Friday, July 30, 2010

Financial Regulation Follow Up… Good News!

(Editor's Note: Paul Schatz, President of Heritage Capital, LLC, in Woodbridge, will be contributing to Fi$callyFit every Friday. Read his biography here)

As a follow up to last week's contribution, Financial Regulation...What It Means to You and America, I want to add two follow up points. As you may have read, I was outraged that absolutely nothing was being done to address two of the main drivers of the financial crisis, Fannie Mae and Freddie Mac. It was irresponsible for Congress to totally take a pass on that gargantuan, systemic problem. Thankfully, others felt the same way!

Earlier this week, the Obama Administration announced that a special conference will be held on Aug. 17 at Treasury to specifically address Fannie Mae and Freddie Mac. I fully applaud this effort and hope there will be bipartisan participation to solve this catastrophic mess that could end up costing the U.S. taxpayer almost one trillion dollars!

Judging by what Barney Frank recently said, I expect the implicit government guarantees to be removed in either one fell swoop, or staggered over a period of a few years. From there, it’s likely that the two behemoths would be broken up in some fashion into smaller entities which could not jeopardize the housing market or financial system if they failed.

I also want to mention another piece of the bill that makes perfect sense to me and I wholeheartedly support. It’s placing the fiduciary standard on ALL financial advisors. Although aggressively fought with enormous lobbying dollars by the major wirehouses, like Merrill Lynch, UBS and Citi, the law of the land will now force brokers to act in the same capacity as registered investment advisors (RIAs) by placing their clients’ interests ahead of their own.

(For full disclosure and transparency, I am an independent, fee only registered investment advisor or RIA. The only way I get paid is by my clients. I do not sell financial or insurance products and do not collect commissions of any kind.)

I am sure many of you always assumed all financial advisors were the same, but that was far from true. The change in the law further protects you and increases the duty to which advisors must act. For decades, only RIAs were required by law to put their clients’ best interests ahead of their own. As long as the investment was considered “suitable”, a broker was free to sell it, regardless of size of commission earned, expense ratios or possibly performance.

Fiduciaries, on the other hand, are supposed to sit side by side with their clients without obvious conflicts of interest. Plainly put, fiduciaries are supposed to do right by their clients are have been held to a much higher standard than brokers. With the passage of this legislation, the rest of the industry, more than 90%, will be now held to the fiduciary standard, a huge win for individual investors!

Don’t get me wrong. There is nothing bad about doing business with a broker as long as all of the details are transparent and properly disclosed in plain English. As a client, you should know and understand exactly what you are buying, the fees, expenses, commissions and any penalties. There are plenty of brokers who do it the right way, but also a good number who look out for themselves first.

As I mentioned earlier this summer, I am working on an interview I did with Spencer Tillman, playfully titled, Superman is Alive and Well and Living in Sugarland Texas! I hope to have more details next month.

I am scheduled to be on CNBC’s Squawk on the Street this Tuesday, Aug. 3rd, around 9:35 am.

Feel free to email me with any questions or comments at

Until next time…

Paul Schatz
Heritage Capital LLC

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