Use of "Fee-Only" Inappropriately or Any Use of "Fee-Based" Can Violate Federal/State Laws

A reader asks: “Can a series 7/66 rep who works for a regional dually registered (broker-dealer and RIA) firm claim to be fee-only, fee-based, and commission-based at the same time?”
Short Answer: No. The terms “fee-only,” “fee-and-commission” and “commission-and-fee” should be used properly. If a person claiming to be “fee-only” or the person’s firm receives material third-party compensation (in the form of commissions, 12b-1 fees, payment for shelf space, etc.), then the use of the term “fee-only” likely violates one or more federal or state securities laws or other consumer protection laws. Additionally, the term “fee-based” should never be utilized to describe an advisor, as it is inherently misleading.
The term “fee-based” apparently arose to describe “fee-based brokerage accounts” – which were permitted for nearly a decade by the SEC under the ill-fated “Merrill Lynch Rule.” The SEC’s rule was overturned in 2007 by the D.C. U.S. Court of Appeals in Financial Planning Ass’n v. SEC, as violative of the “no special compensation” requirement for brokers to be exempt from registration under the Advisers Act.
Following that 2007 decision time was permitted for brokers to change the fee-based accounts to either commission-based brokerage accounts or to investment advisory accounts. Many registered representatives (RRs) of broker-dealer firms converted the accounts to investment advisory accounts, and many of these representatives secured their Series 66 (or 65) licenses in order to be qualified to be an “investment adviser representative” (IAR).
Unfortunately, during this time the term “fee-based” became more widely used to describe the dual registrant (RR/IAR), rather than the account. Some speculate that this was in response to the marketing success fee-only advisors possessed. In particular, hundreds of thousands of consumer inquiries proceed each year through the find-an-advisor web site hosted by the National Association of Personal Financial Advisors (, resulting in many referrals of consumers to its 2,500 or so fee-only members.
The term “fee-only” was apparently coined by NAPFA many, many years ago. Currently NAPFA’s definition of “fee-only” states: “NAPFA defines a Fee-Only financial advisor as one who is compensated solely by the client with neither the advisor nor any related party receiving compensation that is contingent on the purchase or sale of a financial product. Neither Members nor Affiliates may receive commissions, rebates, awards, finder’s fees, bonuses or other forms of compensation from others as a result of a client’s implementation of the individual’s planning recommendations. ‘Fee-offset’ arrangements, 12b-1 fees, insurance rebates or renewals and wrap fee arrangements that are transaction based are examples of compensation arrangements that do not meet the NAPFA definition of Fee-Only practice.”
In contrast, the Certified Financial Planner Board of Standards, Inc. defines a fee-only certificant (i.e., Certified Financial Planner™) as follows: “A certificant may describe his or her practice as ‘fee-only’ if, and only if, all of the certificant’s compensation from all of his or her client work comes exclusively from the clients in the form of fixed, flat, hourly, percentage or performance-based fees.” It should be noted that the CFP Board’s application of this definition takes into account the specific facts and circumstances of the certificant.
While the major online dictionaries don’t apparently yet provide a definition for “fee-only,” “The Free Dictionary by Harlex” defines “fee-only compensation” as “Payment to a financial adviser of a set hourly rate, or an agreed-upon percentage of assets under management, for a financial plan. Under this arrangement, the adviser receives no commissions on any transactions to implement the plan.”
What is the perception of consumers? This is important, because a commonly held understanding by consumers could establish a definition of the term that could result in a securities law violation if the term was misused. However, it is unclear, in my mind, whether consumers would even recognize the “fee-only” term and know what it means, the majority of the time.
But some consumers, whether through readings about fee-only advisors (consumer media writers often caution their readers to seek out “fee-only advisors”) or just through commonly accepted meanings of “fee” and “only” might achieve a understanding of the term “fee-only” in alignment with the definitions provided by either NAPFA or the CFP Board, or both.
(Of course, we must ask how many consumers can articulate the difference between a stock, a mutual fund, and a bond. A low level of financial literacy among consumers excuses neither deceit nor fraud.)
Consumer understanding is not the sole test of the proper use of a term. A commonly held use of the term “fee-only” within the securities industry itself, with dissemination of the term to consumers through marketing and promotional efforts, could also provide the foundational meaning of the term. Any subsequent misuse of the term could then be the foundation for a securities law violation.
Michael Kitces, a widely-respected financial planning industry commentator, summarized past controversies over the term “fee-only” in his recent Nerd’s Eye View blog post (found online at
Nonetheless, the fact that the companies acknowledged the existence of the commissions and disclose them in the Form ADV means, almost by definition, these firms are not fee-only! In fact, holding out as a “fee-only” advisor while the advisor (or his/her parent firm) has a related entity that is an insurance agent is the exact issue that brought about the complaint with the CFP Board against Jeff and Kim Camarda, and the subsequent Camarda vs CFP Board lawsuit that has ensued. Similarly, an advisor holding out as being “fee-only” while working for a company with a related entity that generates commissions was what led to the resignation and subsequent public admonition of former CFP Board chair Alan Goldfarb. And after an article on this blog pointed out that under the related-party rules, any advisor working for a broker-dealer is in violation of the “fee-only” rules simply by the fact that they work there, the CFP Board had to reset the compensation disclosures on its own website after a follow-up story in Financial Planning magazine revealed hundreds were in violation of the “fee-only” disclosure rules.
As Michael Kitces’ blog also pointed out, the term “fee-only” continues to be a point of controversy and continues to snag advisors and firms, sometimes through no fault of their own. As James Dornbrook reported in the Kansas City Business Journal on June 10, 2015:
Leawood-based Creative Planning was recently named as the nation’s No. 1 fee-only wealth management firm by CNBC for the second year in a row. Creative Planning didn’t apply for the award. It was thrust upon the firm unknowingly, and it ended up in the national media.
Soon after CNBC announced its list, Michael Kitces, a well-known commentator and editor of the Journal of Financial Planning, skewered it by questioning whether nine of the 10 firms recognized truly have a fee-only structure. His criticism included Creative Planning, which Kitces said refers clients to insurance affiliates the firm owns, so it shares in those insurance commissions.
Creative Planning founder Peter Mallouk said that when it comes to making any types of investments, his firm is certainly impartial and fee-only, focused entirely on getting clients into the best investments that fit their risk profile and goals.
That said, Creative Planning does have affiliates that offer insurance coverage. However, most of the coverage is group coverage, such as health insurance and property and casualty insurance for businesses. The company does offer insurance policies for individuals, such as term life, health, home and auto, but the offerings do not include any insurance that could be considered an investment vehicle, such as variable life or variable annuities.
The CNBC list required that all firms be fee-only when it comes to investments. It also required that the firms on its list be able to advise on insurance because it wanted to recognize firms that offered a full suite of wealth management services. Creative Planning offers money management, financial advice, legal and tax services, and insurance. So it’s got the full package and serves clients well in each area, which is why it got recognized.
Should Creative Planning and similar firms be considered a pure “fee-only” firm when only a small part of their business makes commissions on clients for insurance sales? CNBC thinks so …
It should be noted that in a 2007 state securities administrator proceeding involving an investment adviser representative who also sold insurance products, the use of the term “fee-only” was found to be misleading and violative of state securities anti-fraud laws. See IN THE MATTER OF: MICHAEL G. GRIMES; and FINANCIAL SOLUTIONS & ASSOCIATES, INC., Case No. AP-07-04 (State of Missouri, Office of the Secretary of State) (available at The State Securities Administrator’s sanctions were upheld on appeal to the Missouri Court of Appeals (Financial Solutions and Associates v. Carnahan (Case No. WD71332 (July 20, 2010). I provide this extended excerpt from the appellate decision:
At the time of the investigation, Grimes [licensed as an insurance agent, not as an investment adviser representative] was acting as a solicitor for Barrington and had his own business, FSI. Grimes was licensed to sell life insurance, variable contracts, accident, and health insurance coverage.   Barrington was a federally covered investment adviser. Between March 31, 2005, and June 30, 2006, Grimes received over $150,000 in compensation from Barrington. FSI’s website, maintained by Grimes, contained a section called “Fee-Only Planner.” That section clearly stated:
 “[FSI] is a fee-only planning firm committed to assisting client[s] to reach their financial goals.   Fee only planners, like us, are compensated solely by fees paid by their clients and do not accept commissions or compensation from any other source.”
“The main difference between a Stockbroker and us is that they make a living by charging their clients commissions.”
“We do not earn any money from commissions, trailers, or markups.”
At the hearing before the Commissioner, Janet Ellingson, an account manager for LiveOffice, who Grimes used to build and house his website, testified that when Grimes gave the information for his initial questionnaire, he stated that he was a fee-only investment advisor. Grimes testified that it was his responsibility, knowing what licenses they had, to build the site and select the proper pages that would equal the services they were licensed to offer.   Grimes also admitted that he was a solicitor for Barrington at the same time he maintained his website and would receive 60% of the management fee that Barrington received when they managed the clients Grimes brought to them.
After a review of the record on appeal, particularly the evidence presented regarding the website and the commissions the Appellants received at the same time the website proclaimed they were “fee-only,” we conclude the Commission’s finding is supported by competent and substantial evidence.
Moreover, to the extent Grimes contends that the Commissioner erred in finding the statements constitute fraud or deceit under § 409.5-502(a), that argument also fails … “[i]t is recognized in Missouri, as well as generally, that the primary purpose of legislation similar to that of the Missouri Uniform Securities Act is that of protecting the buyers of securities.” Garbo v. Hilleary Franchise Sys., Inc., 479 S.W.2d 491, 499 (Mo.App.E.D.1972) (internal quotation and asterisks omitted). To fulfill that purpose, we “embod[y] a flexible rather than a static principle, one that is capable of adaptation to meet the countless and variable schemes devised by those who seek the use of the money of others on the promise of profits.”Id. (internal quotation omitted). As noted supra, under § 409.5-502(a):
It is unlawful for a person that advises others for compensation, either directly or indirectly or through publications or writings, as to the value of securities or the advisability of investing in, purchasing, or selling securities or that, for compensation and as part of a regular business, issues or promulgates analyses or reports relating to securities:  (1) To employ a device, scheme, or artifice to defraud another person;  or (2) To engage in an act, practice, or course of business that operates or would operate as a fraud or deceit upon another person.
The Appellants contend that fraud and deceit under the Missouri Securities Act require the making of a false or misleading statement of material fact, or the failure to disclose a material fact necessary to avoid making another statement not misleading. They contend that the statements from FSI’s website do not meet this definition. Fraud and deceit are not defined in the Missouri Securities Act. However, the terms “ ‘[f]raud,” “deceit,” and “defraud” are not limited to common law deceit.” § 409.1-102(9).
When interpreting the meaning of words used in the Missouri Securities Act, we look to other states’ interpretations of their securities law as well as federal interpretations. Moses, 186 S.W.3d at 904 (“Missouri courts have often looked to cases decided by courts from other jurisdictions to aid in comprehending the definitional limitations of the Act, particularly when the language of the federal and state securities statutes involved is nearly identical.”);  State v. Dumke, 901 S.W.2d 100, 102 (Mo.App.W.D.1995) (“[W]hen construing uniform acts, it must be remembered that the fundamental purpose of a uniform law is to eliminate uncertainty and provide plain and certain the controlling rules of law. It is fitting, therefore, to turn to our sister jurisdictions and examine their solutions to the problem.” (Internal citation and quotation omitted)).
Similar to federal securities legislation, Missouri securities legislation makes it unlawful for persons to engage in practices or a course of business that “operates or would operate as fraud or deceit.” § 409.5-502(a) (emphasis added);  cf.  17 C.F.R. § 240.10b-5(c). This language “quite plainly focuses upon the effect of particular conduct on members of the investing public, rather than upon the culpability of the person responsible.” Aaron v. Sec. & Exch. Comm’n, 446 U.S. 680, 697, 100 S.Ct. 1945, 1955, 64 L.Ed.2d 611 (1980). This same approach has been followed in other states, as these states have also relied on the Aaron decision. See, e.g., Secretary of State v. Tretiak, 22 P.3d 1134, 1141 (Nev.2001).
Moreover, when a definition is not present in the statute, “the plain and ordinary meaning is derived from the dictionary.” Cox v. Dir. Of Revenue, 98 S.W.3d 548, 550 (Mo. banc 2003).  “Fraud” is defined as “[a] knowing misrepresentation of the truth or concealment of a material fact to induce another to act to his or her detriment.” Black’s Law Dictionary731 (9 th ed.2009). “Deceit” is defined as “[t]he act of intentionally giving a false impression.” Id. at 465. It is also defined as “[a] false statement of fact made by a person knowingly or recklessly with the intent that someone else will act upon it.” Id. The evidence presented in the record on appeal demonstrates that the FSI website’s language meets these definitions.
The Commissioner did not err in determining that Grimes’s statements on the FSI website constituted fraud or deceit under the Missouri Securities Act. The Commissioner’s decision is in line with other state and federal decisions and meets the definitions given to these terms. We attempt to construe the Missouri Securities Act in a manner that is consistent with the Commissioner’s interpretation, Moses, 186 S.W.3d at 899, and we do not find that the Commissioner’s interpretation was unreasonable or arbitrary.   Point denied.
The Commissioner’s decision finding that Appellants engaged in an act, practice, or course of business that operated as fraud or deceit upon persons under § 409.5-502(a) is affirmed.
As seen, representations regarding “fee-only” by a person who does not meet the generally accepted definition of that term (whether such definition is promulgated by industry organizations or has achieved more widespread use in the public jargon) is likely to constitute “fraud” or “deceit” under federal and state securities laws.
Permit me to offer my own opinion as to the likelihood of organizational rules or securities / insurance law violations. Of course, each situation is fact-specific; nevertheless, some general legal conclusions can be offered.
If a Certified Financial Planner™ or her/his firm receives any commission-based compensation, 12b-1 fees, or other material third-party compensation, and the certificant uses the term “fee-only” (either on the CFP Board’s find-an-advisor web site, or in any other marketing or promotional materials, or verbally) to describe either: (1) the certificant; (2) the nature of the certificant’s practice; or (3) the nature of her or his firm, then the certificant has probably violated the CFP Board’s rules. If you, the reader, spot such occurring, I would urge you to first contact the certificant, suggest that she or he review the CFP Board’s rules, and permit a reasonable time for corrective action to occur. The appropriate characterization of the practice and/or the advisor and/or the firm should be either “fee-and-commission” or “commission-and-fee” (depending upon which predominates, as a percentage of total revenue). If corrective action by the certificant or the certificant’s firm does not occur, I would urge the reader to file a written complaint with the CFP Board about the certificant.
Regardless of whether the dual registrant (RR/IAR), or perhaps an IAR with an insurance license, possesses status as a CFP®, another issue is whether fraud is occurring under the federal or state securities laws, or common law fraud occurs under state common law. Given the long-standing use of the term “fee-only” within the industry, by both NAPFA and the CFP Board, and given that a significant minority of consumers would likely understand the term “fee-only” as connoting arrangements other than third-party compensation, I would opine that the use of the term “fee-only” would be fraudulent to describe the individual Series 65/66 license holder if that license holder received third-party compensation (such as commissions, 12b-1 fees, etc.).
If the advisor is a registered representative, then FINRA Rule 2210(d)(1)(B) prohibits a firm from making any false, exaggerated, unwarranted or misleading statement or claim in any communication, and prohibits the publication, circulation or distribution of any communication that the firm knows or has reason to know contains any untrue statement of a material fact or is otherwise false or misleading. I would opine that the inappropriate use of the term “fee-only” by a registered representative who also receives commissions or other material third-party compensation, whether from sales of securities or insurance products, is not “fee-only” and that any use of the term “fee-only” would likely violate of FINRA Rule 2210(d)(1)(B). Again, I would urge the reader to contact the registered representative and or her/his firm, and seek that they undertake corrective action within a reasonable period of time. If appropriate action is not appropriately undertaken, I would urge the reader to file a written complaint with FINRA.
If the advisor is not a registered representative, but holds as Series 65/66 license and an insurance licenses, and if the advisor inappropriately use of the term “fee-only” due to receipt of commissions or other material third-party compensation from insurance products, whether through the same firm or through an affiliated insurance firm or even a non-affiliated insurance agency, then I would opine that the advisor is again not “fee-only.” I would note that any use of the term “fee-only” would likely be considered an “advertisement” (any communication addressed to more than one person that offers any investment advisory service with regard to securities) under “the Advertising Rule” — Rule 206(4)-1). Note that an advertisement could include both a written publication (such as a website, newsletter or marketing brochure) as well as oral communications. Under the Advisers Act, advertising must not be false or misleading and must not contain any untrue statement of a material fact. Regardless of whether an “advertisement” exists, all statements made to advisory clients and prospective clients, is subject to the general prohibition on fraud (Section 206 as well as other anti-fraud provisions under the federal securities laws). Again, I would opine that it is likely that a Sect. 206 violation has taken place. I would urge the reader to contact the investment adviser representative and or her/his firm, and seek that they undertake corrective action within a reasonable period of time. If appropriate action is not appropriately undertaken, I would urge the reader to file a written complaint with either the SEC (if the advisor’s firm is registered with the SEC) or with the home state of the advisor’s firm (if the advisor’s firm is not “SEC-registered”).
If the advisor is only an insurance agent, and advertises as a “fee-only” financial or investment advisor, then violations of the anti-fraud provisions of state insurance laws, and/or state consumer laws against unfair or deceptive practices, may have occurred. While this will depend upon that state’s laws, again I would urge the reader to seek corrective action by contacting the insurance agent first, then if correction action is not timely undertaken then filing an appropriate report with either the state insurance commissioner’s office, or the state trade commission, or both.
I believe the term “fee-based” to describe an advisor is intentionally misleading, when utilized. Where both fee revenue (AUM, fixed fees, hourly fees) or commissions (or other third-party compensation) is received, an advisor is properly characterized as either “fee-and-commission-based” or “commission-and-fee-based,” depending upon where the majority of the revenue of the advisor is derived. The omission of “and-commission” in either instance, an attempt to obfuscate and gain the consumer’s trust inappropriately, and hence in my view constitutes deceit under federal and state securities laws.
These are my conclusions only. Again, these conclusions are based upon the general understanding of the law, and varying sets of facts might lead, in particular cases, to different results. Additionally, while one reported decision exists as to the use of the term “fee-only,” other decisions may exist, and/or new cases may arise, which result in different decisions. Nevertheless, I would caution that only advisors which meet the definition of “fee-only” use that term to describe themselves in any communications with any client or any group of clients, or in any other communication.

Vote for financial education

The Economist posted a recent “Where Do you Stand?” feature that goes like this:

Here is a question: Suppose you had $100 in a savings account that paid an interest rate of 2% a year. If you leave the money in the account, how much would you have accumulated after five years: more than $102, exactly $102, or less than $102. . . . A survey found that only half of Americans aged over 50 gave the correct answer. . . .  The solution seems obvious: provide more financial education. . . . A survey by the Federal Reserve Bank of Cleveland reported that: ‘Unfortunately, we do not find conclusive evidence that, in general, financial education programmes do lead to greater financial knowledge and ultimately to better financial behaviour.’  So should we give up on financial education? Please vote.

A friend had forwarded me the link to this feature (, and when I read it, I had a good laugh. What a way to frame a question: Here is some medicine that does not work. Would you take it? Please vote, because we are really interested in publishing your opinion.

I was nevertheless very pleased with the feature. The question that was cited was one that I designed (with Olivia Mitchell) for the Health and Retirement Study, a US survey that covers respondents 50 and older. However, it appears that whoever authored the feature forgot to read my paper because the statistic that is reported is, in fact, wrong. Not half but 67% of older Americans gave the correct answer. This does not mean that financial literacy is high. Nevertheless, it is good to check sources.
I went and searched for the Federal Reserve Bank of Cleveland survey to check it out. The link to the survey report is noted below. I mean this in a friendly way, but it’s worth noting that the Economist’s citation is from an unpublished paper written five years ago and covering only a handful of financial education programs. While the title of the paper may look attractive, I am not sure I would consider it the authoritative source on financial education. (I Googled the authors and it appears they have not written any other papers on this topic nor published that paper.) There are more recent and published papers, some of them pointing to the same result. I would have quoted those.

I voted, of course. (In case you want to know, I voted that we should not give up on financial education; I have read a lot more papers on financial education than the one reported here.) After casting my vote, I was able to see percentage of votes in favor of and opposing financial education. Even before seeing the result, however, I could have made an educated guess as to the outcome. The ING Financial Competence Survey asked “Do you think financial education should be taught in school?” In all of the 11 countries that were surveyed, about 90% of respondents answered yes (the report’s link is noted below). Notably the UK ranked second, with 94% of respondents answering yes. After I voted on the Economist’s question, I could see that 84% had voted in favor of financial education.

By the way, methodologically it is not very useful to ask about choices without mentioning costs. Decisions depend both on preferences and budget constraints. Would I give up cable? No. Would I give up a land-line phone? No. Would I give up on financial education? No. Why should we give up on anything without knowing the costs of doing so? We cannot learn much from asking these types of questions. It is Economics 101.

Athletes going bankrupt: We can stop it

I read the obituary of Ray Williams in the March 25, 2013, issue of the New York Times.  A talented basketball player, Ray Williams started his career playing for the New York Knicks and later for the New Jersey Nets. He also played for the Celtics, the Atlanta Hawks, and the San Antonio Spurs. As the article mentioned, “he had an outstanding shooting touch, he possessed superb body control, and had dazzled the crowds at Madison Square Garden in the late 1970s and early 1980s.” By the time his NBA career ended, he had accumulated impressive statistics.  His private life after he stopped playing is another story. While Williams had earned millions during his career, he declared bankruptcy in the mid-1990s, his marriage broke up, and by the summer of 2010 he was homeless, living in his car in Florida. After he talked about his problems in an interview with the Boston Globe, he received an offer from the mayor of his native Mount Vernon, New York, to work with youngsters at a recreational center. A former teammate interviewed for the article noted that “Williams flourished on the court but, like many athletes, was not prepared for life after the game.”

Williams’s story is surprisingly similar to that of many other athletes. Successful, skillful, and with impressive records, many athletes end up in bankruptcy courts, sometimes as soon as two years after they stop playing. Money mismanagement seems to be the norm, even if players, as in the case of Williams, had earned millions of dollars in their career. But the career of a professional athlete is short; they are lucky to be active past age 35. Their professional skills are many but do not necessarily translate into opportunities for jobs after they stop playing.
There are powerful lessons in these stories. First, skill, talent, and intelligence are not enough to manage finances. Incredibly successful athletes are able to do things that are unimaginable for the rest of us (I, for one, am so inept in basketball that I once fell on my face while trying to dunk a ball; I was alone on the court, so I could not even blame a teammate!) but they cannot necessarily be expected to be as skillful at managing money. While many people believe managing money is not rocket science (I am afraid it is), we need more than general skills to deal with high earnings, especially when those earnings last for only a few years. Second, while we recognize the importance of training to success in the game (and in any job, really), we tend to give less thought to how be successful in other parts of our life, such as managing our finances, which is equally important given that at a certain point we will stop working at our successful (or unsuccessful) jobs and need to support ourselves. 
There is a little bit of Ray Williams in all of us. How many of us have planned for the future so as to be able to support ourselves after we stop working? This is something that most people don’t start to think about until they reach middle-age. Fortunately, regular jobs last for a long time and we can earn income over a long career. But for professional athletes whose careers are very short, a lot more preparation is needed for “life after the game.” Three suggestions come to mind. Let’s make sure that athletes graduate from college so they have a degree they can rely on after they stop playing (Ray Williams did not graduate from Minnesota, where he studied after a year at San Jacinto Junior College in Texas). Let’s add money management to their courses before they go pro. We all need those courses, but the athletes even more! Finally, let’s create programs for professional athletes so that when they stop playing they can use their fame, skills, discipline, outstanding shooting touch, and superb body control to dazzle in their new jobs. 
All of us who cannot dunk without being hurt would enjoy seeing our heroes do well both on andoff the basketball court.

A tribute to Ray Lewis

Tomorrow will likely be the last game where we will see Ray Lewis play, the unforgettable number 52, who sometimes seems to fly. Even for a person like me, born and raised in Italy, with little knowledge of American football until some years ago, Ray Lewis represents what is special about the game.


Ray Lewis has been considered one of the best defense players, a linebacker who can put up an insurmountable barrier for the rival team, who can tackle like no one else. Watching him play, you forget he is often one of the oldest players on the field, as his age is not apparent from the way he runs, jumps, and catches. But perhaps because he has played for so many years, he knows spectators are there to see a good game, and he makes the game special. On the field, he dances, he screams, he prays, but in particular, he gives it his all.
What is special about Ray Lewis is not just his talent, but his passion, his motivation, his iron will. We have seen him motivate the Ravens before a game and console them after a loss. We can hear his screams when he comes onto the field, when he goes back into the locker room. We can hear the passion in his voice.
What I like the most about Ray is the message he has been delivering throughout the years. You want success? You have to work hard, very hard. You have to stay focused; do not take your eye off what you are doing. You have got to practice, get better every day. And most importantly, do not give up, never give up.
It is a message I like to tell my students (including the MBAs), my nieces (even if they do not play football), and, sometimes, myself, too. It turns out that Ray Lewis is also passionate about financial literacy, and about promoting financial literacy among underprivileged children.  Imagine combining passion with knowledge: what a combination that would be!
But tomorrow is a big game, an ending game, it is Super Bowl. Good luck tomorrow, and thank you, Ray Lewis!

My Retirement – Should I buy an Annuity?

Should I or should I not buy an annuity? (An annuity is financial product in which an insurance company, in exchange for a lump sum today, pays the investor a pre-determined cash amount for life.)

Why am I even considering this step?
First, I’m in my early 60s and no longer earning appreciable employment income. Yup, I’m retired and I would rather not un-retire if I can avoid it.

Second, I’m getting CPP but OAS is a few years off. I do not have any defined benefit pension so my investments in various registered plans, a TFSA and a non-registered account are the only possible sources of living expenses for the rest of my life, though at some point I am likely to receive a lump sum inheritance. Probably I am fairly typical of a growing number of Canadians, for whom the comfort of DB pensions providing assured lifetime income is no longer a possibility.

Third, I aim to follow a couple of simple financial management principles that make intuitive sense:

  • Guiding principle #1 – Match spending liabilities with income assets.

To the extent possible I want my various spending needs for food, housing, recreation, health to align with income sources in terms of timing, amounts, regularity and certainty aka riskiness. Grocery money, electricity and property taxes are essentials and must be matched by equally reliable income. On the other hand, I can put off or reduce travel.

This means matching the characteristics of income-producing assets with retirement financial risks and desired benefits, many of which are unique or especially important to the withdrawal phase of investing and to later life. The following chart summarizes the nature of the two main categories of financial products – i) stock & bond portfolios in the various types of investment accounts like RRSPs, RRIFs, LIFs, LIRAs, LRIFs and Defined Contribution pension savings plans and ii) annuities, CPP & OAS and Defined Benefit pensions.

(click on image to enlarge)

The striking feature of the chart is how well the two categories complement each other. Neither ticks a Yes in every box but where one category falls short with a No, the other in almost every case has a Yes. The two exceptions are inflation protection and tax minimization, where each category can only offer partial protection.

The obvious conclusion is that every retiree needs to have some of both types of products, except perhaps for those lucky or wise few whose 70% of final salary fully CPI-indexed DB pensions are more than adequate and who are net savers in retirement.

  • Guiding principle #2 – Take only as much risk as necessary.

Given that my objective is to maintain the lifestyle I have been happy with through the pre-retirement part of my life, if I can see that risk-free income sources will suffice to fund that lifestyle, why should I take any more risk?

Since my present CPP and even including my eventual OAS fall far short of my essential needs, the above considerations naturally lead me to plan for an annuity.

The next steps, for future posts to explore, is to decide:

  • how much to annuitize
  • when – now or later, when I’m 65, 70 or later, or whether to buy today a deferred annuity that only starts paying (how many?) years hence
  • which bells and whistles to buy, like guaranteed minimum payout periods, annual payout increases, death benefits
  • whether to use money from a registered account, which offers a higher payout, or a non-reg / TFSA account, where a prescribed annuity offers a tax advantage

Why Does the U.S. Chamber of Commerce Oppose the Interests of American Business? (DOL Fiduciary Rule)

An Open Letter to the U.S. Chamber of Commerce

Feb. 26, 2015

Tom Donahue, CEO
U.S. Chamber of Commerce

Mr. David Hirschmann
President, U.S. Chamber’s Center for Capital Markets Employee Benefits Competiveness

Mr. Randel Johnson
Senior Vice-President, U.S. Chamber of Commerce Labor Immigration and Benefits

Dear Mr. Donahue, Mr. Hischmann and Mr. Johnson:

I have observed the U.S. Chamber of Commerce undertake actions recently in apparent opposition to the U.S. Department of Labor’s (DOL’s) (via its Employee Benefit Security Administration) (EBSA) re-proposal of its “Definition of Fiduciary” rule (a.k.a. “Conflicts of Interest” rule). The Chamber has suggested that the DOL should not redefine the fiduciary definition, and instead seek a more narrow approach. I believe the Chamber’s position is contrary to the concerns of the vast majority of the U.S. Chamber of Commerce’s members.

The fact of the matter is that the DOL/EBSA re-proposal of the “fiduciary” definition is critical to all businesses, and their owners, that sponsor a qualified retirement plan. Far too often, plan sponsors have been sued for “relying” upon the advice of non-fiduciary “retirement consultants.” Yet, these “consultants” escape liability as they hide behind the low “suitability” standard for the “recommendations” they provided.

The burden on plan sponsors – business owners attuned to running their own businesses but rarely possessing a sophisticated knowledge of investments – is quite high. ERISA demands that fiduciaries act with the type of “care, skill, prudence, and diligence under the circumstances” not of a lay person, but of one experienced and knowledgeable with these matters. 29 U.S.C. § 1104(a)(1)(B). The purpose of this statute is for the protection of plan participants (including business owners and managers themselves). Yet, business owners and managers seldom possess the expertise to select investments for their defined contribution plans. Hence, they must turn to, and rely upon, expert advisors.

The real tragedy for plan sponsors occurs when private litigation arises against plan sponsors [including class action litigation by plan participants, made easier by recent court decisions. A perfect example is the Tibble v. Edison case currently before the U.S. Supreme Court. In this case the plan sponsor – a large business – faces immense liability (as well as litigation costs) due to its stated reliance on a non-fiduciary retirement plan consultant.

Additionally, largely in response to complaints by plan participants, a DOL audit is increasingly likely – and this can result in an enforcement action and/or restitution to plan participants. In both instances, the plan sponsor – businesses both large and small – are held to account.

Yet – here is the rub. In either instance, the plan sponsor has great difficulty holding the “retirement plan consultant” to account, given the low standard of conduct applicable to measure the potential liability of a non-fiduciary consultant. The plan sponsor is the victim of poor (and non-fiduciary) advice, in such cases, and has no effective remedy for the conflict-ridden recommendations it received. And most business owners don’t even realize that they cannot rely upon such non-fiduciary advisors.

Several other class action cases of this nature have already been settled, and more are pending. In each instance, if the U.S. Chamber of Commerce were to contact its member (the subject of the litigation, often bearing millions if not tens of millions of potential liability), that member would likely say: “The primary reason I, the plan sponsor, am subject to this suit, is because I did not work with a fiduciary retirement plan consultant. Although I thought I could rely upon the recommendations of this ‘consultant,’ and that they would be held to account for their recommendations, I came to find out that the ‘consultant’ is able to hide behind the low standard of ‘suitability’ for its recommendations. I am on the hook, while they escape liability for their conflict-ridden, poor advice.”

While the Chamber’s position appears to reflect Wall Street’s fervent opposition to the DOL’s proposed rule to broaden the applicability of fiduciary status, if the Chamber were to investigate it would find that many of Wall Street’s views don’t withstand scrutiny. See my prior blog post.

The U.S. Chamber of Commerce needs to rethink its position. Does the Chamber represent all business owners (many, if not most, of whom, are plan sponsors)? Or does the Chamber represent only a slim minority of the business world – who so often prey upon all of the other businesses? Does the Chamber want to assist its members – business owners and plan sponsors large and small?

American business owners desire to provide for the retirement security of their workers in the best way possible. The DOL’s fiduciary rule-making is a huge step forward toward this goal. The DOL’s fiduciary rule will empower plan sponsors – each of whom truly deserves expert, trusted fiduciary advisors who are, in turn, held accountable for their recommendations.

Ron A. Rhoades, JD, CFP®

Ron A. Rhoades is an attorney, investment adviser, Certified Financial Planner(tm), and professor of business law and finance. He will be joining the faculty of the Western Kentucky University Department of Finance in July 2015, where he will serve as Program Chair for its Financial Planning Program.

This blog post represents Ron’s personal views, and are not necessarily those of any firm or organization or institution with whom he is associated. Ron may be reached via 

Memorial Day

by Bill Sweet

Eric Paliwoda was a big dude – probably about six-foot-six. A mountain of a man. Big, meaty hands that would swallow your own in a tight handshake. Strong jaw that jutted out from his face – particularly when he had a mouthful of dip. He was raised in Arizona and Connecticut but looked like he emerged from a Nebraska cornfield.

He was on the brigade staff in the operations/planning department when I got to know him in 2002, and I was doing the same for our subordinate battalion. Operations is the bullpen where they put young officers to do their time while waiting to get put in charge of line unit, but on the line is where you want to be – in charge, out on your own, raising hell on the countryside. In the staff you’re at the bottom of the barrel, writing reports, getting coffee, answering to some major’s schedule. In the rear with the gear.

We both had timed it wrong. When the orders came down that we were going to war, all positions were frozen to focus on preparation, including ours. About five years ahead of me, Eric was waiting for a company command to open up. I was waiting for a tank platoon. He was in the Engineer Branch and gave me a ton of shit once he found out that here I was a smart guy with a fancy computer engineering degree, wasting my time as a lowly Armor officer. I told him it’s what I wanted to do, be a part of the US Cavalry – who wouldn’t? – instead of digging berms for tankers. When he was promoted to captain a month later, and I had to call him “sir,” which hurt because he gave me even more shit, and I lost my ability to retort. Yet at least he managed it in a good-natured, chew-spitting, big brother manner. Except for the time he filled my can of Coke with spit and didn’t tell me.

We both got our wish and were put in charge soon after hitting theater. I think that he hit the line while we were still in Kuwait – taking command of his own Engineer Company in early 2003. I remember feeling good for him – I knew that’s where he wanted to be. I was assigned to my tank company a few weeks later when the former platoon leader was promoted to the scout platoon, both of us found ourselves right in the thick of things – new leaders in combat.

He was universally known as a good officer. Our tour progressed, and early combat shifted from hunt-and-destroy the remnants of the Iraqi Army, to occupy-and-keep-the-peace, to find-and-destroy the insurgent presence. For me, it was a mix of patrols, checkpoints, quick reaction force, and raids. For him, I think it was a little more nuanced – patrols, explosive ordinance disposal, and city counsel meetings. He was certainly the better officer – he could use his massive, gruff frame to give orders and speak truth, no matter how strange or frustrating things got. Like me, I’m sure that he did some good things, and also some horrible things. I know that his men loved him. They would describe him later “as a gentle giant who took good care of them.”

On January 2nd, 2004, nine mortar shells fell into FOB Eagle where Eric’s company was garrisoned. Shrapnel from one of the rounds took his life. He was buried at West Point ten days later. He was 28.

Four months later, I came home. More importantly, I was able to bring all of my guys home safe, something I will forever be grateful for. I married my wife, was promoted to Captain and had two company command tours, left the Army, ran a successful business, bought a house and our office building, and am proud to be a part of our Chamber of Commerce, our Library, and our Town. Although Eric will always be older than me in my memory, I’m 35 today.

I often wonder what Eric would have done after the war. It’s deeply unfair and awful that we didn’t find out. We know that he was special – he found out about halfway into our tour that he was already accepted to be a professor at West Point. According to his neighbor, “You thought someday he would be a US Senator.”

During dark times, it haunts me that I’m here and he isn’t, part of the weird, complicated guilt of surviving an ordeal when a better man did not. I lived through probably two dozen mortar attacks. I even spent most of my time in Iraq at a much smaller Forward Operating Base – during once stretch, we had several rounds land in the complex every morning between 4-5 AM for eight straight days. It seems ridiculous now, but we joked about how we’d never find or kill the Mad Mortarman (we did). There’s really no reason outside of blind, dumb luck that I spent my nights sleeping on a tank, while Eric slept in a tent.

So that’s what I’m thinking about, a lot of the time. How incredibly lucky I am to be here. That we live in a place where we don’t have to worry about mortar rounds dropping in from the sky or bags blowing up on the side of the road, where we can raise our kids in relative safety, where we can chase our dreams and all have at least the chance to prosper. I try to remind myself constantly not to take this place and this time for granted – every cup of coffee, every completed project, every time I share a laugh with a friend or a client. Every time someone walks up to me and thanks me for my service. Every time I get to go to a baseball game and sit in the crowd and watch our flag waving in the sunshine, forever free.

Also, I think a lot about Eric on Memorial Day. Gary Coleman, Dale Panchot, Jose Mora, and Brian Faunce, Phillip Esposito, and Lou Allen, as well. These and the thousands more proud veterans and their families paid a terrible price in the service of our country. I think about how we owe it to them to live good lives, to love and take care of each other, and to make our corner of the USA just a little bit better. To do something with this time that we’ve been given. To make their sacrifice worth it. For them, and for us.

– Bill

Wanted: Ambassadors for Financial Literacy

In a country where people talk about sums in the millions and billions of dollars, where workers must figure out how much they need for retirement then wander off on their own to make those investments, and where borrowers are bombarded with opportunities for piling on debt, one in four adults cannot do a simple 2 percent calculation. 

And fewer than one-third of Americans can answer three simple questions that assess basic numeracy, knowledge of inflation and understanding of risk diversification.

Yes, we are a country of financial illiterates.

That’s what was revealed in the 2012 National Financial Capability Study, released a few weeks ago, which evaluates adults. When you look at teenagers, the results are even more chilling. Data published bi-annually by the Jump$tart Coalition for Personal Financial Literacy showed that only 7 percent of high school students are financially literate. 
Seven percent!
But it’s not so much about the statistics. What’s most important is the behavior that results from that lack of basic financial knowledge. People who are not financially literate are less likely to plan—or save—for retirement. And they are more likely to rely on costly borrowing, paying high fees and ending up in financial trouble. A paper by Stephan Meier at Columbia Business School and other scholars published this week concluded that people who are stymied by financial concepts are far more likely to default on subprime mortgages.
The President’s Advisory Council on Financial Capability issued a report a few months ago that outlined strategies to address financial literacy. One recommendation stood out: to include financial education in school curricula. There are four compelling reasons to support this. 
First, you must be financially literate to navigate today’s complex world. This has become so evident that the OECD’s Programme for International Student Assessment (PISA) last year added financial literacy to the skills (along with math, science and reading) that it tests in 15-year-olds around the world. 
Every three years, PISA gauges the following: Are students well prepared for future challenges? Can they analyze, reason and communicate effectively? Do they have the capacity to continue learning throughout life? The goal is to see if students nearing the end of compulsory education have the knowledge and skills essential for full participation in society. 
There is a second reason to bring financial education into the schools. At age 17, young people face a life-changing decision: whether to invest in higher education. What they decide carries vast income consequences over a lifetime. It also determines whether they begin their work years with instant debt. Options for financing higher education have changed and the cost of a college education has risen rapidly. That confluence means an average college student now takes on $26,000 in education loans. Graduation celebrations are now tempered with the reality of immediate—and significant—debt.
Financial education in schools also addresses the issue of equality. Who makes up that small percentage of students who are financially literate? White males from college-educated families. And research shows that this distinction is a lifelong one. Women, African Americans, Hispanics and the poorly educated display much lower levels of financial literacy than their counterparts at every step: in school, in middle age, before retirement and after retirement. 
Perhaps not surprisingly, this inequality in knowledge translates into inequality in wealth. As they near retirement, financially literate people tend to have greater levels of wealth than their counterparts who are not financially literate. According to my calculations, about half the difference in that wealth can be explained by financial literacy.  
Finally, by anchoring financial education in schools, we ensure that people are knowledgeable before, rather than after, they engage in financial transactions. Today many transactions—from using a credit card to opening a checking account to buying a car to signing up for a cell phone plan—start at an early age. They involve decision-making that is by no means simple.
You need not wait for our politicians to bring financial education into schools. Be an ambassador. Push your local high school to add financial literacy to an existing math or English curriculum. Ask the business community to support the initiative and train the teachers. It should not take much to convince a business-savvy person that it’s more economical to learn about finances in a high school than in the school of hard knocks.
Organizations like the Jump$tart Coalition for Personal Financial Literacy and the Council for Economic Education have designed standards that can be used in teaching. They have materials for both students and teachers. 
To naysayers who claim financial education does not work, I must point out that ignorance does not work either. Give education a try. As an economist, I know people need an incentive to take action. Here it is: Without some basic financial know-how, your children will move back in with you after college.

No Hype, The Straight Goods on Investing Your Money, 3rd edition, by Gail Bebee

Short, simple, straightforward and sensible. That’s No Hype in a nutshell. As an entry level book specifically for Canadians, it covers all the key financial products, services, principles and issues. There’s not a huge difference with previous edition (see my review of the 2nd edition), the changes have mostly been updates of data and available investments, which is important since Bebee provides a number of useful model portfolios with specific suggested ETF, mutual fund and stock holdings. Updating is a never-ending and always imperfect task since the instant the writing and editing is done, things begin to go out of date and indeed that is already evident in a few minor spots (e.g. Shoppers Drug Mart got bought out and is no longer traded, the website address of the Financial Planners Standards Council is wrong) but the trade-off of greater specificity of the book vs correct vagueness is well worth it.

All in all, still the unique basic go-to book for investing basics in a Canadian context. Still a very high rating of 4.5 out of 5.

It is available for purchase from Bebee’s website –

Disclosure: Author Gail Bebee provided me with a free copy for review

BMO InvestorLine allows swaps between like accounts

Recently I’ve been liberating cash in preparation for buying an annuity. To my relief and delight BMO InvestorLine allowed me to swap cash in my LIRA for bonds in my RRIF, saving me the considerable embedded commission (around 1% from what I have observed from bid-ask spreads) cost of selling the bonds in the RRIF.

It’s good to know that at least one broker has not thrown out the baby with the bathwater by banning any and all swaps after the Canada Revenue Agency clamped down on abusive gaming of the system to boost tax-protected balances. Swaps between accounts with like tax properties are still perfectly legal (per this post at but some brokers seem to have simply stopped doing any and all swaps (e.g. the discussion following this post at Canadian Capitalist and this other CC post). Swaps between registered retirement accounts like RRSPs, LIFs, LIRAs, RIFs, or TFSA to TFSA are ok but not between TFSA and RRSP (or other retirement) or with taxable accounts.

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