Regulations, Regulations, Regulations!

Why is it that people in government think the way to solve a problem committed by a small subset of people is to make new rules that apply to everybody?

A case in point: Regulation Best Interest and Form ADV 3 - CRS. (See June 5, 2019 Final Rules)
https://www.sec.gov/rules/final/finalarchive/finalarchive2019.shtml

This proposed rule by the SEC applies to all broker-dealers and investment advisers. The problem is that this rule favors broker-dealers over investment advisers. There are a couple of lawsuits filed against this proposed rule and we will see how this all pans out. However, herein lies the problem. Broker-dealer representatives can sell Variable Annuities that pay 6% (or more) commissions to their clients and still comply with RegBI. Well, you might say... "What is the big deal as long as it is disclosed to clients in writing?" More disclosures? We really need more disclosures? Let me get this straight. As long as your broker puts it in writing that he is charging you 6% commissions and you do not even have to sign Form CRS, then this makes it okay? Give me a break.

Here is another problem. Think about this from the best interest of the client for a minute. This broker sells you a 6% commission Variable Annuity with a 10 year surrender charge and has given you the proper Form CRS disclosure. What this broker did not tell you was that you can get a multitude of Variable Annuities without any commissions and no surrender charges. Guess what? He didn't put that in his RegBI disclosure either.

Do you see the problem here? How can you ever sell a client a Variable Annuity that pays 6% commission with a 10 year surrender charge knowing full well and trust me, the broker knows full well, that there are Variable Annuities without commissions and no surrender charges? How can this ever be in a client's best interest? It cannot. Pure and simple.

In my opinion, the issue is and always has been to protect broker-dealers over investment advisers like my firm. https://www.marianfs.com.

How do I plan to solve this issue at my firm? Give the Form CRS, plus a side-by-side comparison of the fees currently being paid by a client against the fees if they move to my firm. All you people who still do business with broker-dealers, really need to come see me, or reach out to me. Seriously. This one form will open your eyes to how your broker is not doing things in your best interests and quite frankly, never will. This form is copyrighted by the way, so don't get any ideas you brokers.

Secure Act

The Secure Act has several provisions in it that will affect most people at one point or another. Once the President signs it, then the Secure Act will go into effect with several of these provisions summarized for easy interpretation.

The required minimum distribution age will be raised from 70 ½ to 72. In addition, there are new minimum distribution tables being prepared that will factor into this change. Right now, if you have an IRA, you can choose to re-calculate your RMD each year and pull out that amount. This is based on an IRS Table and this will be changing to allow people a slight benefit meaning that they will be able to pull less out of their IRA’s and let more of their IRA’s continue to grow. 

A negative impact of the Secure Act is related to Inherited IRA’s for non-spouse beneficiaries. In the past, if you inherited your parent’s IRA account for example, then you could roll it over to an Inherited IRA account and pull out RMD’s based on your age theoretically “stretching” it out over your lifetime. This is why they called it a “Stretch IRA.” Now, with the Secure Act, you are going to have to pull it all out within ten (10) years. I believe that this is going to be effective for Inherited IRA’s after January 1, 2020 and the IRS has to issue guidance in the first quarter of next year. I also believe that there will no longer be any RMD’s required from these Inherited IRA’s. You will just have to pull it all out within 10 years.

There will be penalty free withdrawals for expenses related to the birth or adoption of a child form retirement plans.
 
In regard to 529 plans, they will now be able to be used to pay student loan payments.
 
Small businesses will be able to join forces with other small businesses to establish retirement plans. For example, several small dry cleaners could band together and establish a multiple employer retirement plan thereby becoming eligible for lower costs to administer it and better investment choices. Administrative expenses would be shared among the dry cleaners in this example. Not sure how this will work in real life as competitors may not want to work together, but it could be any small businesses who band together like a dry cleaners shop, an auto repair shop and a small survey company.
 
Lifetime income annuities will be allowed in pension plans. This is the insurance lobby at work and totally unnecessary in my opinion. Lifetime income annuities pay a guaranteed income for as long as you live and once you die, then there is no balance left for heirs. Unless of course, you choose a lower payout for yourself with a beneficiary option. (This means lose cash flow in retirement.) The returns on these income annuities are typically very, very low and any good portfolio manager worth their salt can do better with just systematically paying cash flow from principal. With an annuity, you are giving your money to the insurance company, not your heirs. Beneficiary options will be structured so that your most money paid out to you is while you are living and a poor payout if you want a beneficiary.  Further, there is even a provision that favors insurance companies. Basically, if a retirement plan does not offer lifetime annuities, then you can do an IRA rollover of your 401(k) and purchase the annuity in your IRA rollover account. Again, this favors insurance companies, not you. I would be adamantly against these lifetime income annuities inside of retirement plans and IRA accounts, personally. They simply are not needed.

Unearned income for children in the past was taxed at very high trust and estate rates. Now, this will be changed to the tax bracket of the parents. Unless, there are no parents, then they would still be taxed at the trust and estate tax rates.
 
Next year, retirement plans can be started (adopted) as late as the tax filing deadline. In the past, they had to be established by December 31^st. This will be a benefit to businesses.
 
There is a three-year tax credit for start-up retirement plans for small employers who include automatic enrollment for their employees in their plans. Also, the maximum percentage for automatically enrolling participates will be raised from 10% to 15%. The employer chooses the figure from 1% to 15%.

You will now be able to contribute to an IRA after 70 ½ if you have earned income. In the past, you could not contribute past age 70 ½ if you had earned income.
 
Those are the highlights of the Secure Act. Of course, there are other provisions too numerous to mention, but most do not apply to regular people.

 

Whatever Happened to Common Sense Regulations?

The truth is that there never has been any such thing as common sense regulations when it comes to Registered Investment Advisers (RIA's). Do not get me wrong. I am on the side of disclosure and regulation, because every time you turn around, there is another Ponzi scheme happening. Sadly however, the good guys are stuck complying while the bad guys are out there stealing people's money.

The Securities and Exchange Commission has instituted a new Form for RIA's called a Form CRS which stands for customer or client relationship summary. This is to be kept to two pages by RIA's like my firms.

The Form ADV 2A is also required and that is 22 pages long. The corresponding Form ADV 2B that goes with it is another 14 pages long. My firm's Investment Advisory Agreement is 12 pages.

Of course, because I am a CFP®, I am now subject to even more disclosure to clients. I felt the need to create a new CFP® disclosure document that is 5 pages.

Oh, I almost forgot, if I refer a client to Morningstar to let them manage the client account, then I have to provide their disclosures. This is another 24 pages. But wait. There is more. Morningstar requires a Request for Proposal for each client which varies, but generally you can count on another 20 plus pages.

So, if I take out my trusty HP-12C calculator and add all this up, I come to the laughingly low figure of 85 pages of disclosures.

Oops! I forgot. We have to fill out the paperwork from the qualified custodian, Charles Schwab & Co. Inc. or Fidelity Investments. That will get us up to over 100 pages easily.

Don't you think 85 pages of disclosures is a little too much? Are you going to read all of that from cover to cover, each and every word of it?

See what I mean when I say there is no such thing as common sense these days when it comes to regulations. The good guys are being penalized for the bad guys' bad behavior.

We need to get the requirements down to a simple two or four page requirement and refer the client to our web site if they want more details. That's just my lone opinion from someone out here in the wilderness.

Coach John vs. Coach David

People always view the world from their own perspective and sometimes it is hard to get them to think critically and see the other side of the coin. There is a lack of critical thinking in the financial services industry today and we need to right the ship. 

Today, there is rapid change going on right now and unfortunately, there is no shortage of opinions about winners and losers. Sometimes, it is best to express an opinion through the use of an analogy.

Let us look at two imaginary baseball coaches. Coach John is a very successful college baseball coach. His goal in life has been to further his career. He started out coaching kids, quickly jumped to high school baseball and ended up as a college baseball coach. Coach John's style is to recruit the best and win at all costs. When he was coaching kids, he was brutal. He didn't want bad players as he quickly ran them off. At the high school level, he was figuring out how to get the best baseball players to move to his district by convincing their families to move, so their kid could play for him. His high school baseball team soon after won multiple state championships and it didn't take long before major colleges started calling. Coach John took his skills to a major college and recruited the best high school players to come to his college. He only recruited the best. Of course, since he was successful at recruiting, his college teams were also successful. Coach John's goal all along was to be a successful baseball coach and he achieved that goal.

Coach David on the other hand was also a coach of young kids, high school players and college players too, but with a major difference. When he coached young kids, instead of dispensing with the players who were not star athletes, he encouraged them and taught them the game of baseball. He took the time to teach every player on his team the game of baseball. He taught them how to throw a baseball. He taught them how to stand in the batters box. He taught them how to hit and how to bunt. He taught them how to catch a ground ball. He taught them how to catch a fly ball. He taught them how to run the bases and he taught them how to be a team player. Coach David carried this same coaching philosophy on to his high school and finally college coaching career where he too was a success.

Coach John was all about Coach John. He looked at the world from his viewpoint that he wanted to be a successful coach and that what was most important to him. Coach David on the other hand, looked at each individual player on his teams and his goal was to teach these players the game of baseball, how to handle disappointment and challenges in life and be a team player, so that they would go on in life with the skill set they needed to succeed.

Which coach would you rather have played for?

In the financial industry today, we have a lot of people who act like Coach John. They are all about their own egos, building the biggest business, becoming a thought leader, speaking at industry conferences, making the most money they can and stepping on and over anyone in their way. The do not mind calling out the compensation models of other advisors from their "ivory towers". They look at the world from their "pure as the wind driven snow" perspective. They think everyone else is overcharging investors while they have the "best" method of compensation. A lot of times, these Coach John people in our industry have somehow convinced enough people in the industry to be a "thought leader". This gives them the audience and the platform to continue to preach and talk down to other financial industry professionals. At the same time, they do not even realize the effect they are having on the young "players" just coming into the profession.

The Coach David people in our industry are critical thinkers. They see a rapidly changing industry. They see a huge unfilled market of young investors that would not get to open an account with Coach John. You see, Coach John only wants people who pay him according to his "pristine" business model. Kind of like the baseball Coach John who only wanted the best players to reach his personal goals and was not concerned with teaching anyone anything. After all, if you only recruit the best players (people with money), then why do you need to teach them anything? They are already great players (successful people).

The Coach Davids see fee commoditization. They see zero commissions on trading from the major custodians of RIA firms. They see the threats to mutual fund and ETF companies from direct indexing and the move to fractional shares. They see this huge unmet need of younger investors, so these Coach Davids choose to educate and encourage these young investors (players.) Coach David would never show these young investors the door. He believes in giving them the skill set they need to be successful in life.

Coach John also has a problem with the Coach Davids of the world. He routinely calls them out as overcharging clients, ripping off these young investors and criticizing their compensation models. In reality though, the Coach Davids of the world are the ones who are encouraging the young black woman to get into our industry. He is the one who is encouraging the Indian-American to get into our industry. He is the one encouraging the young black man to get into our industry. He is the one encouraging more women to join our industry. Coach David is the one taking the time to teach young investors the best ways to plan for their future and charging a fair fee based on his valued teaching and coaching skills. Coach David is the one encouraging diversity at every opportunity and who is a mentor to young advisors who want to join our industry.

Coach John is all about Coach John. He doesn't encourage anyone unless it fulfills his pocketbook. He routinely beats up on other financial service industry professionals as ripping people off. Coach John is not a thought leader. Far from it. He is narcissistic. I feel sorry for Coach John's clients. Little do they know that he doesn't really care about their future. He only cares about making money from them, if they meet his "recruiting" criteria.

Personally, I do not think we need any more Coach Johns in our industry. I would rather see more Coach Davids. We need advisors like Coach David who not only encourage young investors, but also young advisors to get into our industry and help them determine how best to run their businesses. Coach David's value is immeasurable when it comes down to it, because he is having such an impact not only on young investors by teaching them financial planning strategies, but also helping young advisors from diverse backgrounds to join our industry and be the best advisors they can be.

I would rather be a Coach David any day. What type of coach are you?

https://www.firstcoastplanning.com and https://www.marianfs.com