Who Will Guard Your Nest Egg

By JASON ZWEIG

A power struggle in Washington will shape how investors get the advice they need.
On one side are stockbrokers and other securities salespeople who work for Wall Street firms, banks and insurance companies. On the other are financial planners or investment advisers who often work for themselves or smaller firms.
Heath Hinegardner
Brokers are largely regulated by the Financial Industry Regulatory Authority, which is funded by the brokerage business itself and inspects firms every one or two years. Under Finra's rules, brokers must recommend only investments that are "suitable" for clients.
Advisers are regulated by the states or the Securities and Exchange Commission, which examines firms every six to 10 years on average. Advisers act out of "fiduciary duty," or the obligation to put their clients' interests first.
Most investors don't understand this key distinction. A report by Rand Corp. last year found that 63% of investors think brokers are legally required to act in the best interest of the client; 70% believe that brokers must disclose any conflicts of interest. Advisers always have those duties, but brokers often don't. The confusion is understandable, because a lot of stock brokers these days call themselves financial planners.
Brokers can sell you any investment they have "reasonable grounds for believing" is suitable for you. Only since 1990 have they been required to base that suitability judgment on your risk tolerance, investing objectives, tax status and financial position.
A key factor still is missing from Finra's suitability requirements: cost. Let's say you tell your broker that you want to simplify your stock portfolio into an index fund. He then tells you that his firm manages an S&P-500 Index fund that is "suitable' for you. He is under no obligation to tell you that the annual expenses that his firm charges on the fund are 10 times higher than an essentially identical fund from Vanguard. An adviser acting under fiduciary duty would have to disclose the conflict of interest and tell you that cheaper alternatives are available.
If brokers had to take cost and conflicts of interest into account in order to honor a fiduciary duty to their clients, their firms might hesitate before producing the kind of garbage that has blighted the portfolios of investors over the years.
Richard G. Ketchum, chairman of Finra, has begun openly using the F-word: fiduciary. "It's time to get to one standard, a fiduciary standard that works for both broker-dealers and advisers," he told me. "Both should have a fundamental first responsibility to their customers."
When I asked whether Finra should be that single regulator, Mr. Ketchum replied: "Do we have the infrastructure and would we do a good job? We think yes."
Others disagree. "It would be lethal if Finra becomes the only regulator," retorts Tamar Frankel, a professor of securities law at Boston University. "Finra has an inherent conflict of interest, because it's the same people regulating themselves."
In testimony to the Senate in the past week, SEC Chairwoman Mary Schapiro said the agency is considering "whether to recommend legislation to break down the statutory barriers" that impose different regulations on brokers and advisers.
Ms. Schapiro stepped down earlier this year as head of Finra to lead the SEC. In 2005, when she was vice chairwoman of Finra's predecessor, Ms. Schapiro wrote a scathing letter to the SEC calling "this much-vaunted fiduciary duty ... imprecise and indeterminate."
When I asked her now if she still held that view, Ms. Schapiro replied: "I wear a new hat now. I completely get that I work for America's investors, so my perspective has changed. I think investors would rationally say that they prefer fiduciary duty as the standard of care. And they are entitled to have their interests come first, always."
Ms. Schapiro said it is too early to say who should be the lead regulator if brokers and advisers are brought under the same set of rules.
Ms. Schapiro sounds sincere, and they say there is no zeal like that of the convert. Here is hoping she means what she now is saying, and that Congress -- and the investing public -- will hold her to it. It is high time for everyone who says "Trust me" to be held to the highest standard.
Write to Jason Zweig at intelligentinvestor@wsj.com

The Madoff Madness

As I read the headlines on the internet today, I see that Bernard Madoff, former NASDAQ Stock Market chairman and founder of Bernard L. Madoff Investment Securities LLC, will most likely plead guilty and be sentenced to life in prison.

What did he do? He allegedly collected money to invest from clients, made up false statements to show that they were doing well, and used new clients' money to pay interest and withdrawals to existing clients. This is known as a Ponzi scheme and is estimated to involve more than a $50 billion loss for his investors.

His clients didn't see this coming. Could they have? Let's look at three key safety tips that would have prevented this from happening.

Know what you own. Stick to stocks, bonds, ETFs, and mutual funds that are publicly traded and listed on major exchanges like the New York Stock Exchange. They are valued independently at least daily, if not minute-by-minute, while the exchange is open. You can check their reported returns against your own portfolio. If you can't look up the prices and performance in the newspaper or on the Internet - that's a red flag - ask a lot more questions.

Use an independent custodian. Madoff held his client assets, managed them, and priced them, too. See the conflicts of interest? Investment performance can look better if the prices reported to clients are manipulated, which is allegedly how Madoff showed winning year after winning year despite market turmoil. At our firm, our clients have an independent third party, either TD Ameritrade, Vanguard or American Funds (for the College America accounts) pricing each investment they own. We have no input on investment pricing, and that separation is a very good thing. Clients also get an independent statement directly from TD Ameritrade, Vanguard or American Funds.

Check on insurance. Our clients benefit from fraud insurance. The first part is Securities Investor Protection Corporation (SIPC) coverage for $500,000 per account. Then, at TD Ameritrade Institutional, there is an additional aggregate amount of $250 million of additional securities protection.

Fraud insurance does not protect against market declines; but it does protect against theft of securities and/or related fraudulent transactions.

One final thought - if an investment sounds too good to be true, it probably is. Reportedly Madoff claimed consistent annual returns of 10-12% with little volatility and no annual losses. Can you name any legitimate investor who can make that claim in recent years?

IRA Contribution Deadlines

IRA Contribution Deadline


Don’t miss the IRA contribution deadline! Make sure you make your 2008 IRA contribution before April 15! With share prices at historic lows, fully funding your IRA for 2008 (and 2009) could mean a tremendous boost toward saving for retirement. Times are tough, but remember: the goal is to buy low and sell high! Anyone with an IRA should use this opportunity to fully fund it.If you’ve been contributing $50 or $100 to an IRA each month, there’s room to contribute a lot more. Putting $600 or $1,200 in your IRA annually is nice, but you can direct up to $5,000 into your IRAs for tax year 2008, and up to $6,000 if you turn 50 in 2008. (These limits apply whether you have one IRA or 21 IRAs – they represent the total amount an individual may contribute to one or more IRAs for 2008. If your modified adjusted gross income, or MAGI, is really high, then you may have to contribute less.)

As for your 2009 contribution...You have until April 15, 2010 to make that one, but you can also make it during 2009 and cross it off your to-do list. Again, with stock prices so low, a lot of amazing values are available. This recession will not last forever; looking back years from now, chances are you will be very glad you contributed what you did when you did.



Please call us if we can help you with your contributions.