The Blog Of The Securities Industry Professional Association



Brokers Beware


With each passing year retired Americans have felt the squeeze of the artificially lowered interest rates that have been crippling this country without so much as a whimper from AARP and its lobbyist friends.  Years ago, many Americans would work their whole life and save up a couple hundred thousand and retire.  For most retirees, the idea was pretty strait forward:  put most of your money in a CD or Muni Bond and live off the monthly interest combined with any pension or social security you may receive.  However, ever since Allan Greenspan messed up the economy back in 2000 with his “irrational exuberance” claims and decided to take out the stock market temporarily, our interest rate structure in this country has resembled a banana republic.  Its no longer based on economic evidence or on anything relating to consumer borrowing and spending but is more closely tied to how much we want to pay to borrow money from China and the Federal reserve.

In case you forgot, good old Allan Greenspan artificially raised interest rates in 1999 because he thought the price of internet stocks was too high.  Thus his irrational exuberance was born but from an economic standpoint it was purely a disaster that I believe has been flowing down hill like lava off a mountain top for over a decade.  You don’t notice it at first but it just slowly makes it way down the mountain and into the sea each and every day.  In 2001 Greenspan realized his error and no less then 6 months after raising rates once again, he began the most aggressive interest rate reduction to offset the recession in 2000-2001 that he caused.  The problem is the rates were artificially low for so long that millions of Americans, and especially retired people, stopped buying CD’s, Bonds and other fixed income instruments and switched into things like real estate and real estate derivatives that eventually turned out to be ponzi schemes like provident and meridian.  The bad news is that Ben Bernanke has continued this low interest rate policy and now rates for a savings account is less then a half percent.  The retired people of America are being screwed.

Now more then ever the elderly need financial advisers and financial industry experts to help them navigate through this difficult time.  20 years ago a retiree with a million dollars saved could earn 50-60k per year in interest and keep their principal safe.  Today that same person would be lucky to receive $15,000 on their million dollar investment if they did not want to risk principal.  Right now the entire economy is stuck to the teat of the Federal Reserve and the anemic economic growth is being called the new normal by some economists and its obvious that ultra artificially low interest rates will continue.  This could be the perfect storm brewing and nobody is talking about it except for us.

FINRA and the SEC for years have gone out of their way to educate and protect the elderly due to their limited income and diminishing years.  The suitability rules directly target the elderly to protect them from blowing their retirement income in some penny stock in a Brazilian pharmaceutical nobody has ever heard of.   The regulators prefer to see retired investors in fixed income and principal safe investments that provide income and security.  However, that is not really possible today and brokers need to be cautious of older clients who are trying to figure out how to earn 5-8% on their money.  Many will seek to put the money in the stock market, especially with the recent Bull Run taking the dow to over 14,000.   Will brokers be under pressure from trial attorneys and regulators if the investment in the stock market goes down?  We believe now is the time for regulators to issue some guidance to brokers and brokerage firms and perhaps use all that money they collected on fines to truly educate investors on risks of the market.   For instance, many stocks on the Dow Jones Industrial pay a much higher dividend income then keeping your money in Bank America.  Would it be unsuitable to invest large amounts into some of these companies for the benefit of the older investor?    A million dollars in a CD at most banks is paying less then 1.5%   While a dividend paying stock like Apple and Exxon are currently paying nearly 3% in dividend income.  Would this be considered unsuitable or pragmatic? We believe these are the types of issues that require guidance from the SEC and FINRA and we also believe that the suitability rule needs to be revamped to address the drastic changes in our economy over the last 20 years.

What do you think?   Let us know your thoughts

Post Metadata

April 30th, 2013


Comments are closed.