Department of Labor and the 99%. Consumers will continue to lose, lose LOSE!!

FOR IMMEDIATE RELEASE
San Leandro, California, United States of America (Free-Press-Release.com) December 27, 2011 -- Hilda L. Solis
U.S. Department of Labor
200 Constitution Ave., NW
Washington, DC 20210

RE: The 99% and Financial Planning Fiduciary Standards under Dodd Frank

Dear Ms. Solis,

As you are essentially responsible for the oversight of ERISA, I believe you will find the insight of my recent book the essence to redirect adviser responsibility to consumers.(This text is the hard copy complement to two video courses approved by the State Bar of California for Continuing Legal Education
Fiduciary Standards Dodd Frank: Investments

Fiduciary Standards Dodd Frank: Insurance and Annuities)

ERISA, as does Dodd Frank, reflects the necessity for fiduciary duty. Unfortunately, non of the simplistic demands/requests/laws will make it work. The debacles of 2000 and 2008 reflect a nil understanding of risk and left hundreds of thousands of retirees/pre retirees in a financial morass for which they will never recover. And given the current and projected economics, the simplistic positions of buy and hold, rebalancing et al will cause the same thing to happen to younger employees over and over again. The DOL may not cover all 99% of consumers, but it’s failing grade with 401k employees and more does the same thing.
Per the DOL:
..... while a fiduciary may have relief from liability for the specific investment allocations made by participants or automatic investments, the fiduciary retains the responsibility for selecting and monitoring the investment alternatives that are made available under the plan.
Is it a valid assumption to say a ‘fiduciary’, in name only, has a clue to selecting and monitoring?
No.

Please see my chapter on Illiteracy and Aliteracy. As well as “How do Financial Literacy and Financial Behavior Vary by State?” at http://www.usfinancialcapability.org/download/FinLit_By_State_EBRI.pdf. A sample question for anyone from the financial literacy ‘quiz’ is “Buying a single company's stock usually provides a safer return than a stock mutual fund.” All states failed the question. And while a ‘fiduciary’ can answer that question, the essence is irrelevant to the real world of diversification

The question and answer says nothing a to how many stocks are needed to have the same risk as the market (see diversification chapter). Fiduciaries are not taught this so where are they helping the employee (99%)? Failing the question and then failing the American public in teaching the reality of risk is a breach of fiduciary duty- right to the core of responsibility by the DOL. Diversification has never been taught to brokers. Nor is it even in the mandatory curriculum for CFPs. It must be presented to employees. And yet the rules say that a fiduciary has relief from liability made by participants. A fiduciary KNOWS that the public is so bereft of an understanding of the fundamentals of investing as to make massive errors in judgement. Don’t they? A fiduciary must know diversification in order to have any claim to acting as a fiduciary. But they do not.
If you do not know diversification, you cannot get to risk. If you cannot get to risk, you cannot get to suitability. You sure have failed any type of fiduciary responsibility.

Look at this question- “If interest rates rise, what will typically happen to bond prices?” All states came in at 37% correct or less. A basic bond question that MUST be understood by any and ALL 401k employees. They are obviously clueless. But a named ‘fiduciary’ can escape liability since they are effectively removed from the participants selection. Totally absurd- unless, I suppose, the definition of a fiduciary is the word only that does not have to be backed up by reality. But the reality is that financial advisers, including RIAs who essentially use the Series 7 license to validate becoming a fee adviser, are not taught the fundamentals of investing nor, more importantly, the real life implications. No wonder the financial system for the 99% failed so miserably. The fiduciaries used for training were- and are- inept.

A fiduciary can also hire a service provider or providers to handle fiduciary functions, setting up the agreement so that the person or entity then assumes liability for those functions selected. If an employer appoints an investment manager that is a bank, insurance company, or registered investment adviser, the employer is responsible for the selection of the manager, but is not liable for the individual investment decisions of that manager. However, an employer is required to monitor the manager periodically to assure that it is handling the plan’s investments prudently and in accordance with the appointment.

First of all, how does an employer select a manager. An employer has no criteria or which to base a valid decision. Is it solely returns? What about risk? Well it cannot be since risk is not taught to the industry. Is it MPT- well past its prime. Use of correlation? Standard Deviation? Just what? Is the handling of the investments merely providing quarterly statements? I am clueless in that if risk is not taught to employees there has to be improper handling. Yet never heard a word on this after 2000 or 2008. Why not? Every allocation has a numerical risk of loss that identifies just how bad things can get. But only returns are ever shown. Not simply illogical- a failure of those in knowledge and education.

Information about the quality of the firm’s services: the identity, experience, and qualifications of professionals who will be handling the plan’s account; any recent litigation or enforcement action that has been taken against the firm; and the firm’s experience or performance record; A description of business practices: how plan assets will be invested if the firm will manage plan investments or how participant investment directions will be handled; the proposed fee structure; and whether the firm has fiduciary liability insurance

ERISA, the DOL, SEC et all talk about professionals as indicated above. And just what does that mean in real life? The term “professional” is essentially a moniker for those with extremely limited background in the financial area. Certainly there are a few, but the bulk of RIA advisers/professionals come from the securities side of investing where the bulk of the knowledge base is a one week course of the series 7 where the fundamentals of investing are not taught. There is no insight to asset allocation. There cannot be since there is nothing on correlation. Or the inverted yield curve, There is no mandatory continuing education for RIAs. And while the comments address litigation etc., where is the knowledge to really address performance record? Would it not be true that the losses sustained in 2000 and 2008 by, in particular, 401k employees was a major fault of the professional? Sure is. Pundits may say that there is no way a ‘professional’ was at fault- they did do their job(?) by their instruction of asset allocation.

No they did not. They had a duty to address risk. They had a mandatory obligation to state the exposure of employee allocations and what they would do- if anything- in limiting the losses due to a severe downturn. After all, the recessions WERE known beforehand (see inverted yield curve and year to year real GDP%). It was also known that the correlations would all move together when such occurred and that all equity positions would lose an average of 40%+. But if that is not taught- and it is not due to the sophomoric licensing and testing requirements- then you can have trillions of dollars lost and the professionals can simply say it was an aberration.
Wrong. It is a statistical probability. Further, there is a 85%+ probability that we will have one recession over the next decade which will produce another 40% equity loss. And a 50% chance of two recessions.
The fault of such trivialization lays at the feet of the SEC and its continuing refusal to instruct. But it also lays at the DOL, NASAA, State regulators, and more with their inept staff that has- and remains- clueless to the real world of risk. It is also clear that the UPIA needs a revision to the real world as well- as I have identified as a chapter.

Obviously I do understand the need for long term investing. But the failure of current instruction is that they do not tell the employee they will lose about 50% of their investment once or twice a decade. This is a new world order where massive losses have been and will continue to be sustained. It is true that employees and the 99% will do the wrong thing at the wrong time- changing investments at the very lowest prices. But why are all the ‘professionals’ not even bothering to instruct them as to what to do and when?
Nothing will change without an absolute change in ‘professional’ competence which is not possible with the current legalese that refuses to address what background is mandatory before one can offer fiduciary services.
I am fully aware that my book treads on a lot of egos in a lot of departments in a lot of states in a lot of ......

But there comes a time when the regulatory entities have to stand up and formally recognize that what worked(?) in the past simply existed as long as one kicked the can long enough. When it could go no further, real life took over. Sure there was a breakdown by banks and other corporate entities. Maybe that will get better- at least the FED is trying.
But the 99% and all employees will continue to be victimized by an industry and regulatory entities that have, at least so far, addressed fiduciary only as a word.
Hopefully, you will find the validity of my statements in the book and a recognition that a wholesale revision of industry knowledge and competency is needed NOW.

(Don't hold your breath)

More information can be found online at http://EFMoody.com

401K     99     Deaprtment of Labor     dol     education     investments     Occupy Wall Street     Solis