Fiduciary Magazine

Mebane Faber, the portfolio manager at Cambria Investment Management, has published a white paper which addresses the current underfunding of pension funds and the possibility of pension funds underperforming not only targeted returns of 8% but also the risk-free rate of 4%.  The reason for this underperformance is that pension funds are decreasing their exposure to bonds and increasing their exposure to equities and other illiquid assets.  While this new asset weighting has the potential to generate targeted returns of 8%, it also has the potential to generate negative returns due to increased return volatility.

The New York Times reported on its website that lawsuits filed in Colorado and Minnesota over the reduction in the cost-of-living adjustments (COLA) for public pension payments have been dismissed.  These court rulings may encourage other states to reduce COLA adjustments to assist in balancing their respective state budgets.  Previously, California and West Virginia tried to reduce COLA but appellate courts ruled against the ability to do so.

Earlier this year, the U.S. Government Accountability Office (GAO) published a study on private pensions.  The study examined the characteristics of defined contribution plan participants contributing at or above statutory limits and the long-term effects of the recent financial crisis on retirement savings.  The study found that almost 75% of individuals who contributed at or above statutory limits had a salary of at least $126,000 while less than 1% of individuals who contributed at or above statutory limits had a salary no greater than $52,000.  The study was unable to determine the effects of the financial crisis on defined-contribution and defined-benefit plans due to limited data.  Not surprisingly, the study pointed out that “the unemployed, especially the long-term unemployed, may be at risk of experiencing significant declines in retirement income as contributions cease and the probability of drawing down retirement accounts for other needs likely increases.”

Kristina Fausti of Fiduciary360 makes an argument that providing suitable advice is a part of being a fiduciary but providing suitable advice does not make you a fiduciary. Earlier this year, the Securities and Exchange Commission approved FINRA’s Suitability Rule, or Rule 2111.  The rule requires that a member or an associated person make recommendations that are appropriate for their clients based on obtained information which includes risk tolerance and liquidity needs.  The rule goes into effect on July 9, 2012.

American Public Media’s Marketplace reported that state and local pensions will be earning returns of 4 or 5 percent as opposed to forecasted returns of 8 percent.  However, Dean Baker the co-director of the Center for Economic and Policy Research believes that the forecasted returns of 8 percent are accurate “given the mix of assets held by these funds, current stock market valuations, and projected economic growth”.  With states such as California looking to cut back on pension contributions to narrow their deficits requiring employees to contribute more funds than previously required and the possibility of lower than expected returns, fund managers need to protect assets to ensure pension payments in the long-term.

According to a recent study by Dow Jones, affluent investors (U.S. investors who are at least 25 years old with a minimum of $500,000 of assets to invest) prefer to use self-directed investment strategies through online and discount brokerages rather than full-service firms.  A majority of affluent investors are satisfied with their current advisor or wealth manager but are lacking advice on topics such as tax strategies, estate planning, and emerging markets.  Financial advisors need to be knowledgeable in these areas to provide value-added services to their clients and lure them back from their online counterparts.

Apparently, it should. Ron Lieber of the NY Times makes a case for including index funds in the investment choices provided by a 401(k) plan.

What are your thoughts?

In an article that ran at On Wall St., SEC Chairman Mary Shapiro said that the SEC would take a hard look at the fees as well as a potential 25 bps cap, but it will have to wait until the completion of Frank-Dodd…if that ever happens.

From Finalternatives.com:

Omega Advisors founder Leon Cooperman said he was “mortified” when he received a $19 million tax bill that he claims was the result of bad tax advice.

Cooperman, who seeded hedge fund Jana Partners in exchange for a share of its fee income, turned over that stake to his charity, the Leon and Toby Cooperman Family Foundation, in 2001 and 2006. Each time, he had the future income streams professionally appraised, the first half at $15 million and the second at $28 million.

The only problem, as Cooperman concedes, is that you’re not allowed to deduct non-publicly-traded securities donated to your own foundation. He likely would not know that—and would not be on the hook for almost $20 million—if he hadn’t had his first Jana appraisal redone in 2006, after the second appraisal found the other half of the stake to be worth nearly twice as much.

Armed with a new $20 million appraisal from RSM Business Services, Cooperman filed an amended tax return in 2005. In return, he got the tax bill—for $15 million in unpaid taxes and $4 million in fines.

While Cooperman is formally disputing the whole of the bill, his lawyer told Forbes he’s hoping that the penalties will be waived. Richard Levine notes that Cooperman relied on tax professionals and should not be penalized for their mistakes.

Whether Cooperman’s tax preparer, Gittelman & Co., or RSM will be penalized remains to be seen. The billionaire will wait until the tax case runs its course before considering his legal options against them.

When markets get hammered, you see a lot of ponzi schemes undone. That’s because when the market craps out, no one puts new money into the market and the schemer can’t maintain his lifestyle and meet client redemptions at the same time.

Scott Rothstein, who swindled $1 billion from his clients was sentenced to 50 years today. He committed his crimes while licensed as an attorney. That’s a new take on attorney – client privilege.

But Rothstein isn’t the only dirtbag to get press.

Kenneth I. Starr, a Manhattan business manager and investment adviser, was found hiding – creatively – in a closet and was arrested for conning some of Hollywood’s best known stars out of millions. According to the NYT, “he was arrested on May 27. He remains behind bars at the Metropolitan Correctional Center in downtown Manhattan, after prosecutors argued that he might flee if released on bail.”

Dana Giacchetto and his Casandra Group Investment firm advised Mike Ovitz, Rick Yorn, and Leonardo. Giacchetto was in jail for stealing some $20 million from his star clients.

No one is safe people. You have to do your homework, even if you get referred to someone. You need to get their DNA code.

Here are some helpful links:

FINRA Brokercheck for people who work at brokerage firms.

Investment Advisor Public Disclosure for firms that claim to be Investment Advisors or Independent Advisors. You can also check if their asset under management claims are correct with this site.

National Futures Association’s Background Affiliation Status Information Center (BASIC) is to check the compliance history of those who are in the commodity futures business.