A key mission statement of The Blue Collar Investor is to “become CEO of your own money” A new rule issued by the US Department of Labor highlights why this is so important. In the past, stock brokers were not required to put the best interest of their clients ahead of their own. This is in contrast to registered investment advisors (RIAs) who always had this fiduciary (bound ethically and legally to act in the client’s best interest) responsibility. This will all change in April, 2017 as it relates to our retirement accounts. A second leg of this rule will be activated in January, 2018 pertaining to extra requirements for financial professionals who accept commissions. This new rule does not apply to taxable accounts.
Overview of new rule
All finance professionals that give advice on retirement accounts must put their clients best interests ahead of their own financial gain. This includes disclosing their forms of compensation and any potential conflicts of interest. All brokers, advisers and insurance agents are now required to act as fiduciaries (a financial adviser must act solely in the client’s best interest when offering personalized financial advice) or be subject to litigation. In the past, these professionals were simply required to suggest products “suitable” for their clients.
Which products are impacted?
The main targets appear to be high-commission products sold for rollover IRAs such as variable annuities and non-traded real estate investment trusts. A variable annuity is a tax-deferred retirement vehicle that allows you to choose from a selection of investments, and then pays you a level of income in retirement that is determined by the performance of the investments you choose. Compare that to a fixed annuity, which provides a guaranteed payout. These products may disappear from IRAs in the future. The goal is to eliminate the $17 billion per year retail investors are wasting in exorbitant fees according to the government.
I use an online discount broker
It is unlikely anything will change for those of us who manage our own IRA accounts and don’t take financial advice. Full service brokers, however, will be greatly impacted and will gravitate from a commission-based fee base to a percentage-of-assets system. Clients of full-service brokers will be met with new paperwork to fill out prior to the implementation of this rule.
What about my 401(k)?
Finance professionals will now be required to act in the best interest of your employers plan. Recommendations of rollovers from 401 (k)s will most likely disappear from what I am told.
What is BICE?
This is an acronym for best interest contract exemption. This document must be signed by a client when using a broker that accepts commissions for retirement account investing. It pledges that the adviser will act as a fiduciary.
Changes we are likely to see
- Commission-based accounts replaced by fee-based accounts
- Smaller full-service retirement accounts may be dropped and forced to move to online discount brokers, robo advisories or other firms
- Independent broker-dealers will have to build comprehensive compliance programs if they can afford it
- Smaller broker-dealers may have to pursue mergers to afford these requirements
- Sales of high-commission annuity products will slow
- Robo advisory (digital advice providers) services like Betterment, Wealthfront and Personal Capital will benefit
- Nontraded REITs (high-commission product) will be allowed but subject to the BICE requirements which will likely scare consumers away
- Finance professionals will move away from mutual funds with sales loads and high expense ratios and especially away from funds that carry 12 b-1 fees (up to 1% and used to compensate broker firms and advisers)
- Exchange-traded funds which are generally cheaper from a cost basis perspective should be beneficiaries
- ETFs also benefit because these are the main go-to products used by robo advisers (provide financial advice or portfolio management online with minimal human intervention. They provide digital financial advice based on mathematical rules or algorithms)
- Brokerages may lower ETF fees to take advantage of the new investment landscape
- The birth of a cottage industry of lawyers who are experts in this area
This new rule appears to be a big win for retail investors. We will be able to better evaluate after implementation of the rule in April, 2017 and then again in January, 2018. Keep in mind also that Republican legislators are working hard to reverse this regulation while the SEC (Securities Exchange Commission) is looking to approve a uniform fiduciary standard.
Next live events
Blue Hour 5: Evaluating Mutual Fund Portfolios and Financial Advisors
Plus: The Top 5 Option Questions from 2016
Thursday April 27th
9 PM ET
This is a 2-part webinar presentation:
1: Many of us hold portfolios of actively-managed mutual funds that we’ve either selected ourselves or, more likely, been based on financial advisor advice. This webinar will provide a user-friendly technique to evaluate the performance of these portfolios and hence the performance of our financial advisors. We should commend those advisers who are out-performing the overall market and certainly question those who are under-performing the market and charging us fees to fall short. “Indexing will be defined and explained and a system to set up comparison charts (FOR FREE) will be highlighted.
2: The BCI team has gone through thousands of questions sent to us in 2016 and selected the top-5 most frequently asked questions to ask and answer in the second part of this webinar.
As always, written questions will be answered live by Barry Bergman, the BCI Director of Research, while Alan hosts the presentation.
Premium members login to the member site a register for FREE here:
Long Island Stock Trader’s Meetup
Tuesday May 9th, 2017
7 PM – 9:30 PM
“Using Stock Options to Buy Stocks at a Discount and to Bring Portfolio Returns to Higher Levels”
Admission is FREE
Global stocks declined this week with the increasing geopolitical concerns over rising tensions on the Korean peninsula and the possibility of a stronger US commitment to remove Syria’s Russian-backed leader Bashar al-Assad. Oil prices continued to rebound, with West Texas Intermediate crude rising to $53.25 from $52 a week ago. Volatility, as measured by the Chicago Board Options Exchange Volatility index, jumped to 15.96 from 12.8 last week. This week’s reports and international news of importance:
- Donald Trump sounded much more moderate than he did during last fall’s campaign in an interview with the Wall Street Journal on Wednesday. He reversed course on several issues. First, Trump said he may nominate US Federal Reserve Board chair Janet Yellen to a second term after saying last fall that she was “toast”. He also reversed his opposition to the US Export-Import Bank, which finances US exports. Critics cite the bank as an example of “corporate welfare.” Additionally, the president shifted gears on NATO, saying the alliance is no longer obsolete because it has begun to fight terrorism. Finally, Trump said the United States will not label China a currency manipulator, thus breaking another campaign vow. The reversal may represent an attempt to entice China to increase pressure on North Korea to abandon its nuclear program.
- Tensions continued to mount on the Korean peninsula as the North Korean regime threatened a nuclear strike in response to any US aggression. North Korea is believed to be trying to develop intercontinental ballistic missiles capable of reaching the US mainland. This week, the US navy dispatched a carrier task force to the western Pacific in a show of force, while Chinese president Xi Jinping said that China is committed to the denuclearization of the Korean peninsula. President Trump called on China to do more to rein in its nuclear-armed neighbor, saying if China won’t help, the US could act alone
- The US and other G7 nations continue to pressure Russia to abandon its support of Syria’s Bashar al-Assad in the wake of last week’s chemical attack on Syrian rebels which led to a cruise missile strike on a Syrian airbase by US forces
- For months, there have been three candidates in contention for the two spots in the second round of the French presidential election. Marine Le Pen, the populist firebrand, has consistently led recent polls, trailed closely by centrist Emmanuel Macron. François Fillon, hampered by an ethics scandal, has held the third position most of the time. Now a fourth candidate, leftist Jean-Luc Mélenchon, has entered the fray and is in a virtual tie for third place with Fillon. The conventional wisdom is that Le Pen will be beaten handily in the second round by either Macron or Fillon, who are more centrist. But the emergence of Mélenchon could put an unexpected wrinkle into the process. First-round voting takes place on 23 April
- Fed chair Yellen said that the US economy is healthy and that the Fed is now shifting its focus, taking its foot off the accelerator and allowing the economy to “coast” for a while, saying a gradual path of interest rate increases can get us where we need to go
- Yellen also commented on several bills that are working their way through Congress, expressing concern that the Fed could become subject to political pressure if the bills are signed into law
- Bank of Canada governor Stephen Poloz warned of the growing role of speculation in the recent acceleration in Toronto-area house prices. The central banker said that prices had accelerated from percentages in the high teens to the 30% zone, adding there is no fundamental story that can explain the rise. “I think it is timely to remind folks that prices of houses can go down as well as up,” he said. Poloz also said that further rate cuts in Canada are no longer on the table
THE WEEK AHEAD
MONDAY, APRIL 17th
- Home builders index April
TUESDAY, APRIL 18th
- Housing starts March
- Building permits March
- Industrial production March
WEDNESDAY, APRIL 19th
- Beige Book
THURSDAY, APRIL 20th
- Weekly jobless claims 4/15
- Philly Fed April
- Leading indicators March
FRIDAY, APRIL 21st
- Markit manufacturing (flash) April
- Markit services (flash) April
- Existing home sales March
For the week, the S&P 500 moved down by 1.13% for a year-to-date return of 4.03%.
IBD: Uptrend under pressure
GMI: 3/6- Buy signal since market close of November 10, 2016
BCI: I am currently favoring in-the-money strikes 2-to-1, a defensive posture
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a neutral outlook. In the past six months, the S&P 500 was up 9% while the VIX (15.96) declined by 5%.
Wishing you the best in investing,
Alan ([email protected]) and the BCI team