Some Sanity in Scary Times

Balancing your portfolio in a bonkers market

By John F. Wasik

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Balance is a rare bird these days. Jobs, housing, stocks, European debt: All seem to be in a spasmodic tailspin.

There is some consolation that a balanced portfolio can help smooth out the jagged curves of a bipolar market economy. But balance is rarely what we think it is, and it needs constant monitoring.

When most investment advisers tout a balanced portfolio, it typically means one thing: About 60 percent would be invested in a U.S. all-stock fund and the remainder in bonds.

A good proxy for the stock component would be the index exchange-traded fund SPDR S&P 500 fund. U.S. bonds could be ably represented by the SPDR Barclays Aggregate Bond ETF. Both funds are low cost, diversified ways of owning the lion’s share of each market. Here’s how the returns break out, according to Craig Israelsen, professor of finance at Brigham Young University, who analyzed the underlying indexes:

A balanced portfolio is roughly half as risky as an all-stock mix. If you looked at August’s returns, you would have only lost 2.75 percent in the 60/40 portfolio, compared to a 5.5 percent loss in the all-stock portfolio or a 1.37 percent gain in the much safer all-bond portfolio. No surprises there because bonds are safe havens when investors flee stocks as they did during last month’s volatility — and may continue to do so in a broad-based pullback.

Let’s look back even deeper into the past decade, which included two recessions, 9/11, the 2008 meltdown and the dot-com blow-out of 2001. Bonds are again the best performers as a buffer against stocks — returning 5.5 percent vs. 2.59 percent for 100 percent stocks. Between those two extremes was the balanced portfolio, with a 4.1 percent return through August 31.

In an even more volatile period — going back only five years to include the 2008 meltdown, recession and recovery — bonds again came out on top with a 6.26 percent return, compared to 0.74 percent return for all stocks and 3.3 percent for the balanced mix.

It’s hard to argue against being all in stocks or bonds at the right moments. In good times, stocks are the place to be as you’re rewarded with dividends and capital appreciation based on corporate earnings expectations. When the skies darken, though, bonds are decent hideouts due to their steady payments and appreciation when interest rates decline. Yet how do you time the market? That’s what makes the balanced approach a solid middle ground that lowers both stock and bond-market risk simultaneously.

Long-term, the middle route makes a huge difference. From 1926 through 2010, according to a recent T. Rowe Price study, a balanced portfolio delivered returns above 10 percent almost as frequently as an all-stock portfolio — with 40 percent less volatility.

That means in a dreadful year for stocks, the balanced portfolio would only lose 28 percent, compared to 43 percent for the 100 percent stocks mix.

The balanced approach is a compelling argument for mutual funds that automatically do the 60/40 allocation and for target-date or lifestyle choices within 401(k)-type plans that do the same thing only with specific years targeted for retirement withdrawals. Every major mutual-fund firm offers them as does Folio Investing.

You could also build a balanced portfolio on your own by buying the two SPDR funds I mentioned above. Buy them through a deep-discount broker or find their equivalents commission-free through Fidelity Investments, Charles Schwab or the Vanguard Group.

Want to take the balanced approach one-step further? Consider an ultra-balanced approach with at least 12 separate funds representing seven asset classes, such as the ones found in the 7-12 portfolio. Over the past five years, the passive version of 7-12 has returned 4.8 percent, compared with 3.87 percent for the Vanguard Balanced Index and 0.71 for the Vanguard 500 Index fund, according to Israelsen, who designed the portfolio.

Israelsen has expanded the definition of balanced portfolios by including inflation-protected bonds, cash, natural resources/commodities, global real estate, emerging markets and all sizes of companies. This model reduces risk through diversification and includes tangible assets such as commodities and real estate.

What’s important in a balanced approach for moderate to conservative investors is that more global asset classes get you away from the all-U.S. stocks and bonds orthodoxy. This diversity not only gives you room to breath, you’ll never fly too close to the sun.

Market Madness Avoidable

How to focus in a manic market

By John F. Wasik (Reuters)

While the market was doing another backward swan dive, one email came to me that reflected the mass anxiety: “Some are saying it may be time to panic, and I am resisting. What do you think? And what does panic mean: Jump? Sell off?”

After I offered some brief words of staid resolve, it occurred to me that the luncheon speaker at the Morningstar ETF conference I was attending at the time had the right idea, even though he didn’t utter a word about finance or markets.

Words of fortitude came from Jeffrey Zaslow, who co-authored books with Chesley Sullenberger, the pilot who safely landed a disabled jet in the Hudson River (saving all 155 aboard); and Randy Pausch, the Carnegie-Mellon Professor who offered a moving “last lecture” on life and love before he died of cancer.

Both men faced life-threatening panics and had to make tough decisions. Sullenberger had minutes to decide the best course of action when bird strikes took out his jet’s engines after he left LaGuardia airport. Pausch had a few months to deliver his key life lessons to his students, colleagues and family.

What did they both have in common? Focus and an ability to discern what was important. To distill the essentials of life and articulate them. A lifetime of training, experience and thoughtful examination had prepared them for the moment of truth. As Zaslow noted, they — along with most of us — would be remembered for what they did in critical moments. Yet another such global moment is upon us.

I’m not going to pretend that the markets will suddenly see tomorrow that all will be okay with European banking, or that the U.S. government or American megabanks will fix their tattered balance sheets anytime soon. Or that we’re not all headed for a global recession or more bank failures.

All of that is possible and that’s why the markets are so utterly spooked. Volatility will not ease soon and if you can’t afford the risk, you shouldn’t be invested in stocks.

What I do know is that this is a perfect time to concentrate on what’s essential to you and your family. It’s nearing year-end, so now’s the perfect time to start asking — and answering — these questions:

Are you protected?
This question goes beyond having the basic forms of insurance to cover your vehicles, home/apartment/valuables, life and health. Disability insurance is essential because you’re far more likely to suffer loss of income for health reasons. Portfolio protection is key to make sure all of the risks (inflation, market, credit) are fully hedged.

Is your “gross family spending” positive?
I heard this phrase from Robert Arnott of Research Affiliates and thought it was perfectly descriptive of household financial health. It’s simple: Do your assets (home, business equity, pension, savings, cash) exceed your liabilities (mortgage, credit cards, taxes owed, loans)? If not, what can you do to clean up your balance sheet?

Do you have a plan?
I’m not just talking about a comprehensive financial plan that sets down your goals, objectives and risk factors in an investment policy statement. What about your estate planning? Do you have a living will or trust? Do you want to continue your education? How can you reduce your taxes? How do you plan to invest in your human capital — what you’re good at and passionate about?

What’s your legacy?
This is the hardest question of all. Building an estate is just fine, but if you leave behind love for the people you care about, there’s nothing wrong with that. This is the most lasting legacy.

You may come to the conclusion that you need some help in answering all of these questions. It wouldn’t hurt to approach all of your trusted advisors or summon your family to discuss some of these items. Also check in with your lawyer, accountant or financial planner.

Please note: By “trusted,” I don’t mean brokers or agents. Professionals who are not on commission can give you more objective advice.

Don’t make a move until you know your long-term plan. Now is a bad time to make a decision if you’re just doing it out of panic. You’re not alone in this and there’s no need to completely jump into gold or cash without having a rational defense.

The bottom line is sustainability. If your debts are out of control, why are you worried about the markets? And if you’re not protected against loss of income, the European banking situation is incredibly irrelevant.

After you’ve consulted with your family and professional counselors, then decide if your plan makes sense. You may feel that you’re still wobbly — and need to make some course corrections. But at least you won’t be flying blind.

Why Social Security Will Survive

Perry’s monstrous lies about Social Security

By John F. Wasik (Reuters)

Gov. Rick Perry, the GOP presidential candidate who calls Social Security a “monstrous lie” and a “Ponzi scheme” has implied that future retirees can’t rely upon receiving benefits from the system.

Not only is Perry shooting wildly from the hip on these statements — a strategy cynically designed to attract angry, younger independent voters — he’s spewing some layered falsehoods that need to be addressed.

Social Security can not only be preserved for future generations, its coming fiscal shortfalls can be fixed relatively simply. What Perry also neglects to mention is that it’s one of the most successful anti-poverty programs in U.S. history.

The before-and-after Social Security picture is dramatic. Before Social Security, almost half of elderly Americans had income below the poverty line, reports the Center on Budget and Policy Priorities. Roughly 12 percent of elderly citizens are considered poor today. The program lifted more than 11 million out of poverty — more than 60 percent of those were women.

Here’s some even more relevant Texas-sized context: Today, more people are slipping back into poverty because of permanent job losses, recessions, a housing meltdown, stock-market downturns, reduced employment benefits, higher medical costs and stagnant wage growth. The U.S. poverty rate last year increased for the third straight year — the highest it’s been since 1993. Some 46 million have annual incomes below the poverty line of $22,113.

As the U.S. is saddled with the highest poverty rate among industrialized countries, why are the anti-poverty features of Social Security being attacked?

Behind Perry’s venom about the system is a larger truth that he’s yet to illuminate: Making cash-strapped states responsible for replacing Social Security or privatizing it is unrealistic. There is nothing in the private sector — nor is anything likely to emerge — that could replace Social Security at the same low cost to taxpayers.

Simply trashing Social Security by calling it a Ponzi scheme ignores the fact that when you pay your FICA payroll tax, you’re getting an inflation-adjusted annuity, disability insurance, a small death benefit for your survivors plus Medicare benefits.

Try to find a package like this in the private sector. It doesn’t exist. You’d have to buy an inflation-protected annuity, disability and life policy separately — and they are no bargains.

Keep in mind, when private insurers offer these products they have to pay commissions and marketing costs, so they load policies with lots of hidden expenses. They can’t offer the same economies of scale that Social Security can, which isn’t burdened with the excessive marketing and administrative expenses.

On an inflation-adjusted annuity alone, you pay dearly to keep up with the cost of living. Compared to an immediate annuity (without inflation protection), your payment would be from 24 percent to 30 percent lower. For that reason, private inflation-protected annuities are relatively scarce and unpopular.

Private disability policies, which I recommend, are expensive outside of group plans (buy one through your employer if you can). For a 40-year-old wanting a $4,500 monthly benefit, the annual premium would be about $2,300.

Life insurance premiums vary greatly, depending upon your health, age and amount of coverage. The older and sicker you are, the higher the cost. If you have chronic conditions, risky occupation or a flawed medical history, good luck getting coverage. Social Security and Medicare don’t turn anyone away.

What about examining Perry’s inference that current workers are contributing money for today’s retirees?
That’s true, but it’s not a Ponzi scheme. It’s well known that there will be fewer workers in the future to fund the system, which will create a regular structural deficit by 2016. But that’s only the case if nothing happens and Congress completely ignores technical fixes or simply cuts benefits.

There’s more about the “if nothing is done” scenario: The Social Security Trust Fund — Congress borrows the cash and replaces it with Treasury securities from a pool of payroll taxes — will be exhausted in 2039, according to the Congressional Budget Office. Yet that doesn’t mean that Social Security will be bust; it will then begin to pay reduced benefits, again, if Congress doesn’t take action.

In what Washington Post economics blogger Ezra Klein calls “the boring truth” about Social Security, Congress can raise the amount of salary subject to Social Security tax to fill the funding hole.

Right now, the earnings cap is $106,800 and the tax is only 4.2 percent for employees, which may drop even more (temporarily) if Congress approves President Obama’s extended payroll tax break.

If you want to get personal on how Social Security will impact your life, run a benefits estimate of how much you’re entitled to at retirement age. For me, it’s about $2,000 a month. It’s not a lot of money and I know I couldn’t live on that where I live now.

Now think of what would happen to your future lifestyle if that modest supplement was scaled back — or you had to retire later. Would you have enough in your 401(k) and other savings to ensure a dignified retirement?

Behind Social Security is an appallingly simple truth: We can put more money into it by asking higher-salaried employees to pay more, and by including immigrants and public-sector employees. I know that doesn’t have much political sizzle to it, but this kind of math doesn’t lie.

9/11's Unfinished Business

Days of simmering carbon rage in the post 9/11 world

By John F. Wasik (Reuters)

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By John Wasik
The opinions expressed are his own.

Three friends were recently arrested for sitting in front of the White House to protest a potentially damaging Keystone XL tar sands pipeline. They were joined by actress Darryl Hannah, environmentalist Bill McKibben and more than 1,200 others.

Although they were handcuffed, stuffed into a paddy wagon like livestock and quickly released after paying a $100 fine, they believed their civil disobedience was instrumental in bringing attention to a damaging fossil fuel production process. They are all in their seventh decades and highly educated, but felt they needed to make a stand.

A decade removed from the horror of 9/11 and what’s changed in our attitude towards ecology, energy and economics?

We are still frighteningly dependent upon imported oil and there’s no comprehensive U.S. energy policy other than to consume with abandon every last molecule of carbon by blowing up mountains, fracking bedrock, fouling waterways, polluting oceans and warming the atmosphere.

If you think I’m conflating the horrendous loss of life on and since 9/11 with something unrelated, I’m not. Terrorism is a beast that seems to know no master and we’re still fighting that battle. We are all still grieving for the thousands lost and a violated sense of security that will never be reclaimed.

Yet we can only live in the present and head into the future. The U.S. mostly exports jobs now and debt now instead of fostering new energy technologies to rid us of dependence upon foreign petroleum. We’ve become really good at consuming more than our share and kowtowing to entrenched interests that profit from feeding this addicted dragon, which has the face of most all of us.

If you were looking for a hint of an energy policy in President Obama’s jobs speech Thursday night, you would have needed a microscope. The proposed $447 billion plan is big on more tax cuts and didn’t directly promote earlier Obama proposals for green energy development.

Meanwhile, the carbon age grinds on with more drilling and billing from countries who are not really our friends. Each drop of the 4 million imported barrels of oil the U.S. imports every day uncomfortably links us to many countries that have appalling human rights records that are often openly hostile to American interests.

If anything, U.S. energy security has worsened since 9/11. With the exception of Canada, the leading U.S. oil supplier, five out of the top six exporting countries are run by repressive, hostile or unstable governments (Iraq is number six on the list). We’re financing brutal thuggery on a global scale.

The deadly irony is our nearly complete dependence upon fossil fuels — and our many battles to protect this dependency — has cost lives. Some one in eight soldiers were killed in Iraq from 2003-2007 just protecting fuel convoys.

All told, the U.S. war on terror in two countries and elsewhere is estimated to have cost us $5 trillion.

The lives and the dollars lost to fossil fuel dependence are needlessly wasted. The Navy alone estimates that for every $10 hike in the price of crude, it spends $300 million more annually in fuel costs. And that’s just the Navy.

Shouldn’t that money be going to create jobs, fund schools, clean energy research and fixing infrastructure?

Reducing U.S. dependence upon crude (and coal for that matter) can bolster the flagging U.S. economy and trim the budget deficit. The clean technology sector surged 8 percent last year and is now outpacing job creation in the oil industry.

Policymakers in Washington have known all of this for years, yet keep ignoring the inebriated folly of energy co-dependence.

This institutional blindness leads to astounding decisions such as the U.S. State Department green lighting the environmental soundness of the tar sands pipeline.

Since when did the State Department gain meaningful authority over environmental concerns? What’s next? Will the Energy Department gain purview over Yellowstone?

I’d like to believe that my friends briefly sacrificed their freedom and, in the words of Henry David Thoreau, refused to “resign their conscience” to show what an onerous burden dirty energy places upon the entire earth and society. They don’t want to leave behind one of the most destructive legacies of the industrial era that has become a paramount human rights issue as well.

We must challenge our government when it ignores the collective conscience. And if two wars, street protests, massive activism and voluntary incarceration aren’t enough? Then we will have learned nothing from one of the lessons of 9/11.

Photo: American actress Daryl Hannah is arrested as she joins a protest against the Keystone XL oil pipeline, outside the White House in Washington, August 30, 2011. Dozens were arrested on Tuesday in the protest against the pipeline that, if completed, will stretch from Canada to the gulf coast of the United States. REUTERS/Jason Reed

How Wall Street is Blocking Financial Reform

Published on iWatch News (http://www.iwatchnews.org)

Home > Investor protections imperiled by Wall Street, GOP assault on financial reform

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Consumer Finance [1]

Investor protections imperiled by Wall Street, GOP assault on financial reform [2]

It's no secret that a powerful, well-funded coalition of mega-banks, derivatives users and insurance brokers wants to see major pieces of the Wall Street financial reform law dismembered and defunded. They are partnering with mostly GOP House members to do so.

What's lost in this complex cyclone of industry lobbying, free-market ideology and campaign contributions: some of the most pro-investor protections of the law are at risk of disappearing, including safeguards that would help every American who deals with a broker, bank or insurance adviser.

Among the pro-investor measures facing an uncertain future:

• Requiring stock brokers and insurance agents who offer financial advice to act as “fiduciaries” and put client interests ahead of their own profits;
• Creating an Office of the Investor Advocate and a new Investor Advisory Committee within the Securities and Exchange Commission. Both have been put on hold [3] for lack of funding;
• Supplying all the funding mandated by the Dodd-Frank financial reform law for the new Consumer Financial Protection Bureau;
• Increasing the annual funding sought by the SEC and the Commodity Futures Trading Commission to carry out their Dodd-Frank mandates.

The all-out assault on the reforms began almost as soon as the law was signed in July 2010.

Following the money

Financial industry dollars have been pouring into congressional coffers for years and have mushroomed in the wake of the Dodd-Frank law.

While both Democrats and Republicans receive money from Wall Street, banks and insurers, several House GOP members have aggressively led efforts to dismember key provisions of the Wall Street reform law.

The House Financial Services Committee, now chaired by Republican Spencer Bachus of Alabama, has been at the forefront of trying to delay or dismantle Dodd-Frank investor rules. This was the committee that did the heavy lifting for financial reform under former chairman Barney Frank, the Massachusetts Democrat and eponymous co-author of the law passed in 2010.

Bachus has not only opposed the formation of the CFPB, he has introduced several bills to delay its start-up and replace its sole director with a five-member board answerable to a financial crisis committee of top regulators.

Bachus' frontal assault on the consumer bureau and other Dodd-Frank regulations reflects the disdain of GOP House leadership in general. Only three Republicans voted for the Dodd-Frank bill when it passed the House in a 237-192 vote on June 30, 2010.

First quarter 2011 campaign finance filings reviewed by the Sunlight Foundation showed "that seven of the 10 freshmen Republicans appointed to the House Financial Services Committee have received 40 percent or more of their political action committee (PAC) contributions from the finance, insurance, and real estate sector."

Bachus, who depends on the financial services industry for more than 80 percent of his campaign funds, framed his attack on the CFPB and other Dodd-Frank reforms in the context of government accountability and over-regulation.

“Everyone on this Committee supports robust consumer protection. But there must be real oversight and accountability of every massive government bureaucracy, and that includes the CFPB,” Bachus said [4] on the passage of a trio of bills passed by the Financial Services Committee on May 13.

A coalition of consumer groups including the Consumer Federation of America and the U.S. Public Interest Research Group assailed Bachus' approach, saying that his bills "aren't about reasonable oversight of the CFPB, they are an attack on consumer protection," according to Ed Mierzwinski of US PIRG.

When financial reform was still being debated in 2009, opponents of the bill—mostly Republican—reaped an average 20 percent more in campaign contributions from the financial industry than proponents, according to the Center for Responsive Politics.

House Democrats also received plenty of money from financial interests for their re-election campaigns.

Frank, an architect of the bill, received nearly $1.3 million, the second-highest amount of any House member, from the industry. Jim Himes of Connecticut received $1.2 million. He was followed by Ron Klein of Florida and Carolyn Maloney of New York, who received about $1 million each. Topping the list with $1.7 million was Democrat Paul Kanjorski of Pennsylvania, a former House Financial Services subcommittee chairman who lost his seat in the last election.

When Republicans took over House leadership last November, they began blasting away at the Dodd-Frank law with the support of the financial services industry. Since they knew they couldn't repeal the bill outright, they cherry-picked provisions that were most costly to the industry such as fiduciary duty, derivatives reform and the CFPB.

Bachus told [5] an Alabama newspaper weeks after the November 2010 election that his role was to "serve the banks," later clarifying his comment to say that regulators should set parameters for banks but not micromanage them.

"If they (Republicans) can get control of both houses," Frank told iWatch News , "they can gut this thing (Dodd-Frank). In general, [GOP attacks on Dodd-Frank] are a way to attract campaign contributions and intimidate regulators."

Bachus and his House Financial Services Committee have already passed more than a dozen bills this year aimed at killing or weakening various aspects of the reform law, but the bills have not advanced in the Democratic-controlled Senate.

The top donors [6] to Bachus: Independent Community Bankers PAC, JP Morgan Chase & Co., American Financial Services Association and Capital One Financial Corp. Assn. PAC. Of the 20 top contributors to Bachus, only two—ExxonMobil and Honeywell—had no direct connection to financial services.

All told, Bachus' campaign took in [7] at least $1.23 million from the finance, insurance and real estate sector, more than half of the $1.97 million he raised in the 2010 election cycle, according to Sunlight Foundation.

Financial lobbies have been particularly generous to those on the House Financial Services’ capital markets subcommittee, which has jurisdiction over the SEC, exchanges, capital markets and government-sponsored housing enterprises like Fannie Mae and Freddie Mac.

The subcommittee’s chairman, Republican Scott Garrett of New Jersey, opposes expanding the fiduciary standard. Garrett and 13 of GOP colleagues sent a letter on March 17 to the SEC, saying the agency "has not identified and defined clear problems that

would justify a [fiduciary duty] rulemaking and does not have a solid basis upon which to move forward." Lawmakers said they shared the concerns of the SEC’s two Republican commissioners, who said [8] the agency’s fiduciary study “fails to adequately justify its recommendation that the Commission embark on fundamentally changing the regulatory regime for broker-dealers and investment advisers."

Garrett also demanded a "thorough cost-benefit analysis" of any fiduciary rule that the SEC might propose. Soon after receiving the letter, the SEC chairman announced the rule was put on hold for further study.

Like Bachus, Garrett's campaign was flush with financial services money. Throughout Garrett’s political career, his single-largest contributor by industry came from the finance, insurance, real estate and securities sector, which accounted [9] for $1.8 million of the career total $5.2 million raised.

To be sure, the party in power generally receives more money from special interests, especially when new regulations surface.

According to Opensecrets.org, "The average member of the Financial Services Committee received about 75 percent more money in the last election cycle from industries under their jurisdiction than the average member of Congress." That included more than $3 million from the American Bankers Association, $1.7 million from JP Morgan Chase, $1.6 million from Bank of America and $1.3 million from Wells Fargo.

By imposing restrictions and curtailing funds for the key agencies responsible for protecting investors, House Republicans have put regulators on notice that they will be gunning for them. And if Republicans take control of the Senate in 2012, Dodd-Frank may be mortally wounded.

Investors who lost money from commission-oriented broker advice will continue to get hurt or be sold risky investments they don’t need without tougher watchdogs, according to consumer advocates.

"There absolutely needs to be fiduciary duty," says Robert Talbot, a University of San Francisco law professor who has represented hundreds of broker-fleeced investors. "People are completely trusting."

Attack on SEC funding, fiduciary rule

SEC Chairman Mary Schapiro, a champion of the Dodd-Frank reforms, has faced an onslaught from House and Senate Republicans. GOP members of the House Financial Services Committee want to cut the SEC’s funding and staffing, which would make it difficult for the agency to put in force the major safeguards mandated by the Dodd-Frank law, such as the Office of the Investor Advocate and better policing of investment advisers.

Republicans also want to neuter the power of the new consumer protection agency, complaining [4] that the CFPB should not be led by a single director as the agency is now structured.

Not only is the alliance of GOP lawmakers and the financial services industry seeking to cut funding for the SEC, it wants to shelve a stricter fiduciary rule for brokers. Under pressure from a group of House Republicans and GOP members of the Senate Banking Committee, Schapiro has delayed the rulemaking for the fiduciary rulemaking. The SEC has already received more than 400 emails [10] from industry groups as well as small investors in response to its January study.

One of the biggest supporters of expanding the fiduciary rule, the AARP, plans to do its own research to gauge the financial impact of the proposed rule, said Mary Wallace, senior legislative representative of the group that represents Americans over 50. Amid attempts to weaken or dismantle the Dodd-Frank law, Wallace says it's essential that the fiduciary rule survive so that investors will "be guaranteed that the products they are being sold are the best for the client's needs."

Schapiro recently told iWatch News that the agency has placed a higher priority on other rules for the time being. The reform law requires the SEC to write some 100 new rules, create five new offices and produce more than 20 reports. The SEC plans [11] further economic analysis of the fiduciary issue, and hopes to propose a fiduciary rule in the second half of this year, Schapiro said in May.

Even with its new powers under the Dodd-Frank law, the agency acknowledges that it will be difficult to police such a large and powerful industry.

The investor protection agency was crippled during the Bush administration as the SEC budget was reduced or frozen from 2005 to 2007 – just as Wall Street was selling securitized products that later proved to be toxic for investors and the financial system. Only recently has the agency returned to staffing levels of fiscal year 2005, Schapiro says.

In the interim, the SEC saw trading volume double, a 50 percent jump in the number of investment advisers, and investor assets grow to $38 trillion.

Six years ago, about 19 SEC examiners were available for every $1 trillion invested; now the ratio is 12 examiners per trillion, Schapiro said. Investor protection advocates are troubled by the fact that assets under management have ballooned while the number of watchdogs has dropped.

The agency requested $1.4 billion for fiscal 2012, an amount it says would be covered by the fines and other revenue the SEC generates. That's an increase of $222 million over the previous year, and would pay for 780 new jobs to carry out Dodd-Frank. House and Senate Republicans would like to cut the agency's funding.

"Insufficient funding for the SEC means fewer cops on the beat," Schapiro said in an April 8 speech, "even though fraudsters show no sign of backing off."

Industry defends status quo

Main Street investors have to look deep into the back story of the fiduciary rule to understand why it's attracted the enmity of financial advisers, brokers and insurance agents. The fiduciary rule would upend current business models used by brokers and insurance agents. It would cost brokerages, insurers and banks millions of dollars to retrain their brokers as fiduciaries, add in-house compliance practices and register with states or the SEC as investment advisers.

How much would it cost the industry?

Spokesmen with Securities Industry and Financial Markets Association (SIFMA), the National Association of Insurance and Financial Advisors (NAIFA) and the Independent Insurance Agents and Brokers of America did not respond to iWatch News’

repeated requests to comment on the issue.

Registered investment advisers, certified financial planners and many financial advisers already work in a fiduciary capacity with clients. And so do many lawyers and accountants who provide financial advice.

A coalition of fiduciary advisers has long supported and lobbied for the SEC rule. Their business model is simple: the client comes first. Brokers typically adhere to a much-weaker standard that simply says they must choose financial products that are "suitable" for clients – a definition allowing them to sell products with lucrative fees and commissions.

Another big difference: If an investor is wronged by an investment adviser, the investor can sue in court. But non-fiduciary brokers and insurance adviser/agents usually require customers to take any disputes to an arbitration forum run by the securities industry self-regulator, FINRA.

To challenge a broker’s behavior, a small investor must pay fees and appear before a three-member arbitration panel run by the industry with at least one of the arbitrators representing the brokerage industry. And as an investor, the odds are not in your favor, says Louis Straney, a securities arbitration consultant based in Santa Fe, N.M.

At present, the number of fiduciary advisers is small, so any imposition of a fiduciary rule on broker-dealers and other commissioned financial sales representatives would have broad impact and help the majority of American investors, according to investor advocates.

There are less than 12,000 registered investment advisers policed by the states and SEC, and even fewer certified financial planners. But the securities industry is represented by more than 600,000 brokers and 400,000 insurance agents, many of whom are cross-licensed to sell securities and commissioned variable annuities, which regulators frequently cite as sources of marketing abuses—particularly to older investors.

SIFMA, the main industry group representing securities brokers, stated earlier this year it supports "a uniform fiduciary standard of care for broker-dealers, investment advisers…yet remains concerned about the possible effects on broker-dealers' ability to serve customers as this approach is developed.”

While appearing to support the concept of fiduciary duty, SIFMA has also claimed that its customers would pay more if they were subject to fees instead of commission. A SIFMA-paid study said an investor with $200,000 in assets would pay $460 more annually in additional expenses with fee-based advisers versus commission-based brokers.

NAIFA, a group representing 200,000 insurance agent/advisers, also says that small investors would be hurt. A NAIFA survey of more than 3,000 members found that imposing a fiduciary duty would force many to "discontinue providing some services to middle-market clients," the group said.

“Clients aren’t concerned about whatever standard of care might be imposed by regulators or legislators,” NAIFA President Terry Headley said in a recent statement [12]. “An imposed universal fiduciary standard that increases costs and eliminates the ability of investors to choose how, and from whom, they receive financial products, advice and services would not be in the best interests of consumers.”

Barbara Roper, who has championed fiduciary duty for years on behalf of the Consumer Federation of America, has asked House Republicans to drop their opposition.

"The SEC has proposed a way to move forward on fiduciary duty that maximizes investor protections while minimizing industry disruption," Roper said in a May 9 letter to lawmakers. "It would be tragic if opposition from a few industry members intent on maintaining the status quo were able to derail that progress."

However, FINRA arbitration statistics [13] indicate growing discontent with non-fiduciary brokers and advisers. The number of investors’ claims citing "misrepresentation, omission of facts, unsuitability, negligence, failure to supervise and misrepresentation" doubled in 2009 over the previous year, according to FINRA data. The single-largest problem category was "breach of fiduciary duty."

The human toll

With the 2010 passage of financial reform, there was some hope that investors would gain more robust protection from inappropriate investments. Some $114 billion has been directly lost by investors since 2008 in high-risky, broker-sold products such as auction-rate securities, principal-protected notes and sham securities, according to a study published [14] by the nonprofit Nation Institute.

Linda Soltis, 63, could have used one of the reform law's intended investor shields when she was approached by a broker working inside a Washington Mutual Bank. After inheriting some money from her brother in 2007, the retired San Francisco teacher was hoping to buy a condo in one of the most expensive real estate markets in the country.

Despite making clear that her goal was to keep her money insulated from market volatility, the bank broker invested the money in risky and inappropriate mutual funds that earned him a healthy commission. When the Wall Street meltdown occurred in late 2008, Soltis was told by her broker that she had lost more than $46,000—a large part of her life savings.

After contacting several lawyers, her case against the broker was taken up by the Investor Justice Clinic at the University of San Francisco law school, which was able to recover more than $43,000 in an arbitration award against the bank, JP Morgan Chase & Co., which bought Washington Mutual in 2008 after it failed.

"Something about being in a bank made me trust him," Soltis says of the broker. "I thought he represented me and cared about my account. Then it came out in arbitration that his job was sales. I wasn't able to buy the condo when the money was lost."

Soltis is one of many investors who have been confused by brokers who work in banks, major wealth management firms or insurance agencies.

She could have been protected if the bank broker was required to act as a “fiduciary ,” a legal definition that means placing the client’s financial interests first. Investment advisers are already held to this legal standard when recommending where clients should put their money. But many less-sophisticated investors are unaware of the difference between brokers and investment advisers.

The Dodd-Frank law created a Consumer Financial Protection Bureau (CFPB) and an SEC Office of the Investor Advocate, both designed to protect bank customers and

small investors with a new arsenal of police. It also ordered the SEC to study a fiduciary duty for brokers.

The SEC produced [15] a report in January that said that the fiduciary standard should apply to anyone giving financial advice. The agency planned to begin writing a rule to that effect until it ran into pressure from Republican lawmakers and financial services industry lobbyists.

John F. Wasik is author [16] of ``The Cul-de-Sac Syndrome'' and 12 other books, and is a Reuters columnist.

SEC has yet to move on rules that would hold brokers, insurance agents to stricter “fiduciary” duty to clients

How to Create Jobs with Justice

By John F. Wasik (Reuters)

Where is the real U.S. jobs plan?

Jobs, justice and peace. Have three themes ever been so intimately intertwined since Dr. Martin Luther King, Jr., championed this tri-partite campaign in his 1967 March on Washington?

Unemployment is ravaging the country, especially among urban minorities. Yet Congress has yet to put forward a comprehensive jobs plan to create employment. We’re still fighting two wars and garrisoning troops in Europe and Japan as the jobless rate soars at home. Debt reduction is still a priority over job creation.

The current economic downturn has put the brakes on economic progress for most of the American working class. They shared in widespread growth during the 1990s, but have been falling behind during the latest recession.

The pain has been uneven and most punishing in the inner city and among the young. For white men and women, the jobless rate for those 20 years and older was around 8 percent as of July. For white teenagers (age 16 to 19), the rate was 23 percent.

Unemployment for African-American adults is twice as high as white adults at 16 percent. For African-American teenagers, the rate soars to nearly 40 percent.

Much of the reason that decent-paying jobs have evaporated is that inner cities and suburbs have been de-populated and businesses have left — many of them to wealthy suburbs or overseas. Unionized industrial jobs have also fled.

There’s been great progress made since the end of World War II to create a broad base of high-paying jobs, although the bulk of those positions were in unionized manufacturing companies, nearly all of which have cut back, shut down or outsourced. High-wage jobs left urban manufacturing districts to be replaced by low-wage service jobs or occupational deserts.

There is a pernicious poverty in places where there’s no job growth and few opportunities. Go to any old industrial city like Chicago, Cleveland or Detroit to see what an occupational desert looks like.

Where once there were large plants employing thousands of workers, there are now empty lots. South Chicago and Chicago Heights, where I first started my journalism career, used to be thriving places, employing tens of thousands.

Men I knew like Frank Lumpkin came up from the Jim Crow south to northern cities like Chicago to land decent-paying jobs and to raise families. The mill in which he toiled shut down 30 years ago. Nothing has replaced it. Ironically, one abandoned Chicago steel mill site became a temporary venue for a recent Dave Matthews concert.

Being stuck in low-paying jobs is a social curse. It’s a sign that upward mobility hasn’t been extended to everyone. What’s to blame? Is it the failure of our educational system? Congress? State governments? Overpaying CEOs and Wall Street traders?

Instead of blasting the usual suspects, let’s take a hard look at our educational system. Somehow public schools aren’t guiding graduates to the right kinds of skills needed for lucrative, in-demand jobs such as biomedical engineers, network analysts, financial examiners, biophysicists and biochemists.

The top-paying jobs require extensive training and higher education. Almost half of the very high-paying occupations forecast to grow the most by the U.S. Department of Labor require college.

One-third of those fast-growing job categories require little training and are categorized as low or very-low paying: Home health aides, skin-care specialists, physical therapist aides, veterinary technicians, dental/medical assistants and fitness trainers. But these new service jobs often fall short because they won’t guarantee new workers living wages.

Not all of the current jobless situation can be attributed to a mismatch between needed skills and openings, though.

The “underemployment rate” — those who had to take part-time work because they couldn’t find full-time positions — more than doubled from 2007 through March, 2011, among those with bachelor’s degrees, reported the Economic Policy Institute, a think tank affiliated with organized labor.

“The fact that the economy’s best-educated workers have seen a more than doubling in their underemployment rate is just one of many pieces of evidence suggesting that the anemic recovery reflects a general lack of job growth rather than a deficit of skills or education among its workers,” the Institute stated.

Cutting more government programs will only create more unemployment. Any job stimulus plan has to marry training and education not only with present needs, but the job market of the future. How to best accomplish this?

We have diseases to cure, rebuilding to do and energy needs to meet. An infrastructure bank is a start.

A sustained national program to create clean energy technologies, a new generation of long-term storage batteries, biomedical research and modernizing the electrical grid is another approach. Despite these immediate needs, Washington is helping the wrong people.

As Princeton professor Cornel West wrote in a recent New York Times piece, referring to Washington’s side-stepping of Dr. King’s prophetic legacy:

“Instead of articulating a radical democratic vision and fighting for homeowners, workers and poor people in the form of mortgage relief, jobs and investment in education, infrastructure and housing, the administration gave us bailouts for banks, record profits for Wall Street and giant budget cuts on the backs of the vulnerable.”

If job opportunities don’t materialize on a mass scale, it won’t matter how much government spending is cut. Government assistance will then have to expand to accommodate a burgeoning, restive underclass.

Leadership from everyone in the political spectrum is lacking and most acutely from the Congress and White House. Washington needs to reconnect to the need to champion universal civil and economic justice.

Or, as Dr. King so eloquently put it, “Let us be dissatisfied until the tragic walls that separate the outer city of wealth and comfort from the inner city of poverty and despair shall be crushed by the battering rams of the forces of justice.”