Bob’s Journal for 7/1/21

New Regulation Means Less Financial Advice for Individuals

The Department of Labor’s “fiduciary rule” apparently is causing a number of registered investment advisors to decline to give clients advice on what to do with their retirement accounts.

The Department of Labor regulates qualified retirement plans. Over the years, rules covering financial professionals who give advice to individuals about their retirement accounts went through several iterations. The latest rule went into effect December 21, 2020. Most people refer to it as a rule, but it really is hundreds of pages of regulations.

The rule requires an advisor who recommends that an individual roll over a 401(k) or other qualified retirement plan into another vehicle must justify and explain the benefits, expenses, and all conflicts of interest associated with the recommendation.

In addition, the advisor must provide benchmarks of advisor compensation. The reason is to let the client compare what the advisor is receiving to what other advisors receive.

The advisor must provide the client with a full explanation of the recommendation, documenting all the assumptions behind the analysis. The process for developing the analysis must be fully revealed, including how different factors are weighted and how data are evaluated.

The new rule is more extensive than the Securities and Exchange Commission regulations that advisors have been following for years.

Larger financial services firms are able to set up systems for their advisors to comply with the new rules. But other advisors are deciding they won’t be able to comply and so won’t be giving advice about whether or not to roll over a 401(k) to an IRA or other vehicle, according to comments at a recent webinar by attorneys to financial advisors.

The attorneys say even declining to provide advice to a client isn’t easy under the rule. An advisor has to develop significant documentation that makes clear to regulators that the advisor is not making recommendations about rollovers.

The Department of Labor announced on June 11 it plans to issue a proposed rule soon that might expand who is covered by the fiduciary rule.

Digital Currencies Take a Dive

The boom in digital currencies, such as Bitcoin, that began last fall has turned into at least a short-term bust.

Bitcoin was around $10,000 most of last summer and early fall. It began a climb that took it to $40,000 in early 2021. Then, it shot higher and traded around $60,000 from February through early May.

It took a steep dive from a close of just over $57,000 on May 2 to a close of around $33,000 on May 16. Since then, it has been in a trading range with a high of about $37,500. In June, it mostly traded below where it started the year, eliminating what was once a gain of more than 100% in 2021.

Some people made a lot of money in Bitcoin and other digital currencies in the last 10 years. But trading data indicate that most investors buy the currencies near their peaks amid bullish headlines. On average, investors have lost money on the digital currencies.

Government regulators report that frauds based around Bitcoin and other digital currencies abound and are increasing.

Probably the biggest factor in Bitcoin’s recent decline is that China is cracking down on all the digital currencies, trying to effectively prohibit ownership of them.

The greatest threat to the digital currencies is governments regulating them the way they regulate other investments. That would reduce a lot of the demand for digital currencies and probably reduce the volatility and potential for large gains and losses in short time periods.

Regulations are likely to increase as more governments explore issuing digital versions of their own currencies.

Donor-Advised Fund Contributors Have Few Rights

Donor-advised funds (DAFs) are an extremely popular way to make charitable contributions, and their popularity is increasing.

I discussed DAFs and how to make the most of them in the May 2021 issue of Retirement Watch.

A recent court case emphasizes a point I made in the article.

Once you transfer money or property to the DAF, the DAF sponsor and managers have control. While most DAFs allow you to choose from among several investment options and all allow you to recommend who receives charitable contributions, the DAFs have a lot of discretion.

In the new case involving the Schwab Charitable Fund, a U.S. District Court in California ruled that the donor to a DAF doesn’t have standing to sue the DAF sponsor.

The plaintiff said Schwab was making excessive fees off the DAF because the investment choices offered weren’t the lowest-cost available and the DAF could have negotiated lower fees for custodial and brokerage services than those it paid to Charles Schwab & Co.

The court ruled that the plaintiff gave up control of the money and property donated to the DAF in return for an immediate tax deduction. The rights to advise on how the funds are invested and eventually donated do not give the plaintiff a continuing right in the property. So, the plaintiff has no standing to sue the DAF.

The Data

Home prices increased another 1.6% in April, following a 1.6% increase in March, according to the S&P Corelogic Case-Shiller Home Price Index. Over 12 months, the index increased 14.9%.

This is the 11th consecutive month of rising home prices. The 12-month increase is the highest in more than 30 years.

The FHFA House Price Index reported similar numbers. The index increased 1.8% in April, following a 1.6% increase in March. Over 12 months, the index increased 15.7%.

Pending home sales increased 8% in May from June’s level, according to National Association of Realtors (NAR). May’s pending home sales level was the highest for the month of May since 2005.

Over 12 months, pending sales increased 13.1%. More recent data on the housing market isn’t as positive. In the latest week, applications for mortgages declined 7% from the previous week.

New unemployment claims declined by 7,000 to 411,000 in the latest week. That’s the second consecutive week above 400,000.

Continuing claims declined by 144,000 to 3.39 million. The total number of Americans receiving some form of unemployment benefits held steady at 14.8 million.

Durable Goods Orders increased 2.3% in May from April’s level. April saw a decline of 0.8%, which was the only decline in the last 13 months.

Excluding transportation, orders increased only 0.3% in May. And core capital goods orders, a good indication of business investment, declined 0.1% in May after increasing 2.7% in April.

The third estimate of first quarter gross domestic product (GDP) showed no change from the second estimate, reporting an annualized increase of 6.4% for the quarter. Personal Consumption Expenditures increased at an annualized rate of 11.4%.

The Personal Consumption Expenditure Price Index rose 0.4% in May and 3.9% over 12 months. The core index, excluding food and energy, increased 0.5% in May and 3.4% over 12 months. That’s the highest 12-month increase for the core index since April 1992.

Personal Income declined again in May by 2.0%, following a 13.1% decrease in April. The decreases reflect reductions in federal stimulus and other payments.

Personal Consumption was unchanged in May. April’s increase in consumption was revised higher to 0.9% from the 0.5% initially reported.

The Kansas City Fed Manufacturing Index indicated growth continues to be strong in the sector. The index increased to 27 in June from 26 in May.

The Dallas Fed Manufacturing Survey also reported strong growth. The Production Index developed from the survey rose to 29.4 in June from 15.7 in May. The General Activity Index declined a little to 31.1 from 34.9.

Consumer Sentiment, as reported by the University of Michigan, declined to 85.5 in June from 86.4 in May.

But Consumer Confidence, as measured by The Conference Board, rose to 127.3 in June from 120.0 in May. The Conference Board measure has been higher than the University of Michigan measure for most of the pandemic period.

There was another robust ADP Employment Report for June. ADP estimated that 692,000 new private sector jobs were created in June. The hospitality sector had the strongest growth, adding 332,000 jobs.

But the May estimate was revised lower to 886,000 from 978,000.

Growth in the Midwest slowed in June. The Chicago Purchasing Managers Index for June fell to 66.1 from 75.2 in May.

The Markets

The S&P 500 rose 1.08% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 1.00%. The Russell 2000 increased 0.63%. The All-Country World Index (excluding U.S. stocks) added 0.59%. Emerging market equities are 2.40% higher.

Long-term treasuries grew 0.05% for the week. Investment-grade bonds increased 0.32%. Treasury Inflation-Protected Securities (TIPS) added 0.14%. High-yield bonds gained 0.42%.

On the currency front, the U.S. dollar rose 0.41%.

Energy-based commodities increased 1.14%. Broader-based commodities rose 2.32%. Gold declined 0.83%.

Bob’s News & Updates

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