Investors Raid IRAs, 401(k)s ? Raising Broker & Adviser Risk ...

[ by Melanie Gretchen and Howard Haykin ]

Anyone looking to check the pulse of the American economy might want to check out the status of retirement accounts.? What might be a little known secret might have some serious impacts on the welfare of customers and clients of broker-dealers and investment advisers.? And when their welfare, and well-being is at risk, multiple risks arise for Wall Street firms.? Of course, there's no reason any financial services firms must sit around and wait to see how it all turns out.? There are plenty of PRO-ACTIVE steps that can be taken.

So where are we getting the idea that many Americans are not waiting for retirement before they hit their savings?? Well, that would be Wall Street Cheatsheet, which points out that:? Amid stagnant wages and rising expenses, more Americans are raiding their retirement accounts.

And with all the billions in liquidity that the Federal Reserve appears to be pumping into the financial system ? at record levels, no less ? no much of that liquidity is reaching its intended target.? As Americans are getting "tapped out," they are resorting to tapping their retirement accounts ? before their retirement.? Wells Fargo confirms this phenomenon:? a bank survey found that 1 in 5 workers are using their 401k plans for loans.? To date, the average new loan balance jumped 7% from $6,662 to $7,126 in the same period.

"While the increase in loan activity is concerning, we know that loans are not the biggest driver of leakage from retirement savings.? In fact, employees cashing out their 401k's when they leave an employer are a greater concern. Those dollars are often spent whereas with loans the funds are often repaid and stay in the retirement nest egg." ? Laurie Nordquist, director of Wells Fargo Retirement, in a press release.

Wall St. Cheatsheet scratched the surface when it said, "it is generally considered a bad idea to take a loan out from your 401k plan."? Aside from diminished long-term gains or the very real threat of being laid off (at which point entire loan typically becomes due within a few months), what we're looking at is an entire population of sitting ducks.

Ramifications On The Financial Services Industry.? We'll let you in on a little secret ? but you'll have to promise to follow our logic.? If you agree with us so far ? i.e., agree with Wall Street Cheatsheet ? then many customers and clients of broker-dealers and investment advisers are hurting.? If the investor keeps his or her retirement account with your firm, perhaps you've already noticed a significant decline in balances.? But it wouldn't be so apparent if the account or accounts were held, say, at a custodian chosen by the employer.

Anyway, it would be prudent to take the worst case scenario and presume anticipate your customers or clients are having difficulty.? When people are experiencing net outflows, they sorely feel in need of a quick fix.? That need can be filled by investing an individual's remaining funds in speculative securities ? e.g., penny stocks, out-of-the-money options, junk bonds.? If the stars are aligned, any of those can result in a meaningful return.? Of course, it's not uncommon for such securities to become worthless or fall to a fraction of their former value.?

How does that impact those in financial services??

• Suitability, suitability, suitability!
• Investors may try and win it all back all at once.? But should firms let their customers and clients follow their own leads?? It's probably akin to a bartender who serves a last drink to someone who's already reached his or her limit.? If anything happens to that person, the bartender can be held responsible.
• What about the investments that you and your firm have been soliciting.? In your opinion, they were suitable for your customers a couple of months ago ? so why not now?? Well, if they're down on their luck, they no longer have the risk tolerance or investment objective that they had a short while ago.? If you push those securities on customers and they lose, regulators can come after you.?
• And because regulators also are aware that investors are raiding their retirement accounts, they're likely to revise the scope of their examinations, and see if firms like yours have changed the way they do business/

Proactive Strategy. ? First things first, it's essential to learn how your customers and clients are doing.? Every broker and adviser needs to ascertain what changes have occurred in the lives of their customers and clients, and whether the firm's profiles need to be revised.? Managers and supervisors should work closely with their charges and review all findings.?

It probably would be best to design a standard template for all personnel to fill out.? This will ensure consistency of information and facilitate reviews.?

Supervisors should meet or speak with selected customers or clients ? along with the broker or adviser, or separately.? The key is to know whether the brokers and advisers are asking the right questions and clarifying answers where follow-ups are needed.

Benefits of Elevating Customer/Client Contacts.?? Several benefits come to mind.

• Customers and clients will likely appreciate the additional attention and concern.? This not only can strengthen working relationships but it might also provide troubled investors with an ally ? or someone they can turn to for guidance.?
• Regulators will appreciate the care and concern that the firm exhibits for its customers and clients.? And, by retaining copies of the interviews and updates to customer records, as necessary, it's likely that regulators will reduce the scope of testing because they're satisfied that the firm has gone the extra yard to "do the right thing."
• Finally, the risk of suitability arbitrations and lawsuits are significantly reduced because the reviews are documented and presumably subsequent investment decisions are in line with the new findings.

Seriously ? it really is simply prudent/prescient/just good business to be on the crisis-averse side.

For further details, go to [Wall St. Cheatsheet, 4/18/13].

Source: http://www.compliance-insights.com/perspectives/investors-raid-iras-401ks-raising-broker-adviser-risk

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