Don’t Put all Your Eggs in the Risk Basket

 

We talk a lot about bond risk and how stockbrokers and bankers create pie charts of investments (the ones they sell, that is), breaking them up between stocks and bonds/bond funds. The only thing a banker or brokers knows about retirement is that they are supposed to put a higher percentage of your money into bonds for “safety” as you get older.

 

The trouble is, in a very low-interest rate environment with interest rates rising like we are experiencing now, bonds are not safe! In fact, they’re disastrous.

 

The stock market is not a safe place for retirees to have their money, and that includes bond funds. The great crash of 2008 proved that, when so many retirements were wiped out despite having large bond fund holdings.

 

Historically, the stock market regularly tanks every seven or eight years or so—as it did in 2008, 2001, 1987 (Black Monday) and pretty much every seven-to-eight time period prior. On Wednesday, August 22, the nation reached a milestone—we are now experiencing the longest-running bull market in US history. We are way overdue for another crash. Leaving your money in the market may be okay for the young, who can afford to wait for it to come back up, but it’s a recipe for disaster for retirees who need to withdraw their money to live on.

 

 

 

Recession Predicted

 

There are typically eight signs of a late-market cycle before a crash:

 

  1. Markets average a 27% decline
  2. Treasury bonds average a 20% increase
  3. The labor market becomes unsustainably tight
  4. The Fed raises rates into restrictive territory
  5. The yield curve flattens
  6. Leading economic indicators start to decline
  7. Consumer spending declines
  8. High-yield bond spreads widen

 

The very prestigious Guggenheim Investments’ recession probability model dashboard monitors these signs. Their predictive model says that the next recession will begin in late 2019 to mid-2020. They say that risk assets tend to perform well two years out from a recession, but investors should become increasingly defensive in the final year of an expansion, since they typically decline in the last year before recession.

 

More importantly, if you are close to retirement, you need to hire a fiduciary retirement advisor and get your retirement plan in place as soon as possible.

 

 

 

Finding a Fiduciary Retirement Advisor

 

Part of assessing who is qualified to plan your retirement involves knowing the difference between suitability versus best interest standards when it comes to the recommendations that you receive.

 

Suitability Standard – Sales Commissions

 

“Suitability” relates to brokers and bankers—people who make commissions on securities trades (stocks and bonds), often with a Series 7 license. Suitability, or an investment’s appropriateness for an individual, is ultimately judged by the self-regulatory, not-for-profit organization FINRA (Financial Industry Regulatory Authority), which regulates brokers. From FINRA’s standpoint, age, existing investments, financial situation and goals, annual income, liquid net worth, effective tax rates, marginal tax rates, investment objectives, investment experience, and time horizon to retirement should all factor in to an investment’s “suitability” for you.

 

But, unfortunately, FINRA standards are vague, and there’s nothing illegal about a broker steering you toward investments, which may pay them hidden commissions, or higher commissions than other “suitable” investments. Additionally, brokers and bankers are often captive to their big-name-brand wirehouses, and they can only sell investments that their organization provides. So, their comparisons in terms of investment “suitability” often include a very short list!

 

Best Interest Standard – Fiduciary, Net of Fees

 

“Best interest” standards, on the other hand, apply to advisors (or advisers), who are fee-based fiduciaries holding a Series 65 license. These advisors are regulated by the U.S. Securities and Exchange Commission (the SEC), a federal commission created by Congress in 1934 following the Great Depression.

 

Best interest standards legally require an advisor to recommend only what’s in a client’s best interest, net of fees, compared against a large universe of investments and with only the investor’s personal circumstances foremost in mind.

 

The best fiduciary financial advisors include tax mitigation as a large factor in their plans, especially for retirees with large amounts of money in qualified accounts like 401(k)s, who will be facing RMDs (Required Minimum Distributions) starting at age 70.5.

 

 

 

The Three Requirements of a True Fiduciary

 

Many financial people claim to be fiduciaries required to look out for your best financial interests, but they aren’t. Here are the three requirements, and all three must be present:

 

  1. They have a Series 65 license only*, meaning they cannot accept sales commissions on equities or trades. They are fee based.
  2. They are an independent firm, and offer a large universe of financial instruments. There is no one telling them what they can or cannot sell.
  3. They are structured as an RIA (Registered Investment Advisory) firm.

 

* Watch out for dual-licensed brokers or bankers who claim to be fiduciaries but aren’t. Financial professionals are legally allowed to hold dual licenses—are allowed to make commissions on securities based on “suitability” on the one hand, but then turn around and give you advice in your “best interest” on the other. Just protect yourself and avoid this scenario altogether. It’s confusing and can be duplicitous.