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Economy

If you’ve been paying attention to financial news, you’ve probably heard mention of the fiduciary rule. This rule was approved last year under the Obama administration, with the goal of increasing transparency within the investment realm. It was designed to force advisors to suggest investment products to their clients that were more affordable, rather than being able to suggest ones that instead provided these advisors with higher commissions.

While the rule has not yet been implemented (it was slated to go into play this April), it looks like its run may be short-lived. Today, President Trump signed an executive order that is likely to halt the implementation of the rule, along with ordering a widespread review of the Dodd-Frank Act.

fiduciary rule

This has many up in arms, as the fiduciary rule seems to be a matter of common sense and integrity. Forcing ALL advisors to offer their clients less expensive investment products, rather than higher priced ones that may result in bigger commissions, seems like a great idea. Transparency throughout any industry should be mandatory… so why nix the rule?

Yes, There Is Already a Fiduciary Obligation…

For almost 80 years, a fiduciary obligation — called the fiduciary standard — has been in place. This was implemented with the Investment Advisors Act of 1940, intended to affect most types of investment accounts. This standard implements an expectation that advisors need to place their client’s interests ahead of their own. The advisor is always supposed to act in the best interests of their clients, in every situation, whether the client is aware of it or not.

The reach of this standard is far and wide. An advisor cannot, for example, make trades on a client’s behalf that would result in higher commissions or fees for himself or his firm. An advisor is supposed to make all efforts to ensure that the investment advice given is not only accurate, but complete. They are bound to a “best execution” standard, while dictates that the purchase and sale of securities should be completed with the best possible combination of low cost and efficiency. Advisors are also prohibited from buying securities for themselves before they buy them (or advise their purchase) for their client.

Lastly, and perhaps most importantly, the existing fiduciary standard already prohibits the potential of conflicts of interest. In fact, if a potential conflict of interest is present, the advisor must disclose this to the client before any trades take place. Which begs the question…

Then, What Would the Fiduciary Rule Even Change?

As mentioned, the fiduciary standard already has provisions to avoid and prohibit conflicts of interest between advisors and their clients. This is, of course, the heart of the fiduciary rule… so why the new implementation?

Well, the difference primarily lies in the types of retirement account providers to which the existing rule applied.

As it stands today, the fiduciary standard does not technically apply to insurance reps, broker-dealers, and financial company reps (other than investment advisors). These individuals, instead, are bound by the suitability standard.

The suitability standard is much simpler and much less comprehensive. In a nutshell, it says that an advisor only needs to assess a client’s risk and tolerance before offering investment products and advice. Essentially, gathering a client’s preferences is enough, as long as the products the advisor subsequently recommends match those preferences. This opens up the possibility of a very large grey area… if an advisor simply believes that a product suits a client’s risk tolerance, it’s fair game.

The new rule, though, would make sure that everyone was bound to the fiduciary guidelines. Rather than having the freedom to pick financial products that simple lie below a client’s threshold, all advisors would need to first disclose the fees, limitations, conflicts of interest, etc. of the product. As of now, just the designated investment advisors are bound to such. The fiduciary rule simply hoped to expand this rule to anyone and everyone offering any sort of investment-related advice.

Why It’s Happening

Well, the argument seems to be that the fiduciary rule could actually harm many of the lower-income investors out there, in a number of ways. First, it would prevent advisors from recommending more expensive investment products to their clients when lower priced alternatives exist — even if the higher priced ones were a better match in the end.

Forcing advisors to be transparent about fees and compensation sounds like a great idea, unless the client then chooses their investment product based on this information alone. If an advisor puts three different funds in front of a client, with one having a noticeably higher rate of commission, the client is less likely to lean toward that fund. But what if it had a good chance of outperforming the others? To combat this, potential investors would need to take into account all components of a financial product, not just seek to avoid fees where they could.

Does limiting suggestions to lower cost financial products actually harm the client? Could narrowing their options actually be taking away their investment freedom, causing harm in the long run? Some fiduciary rule-protesters think so.

Another way that this rule could harm lower-income investors is through financial advisor services. Today, some companies are able to offer free or low-cost investment advice to their customers. The new regulations threaten to increase their fees for providing such, resulting in some of the smaller savers being denied advice or simply being unable to afford it.

The Impacts Overall

The fiduciary rule has also been challenged as detrimental to the smaller firms and dealer-brokers in the industry. The cost of compliance with the rule is expected to be high, with additional technology and compliance experts being an added, necessary investment.

As a result, we could expect to see many of these companies disband or be acquired. It’s actually already being seen, in the case of American International Group and MetLife Inc. brokerage operations. Both of these have already been sold off in anticipation of the fiduciary rule’s April 10 implementation date.

What does this really mean, though? Less diversity in the industry, for starters, as the independent companies disappear. Also, as the consolidation continues, it threatens to eliminate (or make difficult to find) advisors who will be able to offer smaller plans. Once again, this has the potential to greatly impact the lower-income investors.

It’s interesting to note that when the United Kingdom implemented a similar rule in 2011, their investment industry had exactly this response. Independent companies could not keep up or could not afford to comply with the technology and changes required. So, they forged paths with larger corporations. As a result, the number of financial advisors in the U.K. has dropped by a whopping 22.5% ever since, creating an even bigger guidance gap than had previously existed.

This effect makes it easy to see why the fiduciary rule has been referred to as “Obamacare for your IRA.” While the rule is necessary and important in many ways, its impact of narrowing the advisor industry down to fewer and fewer options is certainly a check mark in the negative column. Having options and healthy competition between companies is generally a big benefit for consumers.

All Hope Is Not Lost

For proponents of the fiduciary rule who are appalled to see its (likely) overturn today, I have some good news. Many of the financial services companies that were slated to be impacted by its April roll out are going to move forward with their new standards. They had already put new changes in place and believe that transparency is an important part of the advisor-investor relationship.

Companies like Morgan Stanley and LPL Financial Holdings, Inc. have both said that they still plan to move forward with the new standards that they have already worked to create. Hopefully, this idea of working in the best interest of the customer catches on and spreads, on its own, throughout the industry.

Until then, we wait and see.

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If you are a homeowner or have looked at buying a home in the near future, you probably know all about conforming loans. While the limits for these types of loans have remained stagnant for the past decade, steady increases in the housing marking have prompted this ceiling to rise for the first time since 2006. Beginning next year, a wider range of borrowers will now be able to access these types of loans. Rather than being limited to $417,000, conforming loans will now have an increased limit of $424,100 in 2017.

What is a Conforming Loan?

In the United States, mortgage loans are categorized based on whether they do, or do not, conform to the standards set for by Fannie Mae and Freddie Mac. One of these standards is the cost of the home. In order for a mortgage to be considered “conforming” – and be eligible for lower interest rates – it needs to be below the conforming loan limit.

Until this new change was announced for 2017, the conforming loan limit was set at $417,000 for many years. While a jump up to $424,100 isn’t an astronomical difference, it opens the homebuying door to many people who wouldn’t have otherwise been able to qualify for a lower risk, conforming loan.

If you want to buy a home that crosses this conforming limit threshold, your loan is considered non-conforming or jumbo. While these loans are certainly still available, they are considered much riskier to lenders and therefore are harder to obtain. Also, they typically involve higher down payments and a more intense scrutinization of your credit history and/or income. Because of this, they are seen more often with luxury homes, investment properties, or retail spaces.

Conforming loan limits vary by county, as it is relative to the cost of living in that area. The Federal Housing Administration is responsible for setting the national conforming loan limit (which is what will be increased for 2017), but some counties are deemed eve higher cost. As such, they have special higher limits.

In my county, for instance, the conforming loan limit is at the absolute max of $636,150 —  a whopping $212,050 above the standard national limit. Then again, the cost of living where I live is astronomical (Washington, DC area) and home prices stay high, so it makes sense that certain counties are able to get higher loans. If you want to check the conforming loan limits in your own county, Bankrate has a great chart that you can view.

conforming-map

What Does the Increased Limit Mean for Me?

If you are looking at buying a home that was toeing the $420,000 range, this increase may mean the difference between a basic loan and a jumbo loan for you. That equates to a lower down payment, greater chance of approval, and less headache.

Planning to buy your home with a VA loan? You would be obligated to purchase within the conforming limits of your county. A jumbo loan isn’t even an option with these (and other) government-backed mortgages, so the increase may open a few extra doors while finding the home of your dreams.

Why the Increase?

It’s a great indicator of the health and growth of our country’s housing market, that the limit is rising. After the US housing crash in 2007-2008, home costs are on the rise and expected to continue to grow. This is great news for our economy and for anyone whose money is invested in real estate, whether that be their home, rental properties, REITs, etc.

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While the cost of your home isn’t the only limiting factor between your mortgage being “conforming” or “non-conforming,” it’s a big part of it. Non-conforming, or jumbo, mortgages are harder to obtain and often involve more stringent credit/income guidelines, an intense application process, and higher down payments.

If you’re looking at a government-backed mortgage of any kind, you will need to stay within the conforming mortgage loan limits set forth by the FHA. Beginning in 2017, you’ll get a little extra wiggle room. Be sure to check for the actual limit in your county, especially if you live in a high cost area, and happy buying!

Have you ever had to walk away from a dream home because it would have meant a non-conforming loan?

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After a lull in the price of a barrel, we are seeing the cost of oil begin to once again increase. With it comes increased revenue and, in turn, money being pumped into both the stock market and the economy. So, is this good news for the average person? Well, the immediate answer is no, probably not.

It’s All Part of the Plan

Just a few weeks ago, the Organization of the Petroleum Exporting Countries (OPEC) — and even some countries who are not members of OPEC —  was able to create an agreement that reaches far beyond what many economists thought they could accomplish.  The goal? To reduce the supply of oil around the globe by at least 1.2 million barrels a day. Assuming the demand for oil remains unchanged (at least initially), the reduced supply will create a rise in price. This will, in turn, jump-start the oil industry.

As the price of oil continues to rise, it’s suspected that some of the countries involved will jump ship on the agreement. They may see the profits in front of them and begin pumping out more barrels than initially agree. So far, though, everyone is sticking to the arrangement and the price of oil has consistently risen since the start of the month.

No commodity is more discussed in the world of finance than oil. No commodity has more of an impact on your day-to-day personal finances than oil. Turn on any market-driven television channel, and I’m willing to wager that within 10 minutes, the analyst will have brought up oil at least five times. It’s a true driving force behind the global economy, and its shift in price can have drastic changes on you and your family.

Some economists are extremely bullish on oil predictions, saying it will reach $75/barrel before the end of the year. However, even the bears don’t see oil going anywhere but up (albeit slowly) for the next few months.

Now that the price of oil has stabilized and is steadily rising, is this good for your wallet?  Your future?

The Bad News

When the price of oil goes up, it affects the American buying consumer primarily in three negative ways:

The Price of Gasoline Rises – According to AAA, this week’s average price of unleaded regular gas is $2.21 per gallon.  This time last year, that price was $2.02. At its lowest point this year, the price was $1.62.  If you’re someone who takes an hour round-trip commute to work or drives the kids to football practice in the minivan, you will notice more money coming out of your wallet when you fill the tank.

Average Americans fill up w/ roughly 700 gallons of gas per vehicle, per year. Because of this, even a small increase of 25 cents per gallon will put you out an extra $200 or so per vehicle. You can mitigate this loss by owning a cashback credit card (some of which offer up to 5% rewards on gas purchases). Even after saving a little bit more there, though, rising gas prices are an inevitability of higher oil prices.

Price of Travel and Other Goods Rises – When the cost of gasoline goes up, the cost of goods also goes up. This is to coincide with businesses having to pay more money to get their goods to them.  And of course, that cost is passed on to you, the American consumer.

For example, a round-trip flight from LA to Chicago may be $110 today, but closer to $120 in two months when oil goes up another $5.  Truckers moving products across the country, grocery stores taking in daily shipments of produce… there is no shortage of consumer goods affected by a higher cost for oil.

Price of Heating Oil Rises – This is the one that impacts me the most, but overall impacts the fewest number of consumers.  I live in central Connecticut and every year, I buy between 700 and 800 gallons of oil to heat my home through the winter. My parents, who own a much older (and slightly smaller) home, purchase over 1,300 gallons of oil per winter. When oil prices go up, the price per gallon of heating oil also goes up.  The cost of oil is very similar to the cost of gasoline per gallon.

To combat these prices, I locked in a rate of $1.89 per gallon in July and prepaid for the winter. This should help me avoid having to pay inflated costs when the cold weather hits. However, I also lose the ability to pay lower costs should the price of oil go down.

The Good News

It’s not all bad, though, I promise.  When the price of oil goes up, there is a lot of good that comes from it, too.

Retirement Savings Accounts Increase – Because oil is a heavily traded commodity, it’s likely included in any retirement portfolio you own.  Whether it’s in a commodity mutual fund, or a direct stock ownership of Exxon Mobile, Chesapeake Oil, etc., higher prices in oil mean higher value in your portfolio.  As rising oil prices generally (and I say that loosely) means a stronger economy, it would also likely have an impact on the other investments you’ve made. So if the world is paying more for oil, and the demand for oil remains high, most investments are happy.

The Economy Grows – The oil industry is one of the largest in the world, and higher prices mean higher profits for oil companies.  These profits lead to the hiring of more employees to produce more oil (or expand the business in other ways, still hiring more employees). This means more jobs for not only American citizens but also abroad.

With more people employed, more money is spent inside the US economy. Goods that would not normally be purchased are now starting to move off the shelves.  My example is the most basic way in which the economy will see a positive effect of higher oil prices. However, there are countless other ways to quantify it as well. (For an added example of global wealth, Goldman Sachs provides perspective.)

The Government Doesn’t Get the Extra Revenue – When you see the price of $2.25 for a gallon of gas, you might assume that the money you pay the gas station stays with the gas station.  However, inside of that gallon is heavy taxes collected by both the US government and the state government.  Below is a map that shows just how much money you pay in “tax” when you buy a gallon of gasoline (as of January 2016).  The good news here is that these taxes are not based on a percentage of the gallon, but a flat amount. For example, the US government gets a flat 18.40 cents per gallon, no matter the cost of a barrel.  So, the added revenues earned by the gas station are revenues passed economically, without additional government taxes.

gas-tax-map

You’ll notice that the good news is very macro-themed while the bad news is very micro-themed.  When the cost of goods goes up, there’s just no way around having it immediately and negatively impact the day-to-day spending of the consumer.  So, whether or not the price of oil going up is good or bad for you likely depends on your current financial situation.

If you’re well-to-do with money in the bank, savings for retirement, and are secure in your employment (or your employment is oil pump-related), oil prices going up is a good thing.  It goes a long way to secure a stronger economy in the long-run and boost retirement savings.  However, if you’re currently struggling to make ends meet, and things like retirement seem like a dream versus a real goal, then higher oil only means less spending money in the near future. Either way, the rise in oil prices is likely to garner mixed emotions nationwide.

 

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Gallup’s annual “Mood of the Nation” poll sampled 1,018 adults from across the United States earlier this year, and the results show that more Americans say they are worse off financially right now than they were a year ago. 42 percent of the respondents consider themselves to be worse off, 35 percent say they are better off, and 22 percent claim to be in the same financial position.

This sentiment is surprising considering the economy has been continuing to improve and the stock market (measured by the Dow Jones Industrial Average) was up 26.5 percent in 2013, the biggest annual increase in 18 years. Also, the official unemployment rate for December 2013 was 6.7 percent, the lowest rate of unemployment since October 2008, the last month before the economy began seeing the effects of the Great Recession.

Why are people feeling less financially secure about their current situation while the economy, as a whole, has been improving?

Averages don’t tell a complete story.

First, it’s clear that averages don’t apply to everyone. You can’t predict with precision any particular woman’s height when you observe that on average, women in the United States are 5 feet, 4 inches. Americans are in a better financial situation overall, but that doesn’t mean than any particular household is thriving more than last year.

But a survey of a representative sample should show that there is a positive trend.

Self-reporting and questions about feelings are not very accurate.

When the economy is improving but people’s financial lives aren’t, it doesn’t have much to do with averages. If the survey looked at people’s bank accounts and credit card statements, the results would undoubtedly be different than the Gallup poll’s results. This poll is asking people to make a judgment call. It’s a survey that asks about feelings, not about a financial reality. People don’t always know how to accurately report their financial situation.

That doesn’t mean that the survey has little value. Feelings about one’s financial situation are important, because it’s those feelings — not “reality” — that determine the choices people make about the future. It’s possible to have more money in the bank and less credit card debt this year than one had last year, but feel worse about the financial situation.

More knowledge results in more concern.

If you were blissfully unaware of the danger you were in financially last year, and at some point discovered the truth about your financial situation, it’s possible you’re more stressed this year than you were last year about money, despite being in a better position. My concern about my finances increased when I stopped ignoring my bills. The year I began keeping track of my finances, I might have reported feeling worse off financially than I felt the previous year, despite the truth that I was on the road to financial improvement.

Your friends appear to have improved.

One way people determine whether they’re better or worse off financially is by comparing their financial situation with the perception they have of their friends’ financial situations. Studies have shown that income satisfaction isn’t necessarily correlated to certain amounts of income, but the differential in income between a person and his or her friends and colleagues. In other words, a $50,000 income is satisfactory if your friends earn $40,000, but it’s not satisfactory if your friends earn $75,000.

This comparison plays a role in how you judge your financial situation. If your friends appear to have had a much more successful year than you have, you might be inclined to believe and report that you’re worse off financially now than you were the prior year.

And here’s the kicker. Your friends really are richer than you. A new research paper published this year uses the “friendship paradox” to illustrate this. The friendship paradox describes how your friends are more popular than you, because people who have more friends are more likely to also be friends with you. This is described in Slate:

People who have a ton of friends are more likely to be your friend in the first place. They have a greater tendency to make friends. People with a lot of friends drive the average number of friends up in tons of other people’s social networks because they are connected to so many other social networks…

It’s similar to going to the gym and feeling like the most out of shape person there. The reason that everyone around you is so in shape is because they’re at the gym all the time—that’s why you’re seeing them. Everyone else is at home relaxing and not getting in shape. You’re looking at a very biased sample of people.

When we compare the finances of our friends, we’re also looking at a biased sample of people. And when you see the wealth of your friends (and its growth over the past year) outshine your own, you’re more likely to feel bad about your financial situation and report that negative feeling in a survey.

The media affects your perception.

I saw The Wolf of Wall Street in a movie theater a few weeks ago. The film focused on a stock broker who committed crimes, stole investors’ money, lived a lavish lifestyle, and didn’t really get in that much trouble for his misdeeds. Much of the movie focused on his lavish lifestyle without too much criticism. Some will see the film as a glamorization of a lifestyle of excess, some will see it a a condemnation, but I think it was more successful as the former.

For all the criticism of the “one percent” in American culture over the past few years, we are still fascinated by the lifestyles of the rich and famous, as we see through films and television. While more of the middle class struggles, the more we look to the media to help us escape through fantasies about the financial life that will almost always be out of reach. More programs prey on the public’s desire to see stories about rich people, whether they’re stories of success or failure.

Either way, the proliferation of showcases of wealth in the media has an effect on the way we view our own lives, and this might also play a role in our perception of financial progress. That is, the more we see people flaunt their wealth in the media, the worse we feel about ourselves.

Do you feel worse off financially now than last year?

Here’s the question the Gallup organization asked in its survey:

Next, we are interested in how people’s financial situation might have changed. Would you say that you are financially better off now than you were a year ago, or are you financially worse off now?

I am financially worse off now. Technically, that may not be the case. I just paid a large tax bill, and my January balance sheet suffered because of that. But this is a tax bill I knew — or should have known — was coming, so my wealth hasn’t really changed. In fact, I’ve earned more income than I’ve spent over the last year, so my financially situation should have improved.

How would you answer this question?

Photo: Flickr/Gamma Man

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JPMorgan Chase Settles SEC Charges Regarding Fraud in 2012

by Luke Landes
JP Morgan Chase

I would have thought that all the shenanigans within the financial industry ended when regulators began looking into causes of the Great Recession. Today, the SEC announced that JPMorgan Chase is settling the charges that lying to investors was part of the method of operation for the company as late as the first quarter of […]

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5 Keys to Full-Time Employment for Young People

by Luke Landes

The latest economic news from the Department of Labor paints a mediocre picture at best of the employment situation in the United States. It’s still difficult for young people to find full-time jobs. There may be some concern that this lower level of employment is going to be the new norm, and whether American society […]

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Mint.com Tracks Two Million Users to Create Spending Index

by Luke Landes
National Average Monthly Spending

When staff writer Sasha introduced Consumerism Commentary readers to Mint.com in 2007, I began to think about the power of massive consumer financial data. As more people signed up for this online service that connects directly to users’ credit card accounts and bank accounts, Mint.com, or any other similar services, would be able to analyze […]

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Raising the Minimum Wage to $9

by Luke Landes
Minimum Wage

In his State of the Union address to the United States Congress and the television-viewing audience around the world, President Obama called for an increase in the federal minimum wage as a way to reduce poverty. If you believe that business owners have a right to pay whatever the market will bear, minimum wages, whether […]

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$1 Trillion Platinum Coin: The Next Episode of Reality TV

by Luke Landes
$1 Platinum Coin

Political theatrics doesn’t stop. I’ve been ignoring the latest issue for as long as possible, but this is so ridiculous I couldn’t go on ignoring it. Now that pundits have stopped talking about the fiscal cliff, the discussion has turned to the debt ceiling, the artificial limit Congress has put on spending that they have […]

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Romney Versus Obama: Who Will Be Better for the Economy?

by Luke Landes
James K. Polk

Here’s a topic that’s sure to get the public crotchety: politics. Just like I don’t talk about the most intimate details of my personal finances with my friends, I generally don’t discuss politics on Consumerism Commentary. I have friends who consider themselves Democrats, other friends who consider themselves Republicans, and others who prefer not to […]

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