The Dodd-Frank Wall Street Reform and Consumer Protection Act that cleared Congress on Friday, like the health care reform legislation before it, is a complicated document. The US Chamber of Commerce estimated that the 2,319 page bill will generate 533 new regulations, 60 studies and 94 reports. Until the regulations are finalized, and the studies and reports completed, it won’t be clear how it will affect all of us, but there are some observations that can be made now.
Put Clients’ Interests First at All Times
Jane Bryant Quinn, the financial journalist, did a great job of describing the Fiduciary standard and its importance to consumers while the issue was still being debated: (http://janebryantquinn.com/2010/05/will-brokers-have-to-put-your-interests-first/). This standard, unfortunately, did not make it through the lobbying and political process. Insurance agents and investment brokers marketing financial planning and investment products will still NOT be held to the same standard of client care that the Asset Advisory Group follows as a Registered Investment Advisor. Instead, the financial reform requires the SEC to do a second study on the subject. Is it conceivable that someone could do a study and conclude the person giving you financial advice should NOT put your interests first? Stay tuned for the study…..
Consumer Protections
A new Consumer Financial Protection Bureau has been created with the purpose of ‘protecting consumers from unfair, deceptive and abusive financial products and practices.’ My first concern is how will they determine what products and practices are abusive and unfair? If they don’t think the financial community should have to put their clients’ interests first, will selling you a mutual fund that charges a high commission up-front with an annual expense of 2.85% a year be considered unfair? On the positive side, there will be a national, toll-free, consumer complaint hotline for people to report problems. This is a great first step, but how will they follow up on these complaints? Many people reported their concerns about Bernie Madoff to the SEC, but no action was ever taken against him.
Ending the Gambling Risk
Banks and brokerage firms sell products to clients, but they also use their own money to trade investments to make a profit for themselves, a practice known as proprietary trading. Problems developed because these trades were sometimes in conflict with their clients – brokerage firms would sell their clients a product while simultaneously betting against it in their own accounts. Banks also began to take more and more trading risk as they enjoyed the profits it added to their bottom line. When this trading contributed to the failure of companies like Merrill Lynch, AIG and Lehman Brothers, the government was asked to step in to save them. The Volker Rule, contained in the Act, requires regulators to implement laws that will prohibit proprietary trading, investment in and sponsorship of hedge funds and proprietary equity funds – the investments that took down Lehman and forced others to be bailed out. The problem is the laws will be developed after – you guessed it – another study; to be conducted by the new Financial Stability Oversight Council, so it remains to be seen how this will all work out.
The bottom line is there will be much more debate and discussion as the newly created Consumer Financial Protection Bureau and Financial Stability Oversight Council mentioned here, as well as the new Office of National Insurance, Office of Credit Ratings and SEC Investment Advisory Committee are formed. Their studies, decisions and regulations will change the financial industry landscape.
Jeannette A. Jones, CPA, CFP®
jjones@taaginc.com
http://www.taaginc.com/
Showing posts with label financial reform. Show all posts
Showing posts with label financial reform. Show all posts
Monday, July 19, 2010
Monday, July 5, 2010
Investor Protection Gets Knocked Out of the Financial Reform Law
(from Jane Bryant Quinn's website, janebryantquinn.com, 6/25/2010 - read the article directly here)
Senator Tim Johnson socked investors with what might be a knockout punch, during negotiations on the financial reform bill. Investor protection is down for the count. The new law, when passed, is going to leave you out.
Johnson, a South Dakota Democrat, laughs at the concept of “fiduciary duty”—the idea that people who advise you on investments should to put your financial interests ahead of their own.
At present, registered Investment advisers have a fiduciary duty toward you and your money. But there’s an exception for stockbrokers and insurance agents. They can—and do—advise you to buy financial products that benefit themselves more than they benefit you.
For example, it’s okay for them to offer you high-cost mutual funds when low-cost funds are available that invest the same way. It’s okay for them to sell you a high-cost, out-of-state 529 college savings plan when your own state’s plan costs less and gives you a tax deduction, too.
The version of financial reform passed by the House of Representatives would have stopped all that. The House brought brokers and insurance agents under the fiduciary rules when they offer personal financial advice.
The bill passed by the Senate punted, by telling the Securities and Exchange Commission to study the issue. The House and Senate are now negotiating their differences.
Suddenly, out of the blue, Johnson swept in—not with a compromise, but with an even broader anti-investor proposal. When the SEC eventually does the study, limits will be put on its findings. It won’t be allowed to decide that brokers should be subject to the fiduciary rules unless there is virtually no other way of protecting investors from unscrupulous advice.
Barbara Roper, director of investor protection for the Consumer Federation of America, calls the provision a “poison pill.” It ensures that brokers can continue to violate your trust. The Senate negotiators passed Johnson’s proposal on a voice vote, without revealing the names of the Senators who supported it.
Johnson, known as the “senator from Citibank,” habitually sides with the financial industry and against consumers. He’s the only Democrat who opposed last year’s legislation to curb credit card abuses.
Next year, he’s in line to become the chair of the Senate Banking Committee. If that happens, you can kiss any further reforms good-bye. You can also expect his committee to be sympathetic to bills that roll current protections back.
At this writing, nothing is final. But the House will probably accept the Senate’s punt. Johnson’s aggressive language might be watered down, but brokers and insurance agents won’t have to change their ways anytime soon. Remember this, when they give you advice. You can’t trust them. They put their own interests first.
Senator Tim Johnson socked investors with what might be a knockout punch, during negotiations on the financial reform bill. Investor protection is down for the count. The new law, when passed, is going to leave you out.
Johnson, a South Dakota Democrat, laughs at the concept of “fiduciary duty”—the idea that people who advise you on investments should to put your financial interests ahead of their own.
At present, registered Investment advisers have a fiduciary duty toward you and your money. But there’s an exception for stockbrokers and insurance agents. They can—and do—advise you to buy financial products that benefit themselves more than they benefit you.
For example, it’s okay for them to offer you high-cost mutual funds when low-cost funds are available that invest the same way. It’s okay for them to sell you a high-cost, out-of-state 529 college savings plan when your own state’s plan costs less and gives you a tax deduction, too.
The version of financial reform passed by the House of Representatives would have stopped all that. The House brought brokers and insurance agents under the fiduciary rules when they offer personal financial advice.
The bill passed by the Senate punted, by telling the Securities and Exchange Commission to study the issue. The House and Senate are now negotiating their differences.
Suddenly, out of the blue, Johnson swept in—not with a compromise, but with an even broader anti-investor proposal. When the SEC eventually does the study, limits will be put on its findings. It won’t be allowed to decide that brokers should be subject to the fiduciary rules unless there is virtually no other way of protecting investors from unscrupulous advice.
Barbara Roper, director of investor protection for the Consumer Federation of America, calls the provision a “poison pill.” It ensures that brokers can continue to violate your trust. The Senate negotiators passed Johnson’s proposal on a voice vote, without revealing the names of the Senators who supported it.
Johnson, known as the “senator from Citibank,” habitually sides with the financial industry and against consumers. He’s the only Democrat who opposed last year’s legislation to curb credit card abuses.
Next year, he’s in line to become the chair of the Senate Banking Committee. If that happens, you can kiss any further reforms good-bye. You can also expect his committee to be sympathetic to bills that roll current protections back.
At this writing, nothing is final. But the House will probably accept the Senate’s punt. Johnson’s aggressive language might be watered down, but brokers and insurance agents won’t have to change their ways anytime soon. Remember this, when they give you advice. You can’t trust them. They put their own interests first.
Monday, March 22, 2010
The Fiduciary Standard – A Call for Clarity
If you read nothing else in this week’s blog, promise me you and every one you discuss this with will, when it’s time to seek financial planning and investment advice, make sure the person you choose to work with is held to a fiduciary standard. If you’re busy this week and need to move on, you’re free to go.
With all the talk about health-care reform, March Madness, Tiger and the other stories of the day, an issue quietly gliding under the radar is the pending financial services reform making its way through Congress.
I won’t lull you to sleep with all the ins and outs of what’s being discussed or the less than savory politics and lobbying going on behind the scenes. Instead, I want to focus on one issue.
One of the biggest challenges facing legislators is a concept known as the fiduciary standard. This standard simply states that anyone who holds themselves out as a financial advisor be required to act in their clients’ best interests.
Got it?
You pay an advisor to manage your assets and help you plan for your financial future and the advice they offer is in your best interest; not because they get a bigger commission, not because they go on a fancy trip, but because they think it will help provide you a successful investment experience. Seems like a no-brainer, right?
Unfortunately, across the industry, especially the brokerage and insurance firms, millions of lobbying dollars are being spent to make sure this standard doesn’t expand industry-wide. I’ll forego bashing those who are fighting this and let you draw your own conclusions. You can read more about those arguments in an article by Tara Siegel Bernard of the New York Times. My goal is to set the record straight on why this doesn’t need to be the confusing issue that it has become in the face of so many salespeople posing as advisors.
The bottom line is, if you’re looking for someone to pick a few hot stocks for you from time to time, feel free to seek out a non-fiduciary salesperson. Also understand that you’re participating in speculation, not investing. There’s nothing wrong with this. It is similar to buying a racing form or paying a handicapper to get a tip on a horse. You pay for this advice race after race after race and sometimes you win, but does your win cover the costs of what you spent on the advice?
On the other hand, if you’re discussing how to meet your long term investment goals, ensuring that your money outlives you and not the other way around, you should make absolutely certain that the advisor you choose is required, at all times, to put your interests before their own.
If you or anyone you know is shopping for this type of advice, it should be as easy as asking if the person you are talking to is a salesperson or a fiduciary advisor. Just ask. If you receive any answer other than, “Yes, I am held to a fiduciary standard, I have no conflicts of interest in the way in which I will help you and I receive compensation solely from the management fees my clients pay me,” keep looking.
Chip Workman, CFP®
cworkman@taaginc.com
www.taaginc.com
With all the talk about health-care reform, March Madness, Tiger and the other stories of the day, an issue quietly gliding under the radar is the pending financial services reform making its way through Congress.
I won’t lull you to sleep with all the ins and outs of what’s being discussed or the less than savory politics and lobbying going on behind the scenes. Instead, I want to focus on one issue.
One of the biggest challenges facing legislators is a concept known as the fiduciary standard. This standard simply states that anyone who holds themselves out as a financial advisor be required to act in their clients’ best interests.
Got it?
You pay an advisor to manage your assets and help you plan for your financial future and the advice they offer is in your best interest; not because they get a bigger commission, not because they go on a fancy trip, but because they think it will help provide you a successful investment experience. Seems like a no-brainer, right?
Unfortunately, across the industry, especially the brokerage and insurance firms, millions of lobbying dollars are being spent to make sure this standard doesn’t expand industry-wide. I’ll forego bashing those who are fighting this and let you draw your own conclusions. You can read more about those arguments in an article by Tara Siegel Bernard of the New York Times. My goal is to set the record straight on why this doesn’t need to be the confusing issue that it has become in the face of so many salespeople posing as advisors.
The bottom line is, if you’re looking for someone to pick a few hot stocks for you from time to time, feel free to seek out a non-fiduciary salesperson. Also understand that you’re participating in speculation, not investing. There’s nothing wrong with this. It is similar to buying a racing form or paying a handicapper to get a tip on a horse. You pay for this advice race after race after race and sometimes you win, but does your win cover the costs of what you spent on the advice?
On the other hand, if you’re discussing how to meet your long term investment goals, ensuring that your money outlives you and not the other way around, you should make absolutely certain that the advisor you choose is required, at all times, to put your interests before their own.
If you or anyone you know is shopping for this type of advice, it should be as easy as asking if the person you are talking to is a salesperson or a fiduciary advisor. Just ask. If you receive any answer other than, “Yes, I am held to a fiduciary standard, I have no conflicts of interest in the way in which I will help you and I receive compensation solely from the management fees my clients pay me,” keep looking.
Chip Workman, CFP®
cworkman@taaginc.com
www.taaginc.com
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