My Money Scripts

What's to Study? It's Time to Pass a Fiduciary Standard

One of my "broken record" themes over the years has been the importance of requiring financial advisors to have a legal responsibility to act as a fiduciary. This simply means the advisor is required to put your best interest first.

Like attorneys and accountants, financial planners who register with the Securities and Exchange Commission (SEC) as Registered Investment Advisors (RIA) have such a fiduciary responsibility to their clients. However, not every “advisor” or “financial planner” is registered with the SEC and required to act as a fiduciary.

Currently, stockbrokers and agents selling financial products like annuities, life insurance, and mutual funds are not required to register with the SEC and act in their customers' best interests. Their fiduciary duty is to the companies they work for, not to the customers who buy their products.

The financial regulatory reform bill now before Congress originally would have extended this fiduciary standard to every provider of financial advice.

Brokers who combine product sales and investment advice have a built-in conflict of interest. Their jobs depend upon selling products that generate the most profit for their companies, with only a vague legal requirement that those products be "suitable" for their customers.

In recent years, large financial institutions began offering increasingly complex and, in some cases, unregulated and unrated investments. The lines between banking services, sale of financial products, and investment advice became increasingly blurred. In too many cases, the best interests of consumers were left out of the picture altogether. In some cases, these companies' actions brought huge losses for themselves and their investors.

These losses, coupled with the current economic crisis, brought demands from the public for protection against these predatory "investments." Congress is currently considering a broad regulatory reform bill. The Senate version originally included a crucial provision that would have held every provider of financial advice to a fiduciary standard. This provision has strong support from consumers of financial advice.

Senator Tim Johnson, however, a member of the Banking, Housing, and Urban Affairs Committee, added an amendment cutting that requirement. Senator Johnson thinks the Senate should "study" the issue.

What's to study? The idea is simple. Either consumers deserve to have the financial advice they pay for be in their best interests, or they don't.

I believe consumers do deserve advice that's in their best interests. To those of us who are fiduciary practitioners, the solution is obvious: require everybody to act in the best interests of their customers/clients by imposing a fiduciary standard.

Unfortunately, when it comes to influencing legislation, the financial professionals supporting a fiduciary standard are overwhelmingly outnumbered. Financial planners who choose to be fiduciaries are far fewer than those in the financial product sales industry, which has the financial clout to make large campaign contributions. Financial columnist Bob Veres describes this process all too vividly in an online column for Financial Planning magazine.

My colleagues in the financial planning profession and I believe that small investors, purchasers of IRAs, and consumers in general would be better served if anyone wanting to sell them financial advice were required to act in their best interests.

Yet without some significant lobbying from taxpayers, the Senate is almost certainly going to pass a regulatory reform bill that lacks this important consumer protection. For more details, check out Jason Zweig’s February 27 column in The Wall Street Journal. 

Whether you support or oppose keeping the fiduciary requirement in the regulatory reform bill, please let Senator Johnson know. His office address is 136 Hart Senate Office Building, Washington, DC 20510; telephone 202-224-5842. You can send an email through his website at Johnson.senate.gov. For his South Dakota offices, call 800-537-0025, or call Rapid City at 605-341-3990; Sioux Falls at 605-332-8896; or Aberdeen at 605-226-3440.

I'm emailing him this column; with any luck, he'll become a regular reader.

Financial Planning Strategies for Changing Political Times

The relationship between politics and money matters. It can have a direct effect on how you operate a business, invest, manage your finances, and build financial security.

If you believe, as I do, that the U.S. is in a long-term trend toward wealth redistribution, it will be wise to pay attention to that trend as you manage your finances and your career. There are three primary areas to consider: protecting whatever wealth you already have, finding new ways to achieve success and build financial security, and doing what you can to influence government policies.

Protecting what you have. If you want a good lifestyle for yourself and your children (a universal desire), the time to pay attention is now.

1. If you have wealth (defined by many as a net worth above $500,000), use existing laws to help shield your assets from frivolous lawsuits, taxes, and publicity. Consider placing liquid funds in an LLC or a domestic asset protection trust and putting real estate in those same vehicles or in land trusts.

2. Lower your public profile as much as possible. You don’t want to be perceived as rich. Many people have not figured out that 85% of the rich got that way by hard work and frugal spending. Most of the wealthy people I know don't have lavish lifestyles.

3. Diversify your holdings among many asset classes. To protect against global wealth redistribution (the decline of the dollar), hold a significant portion of your net worth in assets invested outside of the United States.

4. Structure your assets to minimize your tax liability. Consider vehicles that defer taxes. Pay attention to the tax rates on capital gains and dividends. If you can, decrease salary that is subject to FICA taxes and increase income, like rent or dividends, that doesn't incur FICA taxes.

Creating success and financial security. One result of a trend toward more direct government involvement in the economy is increasing regulation.

1. If you want to start your own business, do it now, before regulations become even more burdensome. The opportunity to create first-generation wealth won't vanish, it will just become harder. More and more people who are “rich” will be inheritors, rather than entrepreneurs who were rewarded for working hard, taking risks, and managing well.

2. Business owners need to become more politically active. Relationships and connections will become even more important in a government-dominated economy.

3. Good jobs and opportunities to build wealth will become increasingly tied to the public sector. Having a “government job” will take on a whole new meaning of high pay, good benefits, and security. This includes direct government employment as well as increasing demand for contractors in a variety of fields. Consider getting an education in a growing field that will benefit from wealth redistribution in either the private or public sector.

Influencing government policies. It is important to realize that government policies do make a difference in your day-to-day finances, even if you are not a business owner and don't consider yourself wealthy. As one example, the expiration of the Bush administration tax cuts this year will mean significant tax increases next year for middle-class tax payers.

Keep in mind that lawmakers, whether local, state, or national, do respond to public opinion. As citizens in a representative democracy, it's our responsibility as well as our privilege to educate ourselves on important issues and make our ideas known.

As a financial planner, I would prefer to focus on personal finances that were separate from politics. Unfortunately, the increased government intervention in our economy makes that unrealistic. The politics of money affects us all.

Politics and Personal Financial Planning

Recently I've heard from a few readers that some of my columns are too political. Yes, I sometimes discuss politics, because political issues and governmental actions have a direct impact on our personal finances.

One of The American Heritage Dictionary's definitions of "political" is "relating to or dealing with the structure or affairs of government." A fundamental power of our federal government has to do with money: creating it, regulating its value and its cost (interest rates), and, of course, taxation.

Money isn't a natural force. It is an artificial system created by social agreement. Currencies are the "money" of modern society, and government policy regulates how individuals borrow, invest, exchange, and pay taxes on money. Separating personal finance from the politics of finance is just not possible.

Therefore, a critical 21st century survival skill is understanding how money works. This includes understanding and anticipating the governmental policies that will influence how we earn, save, spend, and give money.

Changes in political leadership generally result in some changes in the policies that affect our money and finances. The recent financial crisis and the last national election resulted in what may be the most significant changes to our fundamental economic policies since the 1930's. The economic decisions our government makes today will affect our personal money decisions and lifestyles for years to come. Helping clients anticipate, understand, and deal with the impact of such decisions is part of my job as a personal financial planner.

What I see as one of the significant changes occurring in government economic policy today is a shift toward higher regulation and taxes. These are two important components of wealth redistribution. Most attempts at wealth redistribution have resulted in a decrease of personal freedoms in exchange for increased benefits from the government.

Wealth redistribution is not new. Starting with the Roman republic in the third century B.C., many societies have attempted to limit or redistribute wealth at times when only a privileged few lived in luxury while the masses lived in poverty. It is somewhat of a myth, however, that wealth redistribution works to the benefit of the less fortunate, unless it results in an increase of personal freedom and encourages greater capital accumulation.

In many instances, the wealth is taken from the handful of people who control it and simply redistributed to another handful of people—typically the leaders of the opposition rather than "the people." This was the case after Russia's Bolshevik Revolution in the early 19th century. A modern-day example is China, where 90% of all billionaires are the children of high-ranking officials (WSJ.com, The Wealth Report, December 12, 2009).

I am in no way suggesting that we are on the verge of an upheaval like the Bolshevik Revolution. It isn't that obvious. Wealth redistribution in the U.S. is a shift away from capitalism and toward socialism. This didn't start with the election of President Obama or the current Congress; they've only intensified it.

We've been slowly moving toward a more socialist economic model for decades. This long-term trend toward higher tax rates and increased social entitlements diminishes individual incentive to work toward financial and entrepreneurial success. If unabated, it will eventually result in slowing the financial engines that produced the lifestyles Americans have come to take for granted.

If one of your goals in life is financial independence, it is important that you understand the full implications of this trend. National political decisions do indeed affect our personal finances. Financial planning is impossible to separate from the politics of money.

Next week's column will offer some financial planning strategies for the changing economic times that lie ahead.

Financial Infidelity: When It's OK To Shop Behind Your Spouse's Back By Jeff Zaslow ~ The Wall Street Journal, March 31, 2006

http://www.careerjournal.com/columnists/movingon/20060331-movingon.html

Marital disharmony in America could be eased overnight by a little machine that would sit next to cash registers at every retailer. It would authorize not only your credit-card limit, but also your "spousal authorization amount." That would be the maximum dollar figure you are permitted to spend without informing your spouse. Each couple would determine its own limits in advance, a giant bureaucratic agency would be informed, and countless money battles and divorces could be avoided. That's all wishful thinking, of course. Even if such a gadget were to be built, millions of couples would abhor it, because they're addicted to surreptitious spending. Surveys show that up to half of all couples admit that they commit "financial infidelity" -- lying to spouses about expenditures they've made. At the same time, financial and marital advisers say that a touch of secret purchasing can be healthy and liberating for a marriage. Will an unauthorized purchase strum up marital discord? Above: The $5,999 Martin 000-ECHF Bellezza Nera guitar. So how should couples develop a formula for their discretionary spending? In the corporate world, inventory managers use the term "open to buy," which refers to the amount available to spend. These days, a cottage industry of consultants is helping couples negotiate their own "open to buy" amounts. Ted Klontz is president of Onsite Workshops, an organization near Nashville that helps people with financial issues. Last Friday, he visited a couple in their Tennessee home to help them sort out their spending patterns. The husband is a high-earning music-industry veteran. His wife goes on frequent secret-spending sprees, dropping many thousands of dollars at a pop, usually on clothing. Reviewing their financial records, the couple had a realization: The wife's buying usually followed incidences when the husband was unkind to her. She was retaliating subconsciously, says Mr. Klontz. "Instead of saying, 'Ouch, that hurt,' she'd walk away feeling unloved, then buy things to feel better. This is extraordinarily common." Complicating matters, the wife is beautiful and the husband likes her to look beautiful, says Mr. Klontz. "When she dresses nicely, he falls in love with her all over again. He reinforces the buying behavior." Mr. Klontz is helping this couple understand their dynamics. When couples get married, they often resent losing their autonomy. A common refrain: "Why must I ask permission before I spend money? I'm not a child." Mary Hunt, founder of the DebtProofLiving.com advice Web site, tells spouses to give each other an "adult allowance" -- money that can be spent however they want, without having to justify it. The amount is determined after reviewing all household expenses. For Ms. Hunt and her husband, the amount agreed upon is $200 a month. Ms. Hunt advocates sharing credit reports before marriage, which can reveal a runaway spender. "It's more important than a blood test. It's a character reference." After marriage, couples should have "money dates," where they go through everything they've spent "except the allowance money," she says. They should do it in public places so they're less likely to argue. All this can be a challenge because our culture indulges extra-marital spending. Wine locker rooms now cater to collectors who don't want their spouses to know how many expensive bottles they've purchased. Credit-card statements feature camouflaged business names to mask fees paid to porn or gambling Web sites. Store gift cards can be loaded up with stray cash, and even if your spouse snoops through your wallet, the card doesn't indicate a value. A lot of people find insidious ways to hide secret spending. Some use a check to buy groceries, write it for a larger amount, and get cash back from the supermarket. "They'll use the difference to pay for a pedicure," says Ms. Hunt. "I call it 'money laundering.' " When the canceled check arrives, their spouses assume the full check went for groceries. Ms. Hunt says she pulled such antics earlier in her marriage. She got a private post-office box so her husband wouldn't see bills. She burned collection notices. She'd rip off tags, and put new outfits in her closet for a while, so she could swear that "they're not new" if her husband asked. By 1982, she was $100,000 in debt. It took 13 years for her to get solvent. Her advice: If you're deceitful, ask yourself, How would I feel if my spouse did this to me? Mr. Klontz says that, years ago, he and his wife agreed that they could each spend $150 a month without informing each other. One day, in a music store, he saw an $800 guitar. He wanted it. He bought it. He took it home and played it for his wife. She thought he sounded great, but then asked: "How much was it?" When he told her, she reminded him of their agreement. "You're right," he said. "I don't deserve this. I'll take it back." "No, that's OK," she replied. "You work hard. You do deserve it." He kept the guitar, but has since realized that he was being passive-aggressive. Rather than focus on his violation of their agreement, he played the victim, and manipulated her. Richard Kahler, a financial planner in Rapid City, S.D., runs workshops with Mr. Klontz. Mr. Kahler learned just this week that his wife, Marcia Welch-Kahler, has secretly been spending $30 a month without telling him. Since 2004, she's been supporting a disadvantaged girl in India. "I've wondered why I never told Rick about it," Ms. Welch-Kahler says. "I guess it just felt private. It's something I did that was mine." Mr. Kahler is philosophical about this. "Sometimes," he says, "a spouse really needs to have 'me only' money."