The Gravy Train Looks Like it Will Continue

It is beginning to look like Wall Street is going to win the battle over a fiduciary standard. Registered Investment Adviser firms like ours have always been subject to a fiduciary standard. It is the Banks, Wall Street firms and Insurance companies who have not been subject to the fiduciary standard.

For those of you who do not know, a fiduciary standard of care is one where the adviser must put the interests of the client ahead of their own. Banks, Wall St. firms and Insurance companies have been subject to a much more lax standard called suitability. This basically means if they think it suits you at the time of sale, then that is all that is required. It doesn't matter if it has a 10% commission and 10 years of surrender charges as long as it is suitable for you.

Banks, Wall Street firms and Insurance companies control most of the power and influence in Washington, primarily because they generate a tremendous amount of revenue from selling products to consumers. Registered Investment Advisers or RIA's as we are known, sell advice, not products. The problem with RIA's is that we are all independent people with independent ideas. There is no one association or group that represents us.

There is a consortium of organizations grouped under the name of the Financial Planning Coalition that would like me to believe that they represent me. However, this is simply not true. This group consists of the CFP Board of Standards, the Financial Planning Association and the National Association of Personal Financial Advisors. The CFP Board regulates CFP's. The Financial Planning Association is an organization that includes CFP's, but also ChFC's and other professionals who hold themselves out as financial planners, but are not necessarily CFP's. The NAPFA is a very small organization of Fee Only advisers who have a requirement that their members are purely fee only and sell no commission based products. NAPFA is the best of the three by far.

Of these three groups, the CFP Board only has say over CFP's. There are a ton of individuals out there calling themselves financial planners, but who are under no supervision at all. I have seen numerous cases of insurance agents and bank employees who say they do financial planning, but are not registered to do so. Somebody needs to regulate ANYONE who claims to be a financial planner or who holds themselves out as a financial planner or claims to provide financial planning services. Sadly, the runaway train of bogus financial planners keeps right on rolling down the tracks.

The CFP Board is made up of CFP's who work at guess where? Banks, Wall Street firms and Insurance companies. A very small percentage are independent Registered Investment Advisers with absolutely no employment affiliation with any Bank, Wall Street firm or Insurance company. It does not take a smart person to figure out that if the primary revenue source comes from the financial advisors affiliated with these behemoth firms, then that in all likelihood is where their loyalty will lie. I have been a CFP for almost 20 years and they have yet to prove otherwise to me.

The Financial Planning Association is comprised of a similar makeup of professionals. Most all of them have employment affiliations with Banks, Wall Street firms or Insurance companies. Very few are independent Registered Investment Advisers. Again, it does not take a smart person to figure out where their loyalty lies, either.

The NAPFA is a very select and small group of professionals. The last time that I read about them, they had less than 3,000 members nationwide. I believe that the CFP Board and the FPA have close to 30,000 each. Although NAPFA is a good organization, their sheer lack of numbers probably minimizes their influence in Washington.

This Financial Planning Coalition is up against two major Wall Street organizations in SIFMA (Securities Industry and Financial Markets Association) and FINRA (Financial Industry Regulatory Authority). Both of these organizations want FINRA to oversee Registered Investment Advisers as the regulator of choice.

Somehow when most of the fraud and deceit in the financial services arena comes from Banks, Wall Street firms and Insurance companies, these powerful organizations have managed to turn the tide in their favor and portray RIA's as the enemy in Washington. When the reverse is actually true.

If you get nothing else in this article, understand this point. Registered Investment Advisers are subject to a fiduciary standard already and have been for a long time. Banks, Wall Street firms and Insurance companies have been subject to a suitability standard for also a long time. However, the Dodd-Frank legislation mandated that all financial advisers be subject to the fiduciary standard. The problem is that you cannot sell products and sell products from inventory and meet the legal definition of a fiduciary. As a result, Banks, Wall Street firms and Insurance companies are scrambling to re-write the definition of a fiduciary so it allows them to keep selling their products. In other words, they want the status quo. In addition, they want to gain control of Registered Investment Advisers. We are not the problem (RIA's.) The Banks, Wall Street firms and Insurance companies are the problem. They are the ones selling consumers all these high revenue, high commission, and no liquidity products. They do not want their gravy trains to end. Consequentially, they are lobbying hard to change the legal definition of a fiduciary and gain compliance supervision over Registered Investment Advisers.

It is all about money, power and more importantly control. They want control of the competition which are RIA's. Once they gain control, then they can exert burdensome compliance rules that make the cost of being a Registered Investment Adviser much more expensive. This is the end game in my opinion.

Unfortunately, as a group, Registered Investment Advisers are left to rely on the ethical morals of the people in Washington to protect us. Fat chance that will happen. Sadly, RIA's are the ones that are in the best position to protect consumers. If FINRA ends up in control of RIA's and succeeds in changing the definition of a fiduciary, then consumers will be the ones who lose.

As with everything else in life, we will adapt and move forward. However, it does not mean we will like it. As a consumer of financial services, you had better be very wary of anyone who is affiliated with a Bank, Wall Street firm or Insurance company. They are out to sell products and make as money as possible from consumers. Damn be the consequences.

RJ

Should You Pay the Taxes and Liquidate Your IRA?

As I describe in my book, Keep Your Assets. Take My Advice. It is Easier to Climb Out of a Shallow Hole, there is a way to pay the taxes on an IRA at a lower cost when used in conjunction with a Home Equity Line of Credit or an existing Life Insurance Policy with enough cash values. You are probably thinking...Huh?

Here is how it works:

I like to keep it simple, or as the late, great Steve Jobs said:

Simplicity is the ultimate sophistication.

Suppose we have a $100,000 IRA. If we either convert it to a Roth IRA or just plain cashed it in, then we would likely owe taxes of $25,000 or more. However, let's keep it simple and assume $25,000 is our tax bill for this transaction.

What are some of the ways that we could pay this $25,000 tax bill?

1. We could pull the $100,000 out of the IRA and just put it in a bank account and write a check from the proceeds for $25,000. This would net us $75,000 and our cost would be a simple 25%. You're not fired up about this idea, are you? Neither am I.
2. Or, we could convert the $100,000 IRA to a Roth IRA and pay the taxes from the Roth IRA. You can always pull your cost basis out of a Roth IRA. Since, we just put $100,000 into it, we can pull out $25,000 as part of our cost basis contribution and pay the taxes. However, we would be in the same boat as number one above. We would owe $25,000 or 25% in taxes. Okay, Rick...when are you going to get to the point?
3. Instead of numbers one or two above, we could take advantage of a Home Equity Line of Credit and leverage these funds to pay our taxes at a lower rate. You borrow the $25,000 to pay the taxes at an Interest Only Rate of say 4%. The $100,000 that you pulled out of your IRA is either now in an Investment Account or a Roth IRA. Either way, it grows for the next 5 years at a rate of at least 4.564%. At the end of 5 years, the $100,000 has grown into $125,000. (My trusty HP12c Platinum Calculator says so!) We take a withdrawal of $25,000 and pay off the Interest Only Loan. What did it cost us to do this?
1. It cost us 4% interest on $25,000 spread out over 5 years, or a total of $5,000. So, to get our $100,000 IRA out of IRA status and either turn it into an investment or a Roth IRA, we paid 5% total on the $100,000 IRA withdrawal. Is 5% spread out over 5 years better than $25,000 or 25%? You bet it is.
2. How easy would the decision to cash in your IRA be if you knew you could do it at 5%?
4. Another alternative is if you have an existing Life Insurance Contract with loanable values of more than $25,000. Most Whole Life and Universal Life policies allow you to borrow money from the policies at either a net 2% or even a net 0% rate. So, what you do is borrow the $25,000 to pay the taxes from the Life Insurance policy. Pay an interest only amount back into the policy for 5 years, like $1,000 a year. (Okay. I know what you are thinking. Why don't I just pay it at the 2% rate or $500? Because you are cheating yourself. That's why.) Then, at the end of 5 years, after your formerly $100,000 IRA has grown either as an investment or as a Roth IRA, then you take a withdrawal and pay back your Life Insurance Policy. The difference using this approach is that instead of the bank keeping the $1,000 in interest, you have paid it into the Life Insurance policy and depending on the policy you have, you may have actually paid yourself interest.
1. Wait a minute. If you paid yourself back the $1,000 a year for 5 years and you had a zero net cost loan rate on your Life Insurance policy, then what did that cost you? Now you are thinking! Instead of costing you 5% to cash in the $100,000 IRA, it cost you 0%!!
2. The truth is that there is some minute costs related to how much your insurance policy is crediting your $1,000 that you are paying back in interest, but it is still a great way to leverage money that you already have to make your IRA into a Non-IRA or better yet, a Roth IRA that grows tax-deferred with tax free withdrawals.

There are some life insurance policies that are structured to do this exact scenario, but I cannot tell you unless you come see me. Their lawyers would kill me if I named the companies without their legal approval. Keep in mind that it may be easier to do this with a Home Equity Line of Credit, because not everyone has over $25,000 laying around inside the cash values of their Life Insurance policies.

Of course, each strategy described here should not be done on your own without fully understanding the entire consequences. Further, I would be able to show you the real numbers and how this all works being the Certified Financial Planner® extraordinaire that I am.

The thing to realize is that any money in an IRA account is taxable when it comes out. If you let your IRA continue to grow, then your tax liability also continues to compound. So, the sooner you can eliminate your IRA by paying the taxes with leveraged money, then the better off you will be.

These strategies take careful planning and analysis and should not be done on your own. If you need help, or want to see how this would work in your situation, then give me a call at 904-547-2913.

Later my friends.

My New Re-Affiliation with the Paladin Registry

I have been a member of the National Ethics Association and its predecessor since 2006. However, I think that I am going to let my membership go by the wayside. In these last 6 years, I can honestly say that not one single person has ever even mentioned that fact that I was a member. Nor, has anyone said that they primarily came to be my client because of my affiliation with the National Ethics Association. Therefore, I am going to let my membership in this organization expire.

I have recently re-joined the Paladin Registry which I think will be more beneficial. The Paladin Registry is located at http://www.paladinregistry.com. They help investors find pre-screened financial advisors. Even though the Paladin Registry costs more for me to affiliate with than the National Ethics Association, I think it will be more worthwhile in the long run. Potential clients can check my background via the Paladin Registry and make an evaluation before they call me. This is a smart thing to do by the way.

It is easy to find me by just typing in my office zip code 32259 in the Find a Local Advisor box at www.paladinregistry.com. Then, you can click...Read more about Richard.

Tell you friends about me. Thanks.

It is Tough to Compete Against Unethical Advisors

I do not mind competition, but when the competition is flaunting the laws of Florida, then I have a problem with them. I always like to look up the background of people who use the term "Financial Planner" on their web site. Especially, when I know that they are an insurance agent.

Here is a news flash. An insurance agent, who is not securities licensed with a broker-dealer or who is not licensed with a registered investment adviser, cannot advise people to sell their investments and buy annuities.

In addition, insurance agents cannot hold themselves out to the public as a "Financial Planner" unless they are registered with a registered investment adviser firm. There are some exemptions to this rule, but trust me, insurance agents cannot promote themselves as a "Financial Planner" without being affliated with a registered investment adviser.

There is an insurance agent that I heard about that is working with seniors no less, who gives advice on qualifying for Veteran's Aid & Attendance Benefits and Medicaid. He has no securities licenses, thus he cannot advise clients to sell any securities whatsoever. Plus, he is not an attorney.

In a nutshell, his advice is to sell all your investments out of the senior's name and transfer the money to their adult children. Once it is transferred to their adult children, then he will sell them annuities. By doing this, he claims to have helped them qualify for government benefits. There are so many pitfalls to this advice that I would love to go into more detail about, but for purposes of this blog, let us stick to the unethical nature of the advice.

Not only is this insurance agent flaunting the securities laws of the State of Florida, they are also putting themselves on a slippery slope as it pertains to the Unauthorized Practice of Law. Recommending clients to implement asset transfers to qualify for government benefits without the advice of an Elder Care Attorney is tantamount to Unauthorized Practice of Law in my mind.

This particular insurance agent also mentions on their web site that their career started as a CPA. The implication of course is that this insurance agent is also a CPA. A quick license check on the Florida Department of Business & Professional Regulation web site shows no record as a CPA.

Not only is this insurance agent violating securities laws advising clients to sell their securities to buy his annuities. In addition, he is holding himself out as a Financial Planner which is also a securities violation. Further, he is dancing around the Unauthorized Practice of Law issue with his questionable advice that happens to be the same for everyone he meets. Last but not least, he is implying that he is a CPA when he is not. Yet, people still do business with unethical advisors like this insurance agent.

If you do business with anyone in the financial services business, including myself, you need to know their background. More importantly, you should know whether the advice that they are dispensing is ethical and legal.

Be careful out there.