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On the Horizon
Your monthly entertainment and thought-provokingness from the world of personal finance

The DOL, The Fed, and You

June 2017
Russell Robertson, CFP
® 

So much for the summer doldrums!  Three big things happened this month that probably went unnoticed by most of you reading this.  And please note, when we say “big things that went unnoticed”, we mean “big” in that super geeky personal finance way and not “unnoticed” because we think you are all ostriches.


Not that we have anything against ostriches either!

Those three things are, in no particular order of importance: our one-year anniversary, passage of the DOL fiduciary rule, and a Fed announcement of quantitative tightening.  If you caught all three of those things this month, give yourself a gold star!  And if not, well that’s what we’re here for...just keep reading.


ATI Wealth Partners turns 1!

We’d like to start this newsletter with a big THANK YOU to everyone who has supported us over this past year.  And yes, if you’re reading this newsletter, that definitely means you.  Even if you’re not a client (not yet anyway…), your feedback and support helps keep us going.  Our mission, what we’re trying to do through ATI Wealth Partners, is not to get all the money.


Nope.  Eat a nope sandwich with extra nope sauce.

Rather, it is the much more metaphysical goal of helping you, dear reader, get to where you want to be in life.  If that means managing your investments, great!  That’s something we’re passionate about and happy to do.  If that means just providing little tidbits of knowledge and insight in easily digestible newsletter boluses, then also great!  Happy to do that as well, and we’ll even throw in slightly questionable metaphors and past-their-prime pop culture references for free.  (Give yourself another gold star if you caught the Exploding Kittens reference…)

We’re excited to build on our success over the last year and keep growing - we are currently wrapping up a series for USA Today focused on younger investors: ATI is the financial expert advising different profiles of millennial investors, so keep your eyes open for that in the near future.  And really, one of the best ways for us to grow is with your continued help.  If you have friends or family that have questions about their finances, or just hear someone at work wondering about how to allocate their 401(k), send them our way!  Referrals are the best kind of compliment to receive.

DOL Rule

Okay, fun part over.  Grab a glass of water, because it is going to be hard to not make this section ridiculously dry.  You’ve been warned.

On June 9th, the long-awaited (initiated during the Obama administration) and much-contested DOL Rule (also referred to as the Fiduciary Rule or the Conflict of Interest Rule) kind of came into effect.  “Kind-of”, because no enforcement will take place until January 2018.

In a nutshell, this law requires everyone advising on investments in retirement accounts to act as a fiduciary, which can be defined as someone who is required to do what is in the best interest of the client.  Yes, we can hear what you’re thinking, and no, not all advisors were or are fiduciaries. 

RIAs (Registered Investment Advisors - independent firms, like us!) have been required to operate as fiduciaries since, oh, about 1940 or so when the Investment Advisors Act of 1940 was passed.  Also, CFP® professionals (also us!) are held to the fiduciary standard regardless of who they work for.  So until now, all other financial advisors - we’re looking at you, brokers and insurance agents - didn’t legally have to do what was in the best interest of the client.  They were instead bound by a “suitability” standard, as opposed to a “best interest” standard.

Kind of like this:

Imagine you are in your early 30s, you and your partner are both employed, and you don’t have kids.  Is a $250,000 life insurance policy for each of you suitable?  Well, we would have a hard time arguing that it's un-suitable.  But is it in your best interest?  Probably not.  If your partner has an income stream and there are no kids to provide for, you really don’t need life insurance; chances are that the premium could be better spent elsewhere.  But let’s say the insurance agent gets a 3% commission on the face value of any policy sold.  That’s $15,000 pocketed by selling each of you a $250,000 policy.  Incentive much?

Or, same situation, except replace “life insurance policy” with “variable annuity” and “early 30’s, employed, no kids” with literally almost anything you can think of.

Now, this isn’t the blanket change it might seem.  The rule technically only applies to advice around retirement plans.  Advisors to work-sponsored 401(k) plans or pension plans have already been held to fiduciary standards under ERISA laws, and now that protection is extending to personal retirement-focused investments.  And, as a result of much protest from the industry, there is an exemption to the rule known as BICE (best interest contract exemption) - if an advisor discloses possible conflicts of interest and documents that they were disclosed to you, the investor, then the advisor is deemed to be in compliance with the rule.  So just keep an eye out for any fine print things labelled “BICE” if you’re opening an account up soon...

How will this affect you?  Well, broadly, it is theorized that this rule will completely disrupt the way some firms and advisors have been doing business (arguably a good thing), and there will likely be more of an emphasis on planning rather than just straight up investment management.  At the very least it will cause the cost of compliance to go up (arguably a bad thing), and because of that, perhaps the darker unintended consequences of this rule will either 1) cause the cost of investment management to go up or 2) cause advisors to focus even less on individuals without significant financial resources.



As for us, however...given the two points made a couple paragraphs above about being an RIA and a CFP® professional, this changes nothing about what we do or how we do it.  Well, technically that’s not quite true.   Gone are the days when we could just point out why it’s probably not a good idea for you to leave your money in your old company’s 401(k) plan when you change jobs/quit instead of rolling it over into an IRA.  Now, we’re going to have to get really invasive and document it all for state regulators and/or the SEC and have you sign off on everything.  Which very quickly leads us down the rabbit hole of how government thinks it can legislate “best interest”...but that is a rant for another day.

Quantitative Tightening

Speaking of rant-worthy things, how about that Federal Reserve?  But this isn’t the April newsletter, so we’ll try reeeeally hard to keep the tin foil hat in the closet.


Not a hat...

Here are the rant-less facts:

FACT: The Fed hiked rates this month, the third such hike in the last six months.  The Fed funds rate now sits somewhere between 1% and 1.25%.
FACT: The Fed also announced that they will start shrinking their balance sheet to the tune of $10B per month, increasing over a year to $50B a month.  This is slated to start later this year sometime.

Thank you, Dwight Schrute.  Okay, so to recap: Financial markets went to hell in a tiny little handbasket ten years ago.  To stop that little meltdown and stimulate an economic recovery, the Fed dropped interest rates to 0% and bought up all the bonds they could get their hands on through a program called Quantitative Easing (QE).  This (both 0% rates and QE) had never been done before.  Extraordinary measures, to be sure.  The stock market rebounds in 2009, and the economy starts slowly (very slowly) improving.  But it’s not fast enough for the Fed.  They keep rates at 0% and keep implementing QE programs, saying that they’re waiting to see signs of inflation picking up or the economy overheating before they change things.  “Data dependent”, they say.

Former Fed Chairman Ben Bernanke back in 2013 first mentioned “tapering” the QE program and normalizing rates.  (Normalizing as in getting back to the non-experimental type of monetary policy).  This completely freaked the markets out (go ahead and search for “Taper Tantrum”), but took a full two and half more years before rates were raised from 0% to 0.25%.  And here we are a full four years later before there has been any serious talk about winding down QE.

Here’s the issue: rate hikes are coming increasingly quickly (one in late 2015, one in late 2016, two so far in 2017, one more planned in 2017, probably one coming early 2018 as well), and shrinking the Fed’s balance sheet went from a non-issue to maybe something they would consider to actually happening later this year at light speed (as far as Fed timelines go).  And these are both happening in a “data dependent” world in which the data is actually doing the opposite of improving!  So what’s going on?

We haven’t killed the business cycle.  We’re living the third-longest (and still going!) expansion in US economic history, but another recession will eventually come.  So the Fed wants a little room to lower rates (and thereby stimulate the economy) to counter that recession.  But mostly, it’s about reputation.  Experimental monetary policies need to be ended before the next recession hits, lest anyone impugn the validity of the Fed’s actions over the last decade.  Coincidentally, current Fed Chairman Yellen’s term is up in January.  How convenient to be able to point to a Fed Funds rate at 1.75% and an active program in place to finally wind down QE as a nice “mission accomplished” banner.


Done aaaaaand done.

(Pause. Breath. Re-wraps tin foil and puts back in the closet).  Okay, look.  All we’re saying is that this month seems to have fundamentally shifted the Fed’s bias from looser monetary policy to tighter monetary policy, and accordingly our own bias of market return expectations.  Loose monetary policy resulted in the 232% gains in the stock market since 2009.  We’ll wait and see what tight monetary policy does, but our view is that it’s time to put your seatbelts on.

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