January 1, 2020
Outlook & Trends
Back in September, there was an unusual occurrence in the repurchase agreement, or “Repo”, market. Repos are overnight loans that banks use to
borrow and lend money to meet their reserve requirements using Treasury notes as collateral. One night the interest rate for these loans spiked
to 10%, up from 2.2% due to a lack of liquidity (available funds). The recession of 2008 was similarly accompanied by a freeze-up of the banking
system, so the Fed sprang into action, injecting money into the economy again at a rate of $200 billion initially and promising another $60
billion per month until the second quarter of 2020, similar to the rate during the Quantitative Easing programs earlier in the decade. The
Fed assures us that this is not QE4, but as the saying goes, “If it quacks like a duck...”
Immediate recessionary fears seem to have subsided as the Fed support increased. Leading indicators remain flat, suggesting that the current
low unemployment rate may remain in place for a while. Interest rates increased during the quarter. GDP growth remained little changed from
last quarter at the still unremarkable 2.1% rate. The price of a single family home is up 4.1% nationwide since last year though. It should
not be a stretch to suggest that the administration will do all it can to avoid economic problems between now and the election.
In the third quarter, it was bonds and gold that stole the show. Last quarter those trends reversed, and stocks rose as the Fed resumed its
support. In fact, for most of this decade, the stock market has been dancing at the end of the activist Fed’s and other central banks’
marionette strings. Stock prices have seemingly lost their connection to the reality of company earnings. When liquidity is provided,
stocks go up. When liquidity is withdrawn, volatility appears and stocks are flat or move down. We had mentioned that the Dow Theory signaled
a bear market a year ago. Despite the recent new high performance of the Dow Industrials, the Dow Transports, which are sensitive
to broad economic activity, have still failed to confirm a new uptrend. That index is lower than it was in January 2018.
Another curious sign is a decrease in margin debt. Speculators borrow money (margin debt) to buy stocks. Changes in the level of margin
debt are usually well correlated with the direction of the S&P 500. However, since reaching a peak level in 2018, margin debt has been
falling while stock prices have risen. The last two times the borrowing level dropped this much was at the end of 2000 and the middle of
2008. This is not to say that speculation might not pick up again this time, but stock market activity directly following those dates
was not pretty.
Legal and Regulatory News to Know
Lawmakers and regulators have been busy proposing and enacting several changes that could be important for your retirement and your
understanding of what you can expect from financial advisors.
*** SECURE Act ***
The change with the broadest reach is the recently passed SECURE Act ("Setting Every Community Up for Retirement Enhancement"). Don't
you love the creativity of the people who think up the titles of laws to fit an acronym? The act has a number of provisions that tweak
the existing retirement plan tax rules. Minimum distributions will now be required after age 72, instead of 70 ½ for people currently
younger than 70 ½. Tax-deferred IRA contributions will now be allowed after age 70 ½, as long as you have income from work. Annuities
will become more available in employer retirement plans in a move to make these plans more closely resemble the pension plans of old
(as well as provide a broader market for the insurance companies that provide them).
The casualty of the law is the inherited "stretch" IRA. Previously a tax-deferred IRA that was inherited by a person other than a
spouse had to make required distributions on a schedule that was based on the beneficiary’s age. Young people could stretch these
distributions out over their longer life expectancy. Now new inheritors (after 1/1/2020) must remove all the assets from an inherited
IRA within 10 years. Of course there are always exceptions in every law. The 10-year clock starts ticking for children when they
reach the age of 18. Spouses, disabled, chronically ill, and others whose age is within 10 years of the deceased are exempt from
the new requirement. Financial planning may help here. Inheritors may need to plan their distributions over the 10 years to avoid
taking a large lump sum at the end of the period and incurring an unnecessarily big tax bill.
*** Regulation Best Interest ***
The Securities and Exchange Commission took a 770-page stab at bringing the brokerage industry closer into line with the fiduciary
standard that Investment Advisors have been required to follow since 1940. The result was "Reg BI", which becomes effective 6/30/2020.
The main thrust of the regulation is the statement that brokers should act in the best interest of their clients. Some critics of the
regulation complain, however, that, despite its good intentions and title, the rule falls short, because it never defines the term
"best interest". Instead it suggests that the best interest will be served if a broker discloses that it is acting as broker (selling
a product) when it is, and not implying that unbiased advice is being provided. Further, it requires disclosure of all material facts
regarding recommendations, including the costs and the scope of services involved. Additionally, brokers must exercise reasonable care
and not place the interest of the firm ahead of the customer. The last major required area is that the broker must disclose or eliminate
conflicts of interest, specifically eliminating the practice of sales contests, bonuses, etc. used to promote a specific product or
types of securities. One other change, emanating from the improved disclosure initiative is that, in most instances, brokerage
representatives who are not registered investment advisors (and therefore not required to be a fiduciary) will not be permitted to use
the title "advisor" or "adviser" as they routinely do today.
*** Form CRS ***
In order to try to make Reg BI meaningful, rather than just becoming more fine print buried in the legal account forms, the SEC has
also designed the "Customer Relationship Summary", a two-page disclosure document that summarizes the type of relationship and services
that are to be provided by a broker or advisor, the fees involved, potential conflicts and disciplinary history. The form will be provided
to existing clients and whenever a new account is opened or a rollover or a new service is recommended.
*** Stand Alone Fee Table ***
Presently, Regulation BI and Form CRS apply to large SEC-registered brokers and investment advisors. For its part, Massachusetts has
just instituted the "Stand Alone Fee Table", which, like form CRS, is intended to improve disclosure and understanding of services
offered by state-registered investment advisors and financial planners who work under Massachusetts law. This one page summary of
services and fees will be provided initially along with the advisor's ADVII disclosure document and will also be available on
Massachusetts advisors’ web sites.
*** CFP® Standards ***
And finally, the CFP Board of Standards has adopted a revised set of standards for Certified Financial Planners. The primary
change is that an individual CFP certificant will be required to act as a fiduciary whenever financial advice is provided. This
will be true even if their employer does not follow this standard. While this is not a legal obligation, like that of a registered
investment advisor, it should still be helpful for financial consumers.
Laws protecting clients of the financial industry are continuing to evolve slowly. Disclosure by itself is not enough however.
It is important to look at disclosure information and consider how it applies to your own strategies and circumstances. It is also
important to work with an advisor who takes their fiduciary duty to heart, like
LFM&P, and is not simply going through the motions
for legal compliance.
David C. Linnard, MBA, CFP®
LINNARD FINANCIAL MANAGEMENT & PLANNING, INC.
46 CHESTER ROAD
BOXBOROUGH, MA 01719
Barbara V. Linnard
A Registered Investment Advisor and NAPFA-Registered Financial Advisor