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Dollars & Sense: Lessons Learned 2.0

By Roberta L Nestor

One doesn’t have to go back very far into investment history to find out what can potentially happen to a portfolio when the markets turn negative.  Unfortunately, many of the lessons learned from severe market downturns has been at the expense of the small investor.  It seems like the investment industry, Congress and other interested parties adds safeguards and new regulations after the fact.

Many of our readers might not remember the Enron Crisis.  Enron was a huge energy company that employed 29,000 individuals before it declared bankruptcy in 2001.  Back then, employees unwittingly learned that they did own Enron stock, not outright, but inside of their 401k plans.  Prior to Enron, employers were able to place restrictions that forced the employees to maintain employer stock until they retired or separated from service.  The “Enron Rule” now forces employers to have different investment options for employer contributions so that employees are not forced to own company stock.

The late 1990s was an exciting time for investors, it was the beginning of the dot com era.  This time it was with intent that investors over-weighted their portfolios with investments focused on technology – remember IPOs that were going up 30% – 50% in one day?  Investment portfolios were littered with tech stocks.  That bubble began to burst in the year 2000 and continued through 2002 with 3 consecutive years of severe stock market losses.  Diversification once again was on the front burner and “target date” options became more well-known.

After the .com disaster, investors were leery and relied heavily on target date funds.  These were designed to have your investments become more and more conservative as you got closer to your targeted retirement date.  By 2008, the stage was set for disaster and the only surprise accompanying the devastation to individual accounts was the amount of surprise expressed by advisors, investors, and legislators alike who were shocked to learn that target date funds had widely divergent strategies as the target date approaches.  Acting under pressure from Congress, the Department of Labor (DOL) and the Securities Exchange Commission (SEC) held their first joint hearing ever in June of 2009, to have more regulations for the “problem” of target date funds.

Fast forward to 2020 and we now have the Regulation Best Interest Rule, also known as Reg BI.  The SEC got Reg BI right because it carefully balances consumer protection with investor choice.  For one, Reg BI includes a requirement that brokers act in the best interest of their clients.  Think about that and how important it is that your advisor always places your best interest ahead of their own.

Second, Reg BI requires valuable new transparency focused on ensuring investors are informed.  The new “Client Relationship Summary” (or CRS) is investor-friendly and will allow individuals to make more informed decisions when working with a financial professional.  This additional disclosure and education support consumer choice in deciding the best course of action for their long-term investment strategy; either a low commission brokerage account or an advisory account with ongoing fees based on a percentage of their account balance.

Finally, Reg BI, by strengthening the federal standards for brokerage advice, should give state regulators confidence that strong federal rules are in place and discourage the development of a conflicting patchwork of state regulations, which confuse investors.

There is no doubt that more and more stringent regulations will follow you throughout your investment years.  It’s a good thing.  It would be better if these regulations were more forward thinking to protect us, before we risk our retirement savings.  Maybe our next regulation will be the “Robinhood Rule” to help protect our young investors who prefer to do it on their own.  While learning from your mistakes is what makes us stronger, somehow investment mistakes seem to weaken not only our wallets, but our resolve to save.  As markets, once again, reach all-time highs, many are wondering when the next shoe will fall and what is it that we will learn from the next market crash.  Maybe it is a good time to rebalance and revisit your investment portfolio, when things are going well.  Don’t wait for another market downturn before you call your advisor to discuss the “what ifs”, having a plan and a solid understanding of what you own is the first step.

Roberta L. Nestor is a financial advisor practicing at 759 Boston Post Road in Milford, CT offering retirement, long term care, investment, and tax planning services.  She offers securities and advisory services as a Registered Representative and Investment Adviser Representative of Commonwealth Financial Network – a member FINRA/SIPC and a Registered Investment Adviser.  Fixed insurance products offered through Nestor Financial Network are separate and unrelated to Commonwealth.  Commonwealth Financial Network or Nestor Financial Network does not provide legal or tax advice.  You should consult a legal or tax professional regarding your individual situation.  Roberta can be reached at Nestor Financial Network, 203-876-8066 or roberta@nestorfinancial.com.

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