Mullooly Asset Management

Fiduciary Fee-Only Financial Planner | Investment Advisor in Wall, NJ

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Yanking the Steering Wheel

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It’s been a long time since I took Drivers Ed – nearly forty years. I remember (back then) having a dream (more like a nightmare), where the Drivers Ed instructor yanks the steering wheel while I was driving.

I’m glad it was only a dream.

In reality, the instructor gave the steering wheel a tiny nudge – and only once or twice – over several weeks of driving up and down Hempstead Turnpike and Peninsula Boulevard. A tiny adjustment, just to keep me in my lane.

And sometimes, a small nudge in the right direction can save you from a catastrophe, or at least avoid a dangerous mistake. It doesn’t need to be a violent kind of “yank the steering wheel” event.

I bring this up because we recently encountered a “yank the steering wheel” event here. When the volatility returned to the market in late September, a client called us and demanded we move 100% of his investments out of the market. Sell all his investments and put it all in the money market.   This was completely out-of-character for him.  He had become convinced (as he said, through the talking heads on TV) the end of the world was imminent.

In my conversation with this client, we revisited all the reasons behind his current allocation, and his satisfaction with the progress we had made over the time we worked together. But beyond all of that, he was unflinching in his “feelings” the market would go straight down from that point. He insisted he needed to protect every penny.

He was essentially yanking the steering wheel and purposely crashing his vehicle into the center divider.

yank the steering wheel
Nice Portfolio. It would be a shame to wreck it.

After a few attempts to help the client see things differently, I told him, “OK. Ultimately this is your money and we will do whatever you want. But understand, once these transactions are complete, we are dropping you as a client.”

There was an uncomfortably long silence over the phone after I said that.
His first response was, “Really? You are really going to drop me as a client because of this?”

“Yes.  Absolutely.”

In the “fit meetings” we hold with prospective clients, we cover as much as we can, including the relationship between advisor and client – and what to expect. Even still, you never know when fear will grip someone so tightly where they propel themselves into making bad decisions. A sales manager (way back in my stockbroker days) used to tell the sales force, “if someone wants to commit financial suicide, let them jump out of someone else’s window – not yours.”

There has been exactly one time in my career – one time in thirty-plus years – where selling everything and moving every penny to the money market would have worked out well.  Just one time.  And while it could happen again, these occurrences are rare.  That one time was summer 2008 into early 2009 (roughly six months or so).  A period now ten years in the past.  There are still folks who feel the next drop in the market will be an exact re-run of 2008.  It doesn’t (usually) work this way.

Getting defensive (much like defensive driving) requires awareness. It may require making small tweaks (or small changes) to your portfolio when the risk is elevated.  Or it may require revisiting the goals and the long-term view we had at the start.  Like the Driver Ed instructor at Sacred Heart Academy in Hempstead back in 1979, a small nudge once or twice may be needed to keep me from drifting into the next lane – or avoiding a parked car.

As Charlie Munger (from Berkshire Hathaway) reminds us, “Do not interrupt compounding.”  Yanking the steering wheel can have tragic (and sometimes fatal) consequences.

Escaping the Financial “Upside Down”

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Last Friday, Netflix released the highly anticipated Stranger Things 2. In the show a group of middle schoolers start to investigate the disappearance of one of their friends, Will Byers. Their investigation leads to the discovery of some dark secrets. Most importantly, they discover another dimension exists in their town, which they call the “Upside Down”.

The “Upside Down” is an alternate dimension existing in parallel to the human world. It contains the same locations and infrastructure as the human world, but it is much darker, colder and obscured by an omnipresent fog. Some truly evil creatures live in the “Upside Down”.

The majority of people are stuck in what I’ll call the financial “Upside Down”. The financial “Upside Down” consists of widely held beliefs that are destructive to building wealth. Below are a few examples of those damaging behaviors and perceptions.

“Upside Down”: Everything the financial media puts out is true and/or relevant to you.

The financial media tries to get as many clicks, views, watchers as possible because that’s how they make money. The media preys on emotions such as fear, greed and happiness.

“Upside Down”: Belief that all “advisors” have your best interests in mind.

This one is tricky because a lot of  “advisors” are actually financial sales people. They only want to make themselves rich.  Here are some good questions to ask before working with an advisor.

“Upside Down”: More action in investment accounts leads to better performance.

Ripping up the script every time an investment goes down to chase the latest hot stock is a recipe for disaster. This leads to the exact opposite of the one thing everyone knows about investing; buy low, sell high. Less action usually means more success. Investments need time to work. To quote Nick Murray “Timing the market is a fool’s game, whereas time in the market is your greatest natural advantage”.

“Upside Down”: Complexity is good.

In reality, complexity sounds good. I’m paraphrasing something Phil Huber wrote recently when I say: investors want advice that sounds good, but what they really NEED is sound, good advice. If you can’t sum up your investment philosophy in a sentence or two, it’s probably too complex.

“Upside Down”: The more something costs the better it is.

Unfortunately for investors, complexity and cost go hand in hand. Consider this from Jason Zweig: “If there’s a cheap way and an expensive way to solve an investing problem, stick with the cheap one. The typical hedge fund gouges clients but produces mediocre returns. As for mutual funds, a recent study found that each 1% increase in annual expenses reduces performance by 1.6%; managers may be taking on more risk to overcome the drag of higher costs.” – Are You a Better Investor?

“Upside Down”: Investment returns are the most important factor in creating wealth.

An individual’s savings rate is vastly more important than the investment rate of return is. Check out my brother Brendan’s post on this topic.

“Upside Down”: This is what investment advisors do:

trading floor

Most people’s perception of their investment advisor is that they are “Wall Street”. This is such a dangerous perception. An investment advisor’s main job is to manage their client relationships. All advisors need to know their stuff. But, the most important traits of an advisor are: good listening skills, empathy and preventing clients from making big mistakes.

Investors would do well to escape the financial “Upside Down”, it’s a dangerous place to be.

Lessons Learned After Two Years in the Business

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I started working full-time for Mullooly Asset Management a little over 2 years ago. I graduated college with some basic knowledge about the stock market and was eager to learn more as my career started. As they say, the best way to learn anything is by doing it. I want to take some time to reflect and share some of the most important lessons I’ve learned in my 2+ years at Mullooly Asset Management.

Communication is key

Open and honest communication between client and adviser is the life blood of the relationship. The communication has to work both ways. The adviser has to clearly outline the scope of the relationship, set expectations and often have difficult conversations with the client. It is the client’s job to provide accurate financial documents when the relationship begins, be honest about their goals and be willing to admit when they need help. Something important happens when a client and adviser communicate openly with one another, the formation of trust. 

Filter the noise

Remember the telephone game that you used to play in elementary school? Yeah, that happens out in “the real world” too. So much of the content that is produced by the financial media is twisted and distorted. It really is just like the telephone game, the original message rarely makes it to the end of the line without being messed up or taken out of context. Investors need a way to filter out all that noise and pay attention to the most important topics. I’ve found Abnormal Returns to be an amazing resource for this.

Have reasonable expectations and DO NOT compare yourself to peers

A huge problem in the investing world is the need to compare to others or a benchmark. I get that there has to be some way to measure success. But comparing yourself to someone or something that may have a completely different objective than you is not the way to do it. A better way of measuring success is on an individual basis by asking the question, am I still on track? or, do my goals still have a high probability of being reached? If the answer to either of those questions is yes, than the investments are still successful.

One of the main jobs an investment adviser has is to keep his/her client’s expectations in check. Expectations are the root of all evil.  Not meeting expectations can cause disappointment, anxiety and the feeling of not “keeping up with the Joneses”. These feelings often lead to bad decisions being made and it is the adviser’s job to stop that from happening.

Savings rate > rate of return

Morgan Housel said it best the other day on Twitter. But the problem with this is another lesson I’ve learned, lifestyle change is hard . Saving more money is hard because it forces people to change the way they live their life, and that’s extremely challenging. Instead of doing a reality check and cutting costs, most people look to the market for a quick fix. When people have money invested in the market but don’t have enough saved, problems start to arise. The classic example is taking a loan from a retirement account or draining an investment account to fund some event that should be funded by a savings account. This event can create tax problems, interest payments and it breaks up the process of compounding. Wouldn’t it be easier to just save more?

As you can tell these lessons aren’t really about the stock market at all. They’re about managing investor behavior. Which is the greatest lesson I’ve learned so far. You can have all the investing knowledge and skill in the world but if your behavior is not managed properly the chance of having success in the markets is slim.

Oh yeah! One more quick note, I’ve also come to realize that the learning process is one that never ends. So here’s to many more years of soaking up as much knowledge as I can.

Questions to Ask Before Working With a Financial Advisor

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There needs to be a discovery period between advisor and prospective client. It should be conducted almost as an interview. Both advisor and prospective client NEED to find out if the relationship will be a good match. Each situation will be different, but here are a few essential questions every prospective client should ask their potential financial advisor.

How are you compensated?

This is THE MOST IMPORTANT question to ask before beginning a relationship. A financial professional can receive compensation in many different ways and it can often be confusing for clients.

  • Fee-Only –The fee paid is usually based on assets under management (AUM). The advisor will charge a percentage fee on the amount of assets under his/her control. These types of professionals do not get compensation from any product sales. The ONLY form of compensation they can receive is from the fee.
  • Hourly Financial Planning Fee – Some advisors charge hourly fees based on the amount of time spent working on a particular client’s financial plan. This will be on a case by case basis.
  • Fee-Based –Not to be confused with fee-only, they are NOT the same thing even though they sound very similar. A fee-based financial advisor has the ability to charge a fee based on assets under management AND collect sales charges and commissions on the products they sell. Fee based financial advisors are usually what are known as “hybrid advisors”. This type of compensation structure has serious flaws to it. If the advisor is compensated for selling products, wouldn’t he/she pitch the product that pays the most? This type of compensation structure often leads to conflicts of interest between client and advisor.
  • Commission-An advisor that gets paid on commission gets a percentage of every transaction they execute for a client. Some of the commission goes directly to the advisor with the rest of it going to the firm. This type of compensation structure is loaded with conflicts of interest. The advisor will want to perform as many transactions as possible so they receive more money. Also in some cases, firms place minimum transaction requirements on their advisors. The firm forces their advisors to execute transactions in client accounts even if it is not in the client’s best interest.
  • Wrap-Fee – A wrap fee account is an all-inclusive compensation method. The advisor charges an assets under management fee and a set fee for all of the trading commission. A wrap-fee would make sense for someone that wants to do a lot of trading in his or her account. Therefore, in a sense there is a limit on the amount of commission the advisor can collect. However, the conflict of interest from receiving commission still exists.

Are you a fiduciary?

There are many different titles financial professionals call themselves (wealth managers, wealth consultants, financial advisors, financial planners etc…). None of these matter as much as whether that person is a fiduciary.

A fiduciary is required to put the client’s interests ahead of their own. Investment advisors are legally bound by the fiduciary standard. Under the fiduciary standard advisors must try to avoid conflicts of interest and disclose any conflicts that do arise. Advisors must use best execution practices when transacting client accounts. Best execution involves performing the transaction at the lowest cost and by the most efficient means possible. Fiduciaries’ loyalty reside with the client only.

A financial professional with any other title beside investment advisor or certified financial planner may not be required to act as a fiduciary. All other financial professionals will be acting under the suitability standard of care. The financial professional has to believe that the investments are suitable for the client. They do not have to act in the best of interest of their clients. As long as the recommendations of the financial advisor meet the objectives of the client, the suitability standard has been met. The disclosure of conflicts of interest are also less strict under the suitability standard. The financial professional’s loyalty is split between what is best for his/her firm and what is best for the client.

What is your investment strategy?

An advisor’s investment strategy should be one that can adapt to meet your objectives, time horizon and risk tolerance. An advisor should be as transparent as possible when explaining the strategy to you. If an advisor cannot explain their investment strategy to you in a way that you can comprehend, you should probably not work with him/her. If the advisor seems to have a “black box” or says the strategy has “upside with no downside” run the other direction.

It is important to know what kind of investments the advisor will use as well. Most advisors use a combination of stocks, bonds, mutual funds and ETFs in their strategies. There is no need for a strategy to be more complex than that. Simple is better when it comes to investing, despite what some may say.

Clients of advisors should also be told where the investment accounts will be held. Most financial advisors use a discount broker as the custodian of client accounts. The advisor should let the client know which discount broker they work with. This way the client understands where they will be getting statements from and how to access their funds.

What services does your firm provide?

This might seem like a dumb question to ask, but many financial firms provide different services. Some firms are all inclusive meaning they do financial planning, investment management, tax preparation, estate planning, insurance planning etc. While other firms may just specialize in investment management or another area. It is important to define the scope of the engagement prior to entering into a relationship with a financial professional.

It amazes me how little research and effort some people put into finding the right financial advisor. Just because your friend or relative refers you to their financial advisor does not mean they will also be a good fit for you. There is no right or wrong answer as to what type of advisor to work with. What is most important is to ask and UNDERSTAND at least these questions before agreeing to work with an advisor. When you sign up with a financial advisor you’re trusting that person with YOUR money, YOUR livelihood. Do the research, ask questions and don’t accept anything other than 100% transparency. It’s your future at stake after all.

Mullooly Asset Show: Episode 47 – The Quincy Jones ETF

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Mullooly Asset Show: Episode 47 – The Quincy Jones ETF Transcript

Tom Mullooly: Believe it or not, there are still some investors out there who have never heard of exchange traded funds. In Episode 47, we’re going to take a deep dive.

Welcome to the Mullooly Asset Show. I’m your host, Tom Mullooly, and this is Episode number 47. People ask us all the time, where do we get these topics that we cover in our videos? They come from you. If you’ve got a question or a topic that you’d like us to cover, get in touch with us. You can send us an email or just pick up the phone. Tim, what are we going to cover today?

Tim: I read in the news that Quincy Jones is going to have his own ETF. Is that for real?

Tom Mullooly: Quincy Jones is not going to manage his own exchange traded fund. I want everybody to understand. He has really nothing to do with this. He’s just leant his name, and I guess the Quincy Jones ETF sounds better than the Smooth Jazz ETF or really what this is, this exchange traded fund is being launched, is about streaming music. This is really a basket of companies that are in streaming media or the streaming music or media and entertainment niche, and that is the whole concept with exchange traded funds. We’re losing count of all the exchange traded funds that are out there. There’s just so many that are being created every week.

One takeaway that you should probably put in your back pocket is there’s now over 100 companies that have issued or are issuing exchange traded funds. There’s over 100 outfits that can make ETFs. The first one was back in 1993 with the S&P 500, and they turned that into an exchange traded fund. The whole idea with an exchange traded fund is that it works like a basket of stocks, just like a mutual fund would, but built into a mutual fund, you have to pay a manger, you have to pay all the trading costs, you’ve got built-in tax issues if you’re an individual investor. a lot of these problems either go away or they get minimized with exchange traded funds.

They sound sophisticated because we call them ETFs or exchange traded funds. The main thing you need to know with the name exchange traded is that a mutual fund doesn’t trade on an exchange. It owns stocks that trade on an exchange, but the price of a mutual fund will only change once a day after the market closes. What they do is they figure out, “Hey, all the stocks in our basket of a mutual fund, this, they went up, down, sideways today.” They do all the math, and at 6 o’clock, after the market closes, they post the price, up or down, for the entire basket that day.

An exchange traded fund doesn’t wait till the end of the day. The price changes automatically, and the price is based on the underlying stocks that are in the basket that are going up, down, all the way throughout the trading day. They’re recalculated every 15 seconds while the markets open, and that’s why they’re called exchange traded funds. That’s really the main difference between mutual funds and exchange traded funds. There’s a lot of other benefits that we’ve written about on our website, and you should check it out. Just go to the search bar and type in ETF, but another point that you really need to understand is that in the 20 something years, 23 or 24 years, since the first ETF came out in 1993, the S&P 500, the ticker symbol was SPY, S-P-Y. They didn’t launch another ETF for a couple of years when they made an ETF out of the Dow Jones Industrial Average. That ticker symbol is DIA for diamond. Then they went a long period of time where there were no ETFs being issued. They didn’t really know if these things were going to catch on or not.

Today, if you want to get really specific with a niche or a sector, pretty easy, pretty easy to do. There’s now over a trillion dollars in exchange traded funds. That’s from zero to over a trillion in 20 something years.

Today, we talk about this Quincy Jones Smooth Jazz ETF for media and entertainment. It’s streaming music providers, but if you want to own a basket of drone makers or drone-related companies, ticker symbol is IFLY, I-F-L-Y. If you want to buy or own a basket of companies that are tied into mobile payments, paying through your phone, the ticker symbol is IPAY, unlike me when we’re out at dinner, IPAY. The ticker symbol is I-P-A-Y. If you are interested in cyber security, there’s two exchange traded funds. HACK and CYBER are their symbols. There’s a social media one. Social media, these companies don’t really make money, but they’ve got a lot of promise of the future. Their symbol is S-O-C-L. There’s actually an exchange traded fund that invested in lithium battery makers. Ticker symbol is L-I-T.

Please understand, these are not recommendations to buy these things. We’re just trying to show you that if you want to get really specific and down into a niche in your investments, you can do it. Instead of going out there and buying these individual stocks, you can just buy the whole basket.

Great question that we got. Thanks for sending that in. That pretty much wraps up Episode 47, Tom Glavine, and we will see you in Episode 48. Thanks for watching!

 

If you would like a PDF version of this episode’s transcript, please follow this link!

MAM 184: Tim & Tom Talk DOL Fiduciary Rule

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MAM 184: Tim & Tom Talk DOL Fiduciary Rule Transcript

Tom:    Welcome to the Mullooly Asset Management podcast. This is Tom Mullooly, and I’m joined by Tim Mullooly.

Tim:     Hey everybody.

Tom:    This is episode 184.

Tim:     184.

Tom:    I almost said 185.

Tim:     Yeah.

Tom:    We’re going to talk about a topic that we covered a few episodes back in December, but apparently …

Tim:     It’s back.

Tom:    It’s back. We need to revisit the Department of Labor changes that are coming now on June 9th.

Tim:     That’s right. Yeah. Does everyone remember that DOL rule that people were talking about a lot last year? Well, like Tom said, it’s coming back, June 9th, so next week, it’ll go into partial effect, not full effect.

It was scheduled originally to go into this partial effect back in March or April, I think, but it got delayed, but it’s finally going into somewhat of effect, so we figured we would give everybody a refresher as to what this rule is, who it affects, and the ins and outs.

Tom:    A couple of things that, I think, are important. Tim’s right in the sense that this was originally supposed to be in place April 10th and with the full effect of January 1st of next year, 2018, and that full implementation date …

Tim:     That’s still the case. That’s still set. Yup.

Tom:    Yeah. The major change … I sat on a panel at NASDAQ at the end of November discussing the Department of Labor changes. At that time, we didn’t know it was going to get pushed back like it has, but I remember speaking with a reporter afterwards and I said, “For one of the few times in my career, I can remember being the after picture, not the before picture,” because it sounds like, on the surface, that they would prefer to see advisors gravitate more towards the business model that we’ve got here at Mullooly Asset Management.

Tim:     Right. Yeah. For us here, as a firm, not going to have too many big changes to put into effect with this rule. It’s more going to affect people in the broker/dealer side of things, but it’s just going into partial effect on June 9th, so what exactly does that mean?

Tom:    June 9th happens to be a Friday, so I think everyone’s going to be good over the weekend.

Tim:     Right.

Tom:    They’re not going to really enforce any of the rules on the very first day that this is in place, and it’s kind of … What was the analogy that you saw in a magazine?

Tim:     I think one article in Forbes said there is a “no bite” during this partial effect period, meaning, the rules are there and they want you to abide by them, but there’s not going to be any real enforcement of them until the January 1st full effect.

Tom:    They’re kind of making a trial run.

Tim:     Right. Just a dry run to … You could call it a “soft open”, when you open a restaurant, I think, was the quote from the Forbes article. Even though you know you have to act in the best interest of your investors, there’s no one really enforcing it.

Tom:    It’s pretty amazing to think that between basically now and January 1st, we’re going to force people in the industry to act in the best interest of investors. Are you kidding me?

Tim:     Shouldn’t that have always been the case?

Tom:    Right. I just want to read some things that were in the Department of Labor frequently asked questions. If you want to read the entire rules that they put out, go right ahead, but they put out a couple of these frequently asked question guides and they’re excellent.

Tim:     They’re much easier to read for everyday people.

Tom:    What they talked about was during this transition period, which we’re going to be entering now, advisors in financial institutions must give advice in the client’s best interest.

Tim:     Duh.

Tom:    Yeah, I’m shocked. They said that the client’s best interest has to have two components. It has to involve prudence and loyalty. Very hard to prove in the court of law, but I still can’t believe that everyone is not subject to that level.

Just spending a moment talking about fiduciary obligation, we’re investment advisors. We have a fee-only practice. We assume the mantle of a full fiduciary obligation when we’re managing our clients’ investments, but even a broker has to have some modicum of fiduciary obligation. They can’t be reckless.

Tim:     Right.

Tom:    First of all, they’re not going to be in business very long and secondly, they’re just going to get one complaint after the other until they’re out of business, so there always is some measure of fiduciary obligation, but now, what they’re trying to do is drive home the point that if you’re going to be giving advice, you are going to have a fiduciary obligation for your clients, and that has never been the case for brokers.

Tim:     Surprisingly. Yeah.

Tom:    It’s amazing. TD Ameritrade puts out surveys and year after year after year, they would publish data where they would pull clients, investors and they had no idea that brokers did not have a fiduciary obligation to their clients.

Tim:     I feel like it’s a question that would never get asked because it’s something that you just assume people are always going to act and just have a good nature about them and do the right thing for people, but obviously, not the case.

Tom:    Yeah. Going back to those frequently asked questions, one of the other things that they said during the transition period is that advisors in financial institutions, in addition to giving investors advice in their best interest, they can’t charge no more than reasonable compensation. This one gets me all the time. They can’t make misleading statements about transactions or about compensation or about any potential conflicts of interest.

Again, you can’t see me because it’s a podcast, but I’m shaking my head, like, “Really?” That’s amazing, but yet before we turned the microphone on, Tim and I were talking about specific instances where a new client would come in to our office, they would show us the statements, and what would they tell us?

Tim:     They would say their old broker advisor would say, “Oh, well, there was no commission in there.”

Tom:    Right. Yeah, no commission, but …

Tim:     There might not be any commission, but they got paid on some sort of fee that was baked into the product that was sold.

Tom:    Baked into the cake.

Tim:     Technically, commission, there was none, but they still get paid.

Tom:    Yeah. One of the things that never really gets discussed very much is where this whole idea about the fiduciary obligation and this whole Department of Labor change came from, and it really sprouted from story after story, where investors had a 401k account at work and then they were talked into rolling their account over, once they leave the company, into an IRA. What are some of the potential problems in that scenario?

Tim:     There are a number of problems that could arise from that. First off, no one is forcing you to roll your money out of your 401k, and a lot of the funds, most of the time, in a 401k have greatly discounted fees.

Tom:    Hey Tim, I want to just hit the pause button for a second because I think that’s a misunderstanding that a lot of people have. I think many people have been conditioned to the idea that “Okay, I had this 401k at work and now I’m retiring, so I have to do something with it,” right?

Tim:     No.

Tom:    They don’t.

Tim:     People might think that, but that’s not the case. You can leave that money in your 401k even if you’re not working at that company for as long as you want.

Tom:    Right. Even when you get to the point where you’re, say, 70 years of age or beyond and you need to begin taking required minimum distributions, the 401k plan administrators will calculate that for you and work with you to take that distribution. You’re under no obligation to roll that money from a 401k plan into an IRA, but then what happens, when they go from a 401k plan into an IRA?Tim:     Well, it opens up the door for them to be sold a number of different products that potentially have much higher fees than what they were paying inside the 401k plan, so it, most of the time, ends up costing these people more money and fees and they most likely don’t realize that that’s happening.

Tom:    Right. There is all kinds of different plans out there. Now if you work in a small business and you’ve got a 401k plan that’s being administered by the owner’s financial advisor down the street, it’s probably not going to be a very cheap plan, but suppose you worked for a big Fortune 500 company, I’ve got to believe that they’ve negotiated some pretty cheap fees for the investments in their plan.

Tim:     Right.

Tom:    It may wind up costing you money to go into some of these products, then the whole other question becomes “Am I doing the right thing with these investments?” We’ve all read horror stories about clients retiring and they’re putting all their money into the .com mutual funds in the late ’90s, and it was great for a few months until it wasn’t great for a few months.

Tim:     Yeah.

Tom:    You can run into all kinds of problems. I think that’s really a big issue is that this whole Department of Labor business really kind of emanated from these horror stories that we’ve heard from people who rolled their money out of their 401k plan, when they didn’t need to do that, and then went into an IRA, were sold a lot of crappy products, great fees for the broker or advisor, and these investments, they started circling the drain, which is really bad, and this is money that people have to live on for the rest of their lives.

Tim:     Yeah.

Tom:    That whole 401k transition business really became the starting point for these Department of Labor changes, but they’re still under review.

Tim:     Yeah. Under the new administration, there’s been a mandate for the Department of Labor to conduct a review of the rule.

Tom:    In essence, it could still change or there’s still the possibility that before January, this thing could be scrapped.

Tim:     Right.

Tom:    Which is …

Tim:     It’s definitely not a finished deal that it’s going to 100% go into full effect on January 1st. It’s still up in the air, depending on this review. There had been talks about a delay or pushing it back even further than just the June 9th, but the DOL released their official 60-day delay to the rule, so here we are ready for it to go into this transition period on June 9th.

Tom:    Yeah. I don’t know how many people are actually really ready for this.

Tim:     Right.

Tom:    We’ll see what’s going on. I know that in March, right before the initial implementation date, Vanguard and BlackRock, two of the biggest asset managers out there, called for a much more significant delay, considering all the confusion that the rules have caused, so they did open a period of time about two weeks for a public comment, which is really not a long time, but they got-

Tim:     Right. It says, according to an Investopedia article, they got 193,000 comment letters, yeah, which is a lot.

Tom:    I think almost all of them were opposing a delay.

Tim:     Right.

Tom:    I thought that was pretty amazing to see those kind of numbers. The legislation itself is over a thousand pages in length and I’m sure, like all legislation coming out of Washington these days, it’s going to increase exponentially before it’s a final deal.

If it’s not stopped, it’s going to automatically elevate all professionals in the investment business who work with retirement plans or provide retirement planning advice to the level of becoming a fiduciary. If you’re an advisor who has retirement accounts, you’re going to be bound ethically and legally to meet the standards of the fiduciary practice.

Tim:     That means all advisors or professionals in the business would have to act in their clients’ best interest above his or her own interest.

Tom:    Right.

Tim:     You can’t put yourself first in front of your clients. It’s got to be the other way around.

Tom:    Right. That’s really the whole idea behind being a fiduciary is you got to treat your clients’ money better than you would take of your own.

Tim:     Right.

Tom:    It’s more than just being suitable. The recommendations to clients now have to be suitable and they have to be prudent. They have to be in the client’s best interest. If you want to buy a stock, XYZ, if you’re a client, and it’s doubled in the last couple of months and it’s really speculative, it might be better to wait for this thing to pull back or look for another opportunity. I think the thing that really kind of surprised me with all of these exemptions that came out is that advisors can still work on a commission basis with the clients.

Tim:     Right. Surprising enough, there are a number of different exemptions out there, one called the Best Interest Contract Exemption.

Tom:    The BIC.

Tim:     The BIC, B-I-C, people have been shortening it to. It allows advisors to continue to work on a commission, but they must provide clients with a lot of disclosures beforehand. Just reading the frequently asked questions, it seems like it’s a lot of hoops to jump through if you want to continue to work under the commission-based world.

Tom:    Yeah. I think if you’re a brokerage client, you should prepare to buy a bigger mailbox or just prepare to get flooded with a lot more paperwork because as they begin this transition period now, June 9th, and through the start of this actual implementation on January 1st of next year, financial institutions have to notify their clients of their fiduciary status and any material conflicts of interest.

We provide all of that when we get started with a client, but suppose you’re a big brokerage firm, you got retail clients, you do investment banking for other clients, that their stock or their bonds are going to show up in the mutual funds and the ETFs and all the different products that they own, they’re going to have to send out phonebook-sized updates to clients. The printers are going to make a lot of money.

Tim:     Yeah.

Tom:    I don’t know who else is.

Tim:     Yeah.

Tom:    It’s a good thing, this Department of Labor fiduciary rule. It really is a good thing because it’s going to help level the playing field in terms of hopefully beginning to take away the conflict of interest that brokers have in working with individual investors.

Tim:     Yeah, and then hopefully, we’ll give investors who may be skittish about working with people in the industry, because they think, “They’re just trying to scam me out of money,” hopefully, we’ll give people peace of mind to know that the person they’re working with is putting their best interest in mind when they’re getting recommendations.

Tom:    That’s a good point to end on. Thanks for tuning in to episode 184 of the Mullooly Asset Management podcast and look for us again on the next one, 185. Thanks again.

 

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