In The News...

Two interesting things happened last week, neither involving the words Trump or Comey.

Financial Regulation Hits A Roadblock: The House of Representatives passed a bill to stop the pending Department of Labor (DOL) Fiduciary Rule, a reform that would impose more stringent regulations on financial advisers to ensure that they act in the best interests of clients. The proposed law targets financial advisers and firms that overcharge clients, often through hefty commissions. Advisers within certain firms are incentivized to recommend specific securities or investment products because it nets them higher commissions than comparable funds or products, which are less expensive and often better at fulfilling the client's needs.

The DOL Fiduciary Rule has minimal impact on our firm because we are a Registered Investment Adviser (RIA), which requires serving as a fiduciary to clients by acting in your best interests. We are fee-based (not commission) and receive no benefits whatsoever beyond the asset-based fee we earn and disclose to you each month.

So why don't all financial advisers already put client interests first? The answer is a bit muddled, which is why there is so much debate on this issue. The fiduciary standard that RIA firms like ours adhere to is clear-cut. Non-RIA firms adhere to a suitability standard when making investment recommendations. One requires giving reasonably good advice (suitability), while the other requires giving the best advice based on the client's specific situation (fiduciary).

Here is the analogy I like to use when comparing more traditional firms to RIA firms:

Non-RIA firm adviser would say: "That shirt fits you."
RIA firm adviser would say: "That shirt fits you and looks good on you."

Defining what qualifies as "reasonably good advice" and "best advice" is subjective, which is why these new, more stringent regulations are met with push-back. It is not easy to implement a uniform industry standard. The current construct of the DOL Fiduciary Rule will require minimal change to our existing business practices because of the rigorous, fiduciary measures we already take. Some version of the rule will likely go into effect soon, whether it ends up being this proposed reform or a modified version.

Personally, I am torn on this rule. You can read why in the Opinion section below.

In The Market...

The S&P 500 dipped -0.3% this past week. Let's look under the hood:

Stocks: Friday was a wild day for the tech sector, which fell -2.5% in the single session. The Nasdaq-100 fund (QQQ) had more shares bought or sold than any day since Aug. 2015. Financials rallied hard late and led all sectors on the week.

For now, I believe some of these dips represent buying opportunities more so than major, negative turning points. There is one particular sector, Health Care, which I think has a chance of rallying in the coming weeks. Stay tuned.

Bonds: Not much to observe here. Bonds did not sell off as much as I would have expected amid the rally in Financials. The charts still look good, in my view, and the fact that high-yield bonds did not budge much is positive for the bond market.

In Our Opinion...

I am in favor of the DOL Fiduciary Rule, but there are two reasons I am not wild about reform.

I am not sure it will make a meaningful difference.
Without it, our business model is relatively attractive when compared to commission-based advisers (or advisers who simply overcharge their clients).

I know, I know... One is a cynical view and the other is selfish, so I'll explain.

Bad people will still do bad things. That is reality. Even if the DOL adds a few more hurdles for unscrupulous advisers to jump over, the bad ones will find a way to press on. Also, it seems consumers are already starting to rebel against commission-laden investment products, such as variable annuities and variable life insurance. Finally, like any major reform, I question the ability to enforce the new rules.

On the plus side, the new rules may weed out the advisers who make their hay off selling expensive commission-based investments. It should curb the sale of ridiculously overpriced mutual funds as well, which many investors own without realizing it.

Selfishly, the current landscape helps our firm because it highlights what makes our fee structure and service superior to others. If other firms are forced to be fiduciaries, it levels the playing field in a way that hurts our ability to differentiate. This is not to say we are the best, because one client's interpretation differs from the next. This is not to say we are the most cost-effective either, because value is relative (I will be the first to say if an alternative option is cheaper than ours). We have a very strong business model relative to our peers, one that involves continually searching for ways to give back to you. (The most recent example being that we now pay for all account trading costs for clients who invest $100,000 or more with our firm.)

It is rare for me to pump-up our approach or what we do. But if you spend as many years in this industry as I have, you see too many instances of investors who were misled by advisers, whether in terms of costs they paid or financial expertise they were promised but didn't receive. I try to let our work speak for itself and refrain from comparing our firm's model to other firms that I know are inferior, however this is an important issue and one that is front-and-center in both the financial and political spheres.

In Our Portfolios...

Here are the stocks and exchange-traded funds (ETFs) we bought or sold last week:

(Note: These portfolio changes do not apply to every account. Specific allocations are based on account size and risk appetite.)

Q&A/Financial Planning...

Is good news coming for retirees?

A consumer advocacy group called The Senior Citizens League predicts that retirees currently receiving Social Security will see their benefits increase by +2.1% in 2018. This is what they predict the increase will be to the cost-of-living adjustment (COLA) that typically occurs each year to help Social Security benefits keep pace with inflation.

I say typically because there was no increase in 2016 and there was only a +0.3% increase this year. Inflation is most closely linked to the Consumer Price Index (CPI), which measures the change in the cost of goods and services over time. As of April, CPI was up +2.2% from one year ago. This means a +2.1% increase would almost match current inflation, but not quite.

How this affects you: If you are nearing retirement or have not yet triggered your Social Security benefits, strongly consider delaying payments if you can afford it. Each year you delay benefits beyond your normal retirement age (either 66 or 67 depending on birth year) your payments grow by +8% per-year, until you turn 70 and are required to start taking them.

For those in their early-to-mid 60's, your normal retirement age is 67. If you wait until age 70 your monthly payment will increase by a whopping +24% (three years of delay x 8% per-year). You would be forgoing three years of benefits by delaying them, which is a negative to consider. But if longevity runs in your family you will eventually recoup that -- and much more -- by delaying payments. This is especially helpful if chronic illness is a concern (e.g. Alzheimer's), because you will need to ensure you have enough income or savings to pay for rising health care costs as you age, particularly these types of expenses Medicare won't cover.

Another option is to coordinate benefits with your spouse, by having one spouse take benefits early while delaying the other's. Contact us for more on Social Security strategies.

What's New With Us?

Despite the recent move to TD Ameritrade, you will continue to receive monthly statements from Scottrade. You can disregard those. If your month-end statement for May shows there are still funds in your Scottrade account(s), do not worry. Either we did not get your account(s) transferred prior to month-end, or, it likely shows a small, residual amount representing dividend payments. Those dividends will be automatically transferred over to TD Ameritrade, such that your Scottrade account will be transferred in-full and left with a zero balance.

Have a great weekend,

Brian E Betz, CFP®
Principal

Market & Financial Planning Commentary