A couple of weeks ago at the Republican National Convention, there was a whisper campaign that followers of Ron Paul were going to make a hard push for moving the United States back to the gold standard for our monetary policy. While I’m sympathetic to some of their logic, it’s simply a bad idea.

In 1971, President Nixon removed all ties between the U.S. dollar and gold.  For decades before that, the rest of the world promised to fix their exchange rate relative to the U.S. dollar.  In return, the U.S. promised to fix the price of gold at $35/ounce.  In a way, that implied that all currencies were fixed to gold at $35/ounce.

Why did he do it?  Historians argue to this day.  Some say he did it because French President Charles De Gaulle forced our hand by trading their currency directly for gold.  Others say the high cost of the Vietnam War and the new “Great Society” programs were forcing the U.S. shell out many more dollars than we had gold to back it.  There are many more reasons possible still, but I don’t have time in this commentary to outline them all.  The question is, does it make sense to go back to the gold standard now?

There are a number of positives that make the idea seem attractive.  It would be an immediate guard against inflation.  It would also lessen the Federal Reserve’s ability to tinker with the country’s wealth by printing money in any quantity it wants.  And finally, it would level the currency playing field, so countries like China can’t just make their own rules.

So why shouldn’t we do all of these positive things?  Because if we did, it would be so disruptive to the global financial system, it would make us long for the good old days of 2008.  It would do this because the gold standard forces deflation, and that’s the one thing that every economist agrees we don’t want.  Deflation crushes debtors.  Think about it.  If every dollar you pay your bank for your mortgage is worth MORE than the dollar you originally took out, you lose in a big way!  And that’s not just for home mortgages, it’s for every business that takes out a loan, or our $16 trillion of national debt.  We can’t afford to magnify how much more we owe by deflating our currency.

Also, if we tie ourselves to the gold standard, government would have almost no ability to maneuver in an emergency.  Now I at times I think our leaders don’t deserve much flexibility, but at the same time, I don’t want their hands tied during a crisis.  How much worse would the aftermath of 9/11 been?  How much worse would it have been in 2008 without TARP?  QE I, II, and III wouldn’t have been possible on the gold standard.  

As a nation, we’re frustrated and scared because of what we’ve been through for the last 12 years.  But cooler heads need to prevail and we need to remember there’s no easy solution.  The gold standard sounds good, but only time and discipline will fix our current problems.

Suppose you hire a financial advisor and invest money. One day your statement comes in the mail and you suffered a staggering loss. Do you have any recourse against your broker? Naturally, the answer depends upon circumstances. I'll use a couple of different scenarios to illustrate.

In 2008, a retiree from Kodak brings an advisor a million-dollar IRA to manage, needing to withdraw $4,000 per month. After a thorough analysis of the client’s needs, the advisor puts together well-balanced portfolio with the client’s permission and starts a monthly distribution.  About that time, the market goes into a year-long tailspin and the retiree is shocked see his million-dollar portfolio at $850,000. Compare that to Mrs. Smith, age 78, who has only ever invested in savings accounts and CDs. Disgusted by low rates she agrees to meet the banks investment person who puts all her money into a high yield bond mutual fund.  Her understanding is that it’s paying 6% interest, but is shocked when her $100,000 turns into $85,000.

In this overly simplistic example, Mrs. Smith has far more reason to file a complaint, even though the loss is 10 times greater for the retiree.  Why?  Because a junk bond mutual fund is not suitable as the sole investment for a 78 year old with no prior investment experience.  On the other hand, a retiree who has 40 years’ experience investing in a 401k and gives permission to go ahead with an acceptable strategy after full disclosure has only been damaged by the market – which of course carries no guarantees.  The good news is that most people have fully recovered from the latest meltdown.

Which is the point of this commentary- just because you suffer a loss doesn’t mean you’ve been wronged.  The size of the loss does not matter either. What matters is that investments are suitable for your particular situation. Your advisor must disclose all of the risks. Unless you have given discretionary authority, you must approve every transaction within your account. The advice you receive should be sound, and trading - as well as fees for it - should not be excessive. If you suffer a loss for any of these reasons, your next step would be arbitration.

Whenever you open a brokerage account, in the fine print you agree to settle any disputes through arbitration. You can represent yourself, but I highly recommend using an attorney. After quantifying your losses, a panel assembled by FINRA hears your case and awards or denies damages.  At this point both representatives and the firm that employs them can be held responsible.  Not all losses are created equal, but if yours is caused by an incompetent or predatory advisor, you do have a method for recovery.

As promised, I'm devoting the next few segments of my commentary to talk about those disastrous interactions with brokers and financial advisors. It’s far too common that people lose money from bad investments, bad advice, or even worse, outright fraud and theft.

Most people engage a financial advisor when faced with a large life event – after inheritance, a legal settlement, or at retirement. Usually, it's when large sums of money are involved. But before any investments are discussed you should check the background of anyone you're thinking of dealing with.

There are two basic types of financial advisors. Registered Investment Advisors typically help people for a fee and often maintain custody of customer’s cash and securities. Oversight is provided by the SEC and individual states. There are roughly 275,000 RIAs practicing today

Far more common are Registered Representatives, otherwise known as brokers. There are about 663,000 registered reps working for insurance companies, independent broker-dealers, and large wire houses like Merrill Lynch.  FINRA is a self-regulatory organization that oversees all brokerage activity. They license representatives, track continuing education, and audit and monitor activities of all firms and their registered reps.  If needed, they discipline or suspend representatives and arbitrate disputes between clients and their advisors.

After you determine if you're dealing with a broker or RIA, you should then perform a background check. FINRA makes this very easy if you're dealing with a broker. All you have to do is Google FINRA Brokercheck.  With the correct spelling of your prospective broker’s name, you can select a detailed report that will give their entire employment history and a listing of all their nonbusiness related activities. Most important is a section entitled disclosure events. This lists all complaints, litigation, arbitrations, and regulatory infractions.

FINRA Brokercheck is one of the most important things you can do to protect yourself. Look at these disclosure events very carefully.  This is where the old adage “where there's smoke, there's fire” rings true.  While even the best planners can have an occasional complaint, very few have multiple infractions. In the last five years, about 3.3% of all brokers received a single complaint.  But less than a quarter of one percent had three or more complaints filed against them, and in that group you’ll find the overwhelming majority of bad eggs.

Step one of staying out of trouble is to know who you’re dealing with. Tomorrow I'll discuss what you should do if you really have been harmed by your advisor.

If you are like most Americans, you probably don’t know what’s covered in your homeowner’s insurance policy.  That’s right, the thing that protects your single largest investment.  A recent MetLife survey as reported by US News and World Report showed that almost half of all homeowners don’t know how much coverage they have for the contents of their home, and 1 in 3 don’t even know how much their home is insured for.  This could cause you to end up paying a lot more than you expect after your home is damaged.  Not exactly the time you need any added stress.

Listen to this reported story.  An older couple finally purchases their dream home.  One day while they were out, a lamp overheated causing a fire.  Not only was part of their house destroyed, but they also lost a family pet.  The insurance company arranged to have repair work done, but the hired contractor accidentally caused a major flood in the basement which led to black mold.  In all, the insurance company offered far less than the estimated cost to repair their home.  The couple was distraught and eventually hired a public adjustor to negotiate a higher settlement.  Did they get what they thought they were paying for?

Here are just a few of the questions you should be asking.  Will your insurance policy reimburse you for earthquake damage?  In most cases the answer is no unless you purchase a separate earthquake policy.  Are you covered if your sump pump backs up and your house floods?  Most people say yes, but unfortunately you would have needed to add coverage for sump pump failures.  How about if you take a vacation, or go away for a few months during the winter and your pipes freeze and break, are you covered?  It depends. Did you take all the proper steps to minimize the chances of it happening?  Did you keep the heat high enough and drain the pipes before you left?  If you didn’t, you may be in for a nasty surprise.  And the biggest one, if you have a fire, will the insurance pay the full cost to rebuild?  The answer is no unless you have full replacement costs written into your policy.  Most basic insurance policies cap their coverage and take depreciation into account when calculating the value of your personal possessions.  And even with full replacement cost on contents, most companies pay you only for the depreciated amount and make you whole only after you repurchase the item and submit receipts.  This is known as holdback.

On the positive side, there is coverage for things that many people don’t realize.  Policies usually cover your children while they are at college and living on campus.  And often they cover electronics and damage to appliances caused by a power surge.  
The moral of this story, take the time to read and understand what you are paying for.  If you don’t know what something means or don’t know if it would be covered in a loss, ask your agent to explain it to you.  After a loss is not the time to learn if a check is coming from your insurance company or out of your own pocket.