Starting on Monday, industry regulator FINRA will require brokers to ask for a trusted contact when an individual investor opens an account or a firm is updating client information. A trusted contact is a person the brokerage firm can contact if financial exploitation is suspected. A brokerage firm may also rely on the trusted contact “to confirm the specifics of the customer’s current contact information, health status, or the identity of any legal guardian, executor, trustee or holder of a power of attorney.”

Additionally, effective Monday, brokers will be able to temporarily block the distribution of funds if they reasonably believe that financial exploitation “is occurring, has been attempted, or will be attempted.” The rule applies to investors who are age 65 or older. It also applies to an individual age 18 or older who is reasonably believed by the brokerage firm to have “a mental or physical impairment that renders the individual unable to protect his or her own interests.”

I realize that at this point many of you reading this have questions about the new rules. I will address some of the biggest questions that I anticipate many of you will have. FINRA has a list of frequently asked questions (FAQ) about the rules on its website. You can also see the trusted contact and temporary hold on distributions rules on FINRA’s website. As a quick aside, I have asked FINRA to contribute an article to the AAII Journal about their elder fraud initiatives, but have yet to get a yes or no answer from them.

If a broker places a temporary hold on a disbursement, the firm must provide written notification of the hold and the rationale for it within two business days. The notification must be provided to everyone who is authorized to transact on the account and to the trusted contact, except for anyone suspected of engaging or likely to engage in financial exploitation. The hold cannot be maintained for longer than 15 days. A brokerage firm can extend the block for an additional 10 days if an internal review finds reason to believe that financial exploitation has or may have occurred. Otherwise, a state regulator, a state agency or an authorized representative of the judicial system must require that the hold be extended.

The rule only applies to distributions. Brokerage firms cannot block securities transactions, but they can postpone distributions of the proceeds from a transaction that they suspect is reflective of fraud.

You are not required to provide a trusted contact under the FINRA rule. The brokerage firm is required to make a reasonable effort to ask for the name of a trusted contact, but FINRA says the “absence of the name of or contact information for a trusted contact person shall not prevent a member from opening or maintaining an account for a customer.”

It is a good idea to have a trusted contact listed with your brokerage firm. It is not a means for giving up control, but rather a new layer of protection. A trusted contact is intended to be your advocate, not your overseer. As we humans progress through retirement, cognitive impairment becomes a greater and greater risk. Cognitive impairment alters our view of what is normal, often leading those afflicted to forget what they used to know and how mentally sharp they used to be. Plus, elder fraud is a big problem, with many scamsters targeting seniors they think they can manipulate.

A trusted contact does not have to be a listed agent on your account or have power of attorney. While such a person can have one or both responsibilities, the primary role of the trusted contact is simply to be your advocate. The trusted contact should talk to you about the issue the brokerage firm has contacted them about. If fraud is suspected, this person should reach out to the brokerage firm’s compliance department and the police. If cognitive issues are suspected, the trusted contact should reach out to your doctors and potentially state agencies for assistance. The trusted contact must be an adult, age 18 or older.

You will want to be careful about who you name as your trusted contact since they will have a big responsibility to fulfill. Let other members of your family, your doctor and your attorney know who this person is. Also ensure the brokerage firm has the person’s updated and correct contact information. Just as you should check the beneficiary information on your accounts each year, so should you check your trusted contact information.

• When It’s Time to Transfer Financial Decision-Making – Actionable steps you can to take to effectively transfer control of your finances.
• Steps to Smoothly Transfer Control of Your Family’s Finances – Guidelines for succession planning to ensure your family continues to thrive from a financial standpoint.

• The Individual Investor’s Guide to the Top Mutual Funds 2018 – Our annual mutual fund guide is fully updated. The online version of this guide has information on nearly 1,600 funds.
• February 2018 Editor’s Note – The historical correlation between the performance of the stock market and the flow of investment dollars into and out of mutual funds is breaking down.

Fourth-quarter earnings season will remain busy with 93 members of S&P 500 scheduled to report earnings. Included in this group is Dow component Walt Disney Co. (DIS), which will report on Tuesday.

The week’s first economic report will be the ISM’s January non-manufacturing index, released on Monday. Tuesday will feature December international trade data and the December JOLTS report.

Seven Federal Reserve officials will make public appearances: St. Louis president James Bullard on Tuesday; New York president William Dudley, Chicago president Charles Evans and San Francisco president John Williams on Wednesday; and Dallas president Robert Kaplan, Minneapolis president Neel Kashkari and Kansas City president Esther George on Thursday.

The Treasury Department will auction $26 billion of three-year notes on Tuesday, $24 billion of 10-year notes on Wednesday and $16 billion of 30-year bonds on Thursday.

Pessimism among individual investors about the short-term direction of the stock market is at its highest level in nearly two months, according to the latest AAII Sentiment Survey. Neutral sentiment fell, while optimism declined slightly.

Bullish sentiment, expectations that stock prices will rise over the next six months, declined 0.7 percentage points to 44.8%. Optimism was last lower on December 7, 2017 (36.9%). Even with the decline, bullish sentiment remains above its historical average of 38.5% for the eighth consecutive week.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, pulled back by 4.0 percentage points to 26.5%. Neutral sentiment remains below its historical average of 31.0% for the ninth consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 4.7 percentage points to 28.8%. Pessimism was last higher on December 7, 2017 (34.2%). This week’s increase is not large enough to prevent pessimism from staying below its historical average of 30.5% for an eighth consecutive week.

Pessimism has rebounded by a cumulative 7.4 percentage points over the past two weeks. Some reaction to Monday’s and Tuesday’s volatility was captured in this week’s survey. On the other hand, the current streak of bullish sentiment readings in excess of 40% is the longest in a year. Optimism stayed above 40% for nine consecutive weeks between November 16, 2016, and January 12, 2017.

Some individual investors are encouraged by the record highs for the major indexes, the tax cuts and/or the Federal Reserve’s decision to continue raising interest rates at a gradual pace. Other individual investors are concerned about the possibility of a pullback or a more severe drop occurring. Even many investors who are optimistic about the overall direction of stocks expect a return of volatility this year. Also affecting investor sentiment are the perceived high levels of individual and institutional investor sentiment, earnings growth, economic growth, valuations and the lack of volatility. Washington politics remain at the forefront of many individual investors’ minds.

This week’s special question asked AAII members how the market’s ongoing lack of volatility is affecting their sentiment toward stocks. The question was posted last Thursday and responses, which were mixed, were gathered through yesterday. More than a third of respondents (36%) say the market’s relative calm and/or sustained upward rise has made them more cautious or is leading them to anticipate a forthcoming drop in prices. Conversely, approximately 21% of respondents say the market’s relative calm and sustained upward trend is reason to be optimistic. Nearly 28% of respondents say the current level of volatility is not affecting their sentiment toward stocks.

Here is a sampling of the responses:

• “Low volatility and high valuations are a sign for a major pullback on the horizon.”
• “It makes me feel that stocks are less risky.”
• “No effect. I know the market will be more volatile at some point. That just means there will be more buying opportunities.”
• “Bearish. I believe stocks are overpriced and cannot continue to stay as bullish as they are currently are.”
• “No change. I plan allocations for five years out.”

Bullish: 44.8%, down 0.7 points
Neutral: 26.5%, down 4.0 points
Bearish: 28.8%, up 4.7 points


Bullish: 38.5%
Neutral: 31.0%
Bearish: 30.5%

Individual investors’ exposure to equities declined slightly, but stayed above 70% for a second consecutive month in January. The January AAII Asset Allocation Survey also shows small increases in fixed income and cash allocations.

Stock and stock fund allocations pulled back by 0.8 percentage points to 71.2%. January was the 58th consecutive month that equity allocations were above their historical average of 60.5%.

Bond and bond fund allocations rebounded by 0.5 percentage points to 15.5%. This is the third time in five months that fixed-income allocations are below their historical average of 16.0%.

Cash allocations rose 0.3 percentage points to 13.3%. December was the 74th consecutive month that cash allocations were below their historical average of 23.5%.

January was just the 38th month with equity allocations at or above 70% during more than the 30-year history of our asset allocation survey. Last month’s reading, like the month before it (December 2017), is partially a reflection of the ongoing bull market in equities and last year’s record highs for the major indexes. These factors combined have boosted the value of stock holdings.

Also playing a role are low interest rates and increased optimism among individual investors about the short-term direction of the stock market. Bullish sentiment in our weekly Sentiment Survey has been in excess of 40% for eight consecutive weeks.

Last month’s special question asked AAII members what, if any, allocation changes they expect to make this year. Two out of five respondents (40%) said they do not expect to alter their allocations or will only make small changes. Nearly 19% of respondents said they intend to boost their exposure to equities, especially if stock prices fall. Conversely, 11% say they will reduce their equity allocations. About 9% expect to increase their cash allocations. Slightly more than 8% intend to increase their exposure to fixed-income investments. Some respondents listed more than one intended change.

Here is a sampling of the responses:

• “No changes. I’m right where I want to be.”
• “I am waiting for the market to go down to plow the balance of my cash allocation back into the market.”
• “Transition from bond funds into more stock funds.”
• “Slight increase in cash via profit-taking from equities. I’m nearing retirement.”
• “I expect the stock market’s returns will be better than bonds when measured against inflation.”

• Stocks and stock funds: 71.2%, down 0.8 percentage points   
• Bonds and bond funds: 15.5%, up 0.5 percentage points          
• Cash: 13.3%, up 0.3 percentage points 

• Stocks: 33.3%, up 0.9 percentage points
• Stock Funds: 38.0%, down 1.7 percentage points
• Bonds: 3.2%, down 0.2 percentage points
• Bond Funds: 12.3% up 0.3 percentage points

Take the Asset Allocation Survey.

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