SEC Fiduciary Rule Unlikely in Dodd-Frank’s Third Year of Life

Advisors told ThinkAdvisor that their hopes are fading that the Securities and Exchange Commission will release a fiduciary rule proposal during the law’s third year of life, which was ushered in on Sunday.

“I’m becoming progressively more pessimistic, although there has been no action as of yet” by the SEC on a fiduciary rule, says Harold Evensky (right), president of Evensky & Katz Wealth Management.

However, Marcus Stanley, policy director for Americans for Financial Reform, told ThinkAdvisor on the sidelines of the Cato Institute’s event in Washington Monday titled Dodd Frank’s Third Anniversary: Has It All Been Worth It?, that large institutional asset managers like Blackrock and PIMCO should be targets by the Financial Stability Oversight Council—which was created by Dodd-Frank—to be considered as systemically important financial institutions (SIFIs).

Whether an institutional asset manager or a hedge fund will be the next SIFI designee “is a really important question,” Stanley told ThinkAdvisor, as “so far what the FSOC has done is designate those [firms that are] completely obvious as they were central to the system.”

FSOC, Stanley said, is “just only now saying GE Capital and AIG” are significant. Firms like “BlackRock and PIMCO,” he said, are two of the big institutional asset managers where “there needs to be a more serious examination” taking place as to whether they are systemically important.

MetLife was also recently put under review by FSOC to be considered to be a nonbank SIFI. But James Donnellan, VP of government relations at MetLife, noted at the Cato event that while "AIG is welcoming being a SIFI, MetLife is not." Said Donnellan: "We don’t believe the insurance industry caused the [financial] crisis."

Dodd-Frank gave the SEC the authority to create a fiduciary standard for brokers. However, the law didn’t mandate that the SEC write such a rule. Where fiduciary duty stands among the SEC’s priorities remains questionable, as the agency still has nearly 100 mandated rules to pass.

Given that the SEC has to digest new data after the July 5 close of its comment period on the costs and benefits of a fiduciary rule, as well as two new commissioners likely to take their seats at the SEC soon, industry officials predict any rule proposal from the SEC won’t come until year-end, at the earliest, with more likely bets placed on a release next year.

“This should take time,” says Knut Rostad, president of the Institute for the Fiduciary Standard, who says that a fiduciary rule proposal won’t be released until year-end at the earliest. “With new commissioners on board” at the SEC shortly “and new research data to absorb, in some key respects we are starting anew” on an SEC fiduciary rule. /* .premium-promo { border: 1px solid #ddd; padding: 10px; margin: 0 10px 10px 0; width: 200px; float: left; } .premium-promo li, .premium-promo ul { list-style-type: none; margin: 0; padding: 0; } .premium-promo li { margin: 0 0 10px; padding: 0 0 10px; border-bottom: 1px dotted #ddd; } .premium-promo h3 { text-transform: uppercase; font-size: 11px; } .premium-promo h4 { font-size: 16px; } .premium-promo a { text-decoration: none !important; } .premium-promo .btn { background: #0069a1; border-radius: 4px; display: inline-block; padding: 5px 10px; clear: both; color: #fff; font-weight: bold; } .premium-promo .btn:hover { background: #034c92; } */ The Senate Banking Committee confirmed on July 18 the nominations of Kara Stein, an aide to Sen. Jack Reed, D-R.I., to replace SEC Commissioner Elisse Walter, and Michael Piwowar, an economist on the Senate Banking Committee’s staff, to replace Troy Paredes, a Republican. The confirmations still need approval by the full Senate.

Don Trone, CEO of 3Ethos, says that on a scale of one to 10, he believes that three year's after Dodd-Frank the industry consensus on a full fiduciary standard being passed is between two and three. "That’s right, we’re backsliding," Trone says.

If asked to predict the fiduciary duty rule's future, "I’d say that the broker-dealers are going to win – and, win big," Trone says. The net result, he says, "is going to be harmonized rules which will carry the fiduciary label, but will not resemble the standard which we have spent the last 25 years building. Once there are harmonized rules, then the next step will be to subject all advisors" to oversight by the Financial Industry Regulatory Authority. "Fiduciary will no longer be a point of differentiation, and it will no longer define a higher professional standard of care," Trone says. "The Series 7 exam will have an extra 25 questions on the subject of fiduciary responsibility, and voila – everyone’s subject to a uniform fiduciary standard."

Ron Rhoades, assistant professor and chairman of the financial planning program at Alfred State College, predicts a fiduciary proposal will come in 2014. Neil Simon, vice president for government relations at the Investment Adviser Association, agrees, stating that he’s “expecting” a rule proposal next year.

However, Rhoades, too, remains skeptical that the SEC will promulgate “a bona fide fiduciary standard.” Instead, he says, based on the agency’s March 1 request for data, the SEC seems to be headed toward issuing “a watered-down fiduciary standard just requiring disclosures of certain conflicts of interest.”

According to a Dodd-Frank three-year anniversary analysis released by the law firm Davis Polk, as of July 15, a total of 279 Dodd-Frank rulemaking requirement deadlines have passed, which is 70.1% of the 398 total rulemaking requirements, and 99.6% of the 280 rulemaking requirements with specified deadlines.

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Check out Debunking Time: Fiduciary Duty Would be Good for (a Broker's) Business by Bob Clark on ThinkAdvisor.

Police backtrack on Target suspect claims

A Texas police department backtracked on claims it made earlier that it had arrested a man believed to be linked to the massive Target data breach, issuing a statement that said "it is not believed he was responsible" for the information heist.

The Georgetown, Texas police department initially said in a court affidavit signed this week that Guo Xing Chen, 40, may have been involved in the December swiping of customer records from the retail giant.

"It is also believed Chen is involved in a large scale credit breach believed to be in excess of $70 million according to investigators from the Target Corp.,'' according to the affidavit, obtained by KVUE-TV, Austin, Texas, and USA TODAY.

But the department took a step back from the claim in a statement to the press issued Wednesday evening.

"While it was initially suspected that Guo Xing Chen's activities could have somehow been connected to the larger Target credit breach, at this time there is no indication where he obtained the fraudulent card information," the statement said. "It is not believed he was responsible for the initiation of the breach at Target.​"

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Over the holiday shopping season, in a massive cybercrime discovered by Target in mid-December, 40 million customers had their credit and debit card data stolen. In January, the retail giant said that information including e-mail addresses and phone numbers may have been swiped from an additional 70 million customers.

Target spokesperson Molly Snyder wouldn't comment specifically on the Chen case, but said, "We are absolutely continuing to work with law enforcement and we remain committed to see that any criminals are brought to justice."

At a Target store in Chicago.(Photo: Scott Olson, Getty Images)

A lawyer listed as representing Chen, Abby Alford, did not immediately respond to a request for comment.

The complaints charge Chen with credit card or debit card abuse, and fraudulent use or possession of identifying information, both felonies.

The felony criminal complaint and affidavit asserts that police arrested Chen after being called to a Target store in Georgetown, Texas, on a report that a man had used a stolen credit or debit card to purchase gift cards. It said officers learned Chen had an outstanding arrest warrant from Arkansas involving fraudulent use or possession of identifying information. Georgetown is a city of about 50,000 residents 30 miles north of Austin.

Aside from the statement asserting a link to the massive Target data breach, a pair of affidavits naming Chen describe police officers' physical pursuit of the suspect after responding Dec. 12, 2013, to the call from the Target store for fraudulent use of a credit or debit card.

It says that in responding to the call from the Target store, officers were told "the same subject had used several stolen credit/debit cards the previous day at a Target store in nearby Temple,'' Texas, another 40 miles away.

It quoted a Target employee as telling officers that the suspect purchased $700 in gift cards using credit or debit cards issued to another name, that of a woman.

JUST IN: Georgetown police arrested a man they believe may be connected to the Target data breach: http://t.co/A5FX4PMTDw

— KVUE News (@KVUE) May 7, 2014

Police said in the affidavit that they learned a Target store in nearby Round Rock, Texas, — between Georgetown and Austin — had been victimized in a similar manner the same day.

A store employee identified the suspect in a car in a parking lot outside the Georgetown Target store, and officers later located a man matching the description entering a Starbucks coffee! shop, po! lice said. He appeared to have discarded some clothing while in the coffee shop, suggesting an attempt to avoid recognition by officers.

Officers later recovered several credit or debit cards that had been left in the bathroom of a restaurant, Firehouse Subs, where an employee told officers the suspect and another man had also visited, the affidavit said.

Contributing: Hadley Malcolm in McLean, Va.; William M. Welch in Los Angeles; Kevin McCoy in New York; and KVUE-TV in Austin, Texas.

Detroit bankruptcy costs hit $36 million

Lawyers representing the city of Detroit outside of bankruptcy court.

NEW YORK (CNNMoney) The first six months of Detroit's bankruptcy case cost taxpayers $36 million in fees and expenses for lawyers and consultants, according to a court filing late Tuesday.

The report by the independent fee examiner accounts for costs incurred from the city's initial filing on July 18, 2013 through the end of last year. The city spent $13 million during the first three months of the proceedings, and Tuesday's filing shows bills from lawyers and other consultants jumped 61% in the last quarter of the year.

The city's fee examiner Robert Fishman said in his report that the costs, while substantial, were reasonable and in line with the complexity and quality of the services provided.

The largest payments went to Jones Day, the bankruptcy law firm representing the city in court. It has billed the city $16.6 million in fees through the end of last year, and another $734,000 in expenses. That combined bill accounts for just less than half of the city's total costs so far.

Kevyn Orr, the emergency manager appointed last year by Michigan Gov. Rick Snyder to oversee the city's finances, is a former partner at Jones Day. He has said the firm is charging the city at less than it normally would. Top partners at the firm billed the city at a rate of $825 an hour, according to the filing, while documents indicate that Jones Day partners have billed $1,000 an hour in other bankruptcy cases.

Jones Day's fees jumped 58% in the fourth quarter, because that's when the bankruptcy court held a hearing on whether the city would be allowed to use the bankruptcy process to shed billions in debt and restructure its finances.

The first two quarters of 2014 should also prove costly, since the city, it! s lawyers and consultants have been negotiating with various unions, pension funds and banks to reach cost-cutting settlements.

Restructuring firm Conway MacKenzie had the second largest bill, charging the city $5.3 million in fees and $17,000 in expenses through the end of last year. Its top partners billed at a rate of $425 an hour.

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The report does not cover all the expenses of the bankruptcy process. For example, the bill for work that accounting firm Ernst & Young has performed since the start of the bankruptcy has yet to be finalized.

And the report does not include the $275,000 annual salary that Orr is being paid, or the salaries of other members of the emergency manager's staff, because those are being paid by the state of Michigan, not the city.

Finally, there is no estimate on the cost of time spent by city employees on the bankruptcy case, or on what the city paid auction house Christie's to appraise the value of all the artwork in the Detroit Institute of Arts, the city-owned museum. The bill for fee examiner Robert Fishman bill is also not included in the report.

Voices: Climate change — it's here

Cathy Richard's home, up the road from Santa Claus Lane in North Pole, Alaska, hardly seems the place to tell the story of climate change. It's a middle-class rambler that could be found on so many streets in the United States. Yet that's where I went in August to show readers the impact of rising temperatures.

Cathy, a married bookkepper and mom of three, is like so many welcoming people I met last year as I traveled the country to report for USA TODAY's "Weathering the Change" series.

She isn't an activist or a scientist. She's a homeowner with problems: cracks in the garage's foundation, the sidewalk and the yard. Perhaps the strangest is the heaving of her backyard deck by as much as 7 inches a day. The reason? Increased thawing of the surface layer of her land, which sits on permafrost — ground that's frozen below — rumpled the concrete pillars holding up the deck.

Driving around Fairbanks, I saw how thawing permafrost has caused homes and trees to tilt and roads to buckle. It's not a new problem. Alaskans have been dealing with it for decades, but global warming is making it worse.

These and other problems are highlighted in a federal report compiled by hundreds of scientists and released Tuesday by the White House. The National Climate Assessment says climate change is not a distant threat but rather a reality already affecting American lives.

In Norfolk, Va., where the sea level is rising, I met Bob Parsons and Jennifer Priest, whose homes have repeatedly flooded. In Spicewood, Texas, drought has triggered severe watering restrictions. Resident C.J. Teare was using soapy water left from washing clothes to try to keep her decades-old oaks alive. And in the Chicago area, doctors and patients said allergies are getting worse as the pollen count rises — and that's also linked to a rise in heat-trapping greenhouse gas emissions

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C.J. Teare points to the buckets she uses to catch rainfall so she can water plants. Her community and adjacent Spicewood Beach, about an hour north of Austin, have been under emergency water restrictions that ban outdoor watering since Jan. 2012.(Photo: Wendy Koch, USA TODAY)

To be sure, there's skepticism. I heard from folks who say they don't believe in climate change, even though they see intensifying problems in their communities that science attributes (at least partly) to global warming.

Climate change has been the most difficult issue I've covered in 30 years as a journalist. It's become so politicized and controversial that people are often confused, and reporters who write about it are often criticized.

It's complex. While more than 97% of climate scientists agree on the broad contours of climate change — namely that its primary driver now is the burning of fossil fuels — there's still a lot they don't know about the details. They're improving their modeling, but explaining the nuances is a challenge.

It's also sad -- so much so that people can go into denial. I know I've been shaken. Four years ago, when prepping for an interview with author and activist Bill McKibben about his book, Eaarth: Making a Life on a Tough New Planet, I had to stop reading. His description of how the world was melting, drying, acidifying, flooding and burning in heretofore unseen ways was just too frightening.

But despite all the bad news, what's encouraging is the plethora of technological advances in clean energy. Says Harvard chemist Daniel Nocera, who told me about his own "artificial leaf" for producing hydrogen fuel: "I'm totally optimistic,"

Koch covers energy and technology for USA! TODAY.

Ric Edelman: Stay Cutting-Edge on Technology or Fail

“I tell my people all the time: We’re not in the financial services business, we’re in the technology business. I long have realized: stay on the cutting edge of technology, or fail.”

Ric Edelman of Edelman Financial Services gave this advice at a session Monday morning on the first full day of the Investment Management Consultants Association's national conference in Boston, sharing the stage with another successful advisor, Paul Tramontano of Constellation Wealth. The session, moderated by Matt Barthel of Barron’s, traced the growth of both firms but also yielded suggestions on what both men would have done differently and how advisors can succeed in the future.

For example, Edelman said he had built his now-nationwide practice largely by broadcasting radio and television programs (he says he regrets not having gone national earlier). With changes in the media, that route can’t be imitated by other advisors now, he said, so Edelman counseled the successful advisor to take one of two steps. “Partner with another advisor” to gain scale, or “become a ‘narrow-caster,’ focusing on a specific niche.

“Physicians have long been specialized,” Edelman said, relating a doctor acquaintance who “only works on thumbs.” Responding to a question from attendee and noted advisor Michael Kitces, Edelman said that advisors who want to succeed starting now should become the “plumbers’ advisor,” and not worry about not being the “carpenters’ advisor,” relating other advisors he knows who’ve targeted specific audiences like Marriott Corp. retirees or American Airlines pilots.

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“The most productive thing” for an advisor to do, Tramontano said, is to “give away revenue” from existing clients who are no longer a good fit for you. Partner with another advisor to give away that revenue, he suggested, or just “give them away.”

As for investments that helped the two men grow their businesses, Edelman pointed out that he became an advisor in his 20s, so to demonstrate his expertise to clients and prospects twice his age, he decided to focus on “long-form education.” By using “any media available” for that education, including live seminars and eventually his radio and TV shows, he grew his firm.

“I’m not a marketer; I’m an educator,” Edelman said. He learned that “if we give away our education, or make it very cheap, the world will take care of us.” That’s the main reason why Edelman Financial will add 30 advisors this year, he said.

On technology, Edelman says “we spend a lot of money” to attract and service clients, including his version of what are now called robo-advisors — Edelman Online — and a new website optimized for any device the client is using, especially mobile devices.

Tramantano said that much of his technology budget was spent internally to properly allocate his firm’s resources. In 2008, when his Silicon Valley-based firm opened a New York office, “our best technology investment was the cheapest.” To draw together employees on both coasts and build a common culture and client experience, Constellation “put a camera on every desktop,” so that in every bi-cosastal conversation, “when you call somebody, you see them.” In addition to those internal calls, Constellation also video records every meeting of the investment and compliance committees. “It’s built one company,” he said of the video investment.

Responding to another question from the audience about how to hire advisors, Edelman counseled “don’t hire another you,” and instead grow first by adding an office manager, IT person or public relations consultant. When you are ready to hire another advisor, first make sure that they share your ethics and be clear about “what you want from them.” Stay away from hiring ‘stars’ who want to do things their own way, since providing a consistent customer experience is paramount.

Edelman, who said he was launching a marketing services offering for advisors later this year, answered moderator Barthel’s question about succession planning by saying “we have a very formalized” plan, before turning to the issue of partnerships. “It’s good to start with a buy-sell agreement upfront” when you start a partnership, he said, since it “will make the inevitable divorce less acrimonious.”

Acknowledging that Edelman Financial has “lots of key-man risk,” since Edelman is the only rainmaker (the firm’s advisors “don’t do any marketing” and “can’t take any referrals,” focusing instead on client service) he said that his succession plan includes “having six full-time speakers” for seminars and webinars and “a team of writers for the newsletters” that Edelman Financial produces for clients, though Edelman vets the content and, he said, he continues to write his own books.

Giving the Best Financial Advice to Grandkids

The best thing you can do to ensure the financial security of your grandkids isn't to give them money or wealth, though that would be helpful to them. Sound advice based on the latest research and your experience is what the younger generations need more of, and they aren't likely to get that advice from their schools or accept it from their parents.

The population following the Baby Boomers is in bad financial shape, according to research by Pew Charitable Trusts. The first half of the Baby Boom generation looks to be the last group to retire with enough income and assets to maintain their lifestyles. The following generations so far have less savings and lost a higher percentage of their net worth in the crash following the financial crisis.

A key problem for those following the Boomers is that they are accumulating debt at a faster rate than their predecessors. Not long ago it was hard to believe that any generation could accumulate more debt than the early Boomers, but the younger generations are doing so, according to Pew. College loans are a key component of that debt, but not the only factor. The younger generations also have credit cards available to them at earlier ages and are users of them and other extended payment plans that weren't available to the earlier generations.

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More importantly, younger generations aren't saving nearly enough money for the future. They lag behind previous generations in accumulating savings in their early years. That's doubly bad, because the post-Baby Boom generations likely will need to save money at a greater rate than previous generations.

The Baby Boomers benefited from the post-World War II global boom but especially the boom in the U.S. Extended bull markets in both stocks and bonds boosted the net worth of the Boom! ers, the early Boomers in particular, despite anemic savings rates. The housing bull market that lasted decades also helped the balance sheets of the Boomers.

The younger generations can't count on similar bull markets to offset low savings rates and high debt levels. Social Security and Medicare will still be available but they probably won't provide as many benefits to the younger generations. Employer benefits for retirees also are going to be far less generous in the future.

Saving money is vitally important to financial independence. In fact, other recent research indicates that savings rates are more important to financial security than earning high investment returns or a high income.

Investors with over $5 million in investable assets say that saving early and regularly was the key factor in their financial security, according to a survey by PNC Wealth Management.

Financial security requires a higher savings rate than many people realize. To have a high probability of saving enough to withstand most investment environments, young workers should save 16.62% of their salary for 30 years, according to research by economist Wade Pfau. He refers to this as the safe savings rate.

The optimum savings rate for someone can be determined only after the fact, knowing the investment environments during both the accumulation and the spending years as well as the investment choices made by an individual. Pfau's goal was to determine the savings rate that would provide security over most investment environments.

Pfau ran numbers for a number of different environments and several investment strategies. The optimum savings rate varied widely, but the 16.62% consistently provided enough money for retirement under the most circumstances.

Of course, the longer one waits to save, the higher the savings rate has to be. Pfau assumed a person saved for 30 years in order to have money to spend for at least 30 years. If someone waits to begin saving and saves for only 20 ye! ars, the ! safe savings rate jumps to over 30%. But beginning to save early and delaying retirement so that the savings period is 40 years reduces the safe savings rate to 8.77%.

Perhaps more importantly, a long, steady period of saving reduces the importance of investment markets in the years just before and after the retirement starting date. When people wait to save and accumulate just enough to meet their retirement goals, their financial security is very dependent on investment performance in the 10 years before retirement begins and the first 10 years of retirement. They depend on the last few years of investment performance before retirement to compound their modest nest egg into one that is big enough to sustain their retirement. That's a big risk and can be reduced by saving more money earlier. Not saving early enough is why we hear that so many people plan to delay retirement.

Also, the earlier you begin saving the more work the investment markets do for you. In the past I've discussed my "70% rule." Suppose a young person decides to save $3,000 annually for all his working years and earns 6% annually on that money. After 34 years of saving, investment returns will comprise over 70% of his retirement nest egg, while his contributions are less than 30%. Start saving early, and the markets will do most of the work for you through compounding. But wait to save, and sacrificing current consumption in those later years will bear most of the burden. Your contributions will make up a much higher percentage of the nest egg, and in many cases will dwarf the contribution of market returns.

Young savers also shouldn't try to earn the highest investment returns or seek the hottest investments. That's playing the lottery with your retirement savings. Instead, begin your savings plan with a balanced fund such as PIMCO All Asset All Authority, MainStay Marketfield, Vanguard Wellington, or FPA Crescent (currently closed to new investors). Or own several of these funds. It's important alwa! ys to hav! e a balanced portfolio so you earn steady solid returns and have a margin of safety for your financial security.