SUNDAY, NOVEMBER 28, 2010 PERSONAL FINANCE


In whose best interest? Brokers, advisers and you.


Brokers need only demonstrate BY ELIZABETH ODY B


rokers have never enjoyed the purest of reputations in our popular imagination. From the


corruptible Bud Fox of “Wall Street” to the manipulative bond salesmen of “Liar’s Poker,” the people whose job it is to push investments out the door have often been depicted as morally elastic. After all, brokers are ultimately salespeople who are generally compensated by commission and whose primary loyalty is to their employers. As a result, regulators have never required brokers to act as fiduciaries—that is, to act in the undiluted best interest of their customers. Over time, brokers’ roles have


expanded to overlap those of a different group: registered investment advisers (RIAs), who are paid to provide investment advice and who, according to federal law, do have a fiduciary responsibility to act in their clients’ undivided best interests. Indeed, a growing number of brokers earn their keep in the same way that many advisers do—by charging clients a percentage of the assets they manage. And many advisers still accept sales commissions. A 2008 report published by the


Rand Institute for Civil Justice said that most investors find brokers “indistinguishable” from RIAs. And a 2010 survey sponsored by several industry groups found that two-thirds of investors surveyed mistakenly believe that brokers are required to put their clients’ interests first. The Securities and Exchange Commission is studying the issue and will announce its conclusions in January. There’s a good chance it will impose a fiduciary standard on brokers, requiring them to place their clients’ interests ahead of their own.


Raising the bar At first glance, the idea of a


fiduciary duty sounds warm, fuzzy and unassailable. At its core are both the concept of trust—a client entrusts an adviser with his or her finances, just as you entrust your health to your doctor—and the notion that a fiduciary should make his interests secondary to those of his clients.


that the investments they recommend are “suitable” for customers. Suggesting penny stocks for an 80- year-old widow would almost certainly flunk the suitability test. To meet the suitability standard,


brokers must make reasonable inquiries into the financial situation, tax status and investment objectives of their customers. But brokers are not required to subordinate their own interests—specifically, how much they’re compensated. Imposing the fiduciary standard


sounds like a no-brainer, right? “I don’t believe you can go wrong if you’re putting the client’s interests first,” saysKevinKeller, president of the Certified Financial Planner Board of Standards. The trouble is, it’s difficult to pinpoint ways in which a fiduciary standard would improve the advice brokers provide. Some advocates say that if brokers were required to meet the fiduciary standard, they would have to recommend the best investments for clients, rather than merely suitable investments, because they would be required to take their clients’ best interests to heart. That is, at least in theory, the


standard to which advisers are held. But it doesn’t seem to be an enforceable standard. “I have never seen any case lawdefining the difference between ‘suitable’ and ‘best,’ ” saysNelson Ebaugh, a Houston-based securities lawyer.He says that if an investor sued his or her adviser, arguing that the adviser recommended a product that was suitable but not the best, “it would be considered frivolous.” Ironically, brokers are already


subject to an elaborate oversight system, which aims to ensure that they follow the spirit and the letter of the suitability standard, in addition to the requirement that they “deal fairly” with clients. Broker-dealer firms enforce their own internal oversight systems. Typically, a firm is visited by the SEC or Finra, the brokerage industry’s self-regulatory agency, once every two years. Individual states provide another layer of scrutiny. By comparison, registered investment advisers are regulated by either the SEC or their home state, but not both.


Personal-finance resources roundup


Best way to check out an insurer Knowing its claims record is critical. Before


you pick a company, find out whether it has a reputation for hassling people about claims. Check out the insurer’s complaint record at the National Association of Insurance Commissioners’ Consumer Information Source.


Best way to protect against fraud Here’s a deal: A free, hour-long DVD that will


teach you how con men bilk even sophisticated investors and how to protect yourself from the bad guys. You’ll learn from both the people ripped off and the perpetrators of the scams in “Tricks of the Trade: Outsmarting Investment Fraud,” produced by the Finra Investor Education Foundation in partnership with AARP. Order it online or call 866-973-4672.


Best consumer blog


Consumerist.com is the always useful, frequently fun and deliciously snarky place to get the latest on a wide array of consumer issues. Recent posts: A ripoff at Target, foreclosure nightmares and a toddler-costume tag that’s dangerous.


TIM GRAJEK FOR THE WASHINGTON POST Even so, brokerage customers are


not permitted to sue brokers; instead, they must go through arbitration. In 2009, customers filed 7,137 arbitration cases against their brokers. As of August, 3,778 cases had been filed in 2010. Comparable statistics for advisers aren’t available.


Duties of a fiduciary A fiduciary standard applied to


brokers would not abolish a broker’s ability to charge a sales commission. If the SEC does set a fiduciary standard for brokers, Congress has directed that accepting a commission should not, in itself, count as a violation of a broker’s fiduciary duty. And it wouldn’t be a violation if his or her firm offers only in-house products with high fees, as long as the broker tells clients that they are being offered a limited range of investments. That gets us more or less back to


where we started. Some brokers could still be pressured to recommend high- fee products that don’t really serve their clients’ best interests.Many investors might not be told that they may be better off buying a low-cost index fund than an expensive product managed by the broker’s own firm. Nor, in all likelihood, would many customers be told that they shouldn’t


Reasons to be uneasy about retirement security EZRA KLEIN


klein from G1


pened. Previously, employers had defined-benefit systems inwhich they had toworry about saving enough to pay for the retirement of theirworkers; the 401(k)— and similar defined-contribution systems—let thempush that re- sponsibility onto theworkers. By 1995, thereweremore


401(k)s plans than traditional pension plans.Nowthere are about twice asmany.And they’re notworking out thatwell,Robert Hiltonsmith, a policy analyst at the think tankDemos, shows in his paper “The Failure of the 401(k).” The failure, experts say, basi-


cally, is this:The typicalworker approaching retirement needs about $250,000 in a 401(k).Most don’t come close.The average is closer to $98,000—only a bit more than a third of the recom- mended amount. That’s necessary context for


considering the arguments over Social Security and state pen- sions. In both cases,most of the solutions don’t solve the problem somuch as switch to a different one.The costs come off the gov- ernment’s balance sheet but land on the backs of individual retir- ees.And it’s not clear howthose retirees are supposed to pay for it. On average, baby boomers can ex- pect to subsist on an income of about 77 percent ofwhat they earned in their peakworking years. ForGen-Xers, it’s 65 per- cent.And if they have the bad for- tune to retire during amarket slump,well, it’s not clearwhat they’ll do. The deficit-reduction plans un- der considerationwill accelerate


this trend.Under current law, an average -incomeworker (that’s someonemaking about $43,000 a year) is projected to get the infla- tion-adjusted equivalent of about $15,000 a year in Social Security benefits in 2050.Under the Simp- son-Bowles plan, thatwould drop to about $12,700.That’s not noth- ing, but it’s notmuch. In fact, nei- ther amount is verymuch. Social Security is not a generous pro- gram. It’s actually among the least-generous of any developed nation, and inmaking it less so, we raise the question ofwhat, ex- actly, seniorswith insufficient re- tirement savings are supposed to do.


Social Security, after all, is not


aminor part ofmost retirement incomes. Formore than 20 per- cent of couples and 40 percent of individuals, it providesmore than 90 percent of their retire- ment income.We can take some of those costs off the govern- ment’s books, but thenwe need at least a theory for howseniors wouldmake up the shortfall. The best-case outcome is that


they’llwork longer, contributing more to the economy.But that’s not always possible.Age discrimi- nation is rampant.Employers knowthat youngerworkers are oftenmore productive, and al- ways cheaper, so they push out olderworkers or refuse to hire them.And once unemployed, it’s particularly hard for olderwork- ers to find newjobs. It’s some- thing that’s become all too clear in the current recession,which has seen a startling rise in long- termunemployment among old- erworkers. There are policy solutions that mightwork, but they require


looking at retirement security as awhole and not just as a subcate- gory of deficit reduction. Increas- ing benefits for low-income se- niors even as you reduce benefits for high-income seniors probably makes sense. So, too, does auto- matic enrollment in 401(k)s, which has been shown to vastly increase participation.Hilton- smith supports an expanded ver- sion of the 401(k) called a “guar- anteed retirement account,” in which contributions fromem- ployees, employers and the gov- ernmentwould bemandatory. And the probleminvolves


more than just pensions. Ifwe want seniors towork longer, we’re going to have to think hard- er aboutwhy somany don’t.Age discrimination is often part of it, and so, too, is physical exhaustion among thosewithmanual jobs. Many experts suggest that the typical retirement—where you go fromworking one day to not working the next—could be re- placed by partial retirement, whereworkersmove tomore flex- ible, part-time arrangements as they get older. Shifting risk is not the same as


eliminating it, and sometimes can even add to it.With the rise of 401(k)s, fewer employers need to worry about pension costs, but moreworkers need toworry about retirement security.As Congress and state governments turn to address the solvency of Social Security and state pension systems, they need to domore than just continuemoving the costs to retiringworkers.We need to solve our budget problems, of course, but in away that doesn’t worsen our retirement problems. kleine@washpost.com


be investing at all because of their financial circumstances. On balance, however, extending the


fiduciary standard would be a plus for investors, if only because brokers would be required to clearly explain conflicts—for example, when they receive a commission from the sale of a product. Even this isn’t foolproof. Congress


has stipulated that any fiduciary standard adopted for brokers will not require them to act in that role round the clock, but only when they are providing financial advice. In other words, a fiduciary duty will be a hat that brokers can don or doff, depending on which service they’re performing. Whatever the SEC decides, it


doesn’t relieve you of the responsibility to do your homework when choosing an adviser. If you are looking for someone to execute your transactions, using a brokermay be just the ticket. But if you’re seeking financial advice, you should think carefully about your adviser’s incentives. You wouldn’t go to a doctor who earns a commission on every prescription he writes.Why treat your finances with any less respect?


—Kiplinger’s Personal Finance


Best financial books The skinny on the meltdown, landing a job


and outsmarting your brain: “The Big Short”—leave it toMichael Lewis to


nailWall Street’s greed-chargedmyopia. In a compelling and sometimes hilarious read, Lewis explains the financial crisis through accounts of the colorful fewwho sawthe subprime crisis coming and bet against it to get filthy rich. “MarketPsych”—The market is flooded with


books on investor psychology, but most only outline the various ways we screwup with our investments. This book identifies the root causes and gives a variety of practical, imaginative ways to heal thyself. “GuerrillaMarketing for JobHunters 2.0”—


Many of the latest techniques recommended by headhunters are punctuated with war stories and step-by-step advice.


Best blog for frugalistas Wisebread.com isn’t about being cheap, it’s


about being smart with your money. Or as its tagline says, “Living Large on a Small Budget.” It features everything from restaurant


strategies to 30 uses for the humble cardboard box.


—Kiplinger’s Personal Finance 6 NEW ISSUE—Book-Entry Only


KLMNO


EZ EE


G3


More from Kiplinger Go to www.kiplinger.com for more analysis.


Under no circumstances shall this announcement constitute an offer to sell or a solicitation of an offer to buy, nor shall there be any sale of the Bonds in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of such jurisdiction. The Bonds will be sold by means of an Official Statement.


EXPECTED RATINGS: Fitch: AA+ Moody’s: Aa1 S&P: AAA


$342,400,000*


District of Columbia (Washington, D.C.)


Income Tax Secured Revenue Bonds Series 2010F


(Federally Taxable—Build America Bonds—Direct Pay to Issuer)


• Maturities 2025, * 2030, * and 2035*


• Expected Pricing: December 2, 2010* • Bonds will be available in $5,000 denominations


In the opinion of Bond Counsel, under existing law, the interest on the Series 2010F Bonds is not excludible from gross income for Federal income tax purposes. As described in the Preliminary Official Statement under “Tax Matters,” other Federal income tax consequences may arise from ownership of the Series 2010F Bonds. In the further opinion of Bond Counsel, under the existing law of the District, the Series 2010F Bonds and interest on the Series 2010F Bonds are exempt from District taxation, except for estate, inheritance and gift taxes. See “Tax Matters” in the Preliminary Official Statement.


Further information, including copies of the Preliminary Official Statement for these Bonds, may be obtained from the firms listed below:


(800) 522-3546 Citi 202-334-6200 Buy it. Sell it.


GHI washingtonpost.com CLASSIFIEDS


BofA Merrill Lynch (800) 825-1521


Loop Capital Markets (800) 894-0506


Rice Financial Products (888) 740-7423


C304 MC 3x2.25 Siebert Brandford Shank


&Co., L.L.C. (800) 334-6800


Fidelity Capital Markets (800) 544-5372


RBC Capital Markets (800) 368-3880


Wells Fargo Bank, N.A. (866) 287-3221


**Preliminary, subject to change. **Before purchasing any Bonds, contact your tax advisor to determine any applicable federal, state and local tax consequences.


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66  |  Page 67  |  Page 68  |  Page 69  |  Page 70  |  Page 71  |  Page 72  |  Page 73  |  Page 74  |  Page 75  |  Page 76  |  Page 77  |  Page 78  |  Page 79  |  Page 80  |  Page 81  |  Page 82  |  Page 83  |  Page 84  |  Page 85  |  Page 86  |  Page 87  |  Page 88  |  Page 89  |  Page 90  |  Page 91  |  Page 92  |  Page 93  |  Page 94  |  Page 95  |  Page 96  |  Page 97  |  Page 98  |  Page 99  |  Page 100  |  Page 101  |  Page 102  |  Page 103  |  Page 104  |  Page 105  |  Page 106  |  Page 107  |  Page 108  |  Page 109  |  Page 110  |  Page 111  |  Page 112  |  Page 113  |  Page 114  |  Page 115  |  Page 116  |  Page 117  |  Page 118  |  Page 119  |  Page 120  |  Page 121  |  Page 122  |  Page 123  |  Page 124  |  Page 125  |  Page 126  |  Page 127  |  Page 128  |  Page 129  |  Page 130  |  Page 131  |  Page 132  |  Page 133  |  Page 134  |  Page 135  |  Page 136  |  Page 137  |  Page 138  |  Page 139  |  Page 140  |  Page 141  |  Page 142  |  Page 143  |  Page 144  |  Page 145  |  Page 146  |  Page 147  |  Page 148  |  Page 149  |  Page 150  |  Page 151  |  Page 152  |  Page 153  |  Page 154  |  Page 155  |  Page 156  |  Page 157  |  Page 158