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MAKING CENTS OUT OF THE NEWS
Blog #26
(July 15th, 2010)
Permission for a Fiduciary Standard Regulation is Better Than None;
Odds for Growth Better Than for Double Dip
By Tom McAllister, CFP®
The incredibly complicated financial regulatory bill recently produced by Congress offers a victory – of sorts – for investors. True, the bill fails to address the key cause of the financial meltdown of 2008, namely the granting and sponsoring of sub-prime mortgages. True, the bill does nothing about policing the “too-big-to-fail” banks and other financial institutions that contributed to the debacle. Still, when it comes to the “fiduciary duty” debate going on in Washington, D. C. concerning financial advisers and the standards to which they are to be held, Congress at least “kicked the can” down the road for six months.
As I have stated several times in earlier blog posts, the right thing would be for Congress to flatly declare that anyone offering investment advice for a fee must adhere to a fiduciary standard (under which the customer’s interest comes first). Instead, Congress directed the Securities and Exchange Commission to conduct a review of the controversy, after which they, the SEC, “may commence a rulemaking.” Since SEC Chairperson Mary Shapiro is on record as favoring the stronger fiduciary standard, this permission from Congress makes such a process very likely.
A July 9th news release stated: Securities and Exchange Commission Chairman Mary Schapiro indicated today that she is ready to impose a universal standard of care on anyone who provides investment advice to retail clients. In a speech to the Society of Corporate Secretaries' national conference in Chicago, Ms. Schapiro praised the sweeping financial regulatory bill making its way through Congress, which gives the SEC the power to harmonize the differing fiduciary rules that govern investment advisers and broker-dealers. “I have long advocated such a uniform fiduciary standard and I am pleased the legislation would provide us with the rulemaking authority necessary to implement it,” Ms. Schapiro said, according to prepared remarks released by the agency.
After a pitched battle with the larger broker/dealer and insurance lobbyists, proponents of a universal fiduciary standard carried the day. My own Financial Planning Association and Certified Financial Planner Board enthusiastically endorsed the fiduciary standard. These two groups, along with other supporters, will continue to lobby the SEC during the review process. Legally a fiduciary standard is much stronger than the current “suitability” standard, which has applied to the stock brokerage business for decades. Abuses have abounded, particularly when the major brokerage firms fully entered the investment management business in the 1990s. Brokerage firms have maintained that these activities are “solely incidental” to their main endeavors, namely executing securities transactions. As their management activities became more and more prominent (and profitable!), this position became more and more untenable. I trust the SEC will promptly take advantage of opportunity granted them by Congress to do the right thing.
I don’t “buy” the prospect of a U.S. double dip recession. Allow me to my thinking on the subject:
Markets have corrected sharply in recent weeks from the stimulus-induced highs of the spring. Growth is slowing as the impact of these stimuli wanes. At the same time, most indicators point to continued global growth. The biggest threat I see to recovery is the uncertainty in the markets themselves. In some measure, this uncertainty has been eased by four days of market recovery last week, which erased half the year’s market losses.
Pessimists on Wall Street have been focusing on the Weekly Lending Index, the only indicator suggesting a “double dip” in the market. While that Index has a strong track record, it is very sensitive to financial indicators and vulnerable to temporary “feedback”. Many of the pessimists’ greatest financial fears have been addressed, including Europe’s debt crisis, which appears to be stabilizing. Spain, about which much concern has been expressed, recently attracted strong demand for a six billion Euro bond offering.
Other signals point to continued growth. The U.S. Treasury yield curve is steep; other indicators remain in expansionary territory. World trade has recovered all the way to pre-crisis levels, and industrial production is now strong around the globe. As another strong positive indicator, credit markets have regained resilience.
Equity pricing already reflects the anticipation of lower growth rates, as well as the climate of uncertainty. On a price-to-book ratio of 1.6, global equities are attractive (considering the average has been 2.1 over the long term!). If we take out the “free fall” which followed the Lehman Bros. investment bank’s collapse in the fall of 2008, equities are the cheapest they have been in 25 years!
All these factors seem to justify our expectations, at McAllister Financial, of a substantial gain in U.S. stock markets for the year 2010.
We have revised our blog format to allow readers to interact with Tom, to comment or question him regarding the topic(s) of the blog. Please let us know what you think of these changes.
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QUESTION OF THE WEEK:
Do you believe all investment advisers be held to one unified standard? Would that hold true for an insurance agent who offers investment advice? What about CPA’s who offer investment-related advice?
Click the link below to comment on this blog, or answer the blog question.
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