fiduciary duty

“Fiduciaries” and You
By Greg Leibman, Office Manager

You may have seen headlines in recent weeks about new financial regulations from the Department of Labor regarding retirement accounts.

Some parties affected by the rules are having a pretty sour reaction, but we are looking upon these changes a little more favorably—and believe they have been a long time coming.

A little background: our business is mostly managed on an advisory basis where we make investment decisions on clients’ behalf. That carries with it a fiduciary obligation to disclose and avoid possible conflicts of interest and to put clients’ interests ahead of our own. That’s what being a fiduciary is, upholding that standard.

We prefer this model for many reasons, not least because it aligns our goals with yours: growing your bucket is good for you and us.

So what’s new, now? The latest Department of Labor rule expands this fiduciary duty to almost everyone who services any retirement accounts, whether or not they meet the definition of an “investment advisor.” Now brokerage agents who sell on commission and have no ongoing obligations to clients now also must act in clients’ best interests any time they are dealing with retirement money.

You might be surprised to learn that some financial professionals were not required to act in their clients’ best interest before now. Obviously, fraud is fraud; agents were never legally allowed to lie about what they were selling.

But until now, in one-time brokerage relationships, there was nothing stopping agents from steering clients towards higher-commission products based solely on the peddler’s own benefit.

Owning stocks in individual companies is different than owning packaged investment products. Having equity ownership in companies we’re familiar with gives us transparency in our holdings and avoids adding a (usually hidden!) layer of “middleman” fees to investment product sponsors. That’s our preference, when it’s appropriate by client and situation.

The rules are in place to try and prevent agents from selling complex products with high commissions that are inappropriate for the client. Of course, regulations do have costs. Over the past 20 years, the amount of paperwork required to open accounts and do our jobs has more than doubled. Does practicing within the regulations take time and money? Yes. Will it always stop crooks? No.

But the spirit of the rules… Well, we do happen to believe that when you’re better off, we’re better off. So your best interest has to stay in the center.

Clients, if you have an advisory account with us, and are wondering what impact the new rules will have, the answer is: very little. This rule will bring more change in the world of commission-based agents, which is not what we are to our advisory clients.

When you do have any questions, we are always happy to talk.

Stock investing includes risks, including fluctuating prices and loss of principal. 

Want content like this in your inbox each week? Leave your email here.

Play the audio version of this post below:

Fiduciaries and You – 228Main.com Presents: The Best of Leibman Financial Services

This text can be found at https://www.228Main.com/.

I Was Wrong, and I Apologize

© Can Stock Photo / TanawatPontchour

Thirty-some years since I first became registered to work with securities, we have been doing business with some people for decades. Some of those, I knew before that—friends, people I admire. I disappointed at least one of those recently. I hate that it happened and I am sorry.

This essay is an attempt to minimize the chance of this happening again. Let me explain.

For many years, my practice included aspects that were like a debating society. I would propose the purchase or sale of an investment to a client, we would discuss it back and forth, and the client would make a decision to take action, or not. This is the old brokerage model of investing.

In recent years, there has been a lot less time for debate as more and more people have engaged me to manage investments as their fiduciary advisor. (This is in my capacity as an investment advisor representative of LPL Financial, a registered investment advisor.) The advisors of Leibman Financial Services collectively serve more than 200 accounts with over $50 million assets through LPL Financial, and the majority of our time needs to be devoted there.

The issue is that these investment advisory accounts hold us to a higher standard. We have all the obligations of the old brokerage arrangements, plus we are obligated to put your best interests first, monitor the investments and your situation over time, and manage everything to stay in line with your investment objective. We manage these accounts without prior debate before we take action to pursue your best interests.

The error I made was assuming a client was not suitable for the investment advisory arrangement. I did not think he would give me discretion to manage his account without debate. But I failed to do him the honor of describing it to him, and letting him make the decision. He was disappointed that he had not heard about the alternative sooner, when the subject came up. I had met our legal obligations, but not the higher standard to which we hold ourselves.

If you are a client with products at an insurance company or investment company outside of LPL, or pay commissions on brokerage transactions inside an LPL Financial account, our relationship is on the brokerage account model. There is nothing wrong with it if those products and that relationship addresses your needs. We are always happy to discuss your holdings and your situation—email us, or call.

If you wonder whether an advisory account might be right for you, please email us, or call. We want you to know the situation, and make an informed decision about the kind of relationship you would like to have going forward. We also need to assess whether we have a good fit with you philosophically—a requirement.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Regulation and Structure: Changes Ahead?

canstockphoto17973116

The investment world is changing rapidly in the face of evolving regulation and market forces. This article describes how coming changes may affect us—and you.

Clients know we have been affiliated with LPL Financial (LPL) for a very long time, since 1994, in fact. The relationship actually has two parts. LPL is both a registered investment advisor with the Securities and Exchange Commission and a broker/dealer regulated by FINRA.

As an Investment Advisor Representative of LPL’s SEC-registered investment advisor, I offer investment advisory accounts under LPL’s auspices and rules. These arrangements are fee-based, and hold me to a fiduciary standard where your interests must come first. As a registered representative of LPL, I offer securities on a brokerage basis. This is more of a sales-type situation, where my legal obligation is to present recommendations that are ‘suitable’ when made.

In practice, we have always strived to put your interests first, to focus on improving your financial situation, no matter the legal form of our relationship. This has worked well as a business strategy. It frees us from worrying about our needs or goals, since the better off you are, the better off we figure we will be. But the world is changing.

We see two main impacts of evolving regulation.

1. The investment advisory side of the business will become increasingly important, since the fiduciary relationship is more in keeping with the spirit of the regulations.

2. The brokerage side of the business will have fewer choices and more restrictions as investment firms seek to limit the conflicts of interest that come with wide variation in compensation and fees on brokerage products.

As we think about how to best serve your interests and meet your needs, we have reached some tentative conclusions:

A. The increasing emphasis on fiduciary investment advisory accounts fits well with the trends that make sense for us and for you. Our research and portfolio management processes are more effective and more efficient than ever before, and we continue to hone our processes.

B. In order to preserve the ability to continue to offer our traditional research-intensive, contrarian, value-oriented philosophy, we may have to form our own registered investment advisor. We would only take this step if our methods and philosophies become difficult to implement under LPL’s rules.

C. If we do form our own registered investment advisor, we would probably operate as ‘hybrid’ advisors using LPL Financial on the brokerage side, and to hold client assets, provide accounting and statements as they do now on the advisory side. Your assets would not be going anywhere different. The change would be minimal.

The irony is that if we were doing what everybody else is doing, life would be simple and we would not have to think about changing our structure to maintain our practices. In our opinion, we are different—and YOU are different. Generally, you and we are less sensitive to volatility, more focused on the long term, and more confident that things work out over time.

In a sense, the regulations codify conventional wisdom with which we disagree. The short version of this essay: we will do what we need to do to continue to bring you our philosophy and strategies and methods. Clients, if you have any questions or comments about this or any other issue, please email us or call.

Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risk, including possible loss of principal.

Freedom to Decide vs Freedom to Debate

© Can Stock Photo / JohnKwan

One definition of ‘discretion’ is freedom to decide what should be done. 95% of our investment advisory clients have granted us discretion to trade individual securities on their behalf, for their benefit, in line with their objectives.

In 2016 this privilege was key to making bond purchases, which had to be done on a bulk basis. In other words, one large purchase in the market was divided among scores of our client accounts. The issue is that we cannot talk to eighty or a hundred clients in a short enough time frame to place a bulk order.

The logistics can be daunting. When we learn that a bulk purchase has been negotiated, then we must make sales that same day in all affected accounts to raise the money to pay for the bonds.

Fortunately, we developed a rules-based framework that enabled us to handle all the work on a timely basis. In late 2016 we used the same concept to develop a protocol for trading stocks. This new method is astoundingly effective.

On one day, we placed more than five hundred individual stock trades. We had concluded that a sector we owned was going to have a lot of trouble maintaining revenues and profits and needed to be sold. At the same time, we were excited about the bargains we had found elsewhere in the market. (You can read more about our strategies here.)

We have a high duty to advisory clients, whose situations and accounts we must monitor over time. Even with our new-found efficiencies, we have less and less time for commission-based brokerage business. Because we lack freedom to decide, we only have freedom to debate.

By that we mean to place calls, discuss potential investments, argue or not, and perhaps obtain permission to make a trade in exchange for a commission. The ‘freedom to debate’ part of our business is under $10 million and shrinking. The ‘freedom to decide’ piece is approaching $50 million and growing.

We are committed to our three key activities: talking to you, researching investments, and managing portfolios. We can do the most good for the most people if we have freedom to decide. This is why we ask you for that privilege and obligation. If you have any questions about this, or any other aspect of your situation, please call or write.

In a fee-based account clients pay a quarterly fee, based on the level of assets in the account. In deciding to pay a fee rather than commissions, clients should understand that the fee may be higher than a commission alternative during periods of lower trading. Advisory fees are in addition to the internal expenses charged by mutual funds and other investment company securities. Clients should periodically re-evaluate whether the use of an asset-based fee continues to be appropriate in servicing their needs.

Investing involves risks including the possible loss of capital. No strategy assures success or protects against loss.