Without Congress wrangling over some large piece of legislation, May of 2011 seems a good deal quieter than this time last year. Financial regulation was wending its way through the legislative process, and one of the issues being addressed was whether there should be a uniform fiduciary standard for all financial advisors. As the first article below details, that’s still an open question, though we hope the SEC will ultimately make the right decision and insist upon a uniform fiduciary standard.
The financial planning tip of the month was driven from recent personal experience dealing with hospitals, doctors and insurance companies. Thankfully, everyone is on the mend, but the process taught us a few ways to minimize costs that I thought would be useful to pass along.
The question of the month was driven by something that we’ve been facing for several years now – paltry yields on CDs. In this column, I discuss two primary factors in determining bond yields – maturity and credit quality – and when it makes sense to seek higher yields.
As always, if you have any questions or comments, don’t hesitate to contact us and if you have friends of family that would find the newsletter useful, just click here to forward a copy to them.
Micah Porter, CFA, CFP®
Will all who call themselves investment advisors be held to the same standard?
Although it’s difficult to believe, it has been a bit less than a year since Dodd Frank, or the Financial Regulatory Reform as its more commonly known was signed into law. As with any legislation as complex as Dodd Frank, there will undoubtedly prove to be plusses and minuses to the legislation. However, one aspect of the law that would seem to be an unalloyed positive is the idea that there must be a fiduciary standard for all those who provide financial advice.
A fiduciary standard requires that advisors put their clients’ best interests first at all times. Registered Investment Advisors like ourselves are already required to do so, and in fact, the fiduciary pledge is written into our agreements with our clients.
However, many who hold themselves out as financial advisors work for brokers and other institutions, and they are not held to a fiduciary standard. Instead, they are held to a lower standard of diligence. From a legal perspective when the interest of their employer and their client conflicts, they must act in the interest of their employer so long as the diligence standard is met.
Dodd Frank attempted to bring all who hold themselves out as financial advisors under the same fiduciary standard. After all, what’s the potential downside to ensuring that all who provide financial advice – just as all who dispense medical or legal advice – always act in the best interests of their clients? According to the industry – principally brokerages and insurance firms – the downside is that it will increase compliance costs and these costs would be passed on to consumers. To say that this argument is self-serving and questionable would be a bit of an understatement.
Unfortunately, those making the arguments are deep pocketed, and they have the attention of the House as well as the SEC, who is deciding what should ultimately be done. NAPFA and other organizations are lobbying the SEC for a uniform standard, and hopefully that standard will carry the day.
In the meantime, for those readers that aren’t clients, before you work with a financial planner, ask if they adhere to a fiduciary standard that they’re willing to put in writing. If he or she won’t do that, ask yourself one question – do you really want to place your financial future in the hands of someone who won’t commit to put your interests first?
Financial planning tip – Minimizing medical expenses and insurance
Over the last few months, several people I know have either been hospitalized or undergone medical treatment. Fortunately, all are now doing better, but dealing with the insurance companies during the process was eye opening, and I learned a few things that I thought would be useful to share.
- Understand the procedure for submitting a claim – when a relative was recently admitted to the hospital, I located her insurance policy and read through the terms and conditions. It was an emergency admission, and she hadn’t brought her card with her. I provided the information as soon as I found it, which was a good thing, as the policy stated that failure to initiate a claim within a certain period could result in denial of that claim. Sure, you might be able to convince them to accept the claim if the process wasn’t followed, but that’s not a battle I’d particularly want to fight.
- If possible, check the cost of new prescriptions in advance – if a doctor has written a prescription for you, try to determine what the cost will be before picking up the medication. An optometrist recently prescribed an eye ointment for me, and the cost was substantial for a very, very small tube. When I got home, I checked online and found generic eyedrops were available at a fraction of the cost. Had I known that beforehand, I would have checked with the doctor to see if those would be an acceptable substitute.
- Run it through insurance, even if your deductible is not met – it may seem futile to run something through insurance if you know you’re still going to have to pay, but there are two very good reasons to do so. First, if you run a covered expense through insurance, it will count towards your deductible. Second, insurers have generally negotiated deep discounts with providers, and in order to receive those discounts – even if your deductible means you still pay – you have to run the claim through insurance. If you do, chances are you’ll significantly decrease what you’d otherwise have to spend.
Health insurance is an extremely complex topic, but the steps above offer a straightforward way to save on out-of-pocket expense. While we’re not experts in health insurance, we have a fair amount of knowledge on certain aspects of the topic in general and Medicare in particular. If you have questions or concerns about your healthcare coverage, feel fee to contact us and if we can’t help we’ll put you in touch with someone who can.
Client question of the month – Getting a better return on bonds
CD rates are awfully low. Can I get a better return on another type of bond?
It is possible to boost returns by investing in bonds other than non-callable CDs, but bear in mind the primary factors in a bond’s return are its credit rating and maturity. Bonds with lower credit ratings – i.e. greater risks – and longer maturities are typically going to offer a higher return.
The difference in return, or spread, varies over time but you’re typically going to take on more risk or give up liquidity to achieve a higher return. One way to estimate the amount of excess return you’d get for investing over longer periods is to take a look at the yield curve. This curve measures the return of Treasury Bills and Bonds of increasing maturities, and the most recent yield curve as of Friday on Treasuries was as follows:
What the above chart shows is that an investor investing in a two year Treasury would receive something around .6% return, while an investor purchasing a 30 year Treasury would receive a return of a bit over 4%. Treasuries are considered riskless, but bear in mind that the longer the maturity, the greater the impact of interest rate changes. Thus, if rates increased unexpectedly, the 30 year Treasury would drop much more in price than would the 2 year Treasury.
Similar comparisons can be made for bonds that are similar save for their credit rating. For example, you might compare two municipal bonds with similar maturity and structure, with the sole substantive difference the credit rating. If the one rated AAA, or prime, returns 2%, while the one rated A returns 3%, an investor could attribute the difference to credit risk.
While an investor may well be willing to accept these risks, we typically avoid taking on much risk at all or giving up too much liquidity for money you’re likely to need in the next few years. If, on the other hand, the money isn’t needed for the near term and should be allocated to fixed income, we’d likely invest in one of the bond funds we recommend as they have seasoned managers who have successfully managed maturities, credit risk and a number of other factors to produce solid returns over time.