ERROLD F. MOODY JR.

May 22, 2007

Forrest Jack Lance

Lance and Associates

5220 Bailey Road

Conyers, GA 30094-4737

Fred Reish, Debra Davis

Reish Luftman Reicher & Cohen

11755 Wilshire Blvd., 10th Floor

Los Angeles, CA 90025-1539

RE: District Retirement Plans- Ignore at Your Own Peril

Dear Mr Lance, Mr. Reish, Ms. Davis

I was recently provided your above article and have read The Duty to Know; Investment Advice, Understanding the Rules; et al. The material on fees and expenses is mandatory and excellent. However, I find the continuing reference to advisers as fiduciaries to be far less than correct or valid in the real world. Referencing "I use the term "advisers" to refer to brokers, investment advisers and consultants, which would include third party administrators," you infer a competency in investing that has never existed. You make additional reference to computerized offerings- admittedly allowed by the DOL- yet where they are almost universally wrong. Before proceeding my commentary, I refer you to my resume at my website http://efmoody.com and to http://efmoody.com/bernanke.html, and http://efmoody.com/breach.html in order to address the following.

There are also hundreds of pages under the investment area that can document the positions taken below.

I do not wish to be confrontational per se, but your article(s) fail to provide the understanding of what or who is a proper adviser or consultant. (That said, almost all journalists and articles about RIAs, CFPs et al fail to acknowledge any background save for the term "adviser".) A broker, per se, cannot be a fiduciary to any retirement plan since they have never been formally trained in the fundamentals of investing. As far as fee only is concerned, they may avoid the conflict of interest but the assumption that "fee only" has competency to explain investments or act as an adviser per se is also false.

Why is that ? Simple. The fundamentals of investing have never been taught to a broker. This is not a tirade nor miscellaneous commentary. The basic subjects for investing are not required as part of the licensing exam nor mandatory for continuing education. (I have taught literally all the licensing courses and have manuals from decades ago to present). Diversification has never been addressed as part of licensing training nor is mandatory at any point subsequent. Neither is alpha, beta, standard deviation (a must- but where is it?), correlation (mandatory though very difficult to use in the real world), asset allocation and more. While the comments regarding fees is mandatory and an absolute notification to employers and employees, it does not say anything that the advisor is effectively remiss in any ability to truly understand what they are doing nor the associated risks thereof.

Harsh? Well consider CFPs- considered to be the front line of planning advice. The CFP training is, at best, the equivalent of one semester on money. They have never been required to know diversification. And if you do not know diversification by the numbers, you cannot get to risk, If you cannot get to risk, you cannot get to suitability. DCA is presented but it's all wrong. So is the Brinson Beebower study. And do you know that the bulk of planners in California (as well as about another 35 states) offering comprehensive financial planning advice are illegal? And any B/D firm offering same is also illegal. There is a major difference between an Investment Adviser and a Financial Adviser but it is rarely, if ever, addressed. Even assuming an investment adviser is competent, a financial adviser is taking on more fiduciary responsibilities and requiring, in most states, additional licenses. Why no commentary????

Perhaps more egregious is the continuing use of computerized investment advice that has been universally a fraud. Such plans universally show risk incorrectly- that over time "risk" goes down since they universally equate standard deviation to risk. That is wrong. The risk of loss goes up over time. To the point that retirements can be devastated since the inference to potential retirees is false. The over $1 trillion of value was lost in 2000- 2002 was not due to overcharges of fees. It was due, in large part, to fiduciaries that are NOT providing competent advice- be it with a computer or in an individual seminar. It is true that Monte Carlo analysis does help, but it still leaves the true element of risk without comment. Any ‘fiduciary' that does not offer risk in its proper context is not a fiduciary. Period.

I further note this comment- "........both fee-based and commission-based advisers, as well as a providers, should anticipate that guidance and begin providing client plans with full and transparent disclosure of all fees, expenses and revenues, if they are not already doing so." Is not the same transparency required of fiduciaries to acknowledge that they have not been trained in the fundamentals of investing? Is it not a duty of those fiduciaries that recommend and review advisers to state that they do not have the requisite skills to do same? Or is the acceptable to simply state that if you don't know that you don't know, it is a valid excuse? What is the duty if they are so incompetent that they don't know that they don't know? Yet every B/D firm knows that its reps have never been trained in the fundamentals of investing. Every B/D firm has a fiduciary duty to know that its computer plans are false. Every fiduciary has a duty to know what diversification is. For that matter, every securities attorney has to know what it is. Yet I have never met one that knew. Never. And only one that cared (and he had not done the proper homework and therefore had the wrong numbers.)

The transparency of fees is fine. It's mandatory. But the transparency of incompetency has to be acknowleged as well. If you reduce the fees charged by an incompetent, who has been served? They are still incompetent. A B/D firm- even through its supervisors (series 4, 24 et al)- also has no insight to the fundamentals of investing. There's nothing in the licensing manuals regarding the fundamentals of investing nor how to address risk. So the following from your DOL commentary seems moot at best. "In our view, this has always been a requirement; that is, if participants complain about the service they are receiving – from an investment adviser or other service provider – the general plan fiduciaries have a duty to look into the matter." What?

Why would anyone expect a employee/consumer to complain about a service save it was so intolerable as to be ludicrous? How can they complain about a fraudulent offering when they don't even know that the broker has not been taught the fundamentals of investing? They don't know that they don't know. They don't know that the adviser doesn't know. Is it not ludicrous to assume an understanding of alpha, beta, correlation by an employee so they could complain it wasn't taught? Of standard deviation? Asset allocation? Diversification?? Of course, pundits will now state that such areas cannot be taught to consumers. True- if one is a bad instructor. On the other hand, diversification can be taught to almost anyone in 15 minutes in such an understandable position that they could teach it to a neighbor. Unfortunately, there certainly is something inherently wrong up front because the powers to be that wrote the rules for investing and suitability- SEC, DOL, NASAA, NASD- do not have anyone on staff who even knows what diversification is. It is the height of folly for such entities to suggest that employees would know they are getting bamboozled. The DOL statement is valid in theory but, for the most part, just plain useless in real life. This is all evident by the "trusted" entities that never could figure out that the use of single issues securities was so far beyond statistical logic that it defied credulity.

The article further notes ........"the extent to which advice is appropriate for the stated risk tolerance of a given participant." If the position is that the adviser merely accepts the risk statement from an employee whose understanding of risk is effectively non existent, on what basis is that within the fiduciary framework? None of the employees know diversification. None know that at least 99% of computerized plans are wrong. Generally none know that DCA is nothing more than a marketing tool that has never worked. What's the point? A risk statement by a totally unsophisticated employee is a wasted effort. It does not relieve a fiduciary of the duty to determine what risk NEEDS to be taken, not just what an employee would like to do or had done before. Such activity may have been based on simplistic review of investments- or none at all. They may have merely picked a level that they "felt" had merit. But no corroboration via a formal budget at all. ( A real life budget is the only way to determine what risk needs to be taken for retirement purposes).

Next- "This is consistent with the position the DOL has taken in the past, and that has been accepted in a number of court cases, that investment fiduciaries must take into account generally accepted investment theories, such as modern portfolio theory and strategic asset allocation."

Any why would a broker et al know about modern portfolio theory? Or strategic asset allocation? Or, as stated, even the fundamentals of investing. All know- or should know by a cursory review of licensing material- that none of these areas have ever been addressed. NEVER. That someone has used a computer service that attempts to provide such insight does not indicate that it has been done properly. Where is the insight to such programs? I do not dismiss the necessity of some of the requirements, but the mere suggestion that modern portfolio theory be incorporated without the fiduciaries having a clue to its real life application serves no one.

"Conceptually, it is difficult to distinguish between monitoring the adviser and monitoring the advice. Would a fiduciary be fulfilling its obligations under ERISA if it fails to consider, in the course of monitoring the fiduciary adviser, the results of the advice that is being given? The effectiveness of the advice being given? The extent to which advice being given to a young participant vs. a participant nearing retirement age is appropriate for the stage of their careers? The extent to which advice is appropriate for the stated risk tolerance of a given participant ..................."

Nice words, conceptually, but no validation in the real world. Who is going to monitor an adviser if said monitor also is clueless to the fact that effectively all advisers have not been taught the fundamentals of investing? It is the height of folly to suggest the results of advice, which, universally, has resulted from far less than a fiduciary level of knowledge. The idea of advice to a young versus old MUST address the assets held at that time in conjunction with how much is needed to last a lifetime. No budget? Then the advice is suspect at best. What about buy and hold? Almost everyone uses it- yet Buffet denounces it most recently. And then we go full circle back to a participants "stated risk factor". Somebody has to get real.

I certainly do not dismiss the element of excessive fees- certainly those that are hidden. But I also cannot dismiss the insult that so many writers keep referencing advisers as having some knowledgeable and competent insight to the element of investing where any diligent research would have clearly identified that none of the elements of the fundamentals of investing have been required to be a "financial adviser" save to be simply called one. It is therefore more than a stretch to suggest anything material regarding the efficient frontier, standard deviation, risk, et al than what an ‘adviser' has seen on the back of a Cheerios box.

It is disingenuous to continue to comment about excessive fees- though absolutely mandatory- without addressing the fact that the bulk of advisers even charging a low fee are unknowledgeable to the point of being inept. All one has to do is look at any licensing manual.

If you do not understand diversification, you cannot understand risk. If you cannot understand risk, you cannot understand suitability. Diversification is not taught. Period.

Very Truly,

Errold F. Moody Jr.