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From time to time, all of us think we know what we are doing when clearly we do not, but it is not until we are proven wrong that we come to realize it. For me, it’s home repair. I know it’s not my strong suit, but my “man” button keeps blinding me to that fact until I am calling the repairman to fix the original problem and everything additional that I destroyed, broke, etc.
That, my friends, is humility. And humility is good for all of us. When it comes to investing, such overconfidence in our abilities can be extremely costly. In fact, the larger the balance of your 401(k), the more costly mistakes can be to you.
401(k) investors should be very careful not to allow overconfidence to creep into their mindset after last year’s remarkable rebound, which began after the market bottomed exactly one year ago today. Being a fan of Carl Richards of BehaviorGap.com, his post in the NYTimes Bucks blog section was a great explanation of how to handle overconfidence if it creeps into your investing life.
Carl Richards
When it comes to investing, however, we all have a problem.
As we become more and more confident we become willing to take on more and more risk. Why? We start seeing risky behavior as, well, less risky. But the reality is that as the level of overconfidence increases, the cost of our mistakes increase as well.
And…
But we can do something about it. We need to recognize that we’re not as smart as we think we are. In fact, the smartest investors (and frankly the smartest financial advisers) are the ones that acknowledge that they’re dumb.
So the next time you’re about to make an investment decision because you’re sure you’re right, take the time to have what I call the Overconfidence Conversation. Find a friend, spouse, partner or anyone you trust and walk them through your answers to the following questions:
1) If I make this change and I am right, what impact will it have on my life?
2) What impact will it have if I’m wrong?
Considering the consequences of being wrong might lead you to make more careful decisions and to a greater appreciation of the enormous potential costs.
Our word to the wise is when the market has as strong of a rebound as we have seen over past twelve months, it was the market that drove our accounts to the fantastic gains we experienced in our year end statements, not us as individual investors. Simply put, if you were in stocks, you were going to make a very good return. Hey, it was great after suffering through ‘08 and early ‘09 until a year ago today. However, keep in mind, overconfidence in your asset allocation (investment recipe) is fine if you are positive you understand it. If not, get some help to make sure…
Our friend Jason Roberts, Partner at Reish and Reicher, has been closely monitoring the regulatory developments of 401(k) advice since the passage of the Pension Protection Act of ‘06. The link below provides a brief, yet detailed overview of the regulations and what employers and advisors should take into consideration when it comes to the advice 401(k) investors receive. It is definitely worth the time.
LinkedIn has been something I have been active on for over two years. It’s Groups feature has helped it evolve into a resource in which busy professionals can learn or get free guidance and feedback on various topics of interest. Personally, our company has benefited from other’s experience and expertise to the tune of saving thousands of dollars on various projects.
That being said, with the recent developments in 401(k) advice, we decided to create a group to help keep employers and advisors apprised of the regulatory and market developments that result from the clarifications. We launched the 401(k) Fiduciary Advice Group on Wednesday morning, and since then, there have been over 70 employers and 401(k) industry professionals join. Interested? Simply click the link below to join.
Every investor working with a financial planner/wealth manager/financial advisor/stockbroker…whatever title is used…should read at least the following quote. In Jason Zwieg’s article on WSJ.com, he provides one of the easiest to understand summaries I have read on the responsibility that person has to you:
As of now, the roughly 630,000 brokers, bankers and insurance agents registered to sell securities must determine whether investments are “suitable”—based on how wealthy you are, what else you have invested in, your tax status and your investment objectives.
Securities salespeople generally aren’t obligated to act in your best interest. They needn’t tell you that they make extra money pushing one particular investment or that cheaper alternatives might provide you a higher return.
Suppose two mutual funds are “suitable,” but one of them pays the broker a fatter fee. You may well end up in that one—without finding out that your broker had an incentive to favor it.
On the other hand, financial advisers—who are regulated as “fiduciaries” under the federal Investment Advisers Act—are obligated to put you first. They must explain their fees, disclose conflicts of interest and disclose past infractions. If they get paid extra to recommend a fund or sell an insurance product, they have to tell you.
As promised, the new 401(k) advice proposal has been delivered by the end of the month. While I admit to not having read it yet, the following has been reported by the Wall Street Journal:
“The proposed new rules would shield workers from potential conflicts of interest related to financial advisers. Under the plan, retirement investment advisers and money managers may give investment advice only if they do not get a commission for steering workers into funds with which they are affiliated, or if their advice is based on an objective computer model certified to be unbiased by independent experts.
The rules will be available for public comment until May 5. The Department of Labor will then issue a final rule, which would apply to all financial institutions that both provide investment options such as 401(k)s to employers and offer financial advice to their employees.”
From the look of it, conflict-free advice is being embraced, which is a huge win for 401(k) investors. However, over the weekend I will be reading the proposal, and hope not to find any non-fiduciary, conflicted advice loopholes.
Sometimes, it helps to hear this type of thing from an independent source. As we have said before, we don’t fix our own cars, why should we be expected to be professional investment managers?
Don’t take this too personally, but the less you are involved with investment decisions for your 401(k) the better off you may be.
A new study of more than 400,000 401(k) participants in seven corporate plans found that the median return earned by individuals who sought out help in managing their 401(k) was 1.86 percentage points more than participants who made their own allocation/investment decisions.
Many 401(k) sponsors, providers and advisors eagerly await the DoL’s new advice proposal, which is due to be released within the next 30-45 days. In an effort to put in our two cents, we thought we would share our hopes for the proposal based on our experience in delivering advice, our understanding of other options in the marketplace, and the feedback we have received from employers and investors alike. Keep in mind most of our clients exist in the top end of the small market (250+ employees) to large sized employers (1,000+ employees).
Goal #1 – Advice Must be 100% Conflict-Free
For those of you that aren’t 401(k) geeks like us (it’s understandable), the DoL proposed advice regulations in January of ‘09. The proposal received immediate backlash in the media and from the legal and advisor community, especially those that operate as fiduciaries. The issue resonated from the idea of being a “level fee” advisor.
Level Fee Advisor – The idea here is that mutual funds have revenue sharing arrangements that are different on a fund by fund basis. For example, if you have three large cap funds in your plan from three different mutual fund companies, it is highly likely the revenue arrangement for each fund is different.
Conflicted Level Fee Adviser – The DoL proposed to require the advisor to charge a level fee while not requiring the advisor’s affiliated firms (broker dealer, mutual fund company, insurance company, bank, etc.) to receive level compensation from the funds in the plan as well. Here is a secret of the advice industry: someone provides advice to the advisor, because understanding the markets, determining asset allocations, etc. is a full time job. Therefore, if the advisor is receiving the advice recommendations from the affiliated firms, the advice has the potential to be conflicted as the affiliated firms could steer the advisor towards funds that provide themselves a greater benefit than the participants receiving the advice.
Conflict-Free Level Fee Adviser – Under the conflicted approach, employers would have to determine whether the advice the advisor/team is delivering to their participants is biased or not. A conflicted (even those that are “managed”…whatever that means) environment will likely create a barrier of entry for employers considering advice. Thus, the use of an outsourced third party or 100% fee-only advisor (not just fee-based, as that means they can collect fees and commissions) seems to be a more reasonable choice for those who wish to provide participant advice they can trust as well as a service they feel good about promoting.
Using the “Keep It Simple, Stupid” principle, here is a simple model that allows employers and participants to easily understand the business structure of the advice provider:
No Compensation from Financial Institutions, Period – If the advice provider does not receive any compensation from any investment, insurance, or banking institution, it allows them to be objective in the advice that is delivered to 401(k) investors.
No Under-the-Table Arrangements with Recordkeeper – There should be no undisclosed arrangements with the recordkeeper of the plan to use specific investments that may benefit the recordkeeper more than participants. We have heard rumblings about such arrangements, specifically under the SunAmerica Opinion, but have no concrete evidence. However, such discrepancies have been alluded to in discussions with regulatory bodies, with one example being a recent article by PlanSponsor.
Annual Audit - Did you say audit? Yeah, we don’t like them either. However, when an advice provider is required to be audited by an independent, unrelated third party, that’s a huge benefit to the provider’s clients. How so? It provides peace of mind that a professional auditor is likely going to ask the questions an employer wouldn’t know to ask and look for disparities that have created or potentially could create conflict in the advice delivered to investors.
Full Disclosure of Business Revenue Sources – Full disclosure to employers by service providers is seemingly going to make its way into reality (finally), so it would seem logical to have this enforced for advice providers as well. If there is any revenue coming from a mutual fund, insurance, recordkeeping, or TPA company coming to the provider, then they are conflicted. Period. Employers evaluating advice providers should be informed of any conflicts before making it available to their colleagues. Full disclosure can help provide employers the peace of mind that a service they communicate for the benefit of their participants is in their benefit, not the advice provider’s.
Benefits to Conflict-Free Advice
Increased Availability to Investors – We would argue that it’s not a lack of advice solutions that has kept more employers from providing advice, but the need for it to be conflict free. The vast majority of employers want to do right by their participants, so they evaluate services offered on their merit, value, deliverables and cost.
More Conversations About Advice by Providers/AdvisorsWith Employers – Additionally, it our belief and experience that advice has not been discussed with a lot of employers because the provider/advisor is waiting for the ability to deliver it themselves in a “managed conflicts” manner. Once the advice requirements are defined, the companies that can and cannot deliver advice will as also be defined, allowing the smoke to clear and available solutions to come to the forefront. This will end the wait-and-see period for providers, brokers, and advisors and will instead allow such entities to look at conflict-free solutions that can help their clients’ employees better succeed in managing their 401(k) assets.
Empower Employers to Focus on Service Options, Instead of Fearing PR Nightmare of Offering Conflicted Advice – If there is one thing we have noticed over our years, it’s that companies are very careful about the services and benefits they offer so to ensure they reflect the company in good light to their employees. Imagine a company delivering communication campaigns illustrating the benefits of 401(k) advice to their participants. The campaign is a reflection of the 401(k) committees’ due diligence, and it is intended to be a message the participants can trust. If the advice is conflicted, this could create dissent among employees wondering why such an offering was given the thumbs up.
In summary, we believe the foundation of 401(k) advice must be conflict-free before you even start talking about how the rest of it works. The beneficiaries include employers, their participants, and though they do not realize it yet, advisors, brokers and the mutual fund/insurance companies who provide 401(k) platforms. If the DoL starts with a conflict-free foundation, it will be a huge win for 401(k) investors.
The next edition of this series will come out early next week. We would welcome any comments.
As you know, we are big fans of the BehaviorGap. Our friend Carl Richards is now being featured in the New York Times website. His latest post there is two minutes of really good advice.
Am I investing to meet my most important financial goals or am I investing as a form of entertainment? For almost all of us, it can’t be both.
Sure, investing is fun while you’re making money. But bear markets serve as a painful reminder that we don’t always make money, and I’m sure that no one enjoys losing money. We need to remind ourselves that this is not Monopoly. This is real life. We’re dealing with real money and real goals. And by confusing investing and entertainment, you almost always end up with bad results.
We are a fan of keeping things simple, so when we run across tips on how to do so, we like to make sure we share them with you. The following video is an example of such tips; this one specific to your 401(k) plan.
There is one thing we would like to add to the idea of consolidating your old 401(k)s: If your company has BeManaged available, many of our clients prefer to roll those old 401(k) accounts into their current account to make sure it is managed for them, instead of having to figure out where and what to invest in themselves. Often times they are nearing or already past the capped fee we charge, so there is little to no financial benefit to us, but a big one for our clients.
From time to time, all of us think we know what we are doing when clearly we do not, but it is not until we are proven wrong that we come to realize it. For me, it’s home repair. I know it’s not my strong suit, but my “man” button keeps blinding me to that fact until I am calling the repairman to fix the original problem and everything additional that I destroyed, broke, etc.
The following are some of the topics discussed in this month’s newsletter from 
Every investor working with a financial planner/wealth manager/financial advisor/stockbroker…whatever title is used…should read at least the following quote. In Jason Zwieg’s article on WSJ.com, he provides one of the easiest to understand summaries I have read on the responsibility that person has to you:
As promised, the new 
Sometimes, it helps to hear this type of thing from an independent source. As we have said before, we don’t fix our own cars, why should we be expected to be professional investment managers?
Many 401(k) sponsors, providers and advisors eagerly await the DoL’s new advice proposal, which is due to be released within the next 30-45 days. In an effort to put in our two cents, we thought we would share our hopes for the proposal based on our experience in delivering advice, our understanding of other options in the marketplace, and the feedback we have received from employers and investors alike. Keep in mind most of our clients exist in the top end of the small market (250+ employees) to large sized employers (1,000+ employees).
As you know, we are big fans of the
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