The Independent Investor: The Client Comes First
As of Friday, putting a client's needs first becomes law.
Despite a bitterly contested battle by brokers, banks and insurance companies to kill it, the on-again, off-again Department of Labor fiduciary rule becomes effective June 9, 2017. Investors should cheer the news.
That's right — it is no longer just a slogan that slick marketers use to woo unsuspecting retail investors into their fee-based, commission-based, fee-sharing web of duplicity and immoral behavior. Since I am already a fiduciary, I tried over the years to advise readers on what is in their best interests since their advisers certainly were not. The new law changes all that.
If your adviser, broker, wealth manager, banker, et al provides you retirement advice for a fee, they are required to act in the best interest of their client. This rule covers all tax-deferred investment accounts. Ordinary taxable investment accounts are excluded from the rule.
"But hasn't my broker been acting in my best interest all along?" you might ask.
The simple answer is no. Previously, the law states that as long as he or she puts you in a suitable investment they were within the letter of the law. Suitable does not mean the lowest cost or best performing fund, stock or any other financial security. It just means they can't put a 92-year-old grannie into a two-cent biotech stock that she knows nothing about.
A number of brokers, annuity shops and others have already abandoned ship sending out letters to their customers that they will no longer be managing their IRAs, 401(k)s and other tax-deferred accounts. Some enterprising brokers are trying to get around the law by having their unsuspecting client sign a paper that releases them from acting in their best interests. Why, you might ask would anyone be naive enough to sign something like that?
Many elderly clients, for example, have established long and trusting relationships with their advisers, despite the suitability — only rule. I understand that. There are brokers out there that genuinely do care for their customer's well-being. It is not the individual that you need to worry about; it is the managers that he reports to and the organization he works for those are the real problems.
What do they do when their boss says "get him to sign this form?" Do they quit or do what the boss says?
Balancing the demands of their firm, versus protecting their customer is a dilemma that many in the financial services sector face every day. The new Department of Labor rule makes it easier for some to do what is in their customer's best interests. Yet, others will use the trust they have built up with their clients to have them sign a waiver form. Don't do it!
Studies suggest that over a life time of savings, the typical investor has paid out one third of their saved, retirement assets in fees. From the government's point of view, they are condoning the payment of roughly $4 billion per year in fees by savers on the total $3 trillion in assets that represent the tax-deferred savings pool.
In a world where defined benefit plans and pensions for life have disappeared, it is now the American public's responsibility to save for retirement through government sponsored tax-deferred savings accounts. But most of that public has no financial background or education, and yet they are left on their own to make investment decisions.
Until now, financial advisors, who were not fiduciaries, simply compounded this problem by giving advice and charging fees that were not necessarily in the public's interests. Good advice can make the difference between a satisfying retirements or bagging groceries for income at the local supermarket. Anything that helps savers achieve the former (rather than the latter) has my vote.
The Independent Investor: Elder Care in an Age of Confusion
The Independent Investor: Ready For a 20 Percent Correction?
As the stock market makes new highs, investors tend to get greedy. They also begin to believe that what has happened in the recent past will continue to happen in the future. Actually, history shows the exact opposite. It is time to give the potential downside some thought.
Hope burns brightly in the equity markets right now. Many on Wall Street believe that the Republican-dominated Congress, led by Donald Trump, "The working man's president," will usher in a golden era of strong economic growth and robust financial markets. The problem is that politics and investments make for strange bedfellows.
At some point, I expect that the two will part ways and when they do, look out below.
Now, with that in mind, have you given any thought to what you are going to do when the inevitable correction does occur? When your $1 million tax-deferred portfolio loses $120,000 in less than a month, will you panic and sell or will you hang in there or buy more?
This is the time to plan your strategy — not when the markets are down eight days in a row and pundits are predicting the end of the world. Many indicators I watch are predicting that somewhere up ahead, investors should expect a substantial pullback. Stock market volatility, a sure contrary indicator of market strength, has been declining for the past 15 months. The Volatility Index is at historical lows right now.
Then there is the law of physics. What goes up must come down. We are in our eighth year of a bull market. Memories of the 2008-2009 financial crises have faded. It took many investors at least five years after the crash to be willing to dip their toes back in the stock market.
Those who have done so have been rewarded. Now that many of us have our entire foot, leg and neck immersed in equities, it is time to expect some downside ahead.
Before you ask, no, I don't know when it will happen. If I did, I could retire on my tropical island where I would "buy low and sell high." That said, an exit plan, if that is what you want to do, should be percolating in that head of yours.
For most of us, however, any attempt to sell at the top will be met with frustration, lost opportunity, and in many cases, an emotional decision to re-enter the market at even higher prices. The fact is that major declines are part and parcel of investing in the stock market. Most long-term investors who plan to go to cash may succeed, at first, but they almost always fail to re-invest, or if they do, they re-invest too early or too late.
Sure, you will always hear about this guy or that woman who trades the market. The myth is that these "uber kans" almost always sell at the top, (in the nick of time) and buy back at the lows when everyone is running for the exits. Don't believe it. Rest assured that the majority of day traders who are constantly buying and selling lose more money than they make and would have made more money if they had simply stuck with the markets.
That does not mean you have to simply take your lumps, although some lump-taking should be expected and it is painful. One can always dial down your risk, become more conservative, shift your investments into more bonds etc. There are risks in that strategy.
Take the run-up to the presidential elections, as an example. Several of my clients were convinced that a Trump presidency would usher in a financial meltdown, WW III, and all sorts of evil developments. They wanted to sell everything and go to cash.
I resisted, convincing many of them to stay with the markets. Several insisted, however, that they wanted to reduce their risks and become more defensive. I obliged their requests. The results: they made about half of what they could have if they had stayed fully invested, but still made more than if they had simply exited the markets and gone to cash. Each investor must
decide how much risk they are willing to take and act accordingly.
Before you hit the panic button, however, I see no indications that we will incur anything more than the normal sell-off. Price declines are simply the cost of doing business in the stock market, like paying taxes or insuring your home.
Neither am I predicting a decline is right around the corner. But when it does occur (and it will), be prepared. Understand and plan for it now. If you don't know, give me a call.
The Independent Investor: Health-Care Costs Are Strangling Us
The Independent Investor: Cosmetics Survive, Prosper Despite Competition
As the clash between brick-and-mortar retail enterprises and the mighty Amazon escalates, the internet shopping colossus is laying waste to one store or mall after another. One of the few areas that has not only staved off the internet shopping giant, but has actually turned the internet and social media to its advantage, is the cosmetics industry.
There is a combination of fortuitous developments, some peculiar to the makeup industry, and others the result of adept marketing that has allowed the beauty trade to grow unencumbered. Social media, as you might imagine, has played a big part in growing an industry that has revenues of $62 billion and climbing.
For decades, women would pay a visit to their local department store, drugstore, or shopping mall and head for the cosmetics counter. They did so because most women consider makeup a necessity of life. They received a quick lesson in cosmetics application from the clerk or salesperson. At the same time, they could also see and experience these products on their own skin. The only alternative to the beauty shop was to sign up for a cosmetology class, hire a makeup artist or rely on a girlfriend who knew her way around makeup.
Today, social media has become both the new beauty counter as well as a place to show off the results. Just check out the number of YouTube tutorials available on makeup. Now that the industry can post videos on Instagram as well, industry experts can hawk their wares easily and directly, but can also show consumers exactly how a new product is intended to be used as well.
A whole new industry has sprung up around selling cosmetics on social media. There is now what are called "beauty vloggers," enterprising women who are internet businesses in their own right. Some are models or ex-models; others come out of the makeup industry and set up shop as beauty gurus. They dispense beauty advice as well as tutorials on how to apply specific types and kinds of makeup.
Another new phenomenon is the "haul girls." These are women who take the viewers on an extreme shopping spree and explain on camera what products are "hot," while giving their opinion of the products. Today, fully 95 percent of consumers looking for beauty products will search out YouTube first. Some of these beauty mavens have millions of subscribers and can make or break a brand. In the beauty business, influencers like these vloggers and haul girls carry a great deal of weight.
And with the popularity of posting photos on Facebook, Twitter and other social media, more and more women don't want to be caught "naked" when it comes to makeup. That simply fuels more and more demand for cosmetic products.
While women use social media today for cosmetic instruction and to learn about the latest products offered, many still need to "test-and-trial" as the industry calls it. Video is fine, but how do you really know what that new blush or nude lipstick is going to look like on you? Buying many cosmetic products online is tricky. The subtlety of shades and colors abound and once it arrives in your mailbox, it is too late.
Unlike clothes or that DVD player, cosmetics, once opened, cannot be returned. This becomes problematic, especially at some of the price points these products command. Sure, some products that a woman will use over and over again can be ordered over the internet, but styles and new developments in cosmetics change rapidly.
That's why testers and samples are a large part of any brick-and-mortar beauty store's inventory. Many, if not all, of the basics undergo a revamp every so many years, so most women will check out the newest offerings on a fairly regular basis. And even your most hard-bitten internet buyer will succumb to buying a new product, especially after using the free consultation or makeup classes offered by these beauty centers. Unlike other industries, the beauty store still manages to deliver an "experience" as well as a place to buy products. Remember too, that there are no seasons in makeup, it has year-round fashion demand.
Discounts are also not high on the list of cosmetic company marketing tactics. Prices remain relatively stable, which is anathema to what usually occurs to a product once incorporated into the Amazon fold. So far, few, if any, of the luxury beauty brands have developed relationships with the internet giant. For now, the beauty business is thriving despite Amazon, and they hope that continues, at least until they can build their own e-commerce presence.