Timely new rules for plan advisers
We are now at the pivot point of the Labor Department’s new rule mandating that advisers to retirement plans sell or recommend only what is in “the best interests of clients.” Before, they only had to recommend and sell what was “suitable.” An investment that was “suitable” because it included, say, some bonds or bond funds for someone close to retirement could, at the same time, be charging ongoing fees of 1 to 2 percent per year. To act in the best interest of clients would now require the adviser or broker to find something comparable but less expensive if such an investment existed — or face a possible lawsuit.
My definition of a “professional” in any walk of life is someone who makes recommendations to their clients that they would make for themselves in their own behalf knowing what they know about the products and/or services of the profession in which they practice. The fact that the U.S. Department of Labor felt compelled to step up with a 1,000-page manifesto that has outlawed the siphoning off of retirement assets by the financial services industry says something about the lack of professionalism, generally, in my industry.
Back when financial services regulations were being scrapped and deregulation was on everyone’s lips, Alan Greenspan made the remark that should haunt him still when he said that the instincts of self-preservation would prevent the financial services industry from taking excessive risks. He might just as well have said, “they would never do anything greedy or stupid.” Well, we all know how that turned out.
The timing of this regulation could not be better. The Dodd-Frank regulations have put a severe crimp on the ability of huge financial institutions to make the kind of money they once made in bond trading and derivative sales. Abhorring a vacuum, they have been turning to more consumer-related services typified, say, by Goldman Sachs which has launched a banking service for people like you and me. All the “takers” who only pay Social Security, Medicare, sales, and property taxes may now bank with Goldman — a company with a 147-year history of working for the “makers.”
With embattled financial services companies lining up to capture as much as possible of the $17 trillion in various retirement accounts including 401(k)s, 403(b)s, IRAs and other accounts protected by the Employee Retirement Income Security Act, it was only a matter of time before abusive treatment of retirement savers would become a greater threat than it has been to date.
The suitability standard so far has meant pretty much that “anything goes.” In the retirement plan arena, both sellers and buyers seemed to feel that “any 401(k) was better than no 401(k)” and cost didn’t seem to matter since it just came out of plan earnings — not anyone’s actual pocket or checkbook. As for quality of the investments, past performance is no guarantee of anything, so why even consider it? We’ll just recommend what pays us the most money. This combined mentality began to change with Labor Department and congressional hearings pointing out that the missing 1 percent (compounded) cost investors as much as one third of what otherwise could have been their account balance by retirement.
What has reshaped the playing field are the lawsuits against major companies like Boeing, Kraft, Oracle, Chevron, John Deere, Anthem and many others in what is becoming a long train of settlements in behalf of plan participants at the expense of their employers. Insurance company Mass Mutual reached a $30 million settlement for bilking its own employees.
The new regulation requiring advisers to act as fiduciaries extends out to IRA rollover accounts, so on an individual basis, retirees and plan participants should reap the benefit of more objective advice and a new level of professionalism on the part of those purporting to be working in the sole interests of those whom they are serving. In other words, thanks to a government regulation, they are giving advice that they would take themselves knowing what they know about their business — that, or facing some consequences.
Ask the Fool
Q What’s a company’s “burn rate”? — B.C., Santa Rosa,
California A It’s a measure that reflects how quickly a company is burning through its cash. You needn’t worry about it with most established companies, but it can be worth checking the burn rates of smaller, fast-growing or shakier companies.
Imagine, for example, that in its most recent quarterly report, Spray-on Socks reported negative $50 million in free cash flow, as its cash balance fell to $100 million from $150 million. It’s not unusual for companies to lose money in their early years, but burning through money too rapidly is also what puts many of them out of business.
In Spray-on’s case, at its current burn rate of $50 million per quarter, it will run out of cash in just a few quarters. To stay alive, it will have to cut spending (which could slow its growth) or find more money (perhaps taking on debt or issuing additional stock, which can hurt existing shareholders). Q What is the Federal Reserve, and what does it do? — W.T., Wilkes-Barre,
Pennsylvania A Founded by Congress in 1913 and often referred to as “the Fed,” it’s the central bank of the United States.
In its own words, the Federal Reserve has four main responsibilities: “Conducting the nation’s monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices,” “supervising and regulating banks and other important financial institutions,” “maintaining the stability of the financial system and containing systemic risk that may arise in financial markets” and “providing certain financial services to the U.S. government, U.S. financial institutions and foreign official institutions.”
I trace my roots back to 1886, when my founder bought a flooring business in Racine, Wisconsin, and developed a paste wax floor care product. I started offering paid vacations to employees in 1900, and in 1934, during the Great Depression, I established a pension plan. I’m still known as a good place to work. I hired Frank Lloyd Wright to design some of my buildings. I generate about $10 billion in sales annually and employ about 13,000 people. My brands include Pledge, Duck, Oust, Mr. Muscle, Windex, Saran, Kiwi, Scrubbing Bubbles, Raid, OFF and Ziploc. Who am I?
I trace my roots back to 1965, when a Yale undergrad’s term paper outlined a system to make rapid deliveries. (He got an average grade on it.) I was founded in Little Rock, Arkansas, in 1971, and in 1973, my first night of continuous operation featured 389 employees and 14 jets delivering 186 packages overnight to 25 cities. Today I’m a delivery giant, employing nearly 400,000 people and raking in close to $50 billion annually. My fleet includes 650plus aircraft and more than 100,000 ground vehicles. I handle more than 11 million shipments per business day, on average. Who am I? (Answer: FedEx)
After a rough 2015 and further weakness so far this year, Boston Beer’s shares have fallen far from their all-time highs of January 2015. Slowing sales of the company’s core Sam Adams-brand beer and multiple analyst downgrades have skunked the stock, presenting an attractive buying opportunity for long-term investors interested in a high-quality business trading at a bargain price.
The popularity of its Sam Adams line of beers has allowed Boston Beer to build a powerful distribution system, with shelf and tap space for its newest products. That’s helped its Angry Orchard become the top-selling brand in the fastgrowing hard cider category and should also help spur adoption of its new hard soda drinks and nitro beers.
But competition has been intensifying within the craft brew arena, with industry behemoths snapping up promising craft brewers and new brewers continuing to spring up. (More than 4,000 now operate in the U.S., according to the Brewers Association.)
This competition has taken a toll on Boston Beer’s results in recent months, with core shipment volume falling 6 percent year over year to 830,000 barrels in the first quarter. Its Alchemy and Science craft beer incubator has been driving new growth, though, with further growth expected. With its popular brands, strong distribution system and innovative culture, Boston Beer is worth considering for your portfolio. (The Motley Fool owns shares of and has recommended Boston Beer.)