Author: SynergiaFinancialGroup

On June 30, 2020, Regulation Best Interest, or Reg BI for short, officially went into effect. But what is Reg BI, exactly? Where did it come from, and how does it impact you, the investor? Here’s what we know about the new rule under the Securities and Exchange Commission (SEC).

What is Reg BI?
Reg BI provides a clear set of standards for financial professionals and broker-dealer conduct. These standards include disclosure of conflicts of interest and require that all investments made on the client’s behalf are in that client’s best interest – and not in the financial best interest of the financial professional or broker-dealer. To comply with these standards, financial professionals must provide documentation that explains why a recommended product is suitable for clients based on their needs, risk tolerance, and objectives.

Where did Reg BI originate?
In July 2012, the Financial Industry Regulatory Authority (FINRA), conducted reviews at several financial firms to learn about their internal procedures to identify and manage conflicts of interest. Based on their findings, FINRA published the Report on Conflicts of Interest on Oct. 14, 2013, and concluded that financial firms needed to do more to manage and mitigate conflicts of interest among their employees, including:

For a full summary of conflicts of interest identified by financial firms, see page 41 of the report.

Fast forward to June 5, 2019, when the Securities and Exchange Commission (SEC) approved Reg BI to “enhance and clarify the standards of conduct applicable to broker-dealers and investment advisors.”¹

What Reg BI means for investors.
As a result of Reg BI, you can expect to receive relationship summary documentation (Form CRS)—either in the mail or electronically— from your broker-dealer or financial professional with the following information:

Reg BI improves the client-financial professional relationship’s transparency so that you have greater insight into your financial professional’s investment recommendations and background information.

To learn more about Reg BI, visit the SEC resource page.

¹ SEC, Press Release, June 5, 2019, SEC Adopts Rules and Interpretations to Enhance Protections and Preserve Choice for Retail Investors in Their Relationships With Financial Professionals.

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When people think of wealth, they might think of examples in film, such as Veruca Salt from the 1971 classic Charlie & the Chocolate Factory. Little Veruca had everything she wanted in life but desired one of Willy Wonka’s geese that laid golden eggs. When Wonka refused to sell the little girl’s father one of his prized fowls, the girl broke into song about how she wanted everything… and ultimately labeled a “bad egg” and sent down the garbage shoot.

The truth is people don’t always fixate on money and possessions—even those who have plenty of it to support their families for several generations.  The meaning of wealth can be different depending on the person. Here are different kinds of wealth that you cannot measure in dollars and cents:

Relationships

Wealth in relationships is spending quality time with friends and family. It’s devoting time to staying connected through lunches, golf games, and watching over grandchildren. It’s phone calls made just to check-in or walks in the park to discuss triumphs and trials. Building strong relationships contributes to overall well-being, and the efforts you take to stay connected socially pay off immensely. Staying connected through relationships builds a support system to lean on during trying times, especially as you age.¹

Personal growth

Wealth for some individuals means being laser-focused on personal growth through education and experiences that help them see the world differently. By gaining knowledge and expertise in intentional ways, they improve their problem-solving, leadership, empathy, and influence.

In a 2018 study by the Federal Reserve Bank of St. Louis, respondents who attended college accumulated much more wealth than those who did not – even if their parents did not attend college at all. Those who did not attend or finish college (but their parents did) suffered downward mobility of -16% income.² 

Life meaning

Many individuals identify wealth as having a purpose in life and choosing to help make the world a better place. Perhaps in their younger years, someone helped them overcome a challenge or disability, so they donate funds and volunteer for causes that are personally close to them. Establishing a way to give is a fulfilling way to leave a lasting legacy for these individuals.

How do you define wealth?

Your definition of wealth determines how you plan for the future you envision. Connect with your financial professional to discuss your personal wealth goals. Doing so can help you feel more fulfilled by leaving a legacy that will make you proud. People don’t always fixate on money and possessions—even those who have plenty of it to support their families for several generations. 

¹ Psychology Today. The Importance of Relationships in Aging. Marisa T. Cohen Ph.D., CPLC. March 1, 2020.

² Federal Reserve Bank of St. Louis. Demographics of Wealth, 2018 Series, Essay No. 1. The Financial Returns from College across Generations: Large but Unequal. William R. Emmons, Ana Hernández Kent and Lowell R. Ricketts.

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November third is fast approaching, and investors may be wondering how the 2020 presidential election might impact their portfolios. Here’s what we know from a historical perspective. 

The Presidential Election Cycle Theory

The Presidential Election Theory, developed by stock market researcher Yale Hirsch and featured in the 1967 Stock Trader’s Almanac, analyzed the stock market data over several decades over the four-year term of sitting presidents. Hirsch’s theory suggests that stock markets perform weakest during the first two years of a presidential term when the president tends to work on the proposed policy reform that got them elected.

During the second half of their term, presidents shift their focus to improving the economy to get re-elected. As a result, many stock indices gain in value – and the results tend to be consistent regardless of whether the president is Democratic or Republican. 

An analysis conducted by Charles Schwab in 2016 found that the third year of a presidential cycle tends to have the most substantial gains:

 Average S&P 500 Index returns each year of an election cycle: 

However, many things tend to be at play during election years – especially in 2020.

Short-term stock market results can vary depending on factors, including gridlock in the House and Senate, and whether the election involves an incumbent candidate or a sweeping election victory. Tracking trends like this in the stock market tends to be easier than understanding why they occur.  

2020 is turning out to be a year unlike any other. After an 11-year bull run, we slid into a bear market amid the COVID-19 pandemic. It’s uncertain how long the pandemic will last and how quickly we can recover once a vaccine is available. These variables make it difficult, even with the historical data we have, to determine how the fourth quarter of 2020 will play out.

These reasons are why it is important to remember that time in the market beats timing the market. Stay focused on your long-term financial strategy for stable growth in your portfolio and discuss any concerns you have with your financial professional.

During the second half of a president’s term, many stock indices gain in value regardless of whether the president is Democratic or Republican. 

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Investment risk is always present, but during COVID-19, the stock market has experienced so much volatility that investors are beginning to wonder where to invest. Investors must consider how investment risk can decline their portfolio’s value due to economic events that impact the entire stock market.

The primary investment risks to a portfolio are equity risk, interest rate risk, and currency risk, which is when investors choose to invest in other countries with stable interest rates and currencies and not their own country’s offerings. This risk creates a loss of economic confidence for domestic investors who choose not to invest in their local economy.

Investors should take the time to investigate the U.S. company stocks in their portfolio to determine how they pay out dividends, and if the payout is reliable during this period. Other considerations investors must address to offset investment risk:

Keeping mostly cash in a portfolio can create other risks such as inflation risk and time-horizon risk.

Taking more market risk during a recession can reap higher returns later when the market recovers.

Examine investing in foreign markets or emerging markets to determine if these investments may provide positive returns if their economies recover ahead of domestic markets.

Modify allocations appropriately, rebalance, and continue to invest using dollar-cost averaging.

Maintain a diversified portfolio, which is one way to offset Investment risk.

Longer time horizons help reduce the impact of investment risk; investors should stick to their overall investment objectives and overall portfolio, not individual holdings.

Investors must remember that with more risk comes more reward and that the lowest risk investments are the ones that also produce the lowest yields. Additionally, remember that no investment is without risk.

During COVID-19, it is essential to continue to work with your financial professional to determine a strategy that fits your risk profile. With unemployment high and the economy down, volatility will continue as investment risk for certain types of investments progresses. Remember that letting your money sit idle during this period may mean missed opportunities for your portfolio.

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Remote work is the ‘new normal’ since businesses have transitioned to remote operations or have entirely closed for the duration of COVID-19. During 2020, the remote work culture has projected forward due to necessity, and companies that made the transition swiftly have also reaped the rewards of continual revenue during this period.

While working remote can be challenging for some, the positive experiences from doing so may be hard to leave behind once work commuting returns. 98% of American workers report they would like to work from home indefinitely since having to do so since the start of COVID-19. What are the things people love about working from home?

Source: World Economic Forum, June 3, 2020

According to the U.S. Census Bureau, nearly one-third of the U.S. workforce and half of “information workers” are currently working from home. This statistic is excellent news for our recovering economy and the businesses that can transition their workers to remote work.

While managers may be concerned that productivity, focus, and team collaboration may suffer, 56% of the U.S. workforce holds a job that is compatible with remote work. Additionally, research has found that the cost savings to companies are about $11,000 per year for every person that works remotely half of the time.

Compatible, productive jobs through remote work and cost savings to companies lead GlobalWorkplaceAnalytics.com to predict that the longer people are required to work from home, the higher the remote work adoption. When managers work from home, they realize the benefits it provides to them personally, and become increasingly aware of the positive impacts on their employees.

“No matter where you work, it’s important to create an environment that helps you focus. This is especially critical when working from home; maintaining a clear division between work and your home life will make it easier to show up fully for both.” –Marie Kondo, How to Work From Home…With Joy.

Regardless of whether we are on the path to recovery from COVID-19 or not, working from the safety of one’s home is a valuable benefit that hopefully continues after the pandemic is over.

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With more research and data coming out since COVID-19, the US facing an economic and retirement crisis. Still, many of the world’s countries are reporting the same retirement crisis as they borrow to make pension contributions. When discussing a ‘crisis,’ there are many things to consider leading to this situation for future retirees:

A World Financial Crisis.  Governments have over-spent going into COVID-19 and are anticipating a lower-level of tax collection in 2020 and possibly 2021. This shortfall will impact their ability to fund social retirement programs at the level they once did. Worldwide, tens of millions of people have become unemployed since 2019. The lasting effects of this financial crisis will impact both higher taxes and inflation for future generations.

Prematurely Accessing Retirement Accounts.  Throughout COVID-19, one in four Americans tapped their retirement accounts to make ends meet by exercising ‘hardship’ distributions due to the pandemic.  Hardship classification under federal law includes medical costs, death of a family member, or hardship debts that will result in the individual’s standard of living being affected. The CARES Act legislation now includes COVID-19 impacts as a hardship, and the standard 10% early distribution penalty for those under age 59 ½ will NOT apply if it impacts in any of these ways:

Half of all Americans furloughed, laid off, or terminated from employment due to COVID-19 have saved less than $500 for retirement this past year.

An aging World Population.  Globally, family size has continued to decrease in the U.S. since World War II. There are not enough younger workers replacing retiring workers, and as a result, fewer taxes are collecting into the government retirement systems. Coupled with less tax collection to pay back Federal CARES Act stimulus, public health funding, and social unrest, we face a dire problem of covering our social programs.

The U.S. is not the only country experiencing this, but also China, Italy, South Korea, and much of the world. Over 40 countries have a similar system to our Social Security Benefit system. As a result, the Social Security Administration continues to change the age for full retirement benefits for those born after 1967.

End of Traditional Pension Plans. Companies have moved from pension plans, where everyone gets a retirement plan depending on years of service, to 401K plans. Unfortunately, in the US, legislation was passed in 2006, and employees can now ‘opt-out’ of their employee retirement plan, resulting in 40% of opting-out of saving for retirement.

Now more than ever, it is up to you to plan and save for your retirement. Develop an emergency fund, so if you become unemployed, you will be less likely to access your retirement accounts to cover financial obligations. Pay off your debts and focus on saving for your financial future. If COVID-19 has taught us anything, it has taught us to be financially prepared for anything, even a pandemic.

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Americans are starting to see the impact of increasing prices at the supermarket and the start of inflation. Also, clothing at retail stores is depleting as manufacturing has halted, creating demand for products ordinarily accessible.

Today’s economic conditions are much worse than coming out of the Great Depression. During periods economic recovery, the U.S. experienced historical debt and tax levels, paid for by the American people when tax rates were above 40% for over 40 years (1940-1981). Many older Americans recall the high-interest rates, high prices, and people displacing from the weak economy.

While the CARES Act provided a one-time payment to individuals and for business stimulus, it will not solve our country’s future economic problems. Government-funded recovery will likely lead to higher taxes, and the debt will be collected from U.S. taxpayers to decrease the Federal deficit.

What has changed since The Great Depression is the debt the U.S. carries, now close to $24.2 Trillion with a 106% Debt/GDP Ratio (Gross Domestic Product). Our debt to GDP ratio indicates that the U.S. owes more than it produces and consumes domestically, or exports. How do economies recover? By producing and selling more than its expenditures or by raising the prices of their products. How do government coffers improve? Through tax collection. Both create problems for everyone, but especially for those nearing or in retirement.

In any market, investors must always consider the five risks that can sideline their financial future:

Inflation Risk- Investments are not optimally positioned to address the rising costs of goods and services will deplete a portfolio.

Taxes Risk- Increased taxes erode the investment capital; the investment type and timing are critical.

Longevity Risk- Investment capital is not enough for supporting longer lives and long-term care needs.

Survivorship Risk- Unexpected loss of a life-partner leading to lower investment capital.

Market Risk- Loss of principal value can decrease investment capital.

One solution to addressing inflation risk and tax risk is by increasing the allocation of principal-protected products. The benefits of a fixed-indexed annuity products address all five significant dangers:

Inflation Risk- Allocation to certain products allow asset allocation strategies to address inflation.

Taxes Risk- Leveraging tax-free investment strategies increases investment capital.

Longevity Risk- Utilizing “income for life” features address longevity risk and long-term care risk.

Survivorship Risk- “Death Benefits” provide tax-advantaged mitigant against untimely death.

Market Risk- Principal protection provides a buffer against stock market fluctuations.

The impact of inflation and taxes due to COVID-19 will continue making it critical that you consider your retirement portfolio’s allocation and prepare for your financial future. If you are nearing retirement, make sure you prepare for higher taxes and discuss tax-saving strategies at our next meeting.

Disclosure: Fixed index annuities are intended for retirement or other long-term needs. It is intended for a person who has sufficient cash or other liquid assets for living expenses and other unexpected emergencies, such as medical expenses. Current minimum return, principal value and prior earnings guarantees by the issuing insurance company, subject to their claims paying ability, and contract provisions. Although Fixed Index Annuities guarantee no loss of premium due to market downturns, deductions from your Accumulation Value for additional optional benefit riders could under certain scenarios exceed interest credited to your Accumulation Value, which would result in loss of premium. They may not be appropriate for all. Please contact your financial professional or insurance producer for complete details.

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