty to the client. This includes disclosure of how the financial advisor is to be compensated and any corresponding conflicts of interest.

Theodore J. Feight, CFP® firmly believes this is the strongest definition of Fiduciary available because of the basic requirements of Trust, Loyalty, and Disclosure.

Trust – Someone who does not completely trust their financial advisor can never be fully confident that they are receiving the best possible advice from the best possible advisor. Without trust, can confidence really be achieved?

Loyalty – An advisor who is loyal to only their clients will not be swayed by outside forces to recommend investments with higher commissions or payouts. Without loyalty, can people ever be sure their own interests are being looked after?

Disclosure – People must know, and understand, how their financial advisor is being compensated for the advice they are providing and whether or not any conflicts exist that may cause a problem with that advisor’s ability to provide truly independent advice. Without disclosure, can prudent advice be provided?

It’s hard to find the perfect financial professional who will meet your needs. You deserve an advisor who is competent, qualified, knowledgeable, and is compensated in a manner that minimizes conflicts of interest. But, more importantly, the advisor must be held to a Fiduciary Standard, meaning they will always put your interests first. You want to always be sure the advisor is working for you – not for themselves.

Registered Investment Advisors (RIAs) are held to a Fiduciary Standard. By law, a Fiduciary will act solely in the best interest of the client. They must fully disclose any conflict, or potential conflict, to the client prior to and throughout a business engagement. Fiduciaries will also adopt a Code of Ethics and will fully disclose how they are compensated.

You must be careful to read and understand the disclaimers on marketing and advertising materials offered by a professional. Recent regulations put forth by the Securities and Exchange Commission (SEC) now require brokers and other professionals who are not considered fiduciaries to add the following disclosure:

“Your account is a brokerage account and not an advisory account. Our interests may not always be the same as yours. Please ask us questions to make sure you understand your rights and our obligations to you, including the extent of our obligations to disclose conflicts of interest and to act in your best interest. We are paid both by you and, sometimes, by people who compensate us based on what you buy. Therefore, our profits, and our salespersons’ compensation, may vary by product and over time.”

If this disclaimer appears, you should ask questions, obtain complete disclosure, and determine if the relationship with the financial professional is in your best interests.

Do you know what physicians, lawyers and CPAs have in common? They all hold to a Fiduciary Standard to put your interest first. Look to a Financial Planner who will put your interest first.

The complexity of retirement distributions:

It won't be long before a lot of people are taking distributions from a myriad complexity of retirement plans, taxable accounts, Traditional IRAs and Roth IRAs, and they should be looking for guidance on where the money should come from first. There is little research and even less agreement on how this should be done.

We are developing a decision matrix which takes a lot of things into account before you can decide where to take your initial distributions. For example: Stocks or funds with a high tax basis might be more attractive to liquidate than IRA assets, but stocks or funds with a low tax basis might be profitably held until the first spouse dies, giving the second spouse a step-up in basis that can really enhance tax-efficiency going forward.

Tax-inefficient investments like taxable bonds are most profitably stashed in the IRA. But as you liquidate the IRA, you are also reducing your capacity to deploy those tax-inefficient investments where they belong. So you have to keep an eye on your IRA "capacity" in relation to the percentage of taxable bonds in the portfolio.

How you leave any leftover assets to heirs at death is another consideration. If the next generation of beneficiaries is quite young, then leaving a stretch-out IRA might be more efficient than leaving assets from the taxable account. However, we are not optimistic, given our current budget deficit, that Congress will maintain our current tax rates, and that money inside a retirement plan is more subject than outside money to the government's taxing whims. This would argue for taking money out of the IRA first, while the getting is good.

If there are estate tax liquidity issues, then it might be beneficial to avoid depleting the taxable accounts, since those assets would receive a step-up in basis, and no income taxes would have to be paid by the heirs to get this money. Withdrawing money from a traditional IRA to pay estate taxes would trigger additional income tax payments.

We look at distributing (rather than reinvesting) dividends and capital gains distributions from the taxable accounts, and considers whether clients have capital loss carry-forwards and/or realized capital losses for the current year (which would suggest taking capital gains from the taxable account sufficient to offset the losses). Beyond that, how important is creditor protection? (IRA assets are less vulnerable.) And are the heirs capable of managing a stretch IRA? Is there a high possibility that they would liquidate it in a few years, rather than stretching out the distributions and taking full advantage of the deferral?

There are two points here: First, that the source and sequence of retirement income distributions is a seriously complex planning issue, with too many variables to yield a pat, simple, one-sentence rule-of-thumb answer. Second: we may not have yet defined all the variables or outlined how they interact with each other.

Ted Feight, CFP®

April 2006

The media is touting the first quarter of 2006 as the great quarter in this decade. It was a good quarter with the DJIA up 5.77%, S&P 500 up 9.68% and the NASDAQ up 17.03%. But what makes it seem so good is that there has not been a first quarter in any year since 1998 that all three of these stock market indexes were positive.

So should you get excited and run out and put all your money into the stock market. Probably not, according to the following:

1. Have you ever heard the saying buy low and sell high? Well the stock market indexes are currently at all time highs.
2. If you look you can find a chart called the Average Presidential Cycle. The one I have takes each week of the DJIA, for each week in every United States President’s four-year term since 1897 and averages them together in a four year chart. That chart clearly shows that during the second year in a presidential cycle the DJIA starts out up, then goes flat to down until the last part of the year. Then the DJIA goes up for some time. This chart does not give guarantees, so don’t take it as one.
3. The two year and ten year interest rates have been inverted for 34 days this year. “So what?” you say. An inverted yield curve is when short-term interest rates are higher than long-term interest rates. This is usually measured by using the 2-year treasury rates in comparison with the 10-year treasury rates and/or the 3-month treasury rates in comparison to the 10-year treasury rates. When the short-term rates are higher than the long-term rates, it is called an inverted yield curve. This usually means that the country will go into a recession within the next two to four quarters. The yield curve has predicted essentially every U.S. recession since 1950 (1969, 1973 - 1974, 1980, 1981 - 1982, 1990, 2001 - 2002) with only one false signal, which preceded the credit crunch and slowdown in production in 1967. To be a credible signal, the curve must stay inverted for 30 days and the 3-month and 10-year treasury rates do the best job of predicting this.

So what do you do? Find your self a good Certified Financial Planner™ to help you answer that question. Ad lives are for aminitures and your monitory future is too important to play around with.

Nov 7th 2005

It was my fault. I took some time off to go hunting, even though I knew that there was a good chance the world would fall apart. And this is what happened: A horrible mudslide in Central America, parts of India and Pakistan devastated by one of the deadliest earthquakes in history, a new tropical storm swirled up ominously in the Gulf, Mount Everest inexplicably lost 12 feet in height and a tornado in the Midwest . For those of you who are hiding under your beds, you can safely come out again; I'm back in my office.

While hunting, I did have a saw fall out of a tree and try to cut my nose off, another saw cut through a branch and attack my left hand (3 stitches) and a small tree I was pruning jumped up and it tried to take my head off. Hunting is dangerous.

This is the time of year that we start planning what we want to do during the next year. We try to pre-set client appointments, find a financial planning theme for the coming year and improvements our systems to better help our clients. No matter how much planning we do, nature will usually throw a monkey wrench into things along the way. Yet having a plan often helps us to get better results.

Very often the financial planning theme will be different for each client, as almost each client is in a different stage of his or her financial planning life. Often, the times we pick for appointments will not fit into the client’s schedule. That is OK. We can and will work around these small setbacks. The real joy will come next year at this time, when we see the results of the planning we do now.

June 24th 2005

From time to time I sit back and look at where we have been and how I see it relating to where we are. Although not a complete match, I see us now in a period of time like 1974, 1984 and 1994. In 1974 the oil problems were hitting their second crisis period in 3 years and the markets looked bleak. In 1984 we were in the middle of the S&L crisis, high interest rates and the markets looked bleak. In 1994 we had just had a war in the Middle East , oil prices were up, interest rates were being raised and the markets looked bleak. Today, we have a war in the Middle East , oil prices are hitting their second crisis period in 3 years and the markets look bleak.

During each period you heard people say, “In the future the stock markets will not be able to give us the returns we had in the past.” In the 1970s oil drove the stock markets up during the last half of the decade. In the 1980s computers and lower interest rates drove the stock markets up during the last half of the decade. In the 1990s the internet and lower interest rates drove the stock markets up during the last half of the decade. All of these decades started the boom in the latter half of the decade. They were driven by things we did not even know existed before the decade began.

Well, guess where we are today. I see the markets ready for another new driver that many people do not see coming. Do you see what it is?

June 05. 2005

Retirement in the 21st Century is't like it use to be.

There are several stages in retirement.

1. The early stage (the go-go years).
2. A stage where people can no longer do all the tasks of daily living (the slow go years).
3. Finally the nursing home stage (the no-go years).

During the early retirement, individuals have the most flexibility and can enjoy life the most: they can continue to work full time or part time, they do some things themselves rather than hire someone More importantly, during this time the amount of assets at that time has the biggest effect on sustainable withdrawal and life expectancy is the most difficult to determine. You should tend to be conservative in withdrawal rates during that period. During early retirement the client can enjoy his spending the most, but the trick is to not have the spending be too high or there won't be enough left for the no-go years.

With depression era people, the problem usually is not spending enough of their money. Many planners seem to have the issue of urging these clients to spend more, because depression era people believe they will never have enough. The baby boomer generation is another story. They have not ever had to go without or wonder where their next dollar would come from. They all spend too much, to early in retirement and on many things they really do not need.

I want my clients to understand the trade-off.

June 05, 2005

Currently the economy is growing faster than it is creating jobs. Put another way, companies are accomplishing more and more with technology rather than people. There is a disconnect between job creation and GNP growth which begs the questions:

How will we provide a living to additional people with an economy that creates jobless growth?

How will you protect your assets in an economy that is doing this?

June 05, 2005

It appears that the stock markets liked the information coming out of the Federal Reserve today. There are no guarantees with investments, but it appears the markets want to rally.

May 05, 2005

We need to help people gain insight into the future and how it will impact on them. We need to help people to work on their own personal strategic planning processes so they can move forward and realize their goals whether they be short- or long- term. We need to do this without getting caught up in the short-term smoke screen thrown up by the media. Live and work for the future, not the past or the present.