The new retirement savings account rules announced by the Labor Department yesterday did not let individual investors out of their responsibility to oversee their savings and are not as harmful as some critics would make them out to be. Rather, the rules rightfully require that those giving recommendations about how to invest retirement savings put the interest of their clients first.

At the heart of the rule is the fiduciary standard. The fiduciary standard requires investment professionals to put the interests of the clients ahead of their own. As a holder of the Chartered Financial Analyst designation, I am required to “act for the benefit” of clients and place their interests before my employer’s or my own interests were I to give individualized investment advice. In contrast, the U.S. government’s existing regulations on retirement savings follow the suitability standard. The Securities and Exchange Commission (SEC) says that this standard simply holds that the broker, adviser or other financial professional has “a reasonable basis for believing that the recommendation is suitable for a client.” A variable annuity might be suitable for a new retiree rolling over his 401(k), but it wouldn’t be in his best interest if a lower-cost deferred or immediate annuity would work just as well.

I’ll discuss what the new rule covers. But first, I want to specifically address what it doesn’t do. It does not stop malfeasance or incompetence. If a broker, adviser or other financial professional is motivated to bend or break the rules, he or she is going to do so. Fortunately, the majority of financial advisers obey the rules. The bad news is that there are bad apples—as there are in many other industries—and many advisers who engage in misconduct are rehired, as we discuss in the April AAII Journal. As such, it is still your responsibility to check FINRA’s BrokerCheck, look at the SEC’s Form ADV, check with your state securities regulators and run a Google search on the adviser’s name.

You should also seek a second opinion before taking the advice of any financial adviser. It’s akin to medical recommendations. If a doctor advises getting back surgery, you’d likely seek out a second opinion, wouldn’t you? So why should financial advice be any different?

What the rule does cover is recommendations. The Labor Department defines a recommendation as a “a communication that, based on its content, context, and presentation, would reasonably be viewed as a suggestion that the advice recipient engage in or refrain from taking a particular course of action.” The Labor Department adds that “the recommendation must be provided in exchange for a ‘fee or other compensation.’” Merely providing educational information is not enough.

Commissions will be allowed if a “Best Interest Contract Exemption” (also known as a BIC or a BICE) is issued. The BICE will allow for commission-based products such as annuities to continue being sold. Firms will be required to disclose fees, charges and conflicts of interest, but it will still be your responsibility to assess all costs (including surrender fees and other fees for getting out of the investment) as well as to shop around, say, for a lower-cost annuity contract. The same advice applies to life insurance policies, funds or any other proposed financial product.

The new rules will start to be implemented in April 2017 and will be fully effective on January 1, 2018. Note that these dates are after President Obama’s term ends. The next president may choose to alter or rescind the rules. Lawsuits challenging the new rules could still be filed as well. So, full implementation is not an absolute certainty.

Finally, there is the question as to whether you need a financial adviser or planner at all. The answer depends on you and your personal situation. A good adviser or planner can help you plan to achieve your goals and assist (or even manage) the complexities of your finances. About 30% of AAII members work with a financial adviser or planner.

It’s not necessary to work with one. If you feel comfortable managing your portfolio and your finances on your own, then keep doing so. I think the decision is akin to hiring a personal trainer. It’s possible to be very fit without a trainer, but some people find it helpful to hire one.

If you want to learn more about the new rule, the Labor Department has a fact sheet. The text of the rule is available on the Federal Register’s website.

• How to Check Out a Financial Advisor – Chuck Jaffe lists the questions you should ask a potential financial planner, broker, insurance agent or lawyer before working with them.
  
• Why Your Financial Adviser Should Be a Fiduciary – CFP Board ambassador Larry Stein further explains the importance of working with an adviser who adheres to the fiduciary standard.
  
• What Do You Think of the Labor Department’s Fiduciary Rule? – Like it? Think it’s a bad idea? Share your opinion on the AAII.com Discussion Boards.
  

First-quarter earnings season will “officially” start with Alcoa’s (AA) release on Monday afternoon. Joining it will be approximately 15 other S&P 500 members, including Dow Jones industrial average component JPMorgan Chase & Co. (JPM) on Wednesday along with Bank of America Corp. (BAC), BlackRock (BLK) and Wells Fargo (WFC) on Thursday and Citigroup (C) on Friday.

The first economic report of note will be March import and export prices, released on Tuesday. Wednesday will feature the March Producer Price Index (PPI), March retail sales, February business inventories and the Federal Reserve’s periodic Beige Book. The March Consumer Price Index (CPI) will be released on Thursday. Friday will feature March industrial production and capacity utilization, the April Empire State manufacturing survey and the University of Michigan’s preliminary April consumer sentiment survey.

Several Federal Reserve officials will make public appearances: Dallas president Rob Kaplan on Monday; Philadelphia president Patrick Harper, San Francisco president John Williams and Richmond president Jeffrey Lacker on Tuesday; Atlanta president Dennis Lockhart and Governor Jerome Powell on Thursday; and Chicago president Charles Evans on Friday.

The Treasury Department will auction $24 billion of three-year notes on Tuesday, $20 billion of 10-year notes on Wednesday and $12 billion of 30-year bonds on Thursday.

Pessimism among individual investors about the short-term direction of stock prices is at its lowest level in five months, according to the latest AAII Sentiment Survey. Nonetheless, less than one in three individual investors are optimistic.

Bullish sentiment, expectations that stock prices will rise over the next six months, rebounded by 5.0 percentage points to 32.2%. The rise mostly, but not completely, reverses last week’s drop. The increase is not enough to prevent bullish sentiment from staying below its historical average of 39.0% for the 22nd consecutive week and the 55th out of the past 57 weeks.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, receded 0.7 percentage points to 46.3%. This is the 10th consecutive week and the 62nd out of the past 66 weeks with a neutral sentiment reading above its historical average of 31.0%.

Bearish sentiment, expectations that stock prices will fall over the next six months, fell 4.3 percentage points to 21.5%. This is the lowest level of pessimism recorded by our survey since December 3, 2015 (21.2%). It is also the sixth consecutive week bearish sentiment is below its historical average of 30.0%.

Though pessimism is near the bottom of its typical range, optimism remains relatively low though still within its typical range. During 20 out of the past 21 weeks, less than one in three individual investors have expressed optimism about the short-term direction of the stock market. Bullish sentiment has only exceeded 33% twice since mid-November, on March 10 (37.4%) and March 24 (33.8%).

Giving individual investors cause for concern is the slow pace of U.S. economic growth and uncertain global economic growth, terrorism and global unrest, lackluster corporate earnings and the prevailing level of valuations. Some AAII members, however, are encouraged by the sustained domestic economic growth, expected corporate earnings growth and still-low energy prices.

This week’s special question asked AAII members what one thing they would change about the market environment if they had a magic wand. More than one out of three (35%) of respondents said politics, particularly the election, taxes (many want to see reform), regulation and fiscal policy. Monetary policy was listed by 13% of respondents. Higher interest rates, more stable market conditions and oil prices were each named by 7% of respondents.

Here is a sampling of the responses:

• “The Federal Reserve would raise the Fed funds rate.”
• “Change the political environment; it’s too toxic now.”
• “World economies improve.”
• “Corporate profitability and growth, with an increase in hiring.”
• “It would be an improvement if there were better monetary and fiscal policy to add certainty to the world markets.”
• “Lower valuations or higher earnings.”

This week’s AAII Sentiment Survey results:

• Bullish: 32.2%, up 5.0 percentage points
• Neutral: 46.3%, down 0.7 percentage points
• Bearish: 21.5%, down 4.3 percentage points

Historical averages:

• Bullish: 39.0%
• Neutral: 31.0%
• Bearish: 30.0%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.).

Bullish: 32.2%, up 5.0 points
Neutral: 46.3%, down 0.7 points
Bearish: 21.5%, down 4.3 points


Bullish: 39.0%
Neutral: 31.0%
Bearish: 30.0%

Fixed-income exposure among individual investors rose last month to levels not seen since January 2015, tying a three-year high. The March AAII Asset Allocation Survey also shows higher exposure to equities and smaller cash positions.

Stock and stock fund allocations rose 2.5 percentage points, to 64.0%. The rebound reversed two months of declines. It also kept stock and stock fund allocations above their historical average of 60% for the 36th consecutive month.

Bond and bond fund allocations edged up 0.3 percentage points, to 17.5%. Fixed-income allocations were last higher in May 2013 (18.1%). Last month’s modest increase also kept bond and bond fund allocations above their historical average of 16.0% for an eighth consecutive month.

Cash allocations fell 2.8 percentage points, to 18.5%. This is a three month-low. Last month was also the 52nd consecutive month with cash allocations below their historical average of 24%.

The market’s rebound off of the February lows and the reduced valuations on stocks prompted some investors to put some of their cash to work in equities. Sentiment about the short-term direction of the stock market was generally higher in March than it was during the first two months of the year. Many individual investors continue to be frustrated by their investment options, however, with headline risk and lackluster earnings growth affecting stocks and low yields afflicting bonds.

Last month’s special question asked AAII members what most often causes them to alter their portfolio allocations. The largest group (14% of all respondents) cited market factors such momentum, technical analysis and valuation. More than 13% said that they periodically rebalance portfolio or otherwise make small adjustments when their allocations stray too far off target. A nearly equal number of respondents said that they don’t or that they rarely change their allocations. About 10% of respondents said that they take advantage of market downturns to buy perceived bargains. Age, particularly nearness to or progression in retirement, is a catalyst for more than 7% of respondents. Approximately the same number of respondents said that the economy or other macro factors influence their decisions.

Here is a sampling of the responses:

• “I don’t change my allocation very much. I try to stay with stocks by picking good companies that are going to grow over time.”
• “Market drops to increase present positions and to take advantage of new positions”
• “Tilting more conservative as retirement approaches.”
• “Generally, I don’t alter my portfolio except for my annual rebalancing.”
• “Market volatility”
• “I only alter my portfolio when I have a projected or emergency need for cash.”

• Stocks and stock funds: 64.0%, up 2.5 percentage points
• Bonds and bond funds: 17.5%, up 0.3 percentage points
• Cash: 18.5%, down 2.8 percentage points

• Stocks: 30.3%, unchanged
• Stock Funds: 33.7%, up 2.5 percentage points
• Bonds: 3.6%, down 0.7 percentage points
• Bond Funds: 13.9%, up 1.0 percentage points

Take the Asset Allocation Survey.

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