These are just some of the headlines in recent pages of the financial press.

• The pace of construction of new homes fell in July to the lowest in nearly 11 years. Housing starts reached an annual rate of 1.4 million units, down 6.1% from June and 21% below July 2006 levels and was the weakest reading for housing starts since January 1997.
• Countrywide Financial shocked the markets by stating it would tap its entire $11.5 billion line of credit.
• The Chicago Board Options Exchange’s volatility index, or “fear gauge,” hit levels not seen since the October 2002 bear market.
• The Japanese yen rallied vs. the dollar by the most since 1998, according to Bloomberg News, as speculators unwound risky “carry trades” where low interest rates in Japan have allowed traders to borrow yen and use the money to buy riskier and higher-yielding assets in other countries. Fearing market turbulence, speculators undid their trades by buying yen and closing their positions thus adding more volume and volatility to the markets.

With all of that said, as of this writing, the Federal Reserve Board made a symbolic cut in the rarely used discount rate which affects banks borrowing from the Fed in overnight transactions, i.e. this action provided an increased liquidity in the markets. Will we see a cut in the more followed federal funds rate which affects short term rates such as credit card debts, adjustable rate mortgage, auto loans and the like? Maybe. The Federal Reserve has more to their job than just making the markets happy. As such, the inflation concerns which still abound would be a reason to not cut this rate. The Fed can not step in every time the investment community makes stupid decisions and bail out those who are causing them, i.e. the unregulated hedge funds using collateralized mortgage debts. If they bail them out, what concept will be the next bubble to possibly burst and be expecting a bailout. However, the odds of the Fed actually cutting the rates and “doing what is needed with all tools available,” according to Christopher Dodd of the Senate Banking Committee, has increased.

We never know what tomorrow will bring in the markets and the underlying fundamentals – lower than historically average price to earnings ratios, relatively strong corporate earnings and other economic factors point to a market that could rise. Whatever the reactions, expect volatility, up and down, to continue throughout 2007.

The volatility we are seeing is not rare. In fact, it is common. To test this, I reviewed all trading data on the S&P 500 from January, 1, 1995 – August 15, 2007. There were 3,177 trading days in that time frame and out of those 3,177 days, 508 days (almost 16%) saw intraday swings of > 2%, i.e. from the trading high to low (not open to close). While five of the worst 100 trading days have been in 2007, none have been in the top 10. As of this research, 2007 occupied only 155 trading days out of 3,177 population days or approximately 5.0%. If 5 out of the worst 100 trading days occurred in 2007, this also represents 5% which would be an expected ratio.

The worst performing day was October 27, 1997 which was down 6.87% from open to close. The biggest intraday swing was July 24, 2002 when the high to low changed 8.85%. The best performing date was July 24, 2002 which was up 5.73% (note, the intraday swing on the same day was 8.85%).

Why all the facts? Simply to transition into an excellent article I recently read from Nick Murray on why focusing on such facts may make you appear smart in your own mind, but is it all that important to your clients? In summary, his article states, “how very badly accounting, engineering and other technical disciplines prepare one for a career in personal financial advice…two questions I received from CPA types highlighted, for me, the dangers of a crippling dependence, on the part of technically-oriented people, on statistical evidence as a form of persuasion. Simply stated, the more heavily armed you are with statistical demonstrations of your essential theses, and the more reliant on those ‘proofs’ you are in your interactions with prospects and clients, the less likely I believe you are to forge lasting relationships built on trust.”

You may be thinking that the more you can demonstrate factually/statistically, the more likely you are to succeed. Murray stated, “Once the needle of dependence on numbers goes into one’s arm, it never comes out.” Don’t ask any number, or any accumulation of numbers, to win your prospects’ or clients’ trust. They can’t and they won’t. Belief is what inspires belief, and the only sure path to trust is trustworthiness. If you do not have a deep belief in your ability to provide value in the volatile markets and focus on comprehensive financial planning, then you should stay out of the field. We must have a passion for what we do or we must simply find something else to do. Our clients pay us for our statistical data but they stay with us because of the relationships. After all, statistical data is simply a manipulation of things that have already happened. Our clients are with us for so much more.

Do it well or don’t do it at all.

Because 529 plans offer a range of savings options, including stocks, bonds and money market funds, your education planning professional can help you determine the right blend of investments to maximize your college fund. If your child is very young, your education planning process can emphasize higher-risk, long term savings options. Even if your child is due to start college in the next few years, a visit with an education planning expert can identify low-risk savings alternatives that still generate a return on investment or the proper tax break for the money paid.

Second, a growing number of families are now subject to the Alternative Minimum Tax. Originally designed as a tax on the super-rich, the AMT forces a minimum tax on families with AGIs above a designated threshold. Unfortunately, that threshold has not risen at the same pace as salaries and real estate values, meaning that you could wind up paying more taxes than you had planned.

For these two reasons alone, you should make income tax planning an important part of your annual routine. Just like a regular check-up with a doctor or a dentist, an income tax planning session can alert you to the early warning signs of trouble. Meeting with these professionals can identify ways that you can reduce your overall tax burden.

Income tax planning doesn’t have to be stressful, and it doesn’t have to involve last minute meetings with your financial planning team. If you begin your income tax planning process during the summer and fall, you can map out a financial strategy that legally reduces your adjusted gross income without stunting your earning potential. This way, you can ensure that you and your family enjoy a consistent quality of life without any surprise bills from the IRS.

An experienced retirement planning professional can demystify the process for you. In a world where retirement has become incredibly complex, retirement planning can help you understand how the choices you make today can impact your quality of life tomorrow.

America’s Baby Boomer generation is already redefining what it means to be “retired.” A growing number of Americans plan to remain vital and active through their retirement years, whether that means growing a business or traveling the world. Without the right retirement planning, you could find yourself in the same predicament as too many older Americans – working to pay the bills during your golden years.

Obviously, the earlier you sit down with a retirement planning professional, the sooner you can build your plan for the future. A recent column in the Wall Street Journal highlighted the fact that many Americans can use careful retirement planning to build a portfolio of a million dollars or more – as long as they let their investments do most of the hard work.

I confess – as a comprehensive, fee-only, financial planner – I am a fiduciary and feel that any person in my field who is serving a client should be one as well. I want every person providing investment advice to be obligated – by professional standards and regulatory and statutory authorities – to focus on the client and not the financial needs of the brokerage firm, insurance company or other firm for whom they work. As an advisor who practices this way, this is how I desire for my competitors to act. Lastly, if I were a client this is what I would expect as well.

However, it seems the SEC doesn’t share my view, and most professionals who give investment advice are not and probably never will be fiduciaries. As such, I felt especially vindicated in May when the DC Circuit Court of Appeals struck down the SEC’s rule that brokers could offer financial advice for a fee without becoming registered investment advisors or living up to fiduciary standards. The court told the SEC that professional advisors can not give their best advice “unless all conflicts of interest between the investment counsel and the client were removed,” and that the major focus of the Investment Advisers Act of 1940 “was to substitute a philosophy of full disclosure for the philosophy of caveat emptor.”

The court went further and said the 1940 Act was created to “safeguard the honest investment advisor against the stigma of the activities of faux professionals who follow fraudulent or deceptive practices.” Brokers have been living under this so called “Merrill Lynch exception” since 1999. So why am I not celebrating? Honestly, I am more worried today than before the decision because the decision made it clear that brokers cross into fiduciary territory simply by charging fees for their advice. A broker-dealer representative under the Act is exempt from RIA registration if that person offers investment advice that is “solely incidental to the conduct of his or her business as a broker or dealer, and who receives no special compensation therefore.” In other words, if the advisor acts solely in a transactional matter, no registration is required. When is the last time you heard someone holding themselves out as an advisor say they were simply completing the transaction vs. providing advice? Take a look at a business card. Does it say “transactional facilitator” or “advisor”?
I’m worried that the court’s ruling has backed the supporters of this business model into a corner. Those who have not been registered and putting clients first, have little choice but to adapt. If these companies decline to register, then they have to turn those asset management accounts into brokerage arrangements and take a blow to their credibility. If they decide to register as investment advisors, then every recommendation will be scrutinized by the courts in light of their conflicts of interest.

Given the changes at hand and the money associated with it, there are bound to be changes but what kind and how severe? That is open to much debate and will play out in the press, Congress and back offices of many firms in the coming months.

In the mean time, advisors should simply take a fiduciary oath to their clients and put their interests first.