Rebalance

Financial luminary and Rebalance Investment Committee member Burt Malkiel joins PBS Wealthtrack for an exclusive interview where he addresses the current state of retirement investing, and the stock market at large. Burt will detail how Rebalance’s Investment Committee works to help clients achieve more returns with less risk, and much more, now streaming at wealthtrack.com.

In addition, check out Burt’s previous appearances on Wealthtrack, where he discusses Rebalance’s unique investment approach, and the latest strategy employed by our firm to help clients retire with more.

Watch the Full Episode

Learn more about Professor Burton Malkiel

For all of the hand-wringing about the Department of Labor’s fiduciary rule, a surprising number of people don’t know what it is. And that ignorance may affect your retirement savings.

Only 32% of adults had heard of the fiduciary rule, according to a survey of 1,000 adults conducted on behalf of one of the original retirement robo advisers, Financial Engines. FNGN, -1.01% Of those surveyed, 22% worked with a financial adviser and 21% knew the difference between an adviser who acted as a fiduciary and one who did not.

“These are things people don’t pay a lot of attention to unless you are in the industry in some way,” said Chris Jones, chief investment officer at Financial Engines. The financial services industry has done a good job of obfuscating the importance of fiduciary responsibilities, he said.

So what’s the fiduciary rule? Here’s a refresher: The fiduciary rule is a highly contested piece of legislation, produced during President Obama’s presidency and managed by the Department of Labor, focused on mitigating conflicts of interests that may arise in financial advisers’ investment recommendations on retirement accounts. Not even two months after Trump’s inauguration, the Department of Labor announced it would delay the implementation — originally set for April 10 — until June 9.

The prior administration had argued the rule would protect retirement savers from losing $17 billion a year to conflicts of interest, which could come from commissions earned on product recommendations. Critics, on the other hand, said it would orphan small accounts that managers deemed too costly to manage, and shrink the variety of investment options savers have.

There is a disconnect between what investors believe to be true of their adviser’s responsibilities — and what’s actually true. For example, respondents were asked if all financial advisers are legally required to put the best interests of their clients first when they give advice on retirement investments — 53% said that was true, 47% said it was false. (It is false — not all advisers are legally required to act in their clients’ best interests). Here are some takeaways from the Financial Engines survey:

If your financial advisor was not a fiduciary, would you:

Continue working with that person in the same way you do now	12%
Ask more questions about the investments your advisor recommends	47%
Switch to another advisor	24%
Stop working with a financial advisor altogether	18%

Financial Engines has openly supported the fiduciary rule, as have others, including New York-based robo adviser Betterment and New York-based financial services firm Merrill Lynch BAC, +1.83% , the latter of which said it would no longer allow clients to open commissions-based individual retirement accounts. Other firms, including New York-based firm Morgan Stanley MS, +0.77% and San Francisco-based firm Wells Fargo WFC, +0.72% say they would continue to allow commissions-based accounts but use the “best interest” contract, which clients sign indicating they accept adviser’s terms.

In order to educate more investors, the industry needs to improve transparency and communication efforts with investors, said Scott Puritz, managing director of advisory firm Rebalance. “Fiduciary” can be an intimidating word, as can investing in general, he said. The firm released its “Dear Advisor” campaign in February, which is a letter investors can give their advisers to learn if they’re a fiduciary and what they are paying in fees. “The challenge is to make it in plain English.” (For example, when Financial Engines asked survey participants if they’d support requiring all financial advisers to provide advice on retirement assets be legally required to put their best interests first, 72% said yes, 7% said no and 21% said they were indifferent.)

“We are fighting an uphill battle,” Puritz said. “Consumers think the other options are free because so many costs are hidden and that’s deliberate.”

Dramatic changes for your retirement savings are coming, and your relationship with your financial advisor is due for a shift

The new “fiduciary rule” went into effect Friday. The regulation will require your financial advisor to act in your best interest when advising over your 401(k) and individual retirement accounts.

This hotly debated rule was originally slated for an April 10 debut, but the Labor Department delayed its start date by 60 days after President Donald Trump drafted a presidential memorandum in February. In it, he told the federal agency to review the rule and prepare an updated economic and legal analysis.

Changes are also coming for your relationship with your financial advisor, particularly if you roll over your 401(k) savings with him or her, and you may wind up paying higher fees as a result.

“Many advisors have taken the position that they can advise on your 401(k), but to do it well, they need to understand your other income sources and your family situation,” said Marcia Wagner, managing director of the Wagner Law Group in Boston.

“I see more use of full-scale financial planning,” she said. “It’s a way to demonstrate best interest and to look at things more holistically.”

Here’s how your advisor’s services may evolve post-fiduciary rule.

Conflicts of interest

As of Friday June 9th, your financial advisor and his or her firm will need to comply with the “impartial conduct standard.”

This means financial advisors must charge no more than reasonable compensation, avoid misleading statements and, perhaps most importantly, provide advice that is in the best interest of the investor.

Between June 9 and January 1, 2018, the Labor Department will apply a temporary enforcement policy, under which it will not pursue claims against fiduciaries who are working in good faith to follow the rule.

“In order to demonstrate compliance with the standard under the new rule, advisors will have to develop a paper trail,” said Duane Thompson, senior policy analyst at Fi360, a fiduciary consultancy.

“For rollover advice, advisors need to show a comparative analysis between the costs and services offered in [an] IRA and the 401(k) in order to stay out of trouble,” he said.

Bear in mind that IRA rollovers out of retirement plans have been a gold mine for advisors and their firms.

Investors may have a wider array of investments in an IRA compared with what they had in a 401(k), but they may also be subject to higher costs, including the fee an advisor will charge.

Emphasis on financial planning

An advisor who moves a client from a low-cost 401(k) to a more expensive IRA will need to justify his fees, Thompson said.

As an investor, you may see your advisor do this by providing you with enhanced service, including customized financial planning and income distribution planning.

“More advisors have flat fees as part of their structure as they place more emphasis on service above and beyond the investment process,” said Rob Cirrotti, head of retirement and investment solutions at Pershing LLC. “That gets back to the financial planning process.”

Some of that additional advice might include planning out your income stream, customizing your investment selection and devising a strategy for the required minimum distributions you must take from your retirement accounts after age 70½.

Be discerning

The fiduciary rule is taking effect, but at the end of the day you’re your own best advocate — especially when you’re looking for the right advisor.

Be prepared to compare costs and services.

“The investor has a higher awareness of the fiduciary standard, but it doesn’t mean you should implicitly trust your advisor,” said Thompson. “You still need to ask questions.”

Are you a fiduciary? Find out immediately if your advisor is acting in your best interest. Get the point across with this fiduciary oath from the Committee for the Fiduciary Standard. It’s best to ask this question in writing.

“If you deliver the questions orally, you get a wishy-washy answer,” said Scott Puritz, Managing Director of Rebalance. “Send an email and request that the answer come back in writing.”

How are you paid for your services? Ask whether you’re paying a fee for your advisor’s help, be it hourly, as part of a subscription or based on assets he or she manages for you. Find out whether your advisor receives a commission for the sale of mutual funds, insurance and annuities.

Where do you keep your assets? Some large broker-dealer firms will hold your assets in custody because you have a brokerage account with them. If you’re using an independent fee-only advisor, he or she will likely hold your assets at a custodian, such as TD Ameritrade, Charles Schwab or Fidelity.

“Don’t let your advisor take your money and move it to their account,” said David J. O’Brien, principal at Evolution Advisers in Midlothian, Virginia. Be sure to match the statements you get from your custodian and the statements your advisor provides you.

What are your qualifications? There’s an alphabet soup of different designations for financial advisors, but keep an eye out for the best-known credentials: certified financial planner, chartered financial analyst and certified public accountant. Though each of these designations correspond to different specialties, all three require study and practical experience.

Buying and holding a diversified portfolio of American stocks — such as the S&P 500 stock index — has been a winning strategy over the long run, beating most managed mutual funds and investment adviser recommendations. But what happens if it’s too successful?

That’s actually a problem you might have today. As the market reaches all-time highs again and again, the value of your stocks might have started to overwhelm your appropriate asset allocation — especially if you’re nearing retirement and soon will need to start making required annual withdrawals.

The S&P 500 index has made 204 all-time high closes since 2012, according to Daniel P. Weiner, editor of the Independent Adviser for Vanguard Investors newsletter. If you sold at the highs, you would have regretted each of those sales.

And what if you didn’t sell? Weiner’s report shows that if you had started with a 60/40 allocation to stocks and bonds at the market lows of March 2009, today the stock portion of your portfolio would have grown to an 80/20 stock allocation — perhaps far more equity exposure than is appropriate at your stage in life, eight years later.

But, then, when do you sell? Do you have the discipline to prune back stock market holdings as the market rises? On the other hand, do you want to wait until the market rebalances for you — in a sickening slide that brings the value of your stock holdings back down to a lower level?

Here are three tips for the discipline of rebalancing inside a tax-deferred account:

• Set an appropriate allocation percentage to stocks, bonds, international, real estate and even a small percentage to gold, energy and/or precious metals. Review that percentage only every three years.

• Rebalance back to your target allocation no more than twice a year, on pre-set dates, preferably not around year end when markets become distorted.

That sounds so simple, but it may be difficult to do when markets are volatile. Knowing your own weaknesses, you might opt to have someone do it for you.

Consider the automatic service offered at www.Rebalance-IRA.com, a registered investment advisory company. It offers individualized financial planning to create personalized asset allocation advice for IRA investments. Clients’ IRA funds are invested into one of the company’s six diversified portfolios, created by a group of market technicians and economists. The portfolios are invested only in Exchange Traded Funds (ETFs) in a variety of asset classes. The portfolios range from conservative to aggressive.

Each portfolio is automatically rebalanced back to the targeted allocation twice a year — in late April and mid-November. So if one segment of the stock market has risen, some assets in each portfolio are sold, while others are purchased.

The overall management fee for this advice is 0.5 percent — or 50 basis points, plus a charge of $35 per account each time the account is re-balanced (twice a year). And, of course, the underlying ETFs have their own small costs, averaging 17 basis points per year. The minimum account size is $100,000. It’s a relatively small fee for both diversification advice and discipline.

Of course, you could use the services of a broker or investment adviser to guide you to rebalancing back to your original (or revised) targets. But be sure to consider transaction costs as you buy or sell stocks or funds.

If you use the services of mutual fund companies like Fidelity or Vanguard, you can get free initial asset allocation advice for your IRA rollover. And if you sign up for a “Fidelity Go” account at Fidelity (minimum $5,000 investment), the company will rebalance your account at the discretion of an investment manager, informing you online after the trades have been made. The fee is 35 basis points all in, including the underlying fund costs.

No matter what route you take, if you haven’t done any rebalancing since the start of the current bull market, this is definitely the time to take a second look at your growing exposure to stocks. And that’s the Savage Truth.

Starting June 9, a new rule goes into effect that raises the standards for investment advisers.

The Department of Labor’s fiduciary rule, as it’s known, simply says investment managers have to put the best interest of their clients first.

“There is a whole segment of the retirement industry who currently only have to adhere to a much dramatically lower standard,” said Scott Puritz, Managing Director with Rebalance.

What does that mean in the real world? It means investment managers can sell you on an investment, from which they get a commission, even if it’s not the best deal for you. For example, “they can recommend actively managed mutual funds, which have higher fee structures,” said Puritz, even when when there are low-cost alternatives. Puritz estimates Americans are charged $17 billion in excess fees each year.

So the fiduciary rule basically says, no, investment advisers, if you’re managing people’s retirement accounts, you have to put their interests first.

“Well, nothing’s wrong with that concept,” said Ken Bentsen, CEO of the Securities Industry and Financial Markets Association, but, he adds “we think the Department of Labor rule has a number of unintended consequences.”

The rule makes it possible, for example, to file a class action lawsuit against firms that sell commission-based products, so some investment advisers have tried to limit their legal liability by just not offering certain services, he said.

“We’re seeing that firms are now in the process of shedding low balance accounts, shifting brokerage commission accounts, which are much more cost efficient, into managed accounts, which are less cost efficient.”

The Obama administration spent five years putting the fiduciary rule into place. After his election, President Trump called on the Department of Labor to review the rule, and Secretary of Labor Alex Acosta said he couldn’t find a principled legal basis to block it. That doesn’t necessarily mean the rule is home free, though.

“He also said the agency will continue its review of costs and benefits of this rule until the Jan. 1 final implementation date,” said Dana Muir, professor of business at University of Michigan’s Ross School of Business. “The department has the ability to rescind a regulation that it has implemented.”

Burt Malkiel Wall Street Journal Indexing Beats Wall Street

A recent report from Standard & Poor’s adds impressive support to the large body of evidence suggesting the superiority of simple index investment strategies over traditional stock picking. At the start of every year, “active” portfolio managers declare that the current year will be the “year of the stock picker.” But the results consistently fail to support that view.

For years S&P has served as the de facto scorekeeper demonstrating the dismal record of “active” portfolio managers. During 2016, two-thirds of active managers of large-capitalization U.S. stocks underperformed the S&P 500 large-capital index. Nor were managers any better in the supposedly less efficient small-capitalization universe. Over 85% of small-cap managers underperformed the S&P Small-Cap Index.

When S&P measured performance over a longer period, the results got worse. More than 90% of active managers underperformed their benchmark indexes over a 15-year period. Equity mutual funds do beat the market sometimes, but seldom can they do it consistently, year over year.

The same findings have been documented in international markets. Since 2001, 89% of actively managed international funds had inferior performance. Even in less efficient emerging markets, index funds outperformed 90% of active funds. Indexing has proved its merit in various bond markets as well.

The logic behind the empirical results is irrefutable. In any national market, all the securities are held by someone. Thus if some investors are holding securities that do better than average, it must follow that other investors do worse than average. Investing has to be a zero-sum game. For every winner there will be a loser.

But in the presence of costs, the game becomes negative-sum. The index investor will achieve the market return with close to zero cost. Actively managed funds charge management fees of about 1% a year. Thus, as a group, actively managed funds must underperform index funds by their difference in costs. And empirical evidence suggests that active funds underperform index funds by approximately the difference in their costs. Moreover, actively managed funds tend to realize taxable capital gains each year. Passive index funds are more tax-efficient, making the after-tax gap even larger.

In 2016 investors pulled $340 billion out of actively managed funds and invested more than $500 billion in index funds. The same trends continued in 2017, and index funds now account for about 35% of total equity fund investments. Now a new critique has emerged: Index funds pose a grave danger both to the stock market and to the general economy.

In 2016 an AB Bernstein research team led by analyst Inigo Fraser-Jenkins published a report with the provocative title “The Silent Road to Serfdom: Why Passive Investment Is Worse than Marxism.” The report argued that a market system in which investors invest passively in index funds is even worse than an economy in which government directs all capital investment. The report alleges that indexing causes money to pour into a set of investments without regard to considerations such as profitability and growth opportunities. Detractors also accuse index funds of producing a concentration of ownership not seen since the days of the Rockefeller Trust.

What would happen if everyone began investing in index funds? The possibility exists that they could grow to such a size that they would distort the prices of individual stocks. The paradox of index investing is that the stock market needs some active traders to make markets efficient and liquid.

But the substantial management fees that active managers charge give them an incentive to perform this function. They will continue to market their services with the claim that they have above-average insights that enable them to beat the market, even though they cannot all achieve above-average market returns. And even if the proportion of active managers shrinks to a tiny percentage of the total, there will still be more than enough of them to make prices reflect information.

Americans have far too much active management today, not too little. The S&P report reveals that ever-increasing percentages of active managers have been outperformed by the index. If anything, the stock market is becoming more efficient—not less so—despite the growth of indexing.

It is true that there will be a growing concentration of ownership among the index providers, and they will have increased influence in proxy voting. The possibility of excessive market power needs to be monitored by antitrust authorities, but index funds don’t have an incentive to use their votes to encourage anticompetitive behavior.

Index funds have been of enormous benefit for individual investors. Competition has driven the cost of broad-based index funds nearly to zero. Individuals can now save for retirement far more efficiently than before by assembling a diversified portfolio of index funds. There is no better way to preserve and grow one’s savings.

This Op-Ed originally appeared in the Wall Street Journal on June 5, 2017. Professor Malkiel serves on the Investment Committee of Rebalance.

Rebalance cautions against any attempts to water down aspects of the Rule, and encourages investors to protect themselves by asking the right questions

Washington D.C, June 9, 2017 – Rebalance, a leading pro-consumer investment firm that is at the forefront of providing Americans with a fundamentally different and better set of retirement investment options, today shared its support and encouragement following the first phase of DOL Fiduciary Rule implementation, a watershed moment not only for the financial services sector, but more importantly for the millions of American investors whose financial advisors must now serve as fiduciaries, acting solely in their client’s best interest.

Rebalance believes that the DOL Fiduciary Rule as a whole represents a “level playing field” of rules and pro-consumer protections within the personal finance industry, essentially a tool for American consumers. However, the firm emphasizes how equally important it is for investors to ask their investment advisors the hard questions: “how much am I paying all-in?” “do you experience conflicts of interest managing my account?” and “do you have a legal obligation to put my best interests first?” To further support consumer education, Rebalance released the “Dear Advisor” letter to all Americans, empowering individuals with the tool that they need to make better-informed investment decisions.

“The implementation of this rule by the Department of Labor is an important first step in establishing a fiduciary standard,” said Scott Puritz, Managing Director at Rebalance. “The ongoing battle for complete consumer protection will continue surrounding other important aspects of the rule slated for implementation in January 2018.”

Rebalance and Managing Director Scott Puritz have participated in the Save Our Retirement coalition, an organization created to advocate for establishing a fiduciary requirement in a spirited battle with the financial establishment. Staunchly in support of the rule, Puritz testified before Senate, and in April 2016 Rebalance received recognition from Secretary Perez during his keynote speech announcing the rule’s promulgation.

“While the financial services industry has long opposed the DOL Fiduciary Rule implementation, we believe that it will create an environment where competition and innovation can flourish,” said Puritz. “This will result in free market dynamics leading to the widest array of investment options at the lowest cost for the American consumer.”

About Rebalance
Rebalance is one of America’s leading investment firms that is at the forefront of providing consumers with a fundamentally different and better set of retirement investment options: lower costs, “endowment-quality” globally-diversified retirement investment portfolios, and systematic rebalancing. This investment approach is combined with a team of sophisticated and highly credentialed finance professionals who provide advice that is unbiased and focuses on the client’s long-term retirement investment goals.

The Firm’s Investment Committee is anchored by three of the most respected experts in the finance world: Princeton Economics Professor Burton Malkiel, author of the classic investment book, A Random Walk Down Wall Street; Dr. Charles Ellis, the former longtime chairman of the Yale University Endowment; and Jay Vivian, the former Managing Director of IBM’s $100+ billion in retirement investment funds for more than 300,000 employees worldwide.

Rebalance’s innovative, pro-consumer approach to retirement investing has garnered high profile coverage. The Firm, and its leadership, regularly have been featured in The New York Times, The Wall Street Journal, NPR, Fox, PBS, Forbes, USA Today, CNBC, Nightly Business Review, CBS, The Washington Post, The Economist, and a wide range of other national and local media. Managing Directors Scott Puritz and Mitchell Tuchman are acknowledged industry thought leaders, and Mr. Puritz testified before a U.S. Senate Committee evaluating the U.S. Department of Labor’s new fiduciary rule.

Rebalance is headquartered in Palo Alto, CA. and Bethesda, MD., and currently manages more than $460 million of client assets.

For Media Inquiries:
Kate Caruso-Sharpe
646-699-1414
kate@fischtankpr.com

HBO’s new film The Wizard of Lies, starring Robert De Niro as fraudster Bernie Madoff and Michelle Pfeiffer as his wife, calls attention to the risks investors face from bad financial advice. Rebalance, a Bethesda-based retirement investment firm, will show highlights from the film followed by an educationally-focused panel discussion on June 7th from 7 – 8:30 p.m. at Hera Hub, located at 5028 Wisconsin Avenue, NW in Washington, DC.

The program will focus on how investors can protect their retirement savings from conflicts of interest in light of the new fiduciary rule. Last week, Labor Secretary Alexander Acosta announced that he will allow the landmark Obama-era regulation designed to protect individuals from unscrupulous financial advisors, to go into effect on June 9th.

Every year, American retirement investors lose an estimated $17 billion to hidden fees and conflicted investment advice.

“Retirement savings are more than just a bank account—they represent the product of our work and the sacrifices we make throughout our lives in order to support ourselves and our families,” said Rebalance Managing Director Scott Puritz. “This program will help investors learn how to protect themselves from financial professionals who give self-serving advice and will share best practices for prudently growing your retirement savings.”

Moderated by Puritz, the educationally-focused panel will include Phyllis Borzi, former assistant secretary for employee benefits security of the U.S. Department of Labor and chief architect of the fiduciary rule; Congressman Jamie Raskin (Maryland’s 8th District); and Elizabeth Kelly, chief of staff at United Income and former special assistant to the president at the White House National Economic Council.

The event is free, but an RSVP is requested. For more information and to RSVP please visit rebalance-ira.com/wizard-of-lies

Rebalance is one of America’s leading investment firms that is at the forefront of providing consumers with a fundamentally different and better set of retirement investment options: lower costs, “endowment-quality” globally-diversified retirement investment portfolios, and systematic rebalancing. This investment approach is combined with a team of sophisticated and highly credentialed finance professionals who provide advice that is unbiased and focuses on the client’s long-term retirement investment goals. Rebalance is headquartered in Palo Alto, CA and Bethesda, MD, and currently manages more than $466 million of client assets. More information is available at www.rebalance-ira.com.

CONTACT: Robyn Miller-Tarnoff, 703-405-8355, rmiller-tarnoff@rebalance-ira.com

In a new op-ed for the Wall Street Journal, Labor Secretary Alexander Acosta announced that he will allow key Obama-era regulations designed to protect individuals from unscrupulous financial advisors to go into effect. That’s surprising because the Trump administration had previously signaled that it wanted to roll back the rule.

Because the regulations were finalized in the final year of Obama’s second term, they haven’t actually gone into effect yet. Key provisions are scheduled to take effect on June 9, and critics hoped that the Trump administration would push back that effective date as it works on a plan to repeal the rules outright. But Acosta now says he has found “no principled legal basis to change the June 9 date.” It takes a year or more for an administrative agency to change this kind of rule, and the Trump administration hasn’t had time to do it.

The Obama regulations require financial advisers to follow the fiduciary rule, a legal standard that means advisers have to always offer advice that’s in the best interests of their clients. Right now it’s completely legal for an adviser to steer clients toward financial products that pay big commissions to the adviser — even if that means the client will get a lower rate of return on his or her investment.

The new rules that take effect next month require advisers to disclose this kind of conflict of interest, and they open them up to lawsuits if they took a commission after giving bad advice. To avoid lawsuits, many firms may shift to a model where they charge customers directly rather than taking commissions from mutual fund companies.

“When consumers are not fully informed about the potentials for conflict of interest or hidden fees, the amount they pay for retirement investment goes way up,” argues Scott Puritz, an investment adviser at the firm Rebalance who has testified in favor of the Obama approach.

Of course, many of the companies earning those hidden fees hated the proposal when the Obama administration started working on it a few years ago. A common argument has been that it would result in many middle-class consumers being unable to get financial advice at all. Earlier this year, the Trump administration picked up this banner, suggesting that getting possibly conflicted advice is better than getting no advice at all.

But Puritz says the political landscape has been shifting over the past year, with major industry groups opposing the rule less vehemently than they did in the past. One big reason for this is that big financial services companies like Merrill Lynch, Morgan Stanley, and Wells Fargo have already spent millions of dollars revamping their investment products in anticipation of the new rules taking effect. While most of these companies lobbied against the rule initially, they’ve become more ambivalent about it now that they’ve done most of the hard work required to comply with it.

All this means that the Obama rule could wind up having a big impact on the industry even if the Trump administration ultimately repeals it in a year or two. And in his Wall Street Journal piece, Acosta is surprisingly equivocal on whether the rule will be repealed, writing only that it “may not align” with Trump’s goals.

“It is important to ensure that savers and retirees receive prudent investment advice, but doing so in a way that limits choice and benefits lawyers is not what this administration envisions,” he writes.

All of this suggests that Acosta may be envisioning incremental changes to the Obama administration rules rather than full repeal.