SYM News

A Step in the Right Direction – The DOL’s Revised Fiduciary Rule

On April 6, 2016, the Department of Labor (DOL) released its new fiduciary rule. Discussed and debated for almost a year, the final provisions offer a stricter interpretation of who in the financial industry must serve as a fiduciary and how disclosures must be made to investors. Implementation of the new guidelines is scheduled to take place between April of 2017 and January of 2018.


Up to this point, some players in the investment industry have been allowed to abide by what is referred to as the suitability standard. At its worst, the suitability standard of service permits almost any type of recommendation to be made as long as the advisor does not knowingly harm the client. Put another way, in lieu of making a choice to place a customer’s best interests above their own, financial professionals could comply with the suitability standard by simply relying on their own reasonable belief that the recommendations they made were well-suited to the client’s financial needs, objectives and unique circumstances.


Because their advice only had to be deemed suitable, brokers would reasonably argue their primary responsibility was to the broker-dealer and the products they represented. This left plenty of room for conflict, and allowed many financial professionals to charge undisclosed fees or to favor investments with hidden commissions. The advertisement and promotion of higher-cost/higher-commission funds over equally or better-suited funds that paid less in commission to the seller is a common example of the fruit of the suitability standard. Though these actions may have met the legal definition of suitability, they do not go so far as to be considered in the client’s best interest. 


Previously allowed under the suitability standard, such practices will no longer be acceptable under the new fiduciary standard of care. As a result of the DOL’s ruling, the fiduciary standard will shortly become the new paradigm in the advice industry. However, not all segments of the investment advisor population will be equally affected by the change. While many advisors happily conducted business under the less stringent suitability standard, an elective fiduciary standard has also been in existence since the Investment Advisors Act of 1940. This preexisting fiduciary act clearly instructs advisors to place personal interests below those of the client, and identifies particular loyalty and duty of care obligations that further build out the overarching directive:  All actions taken by a fiduciary advisor must serve the best interests of their client. Moving forward, advisors who already operated by these standards will make few or no changes in preparation for April 2017. Other advisors will have to rethink the concepts of cost containment, full disclosure and their parameters for positioning a client’s investments, all concepts that were fully addressed all along for each and every client of a fiduciary investor.


While the new fiduciary standard will demand monumental change for a number of financial professionals and institutions, at SYM we already abide by the fiduciary standard and have done so for years. In addition, we applaud the Department of Labor’s action and feel it will lead to greater opportunity for people to achieve their retirement, investment, philanthropic, and legacy goals. If you have questions about the new rule or know someone who could benefit from a relationship with SYM, please don’t hesitate to contact us.


Source:  http://www.wsj.com/articles/new-government-rule-rewrites-retirement-savings-1459762202
Source:  http://www.dol.gov/ebsa/regs/conflictsofinterest.html

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Even More So in 2016, Beware of Fake Filers

Each tax year, the risk of identity theft is highlighted in the news as scammers adopt new methods to separate people from their money and credit. 

 

Some sources estimate up to $21 billion will be claimed on fake tax returns in 2016. In order to propagate this ruse, thieves steal an individual’s Social Security number and file electronic returns, sending refunds electronically to fictitious bank accounts also opened with the stolen Social Security number.

 

Most people find out they have been a target when they attempt to file their own return and have it rejected, or when they receive a suspicious filing notice from the IRS. If this happens to you or someone you know, contact the IRS Identity Protection Specialized Unit by phone at 800-908-4490 and then download Form 14039, the “Identity Theft Affidavit,” and submit it when you file your actual tax return. Once the IRS has resolved your situation, they will provide an Identity Protection Personal Identification Number (IP PIN) to be used for all future tax return filings. Without this number your future tax returns will not be accepted. If you are the victim of fraud, you also have the right to obtain a copy of the fraudulent return to see what was claimed on your behalf. To do so, visit www.irs.gov and search for “Instructions for Requesting a Copy of Fraudulent Returns.” As a final step, notify the three major credit agencies, Equifax, Experian and Transunion, of the fraud to avoid negative reporting consequences.

 

Your advisor is ready to help you with this process should you find yourself a victim. 

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Certainties

The first three and a half months of every year often provide a reminder of the maxim “nothing is certain but death and taxes.” Our fear of taxes (or the IRS) and the regularity of filing returns drives most of us to be punctual, prepared, and accurate in our annual preparation for the inevitable.

 

It’s not uncommon for those who approach tax season with precision to take a more cavalier attitude toward that other certainty. Perhaps this is because the basic information and steps necessary to file our income tax return are well known to all of us. We are less likely to be familiar with the financial and legal steps which, taken in advance, may ease burdens at the death of a loved one. 

 

Though many people prefer to avoid discussions of such sensitive subjects, advance preparation is obviously the key. While not an exhaustive list, let’s take a look at some basics.

 

  • A critical first step is to choose a person to be in charge of your assets once you’re gone. This personal representative (often referred to as executor) should be someone who is financially stable, trustworthy and willing to accept the responsibility the role entails. Be sure to document your decision in writing and make sure to revisit your selection on a regular basis in case there is a reason to make a change.
  • When you hire a new CPA, you intuitively know to provide the relevant details of your finances.  Likewise, don’t neglect to inform your personal representative of personal matters.  Inform them of the location of important documents and give them a general sense of your possessions. This will help later, because one of this person’s first tasks after your passing will be to inventory the estate.
  • Keep your belongings organized. Many people get all tidied up once only to let things get out of control again as years go by. If it helps, think of the execution of your estate as “the great audit.” Organize your records, make accurate accounting of your assets, and tell people how locate these items and information. 
  • Keep your family informed of your choices, particularly if you selected a specific member of the family or an outside person to take charge. Blindsiding loved ones about your choice of a personal representative often leads to a disordered estate, uncomfortable feelings and damaged relationships.
  • Unlike April 15, no one knows exactly when, or in what fashion, a personal representative will need to fulfill their duty. Extended illness is one example of a situation that takes a toll on everyone involved. To ensure your wishes are honored, nothing is more effective than having appropriate medical directives and powers of attorney in place - before they are needed.
  • Don’t let important estate documents become stale or inaccurate. Wills and trusts should undergo review whenever there is a significant life event (or in the absence of that, every four or five years). Advance medical directives and powers of attorney should be updated more frequently. We recommend a review every three years in order to keep pace with changing legal requirements.

 

If you haven’t covered this topic with your SYM Advisor in a while, we would encourage you to do so.

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View Markets Through a Wide-Angle, Not Magnifier

Driven by several factors including a decline in the China stock market, the price of crude oil, negative interest rates in Japan, concern about slowing global economies and a strong U.S. dollar, global equities are off to their worst start in years. While this may seem like new territory, challenges have existed in the stock market from its beginning. The question of a stock market correction has never been one of “if”, but “when” it would occur. One of the things that is most certain in the world of investing is that it can be very uncertain at times. This can get even more magnified in the short term.  Understanding this provides perspective.

 

As the graph below illustrates, there have only been four 10-year cycles since 1871  where stock prices ended the period lower than where they started: twice in the Great Depression of the 30s and twice in the tech bubble burst and credit crisis during the 2000s. In each of those cases stocks were still close to breakeven at the end of the 10-year cycle. This is why we spend so much time discussing investment time horizon and asset allocation. 


 

What we have learned over the years is that time in the market makes the investor successful, not timing the market. The graph below illustrates the annualized return of different asset classes from 1995 through 2014. An investor during this 20-year time frame experienced several periods of significant short-term volatility during the Asian Crisis of 1997-1999, the dot-com correction of 2000, the terrorist attacks of 2001, the financial crisis of 2008 and the European debt crisis of 2011. Consistency was rewarded as evidenced by an S&P 500 that returned an annualized 9.9% over those two decades. Alternatively, the average investor earned significantly less (2.5%) as a result of trying to time the markets. Thus, while instinct might pressure a “timing strategy” such as going to cash in response to recent market movements or troubling headlines, evidence tells us to avoid such a pitfall.

 

 

The following chart further shows how impactful being out of the market can be, especially in the weeks following a stock market slide. Indeed, reaping what the market provides requires the resolve to stay put.

 

 

The most important aspect of investing is to have the right portfolio allocation. This affords our investors the ability to weather market downturns when they occur. We understand that these times are emotionally difficult. However, it might be of interest to note that over long periods of time stock returns have averaged 11% per year, and returns after market corrections average considerably more than that. While emotions naturally distract people from the multi-year return prospects aligned with their investment horizons, long-term return profiles are good information to keep top of mind when we read headlines focusing on the very short-term. 

 
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Climbing A Wall Of Worry

Over the past few weeks, consumers of worldwide media have been bombarded with alarming news from the financial markets in Greece, China and Puerto Rico. If those stories weren’t enough to promote a feeling of uneasiness, the New York Stock Exchange shut down last week for a few hours for what was deemed to be a “technical glitch.”

 
We are left to wonder if these events are just noise, soon to be resolved and forgotten, or if they will culminate in the often-predicted but not yet realized double digit correction that would mark the end of the current bull market.

 
At some point in the near or distant future, traders and investors will decline to buy the next dip, and the market will correct by 10%, 15% or more. When this adjustment will occur and what will trigger it are impossible to predict. It is a key point to remember, however, that many investors could either benefit from or be relatively unaffected by a stock market sell-off. 

 
For example:

  • Anyone with an investment time horizon that extends beyond a few months will be relatively unaffected by a market event. These investors have no immediate need to sell.
  • Anyone who plans to be a net saver in the coming years will be relatively unaffected by and may benefit from an event. These investors will have the opportunity to take advantage of low prices and add to their portfolios.
  • Those who thought in 2012 to wait for a 10% correction before putting more money into the market will be unaffected, but for a different reason. These unwise investors already missed the current rally, so they have no gains to lose.
  • Finally, anyone who is fortunate enough to be holding cash or bonds in their portfolio, AND (this is important) has the requisite courage to buy stocks when no one else is willing and the trajectory for market averages seems to be nowhere but down, will see great opportunity at the time of a market adjustment.

 

Because investors have witnessed two substantial market crashes since the year 2000, many now automatically assume that any market decline will be an agonizing, gut-wrenching experience leading to large and real losses. Rarely do you hear people extol the virtues of a healthy stock market correction. Instead, we are led to associate down markets with calamity and heartache as opposed to an opportunity to buy, or just a passing storm. 

 

Stock market corrections are the environment where successful long term investors make money and unsuccessful investors make permanent mistakes. The current challenges in Greece, China, and Puerto Rico are worrisome, but as they pass new ones will emerge.

 

Everyone invested in stocks will see a decrease in value on their portfolio statements during a market correction. For most, this is a temporary setback and will reverse as the market recovers. For the unlucky few who fall victim to the headlines, losses could become permanent, but only if they sell.

 

The markets have always climbed a wall of worry, but remember this:  Innovation, technology, and the natural growth of a diversified global economy (and a well-diversified portfolio of investments) continually prove, over time, their ability to outmaneuver market corrections.


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