Tuesday, December 22, 2009

Remember When I Said...

Regulation D offerings are no good? See my prior post of Do Not Buy List investments below.

Here is an article from Investment News that proves my point. Once again, people fell for the trap of "18% returns." I'm telling you that this kind of talk is only intended to get you as an investor to give them your money. They do not care about you and they do not do things in your best interests. All they care about is getting fools to give them their money, preferably in large chunks.


Read it until you get the point that I am trying to make. As the title of my book says: Keep Your Assets. Take My Advice. It is worth the small pittance of an investment to buy my book, if it will protect you from making mistakes like investing in Regulation D offerings.

God Bless You and Merry Christmas.

Wednesday, December 9, 2009

Remember When I Said...

Do not buy Structured Products? Here is an example as to why:


As I mentioned before, in my prior post, I do not like Structured Products. This proves my point. Plain Vanilla people! Quit searching for Nirvana in regard to investments.

Wednesday, December 2, 2009

Do Not Buy List - When Are You Going To Get This?

If you are an investor, chances are that a broker or financial advisor (and I use that term very loosely) will ask you to invest in something illiquid. They will promise some kind of benefits like tax savings, high current income or great performance. The truth however is that your broker or financial advisor has a financial incentive to sell you that investment and chances are that they will make at least 8% in commissions from selling it to unsuspecting people like you.

What I thought that I would do is create a short "Do Not Buy" list to help investors. Of course, broker/dealers and their reps will hate my guts for blogging about this subject, but personally, I do not care. The investor is more important.


Private Placements
Structured Investments
Non-Publicly Traded REITS
Non-Publicly Traded Limited Partnerships
Promissory Notes
Regulation D Offerings
Exchange Traded Notes (ETN's)
Precious Metals (The physical commodity)
Floating Rate Bank Loan Mutual Funds
A Shares Mutual Funds (unless commission waived)
B Shares Mutual Funds
C Shares Mutual Funds


Private Placements - These are illiquid, not in your best interest and carry a high degree of losing your money. Generally pays the broker 8 to 12% in commission to sell it. Example - Investment in a new movie or business.

Structured Investments - These have liquidity restrictions, are not in your best interest and because of the liquidity restrictions, you have no way of getting out of a declining market. Generally pays the broker 3 to 5% in commission to sell it. People invested in these watched helplessly as their investments dropped 40 to 50% last year. Example - Dow 30 Trust.

Non-Publicly Traded REIT's - These are highly illiquid, not in your best interest and carry a high degree of losing your money. Generally pays the broker 8% to 9% in commission to sell it. Why should you buy a Non-Publicly Traded REIT when there are plenty of Publicly Traded REIT's available? The answer is that it benefits your broker. As far as I am concerned, that does not benefit you the investor, therefore there is no reason whatsoever to ever buy it. Example - pick one, any one sold by brokers.

Non-Publicly Traded Limited Partnerships - These are highly illiquid, not in your best interest and carry a high degree of losing your money. Generally pays the broker 8% to 9% in commission to sell it. Example - tax credits or equipment leasing.

Promissory Notes - These are highly illiquid, not in your best interest and carry a high degree of losing your money. Generally pays the broker 8% to 12% in commission to sell it. In almost all cases, the investor loses all their money when they invest in these promissory notes. There is no guarantee of anything. The person or entity cannot raise funds through normal lending channels, so they turn to this option. If several lenders turned them down, then why should you be the one to give them the money? Promissory Notes are a mini-Ponzi scheme in my mind. They lure investors in and pay them interest from the other investors principal, then invest the bulk in their "can't fail" business. Sounds like a ponzi scheme to me. Example - Most often, it involves some type of business venture that "can't fail."

Regulation D offerings - These are highly illiquid, not in your best interest and carry a high degree of losing your money. Lots of people get paid to sell it. it depends on each offering. Yes, you get some stock, but with restrictions and no guarantee that it will be worth anything at all. Example - stock offering of a company that "may" go public in a year or two like a bank.

Exchange Traded Notes - These are structured investments traded on an exchange. Do not confuse these with Exchange Traded Funds, because they are completely different. This is basically a basket of investments that is held for a length of time in the hope that they will mature at a higher value. They do have some liquidity features, but other alternatives are available that are better like Exchange Traded Funds. Example - India or China ETN.

Precious Metals - Have you been watching television lately? There are loads of commercials suggesting that you buy physical gold or silver. Let me ask you a question. Have you every heard of these companies before you saw their commericials on television? That is what I thought. And you were thinking about sending them a check? Come on. You can buy gold and silver in Exchange Traded Funds that are fully liquid and publicly traded. There is no need to hold the actual physical metals. Besides, if you buy the physical metals, then you will have holding fees and trust companies fees. Go with Exchange Traded Funds instead. Example - GLD, SLV.

Floating Rate Bank Loan Funds - These are mutual funds based on a pool of bank loans. They have liquidity restrictions where you cannot get out of them except a little at a time. This fact kills the deal for me. I do not like anything that I cannot only get 25% of my money out at a time. What if the returns on floating rate bank loan funds turn south? You are stuck. Dumb, dumb investment. Example - Floating Rate Bank Loan Mutual Fund.

Mutual Funds in Class A, B or C Share Classes - Mutual funds are a dying breed. More and more fund companies who refuse to go to Exchange Traded Funds will lose their assets. In the past, I would say buy no-load mutual funds instead, but now with the advent of Exchange Traded Funds, these ETF's are a much better alternative. The liquidity restrictions on these are self imposed sometimes. If you paid the upfront commission on an A share mutual fund, then you may want to give it more time to get back to even. B and C shares are starting to go away, because the fund companies cannot get the loans necessary to pay the brokers their commissions. The point is that A, B or C class shares of mutual funds benefit everyone except you! You do not need them, when ETF's present a much better alternative. Example - Class A, B or C shares mutual funds.

There is your Do Not Buy List. Most everyone that would sell you these investments on this list are brokers with a brokerage firm that earns commissions from sales. Commissions from sales benefit the firm, not you. When are you going to get this? Let me say it again. When are you going to get this? Quit buying this garbage from brokers that only benefits them and their firms. Stop it now.

If you own any of these investments already, then you may want to go see a registered investment adviser who does things in your best interest. They may be able to devise a strategy to get you out of some of this garbage before it is too late. These registered investment advisers should have no affilliation with a brokerage firm. None at all. No ifs ands or buts.

Tuesday, December 1, 2009

Now You Can Check Out Your Unethical Broker or Insurance Agent

Go ahead. Go to FINRA Broker Check and run a check on your broker or securities licensed insurance agent. You may be very surprised at what you find. You will need to know their full name, or at least what their name starts with. It also helps to have the name of their brokerage firm. Just Google FINRA Broker Check and you will easily find the site.

Effective November 30th, 2009, the SEC approved a move by FINRA to put back in the system all the brokers who have had their securities licenses revoked or suspended.

They even put old Bernie Madoff back in there. He was missing in action for a little bit, but alas he mysteriously reappeared.

For posterity purposes, you can read the Bernard Madoff FINRA Broker Check report on the man himself and his firm, Bernard Madoff Investment Securities LLC, by going to my site at http://www.firstcoastplanning.com/ and choosing the Madoff button.

It is a good idea to check the background of your broker or insurance agent. I have a list of web sites in my book, Keep Your Assets Take My Advice, that you can find information on just about anyone with a few caveats. My book is also available through my web site via my web address listed above.

Contact me if you need help in doing background searches. I would be happy to assist.

Monday, November 23, 2009

FINRA Comes Up Shy of the Goal Line

FINRA, the Financial Industry Regulatory Authority in charge of protecting investors (yea right) is going to put brokers who've had their securities licenses suspended or revoked back in the FINRA Broker Check system starting November 30th, 2009. Previously, if you were a broker who lost your securities license, then all you had to do was wait two years and FINRA would automatically remove your record from the FINRA Broker Check system. Apparently, FINRA felt a little bit of heat after the Madoff Scandal by not having these rogue brokers in their system. You tell me. Why on earth was this loophole ever allowed in the first place?

Supposedly there are approximately 15,000 of these rogue brokers running around. That means there are about 300 per state if you do the math evenly across the fifty states. Of course, you can probably surmise that states such as California, New York, Florida & Massachusetts have more than 300 of these rogue brokers running around acting unethical still today. Then, if you further imagine that most of these rogue brokers huddle where the money is, then you probably have a good chance of doing business with one of these creeps if you live in South Florida, or Southern California or similar high net worth areas.

Take heart rogue brokers, especially those with criminal convictions. You have nothing to worry about. FINRA will not let anyone know that you have a criminal record. They are actually excluding the criminal convictions of rogue brokers in the FINRA Broker Check system. FINRA does not think it is relevant apparently. If this is not ass backwards, then I do not know what is. This just goes to show you that FINRA does whatever they want to do and protecting consumers is not one of the things they do, despite what their frilly commercials say.

I know a few rogue brokers and I am anxiously awaiting November 30th to see if these unethical people show up in the FINRA Broker Check system as advertised. I will have to see it to believe it. They put Bernard L. Madoff back in the FINRA Broker Check system to my surprise. The last time that I looked, he was not in there. Now that it doesn't matter, they put him back in there. Where were they when it did matter?

Wednesday, November 11, 2009

State Regulators May Supervise More Registered Investment Advisers

One of the items being kicked around in Congress right now is to allow the SEC to handoff to the individual state regulators the regulation of registered investment advisers with total assets under management of $100,000,000 or less. This would make a whole lot of sense. I read at Investment News online today, http://www.investmentnews.com/, that the SEC only reviews about 9% of all registered investment advisers each year. This means that 91% are not being examined.

The bulk of all registered investment advisers are in the $100,000,000 and less category. Currently, if you have $30,000,000 or more, then you must be registered with the SEC. By raising the threshold, then the bulk of registered investment advisers would fall back to the states for supervision. Of course in this economic environment, we may see a lot of understaffed and underfunded state securities regulators with a lot more on their plates. Nevertheless, something good may come out it, like new jobs!

Here is an example of the problem with regard to the current regulatory environment. Let us suppose that a registered investment adviser has $50,000,000 under management. Further, let us assume that this registered investment adviser is doing something unethical enough to be shut down. If only 9% of the registered investment advisers are examined each year by the SEC, how long could this unethical firm continue to operate? Theorectically, they could probably go on for a few more years, perhaps even five or six more years before the SEC ever got around to examining them. The state regulator's hands are tied, since they do not have jurisdiction. Even if they were to clue the SEC in on the unethical activity, there is no guarantee that the SEC would deem it serious enough to swoop in immediately. Or, the SEC may have other pressing issues that they deem to be more important.

Contrast this with the same firm being under state regulation now. The state regulators, who are more aware of what is going on with the unethical firm, would have nothing in their way to go in for a surprise exam. They could go in and clean things up.

All in all, I totally agree with the idea to raise the minimum assets under management to be registered with the SEC from $30 million to $100 million. Let us hope that they can get this done.


Wednesday, October 28, 2009

Why Broker/Dealers Can Never Be Fiduciaries

I suppose with this new law being worked on by the House Financial Services Committee that this will open the flood gates for financial advisers who want to do want is in the best interest of the client. In my prior post, I show the one quote that will kill it for consumers.

Let us assume that I want to go to work for a major broker/dealer. I would name one but who knows what they are calling themselves these days. I cannot keep up with all the name changes and mergers. Back to my premise of wanting to go to work for one of these firms. (Why, I do not know.) I read the Investor Protection Act of 2009 and notice that I can finally do what is in the best interest of the client. So, when that mean old branch manager tells me that I have to produce $300,000 in gross revenue in order to keep my job, all that I have to do is remind him that that is not in the best interest of my clients. The branch manager will not be able to touch me. I can keep my job even if I only produce $30,000 in revenue. After all, a production quota is in the best interest of the firm, not the client. Therefore, Mr. Branch Manger, you can take that production requirement and stick it.

Now, do you really believe that broker/dealers are going to dispense with revenue production requirements? Neither do I.

You cannot have revenue production requirements and do what is in the best interest of the client. Period.

This is why the Investor Protection Act of 2009 is a bunch of bunk and all a show. I can see loophole after loophole in it. The stupid bill conflicts itself, saying one thing and contradicting it later. Obviously, they have not read this bill either.

The broker/dealers have won, yet again. Proof positive that Congress does whatever Wall Street wants them to do. After all, that is where the money is.

I say vote them all out. Let's get someone in Washington who can read!

Broker Dealers win the Lobbying War - Consumers Lose

The House Bill known as the Investor Protection Act of 2009 has been watered down as feared. The Broker/Dealers and Wall Street with all their lobbying money have won the war.

Here is a portion of the bill:

"The receipt of compensation based on commission shall not, in and of itself, be considered a violation of such standard applied to a broker or dealer."

So, what they are saying is that as long as you charge 5.75% commission to your client and you tell them, then as an adviser, you have nothing to worry about. You will have complied with the law. The fact that you are selling them some piece of crap investment does not matter.

Sorry consumers. You lose again to Wall Street.

Friday, October 2, 2009

FINRA Special Committee Report

The Special Committee that FINRA put in place to review their failures related to the Stanford and Madoff cases is now available for download. You can get it here:


Here is a quote from the Executive Summary:

"FINRA’s examinations of the Madoff and Stanford firms did not uncover these frauds."

Lately, I have been jumping up and down over FINRA's failures. In this report, they actually claim no knowledge of Madoff being a registered investment adviser firm. Their reasoning was that Madoff claimed to have no customers, so there was nothing to examine. Madoff made FINRA examiners believe that he was only operating as a trading and market making firm.

Frankly, I find it hard to believe that everyone at FINRA can lay claim to the fact that Bernard Madoff did not have any clients as far as FINRA knew. It was common knowledge that Bernard Madoff and his wife often attended private parties of the rich and famous at which he solicited clients. Ask Donald Trump if he was ever solicited. It defies logic that FINRA examiners who were well entrenched examining multiple New York broker dealers were not aware of Bernard Madoff having clients. This simply does not compute.

Another quote from the report:

"FINRA examiners did not have direct access to the Madoff firm’s IARD entries."

Here again, FINRA is trying to bolster their position that they did not have access to Bernard Madoff Investment Securities LLC, the registered investment adviser firm. I found a FINRA Broker Check report on Bernard Madoff Investment Securities LLC. Here it is:

http://www.firstcoastplanning.com/Madoff FINRA Broker Check Report.htm

Open this report up and look at the bottom of the far left column on page 3. It says:

"This firm is a brokerage firm and an investment adviser firm. For more information about investment adviser firms, visit the SEC's Investment Adviser Public Disclosure website at http://www.adviserinfo.sec.gov ."

Wait a minute. I am going crazy here or what? Did the Special Committee Report from FINRA not say that they did not know that Bernard Madoff Investment Securities LLC was a registered investment adviser? If what they say is true, then why does the FINRA Broker Check report on the firm, (not the person) Bernard Madoff Investment Securities LLC say that they know he is a registered investment adviser firm. It is right there in black and white.

Interestingly though, there is no FINRA Broker Check on Bernard Madoff the person. Normally, a record of a registered principal of a broker dealer is on the FINRA Broker Check site for two years. Where oh where did Bernie's FINRA Broker Check report go?

This brings me to another point that I reiterated before about the gaps in the FINRA Broker Check system. After two years, if you are working for a registered investment adviser firm and not a broker dealer, then there is not a record that you ever existed in the FINRA Broker Check system. Not only that, if you had your FINRA registered securities licenses suspended and it has also been more than two years, then there is no record in the FINRA Broker Check system. None.

My question is why was there ever such a huge loophole which is totally against the investing public? Supposedly, FINRA is "thinking" about correcting this gap.

Isn't it funny how a few weeks prior to the release of this Special Committee Report that FINRA is all over the airwaves with a commercial on how they are protecting investors? I know what they are doing. I have seen this public relations game plan before today used by other firms. Banks use this strategy all the time. When bad PR is coming out, then you blast the airwaves with warm and fuzzy commercials intent on softening the backlash against the firm.

The question is...do you feel better about FINRA watching out for you as an investor?

I for one do not.

Tuesday, September 15, 2009

SEC Investor Advisory Committee & Subcommittee

Okay. We are finally getting close to some movement on this fiduciary issue. Mercer Bullard, the esteemed Associate Professor of Law at the University of Mississippi Law School in Oxford, Mississippi is chairing the all important subcommittee called the Investor as Purchaser Subcommittee. This particular committee "will consider the fiduciary duty owed to investors by those who provide investment advice, as well as issues related to pre-sale and other disclosure, intermediary fees and compensation practices, arbitration, and technology.", as stated on the SEC press release site:


Looking at Mr. Bullard's Fund Democracy activities, I can see that Mr. Bullard has long been a proponent of the fiduciary duty owed to investors. See his article on Broker-Advisor at the Fund Democracy web site. Here is the link:


Mr. Bullard has made his position plain in the past and we must assume that his thoughts are only stronger after the events of the last year. Therefore, this is where we find out if the deep pockets of Wall Street can override the efforts of Mr. Bullard.

Mr. Bullard has also made his opinion known about broker sold mutual funds and how investors typically lose money by buying broker sold mutual funds as opposed to true no load funds. He is liable to make mutual fund companies and Wall Street firms squeal like stuck pigs when they find out he is chairing this subcommittee. The old way of making revenue from high load and commission mutual funds may just have a shot at disappearing. We will see a big fight in this area. That is for sure.

It looks like investors may actually have a shot at getting things done in their best interests. For the sake of investors everyone, let's say a prayer for Mr. Bullard's success.

Stay tuned.

Saturday, September 12, 2009

Bernard Madoff is Missing from FINRA Broker Check

I wonder why after going to Saveandinvest.org (see prior post) and following through to the FINRA Broker Check site, I simply cannot find any information on Bernard L. Madoff. There is no information available. I know his name. I know his firm CRD # 2625. I know his individual CRD # 316687. I know the name of his brokerage firm, Bernard Madoff Investment Securities, LLC. However, for some strange reason, I cannot find a FINRA Broker Check report on Mr. Bernard L. Madoff.

This points out a gaping problem in the FINRA Broker Check site in my opinion. Anyone and everyone who has ever had disciplinary actions while a FINRA registered representative and after they leave FINRA firms, should have their backgrounds disclosed. Just because he is in prison, makes no difference. Think about the people who maybe were just barred from the industry. All they have to do is wait for FINRA to drop their disciplinary history from the FINRA Broker Check site after two years, then they can go back to stealing money from investors.

Please tell me where I am wrong.

Are You Kidding Me? Saveandinvest.org

This morning while reading the newspaper, my wife pointed out that there was a commercial on television talking about protecting investors with direction to a web site call http://www.saveandinvest.org/. My first thought was... "have we finally found something good for investors?" To my dismay, it is a re-direct to FINRA's web site. FINRA is the organization behind the failure to catch Bernie Madoff, though you would not know it based on what is going on right now.

Here is the problem with FINRA and their Broker/Check site. If you were a licensed FINRA registered representative and you had your securities licensed revoked more than two years ago, then you do not have to worry about being found on the FINRA Broker Check site. FINRA gladly removes your entire corrupt licensing history automatically for you. They gladly protect their bad apples with this process.

Now, when I and everyone who has ever had a FINRA license knows this, it is incomprehensible to me that FINRA would put up a re-direct web site call http://www.saveandinvest.org/ with the pretense of protecting investors. Are you kidding me? They are not protecting investors. They are protecting their former members with bad disciplinary histories.

Bernard Madoff and FINRA

Bernard L. Madoff was the name of his NASD broker/dealer before he changed the name to Bernard Madoff Investment Securities LLC on January 1, 2001. Bernard Madoff broker/dealers were registered as broker dealers with the NASD/FINRA from March 25, 1960 until they closed him down on June 17th, 2009, the official closure date. What I would like to see is who from FINRA visited Bernard Madoff Investment Securities, LLC as a regulatory and enforcement person during the last 15 years. Apparently, someone from the NASD visited him. In the enclosed FINRA Broker Check report, it shows disciplinary actions initiated by the NASD(FINRA's predecessor organization) on July 6, 2005, February 26, 2007, February 27, 2007 and August 27, 2008. As you can read in this report, the issue was related to quotes. Apparently, he was not submitting quotes to the stock exchange for all of these purchases he was doing. Couldn't these FINRA gurus ask themselves the question, "maybe he is not submitting quotes to the exchange because he is not really doing any trading."

I am deeply afraid that the 400 odd page report lambasting the SEC is what was put forward to keep the limelight off of FINRA. FINRA has made overtures publicly that they want to be the self regulatory organization for investment advisers and broker/dealers. They did such a good job with Bernard Madoff Investment Securities, LLC. I guess they think they earned it.

Friday, September 4, 2009

Harvey Pitt Former SEC Commission is an Apologist for FINRA?

I was stunned last night watching Fox Business with David Asman. He had on his show two Madoff victims, Sue and Dominic Ambrosino, Larry Doyle of senseoncents.com and former SEC Commissioner Harvey Pitt.

The tide is beginning to turn against FINRA. Larry Doyle has long spoken out against FINRA on his blog at www.senseoncents.com. Last night on Fox Business, LD mentioned the fact that FINRA had money in Auction Rate Securities in 2007, but inexplicably got their own money out before the Auction Rate Securities collapse. I guess they are an investor watchdog, but not when it comes to saving their own bacon.

Sue and Dominic Ambrosino are wise to FINRA and their culpability in the Madoff Scandal. They pointed out that FINRA has not been too transparent about whether they too lost money with Madoff. The latest FINRA Annual Report does not disclose whether they did or did not lose money with Madoff or one of his feeder funds. Word on the street is that they did lose money as a result of Madoff.

Former SEC Commissioner Harvey Pitt, not one of the best SEC Commissioners we ever had by the way, seemed to me to have been given talking points. He kept trying to hide the fact that FINRA and its predecessor organization was responsible for the Madoff mess. Pitt kept trying to keep the blame squarely on the SEC. This was stunning to witness from my perspective.

David Asman pointed out that Mary Shapiro was the former head of FINRA and now she is the head of the SEC. I have nothing against Ms. Shapiro, but it seems like they got someone at the helm of the SEC who can probably keep FINRA out of it. However, time will tell. FINRA is guilty as sin in my opinion. You cannot convince me that FINRA did not look the other way when it came to Bernie Madoff.

As a former NASD Registered Principal, I had my office gone through with a fine tooth comb by an ex-NASD Examiner for several years. Of course, I always had good exams. I can guarantee you, the guy that examined my office would have easily discovered the Ponzi scheme Madoff was running.

There is something amiss with regard to FINRA being able to dodge the Madoff scandal up until now. Hopefully, with Fox Business getting a little nosy, the truth will come out about FINRA and their cosy little relationship with Bernie Madoff.

Stay tuned.

Friday, August 28, 2009

The Number of Banks in Trouble Grows

Is there any safe place to put your money these days? Well yes, but you must be smart about it.

Did you know that the FDIC has increased the FDIC coverage for depositors to $250,000 per person, per bank? They have these limits in place until 2013. The thing to do is to not put all your eggs in one bank.

The Wall Street Journal has an article on the status of the FDIC and the banks in today's edition. You can read all about it here: http://online.wsj.com/article/SB125137695691263385.html .

If you want delve in a little deeper to see what might be going on with your bank, then you may want to take a look at http://www.financialstability.gov/latest/reportsanddocs.html . Look at the latest TARP report by date. This will give you a list of all TARP recipients and show whether they have paid back their TARP funds. Is your favorite bank in here?

When buying CD's, make sure that your brokerage account is not also buying CD's from the same bank. This would jeopardize your FDIC insurance by potential exceeding the $250,000 limit.

You want to be smart about investing? Then, buy and read my book, Keep Your Assets Take My Advice. http://www.amazon.com/Keep-Your-Assets-Take-Advice/dp/1440126933 You will wonder where I have been all your life.


Monday, August 24, 2009

Vilification is Getting Old

The liberal playbook is getting old. The problem is that they believe most Americans are stupid. What the liberal's do to get their way is now common knowledge. Their playbook has not changed. It is:

  1. State that there is a major problem.
  2. State that they have a solution to the problem.
  3. Vilify opponents publicly.
  4. Vilify major corporations publicly.
  5. Threaten opponents and major corporations.
  6. Bring forth legislation to fix the problem.
  7. Vote in favor of the legislation.
  8. Ignore constituents.
  9. Spread the rewards to their cronies.

The problem with the Health Care Reform Public Option is that it affects most everyone. If Congress is passing legislation to build a bridge in some far off state, then that does not really have much effect on everyday Americans. However, health care affects everybody, so people are more engaged on this topic and they are making it known to their Representatives and Senators.

Keep up the good fight America.

I say VTO in 2010. VTO stands for Vote Them Out in 2010! Maybe it should be VTAO. Vote Them All Out!

Sunday, August 2, 2009

Bicycling Accident

The last weekend for the Tour de France was kind of exciting for me. I went out and road my Trek bike around on Saturday, the 25th of July. The very next day, I decided to go for another ride. I was almost to my house when I got hit from behind by a car. I spent several hours in the hospital that night. I had cut my head which needed a couple of staples. I had a concussion, lots of road rash and I believe that I might have fractured my collar bone. I slept most of this past week away. I could not stay awake more than an hour. Today, I finally feel like I can stay awake.

The collar bone is painful. I am going to have to visit my personal physician to see about it. I cannot move my arm around without sharp pains.

I marvel at George Hincapie who injured his collar bone and continued to ride in the Tour de France. That guy is my hero. He is tougher than nickel steak. I had an official George Hincapie jersey on which was proudly displaying the Arkansas Razorbacks insignia. I also had a pair of Hincapie gloves on. The Giro helmet saved me from a worse fate. I am very lucky to be here.

I thought I would give you an update as to why I have not blogged in a few weeks. Now you know.

Stay safe out there.

Monday, July 13, 2009

A Blast From the Past

About 4 and 1/2 years ago, the Securities and Exchange Commission put out a request for comments on whether to allow broker/dealers an exemption from being registered as a registered investment adviser. Back then, the SEC ruled that broker/dealers were exempt. This has obviously turned out to be a huge mistake as the events of the last year will attest. I thought it would be interesting for my readers to go back and see my position as I wrote it. Seems like I knew what was in store for the future. My response from February 3, 2005 is in blue type. I will add some final comments at the end of this blog article.

Subject: File No. S7-25-99
From: Richard A Johnson,
Affiliation: Rick Johnson Family Office,

February 3, 2005

Although there are many issues to discuss with this proposed rule, I shall limit my comments to a few key points.

1 The use of titles by broker/dealer registered representatives: Financial Advisor, Financial Consultant, Investment Consultant and other similar terms are a major source of confusion for investors. I believe that any individual holding themselves out as a financial planner, financial consultant, financial advisor, investment consultant or other similar term should have to register under the Advisors Act of 1940. This is regardless of whether or not they have discretion over an account or not.

Further, registered representatives of broker/dealers should only be able to use terms that include the word representative in its description. For example, financial representative, or investment representative. In addition, senior broker/dealer representatives could have a title similar to these senior financial representative, senior investment representative, or financial representative II. The point is that registered representatives should have at least the word representative on their business card, if they want to rely on the exemption for registration under the Advisors Act. Those who desire to put financial planner, financial advisor, financial consultant or similar term should have to register under the Advisors Act.

2 The commission is mistaken if it believes that fee based investment advice is one of the best ways of delivering value to an investor. I see a scenario where broker/dealers will be given a green light to put every client that they can into a fee based brokerage account. This truly benefits the broker/dealer in stabilizing their revenue stream. But what about the client? Is the Commission naive enough to believe that broker/dealer clients who were neglected in the past because they had already been sold B shares, CDSC annuities and the like will suddenly be taken better care of by being in a fee based account? Specifically, I am referring to a clients second and third year of being in a fee based account. If a client has given the broker/dealer all their money, then how much attention do you truly believe they will be getting in years two, three and beyond? If history lends us a clue, we only have to look at how these same clients were treated when they had already been sold every possible commissionable investment. They were put aside for new clients of the firm. The same thing will happen if you allow a green light to the broker/dealers to sell fee based accounts without being registered as investment advisors.

Financial Planners/Registered Investment Advisors have a fiduciary responsibility to not only give the initial advice, but also to continuously give advice. Broker/Dealer representatives would not have the same standard.

3 Further, what value does the client receive from a broker/dealer sold fee based account when the client is not trading very often. Wouldn't they be better off in a commission account over the longer term? However, again I believe the Commission would be naive to believe that broker/dealers are not going to pressure their sales force to constantly add fee paying clients to its roster. It is the firms interest which will override the clients interest.

As a former branch manager of a major broker/dealer, I can tell you that I had significant pressure to put clients into fee based accounts. Sadly, with my knowledge as a CFP, I knew full well that clients were not going to be taken care of properly over the long haul in these accounts, because the broker/dealer was not interested in taking care of clients. They were interested in taking care of their own revenue.

You tell me if this is a conflict of interest or not. As a branch manager, I had a 67,000,000 target in my last quarter, yes that's right, I said quarter. If I brought in a million dollar account, then I was credited with 1,000,000 to my asset target of 67,000,000. However, if I took that same 1,000,000 account and put them in a fee based account, then I was credited with an additional 1,250,000 in asset credit towards my target. Now where do you think my focus was as a manager? To make sure clients were getting great financial advice, or to make sure that I reached my asset target? I was crazy not to take advantage of putting everyone that I could into fee based accounts, when I received 225 percent towards my asset target. Wouldn't you agree? Again, where is the client in all this? Neglected that is where.

Broker/Dealers should register under the Advisors Act to insure that clients receive not only initial advice, but ongoing advice held to a fiduciary standard.

Thank you.

Proof once again that I know my stuff. It sure is telling now that there is a call for a fiduciary standard for broker/dealers and their registered representatives.

The broker/dealers won their lobbying efforts back then, and I fully expect them to win their lobbying efforts again. In other words, the fiduciary standard will have loopholes in favor of the broker/dealers that they will be able to drive their Mack Trucks through. They have all the political clout in Washington D.C. Clients unfortunately do not stand a chance. Wait and see.


KYATMA Explained

KYATMA is the initials to the title of my book, Keep Your Assets Take My Advice, It is Easier to Climb Out of a Shallow Hole.

I read a lot. These are some of the things that I read weekly or monthly as they are published.

Inside Information
Investment News Magazine
Investment Advisor Magazine
Financial Advisor Magazine
Financial Planning Magazine
Futures Magazine
Registered Representative Magazine
The Wall Street Journal
Senior Market Advisor
Benefits Selling Advisor
Life Insurance Selling
The Register

My wife tells me that I am all business, but I find time to read the Bible. The Bible is God's word and the works of Jesus Christ. We all need to read it more, myself included. I also read non-business books like The Noticer by Andy Andrews. Andy has a good blog. He is an inspirational writer that can make you focus on what is most important in life. http://www.andyandrews.com/blog/

What is my point? When I walk into a room full of my professional peers, I can easily see by their questions and responses that I am far ahead of them in wisdom. In these trade magazines that I read, they are becoming more like psychology magazines than they are financial magazines.

It appears that most financial advisors have failed miserably in their duties to their clients in protecting their investment portfolios. A ton of the stories that I read now are how to keep clients after you have done a lousy job for them. Other stories talk about how to deal with the stress of losing a large chunk of revenue as a result of your bad advice. Still others discuss ways to lay people off from work, again as a result of your bad advice.

What kills me is that this is all really simple when it comes down to it. If you are a client or a financial advisor, then listen up. There are two inevitable truths when it comes to the stock market.
  1. The stock market goes up.
  2. The stock market goes down.

You have to invest based on both of these two facts. It is really that simple.

Most every investment mistake can be traced to either an investor or a financial advisor believing only in number one above and completely ignoring number two.

In my book, I talk about how if you put more than 20% in any one asset class, then you are putting your entire investment portfolio at risk. In addition, I discuss how if you put more than 65% in the stock market, then you are also putting your entire investment portfolio at risk. When you combine the two, like for example, holding 50% in one stock (think Bank of America or GE) and the other 50% in four of five blue chip stocks, then you are doomed to failure. This portfolio will lose money at the first sign of a recession or bear market.

You have to invest based on the known fact that the stock market will go up and also go down. In my book, I have a plan and a process that you can follow that will help you manage money. Or, you can be one of the many fools who believe that they will make a killing by picking individual stocks.

Let me show you the fallacy of picking individual stocks. Pick a stock. Any stock. Let us choose one that is selling for $30 a share right now. You buy 1000 shares of it to start. Now, when do you sell? Do you sell when it is $35? Or, $40? If $40 is better, then why not $45? If $45 is better, than why not $50 or even $60? Whatever number on the upside we choose, once it hits our target price, then are we really going to sell it at that exact moment? Do we put in a limit order? Or, do we re-evaluate? Do we become a little greedier and raise our target and let winners run? Or, do we get out while the getting is good? These are only the questions related to when the stock goes up.

Now, let us consider the downside. When do we sell on the downside? Do we sell at $25 or $26? Or, do we sell at $27, $28 or even $29 a share? When it does hit our sell target, then what? Do we immediately buy another stock? Or, do we wait until we do some research? How long do we take to do our research? A day? A week? Two weeks? A month? Where do we park the money in the meantime? What if we are suddenly in a recession? What if we are in a bull market?

These are just some of the decisions that you have to make to invest in one stock. Now, imagine that you have to make 30 or 40 independent decisions just like these on your entire portfolio. Another point that I make in my book is if I pick 30 or 40 stocks, then I have effectively made my own personal index fund. The performance of my personal index fund is going to match the performance of the stock market. You cannot pick 30 or 40 stocks and they all be winners of 50% performance of higher. Some will win. Some will lose and the end result is that you will have built your own personal index fund, like I said. More than likely, you will have done a bad job at it, too.

If you follow the principles in my book and become a KYATMA follower, then you will have a plan and process that will give you more of an opportunity for success. There is one catch, however. You have to read my book.


Thursday, July 9, 2009

Schwab Offers No Commission Trades for RIA Clients

Schwab recently announced that for new clients of registered investment advisers (RIA's) who open an account between July 1, 2009 and December 31, 2009, they will receive commission free trades through June 30, 2010. In addition, they will reimburse any fees to transfer your account from another firm.

See this article for full details:


There is no disputing that Schwab is the number one custodian for registered investment advisers. They are also the leader and with this move, they are leading by example.

Of course, I have a soft spot in my heart for Schwab since I am an ex-Schwabbie. Currently, because we custody our client's accounts with Schwab Institutional, any new clients that come to our registered investment advisory firm, Marian Financial Services, Inc. can take advantage of this no commission offer.


Thursday, July 2, 2009

Hunker and Bunker Economy

Everyone seems to be so concerned with inflation right now, because of the government's monetary policy. There is no need to worry about inflation right now. There is not going to be any inflation when people are losing their jobs. As we approach the 10% job loss figure, keep in mind that we are still climbing the mountain of job losses. Inflation usually rears its ugly head when we have a strong job market. Today, we obviously are not looking at anything near a strong job market. As a result, do not short Treasuries just yet.

As a mentioned in my book, Keep Your Assets Take My Advice, there is a business cycle and there always has been a business cycle. There are periods of time when people forget about the business cycle. Major corporations have begun the process of reducing inventory, downsizing their operations and laying people off. They will continue to do so until they reach a point where they have no inventory, they cannot close any more operations and they have no further need to lay people off from their jobs. We are in the middle of this process right now. We still have farther to go.

I heard that GM had more than 365 days of Pontiac G6's in inventory. All you have to do is to think about how many Pontiac G6's are driving around in your neighborhood, then you will realize that GM is probably going to have to give those cars away to get rid of them. The problem is exasperated by the fact that the Pontiac brand is being sold or discontinued. My guess is that this will make it even harder to sell those G6's.

Guess what? GM is getting yet more money from the government as announced in today's news.

My son, Marshall is headed off to Florida State University to major in mechanical engineering. His goal is to help turnaround GM. You ought to hear the confidence in him when he says that goal. He is one example of the many great young Americans rising up to save our future. They do not think they can make a difference. They know they can make a difference. The size of the problem is not a concern. I do not know about you, but I am glad we have young people with confidence like my son's.

This is an economy where businesses are hunkering down and consumers are building a bunker of cash right now. Businesses that are savvy enough to survive will emerge stronger than ever, because several of their competitors will be gone. A case in point. Whenever I needed some new technology, I would go to Best Buy, Circuit City and CompUSA to see who had the best offering. Today, there is no Circuit City. CompUSA was purchased by Tiger Direct. They have changed their offering of computers to older technology. As a result, they have carved out a market for themselves selling slightly older technology.

Best Buy remains in the latest and greatest technology category. They have the latest gadgets, gizmos and TV's. This is the change that has come to my market. I suspect that Best Buy will come out as an extremely strong brand when consumers begin to spend again. Consumers will start spending again when they feel that their savings level is replenished, their debt is reduced significantly and they can feel secure about their jobs again. Are we there yet? I do not think so.

Keep the faith. We will get there. The business cycle is a cycle with both recessions and expansions. The changes going on today will set the stage for a stronger economy later. You will be out of your bunker before you know it.

Monday, June 29, 2009

Good Riddance Bernie Madoff!

Bernard Madoff received 150 years in prison as his sentence today. I say good riddance. Anyone who so callously steals money from people who trusted him deserves such a fate.

A Wall Street Journal article said he had 35 different watches. Take note people. If your financial adviser likes to get his picture made in front of corporate jets, yachts, big houses, fancy cars and plush hotels, then you should know right away that this financial adviser has their personal values out of whack. In the pre-Madoff days, you might have made your decision to go with a financial adviser because they were "successful." Post-Madoff, I doubt that it is a very smart decision any more. Now maybe people will think a little harder about going with someone because they are "successful."

There are two major lessons here:

  1. Do not choose a financial adviser based on their performance track record.
  2. Do not choose a financial adviser because they are "successful."

See my previous Blog article entitled, Understanding Performance Mistakes.


My guess is that the judge sentenced him to the maximum for a very important reason. The prosecutors are going to get real serious about the rest of the scoundrels. Now that he received 150 years, you will see some plea bargaining like you have never seen from these other people implicated in the scam.

For what it is worth, there is no possible way that this man perpetrated this fraud by himself. Let us all hope that they catch everyone of these crooks that were complicit in the crimes.

I do not know about you, but I am praying for the success of the federal prosecutors. If there ever was a message that needs to be sent to these scoundrels, then now is the time.

Monday, June 22, 2009

Regulatory Regime?

SEC Chairman Mary Shapiro continues to work the media in regard to the harmonization of "regulatory regimes." I do not know about you, but when I hear the word regime I think of places like North Korea, Iran, Venezuela, Cuba and the Taliban. I am not sure if we need a regulatory regime.

She keeps referring to brokers and investment advisers as being "virtually identical." I believe this is the end game. The powers to be want to meld the broker dealer world with the investment adviser world into a unified regulatory structure.


It is funny when regulators fail in their duty to protect investors they suddenly become the mouthpiece for what is wrong with the regulations. Their patented answer is always "we were under staffed and under funded." If only they had more employees and more money, then that certainly would have solved everything. I beg to differ.

I think the problem lies in training. A trained eye would have been able to look at the account statements produced by Bernard Madoff Investment Securities LLC (FINRA regulated for 28 years) and determine within a few minutes that they were fraudulent. It was obvious to me that a template method was used to produce those statements. A template is a blank statement where the template is put into the printer while someone prints bogus information from a spreadsheet to perfectly fit the columns in the template statement.

Last summer, I met a couple whose broker had done something similar. This broker cut and pasted financial firm logos in an unusual manner in letters and emails. This broker sent out numerous communications from a financial firm that he was not even affiliated with to these clients. All you have to do is go to FINRA broker check and see that this broker was not registered with the company that he was purporting to be a broker with. I was able to spot it in about two minutes. I worked with a federal regulatory person to help put this broker out of business. Luckily, we caught him after he had duped only three investors and I believe a lot of the damage was reversed. Oh by the way, this unscrupulous broker was a FINRA registered representative. Imagine that! That came as no surprise to me, of course.

Make no mistake. I am not here to beat up on the SEC Chairman or the regulators in general. They have a tough job and it is not getting any easier for them. My take on it is that better training (forensics) should be the focus.

Further, if the regulators focus on those brokers or advisers who sell exotic products, then they are likely to find most of their criminals in these areas. For example, highly exaggerated performance claims, 12% promissory notes, 12% CD's, Private Equity, Illiquid Real Estate Limited Partnerships, Structured Products and various Alternative Investments. Most of the problems involving criminals revolve around appealing to greed by promising high returns. Registered investment advisers out there charging a percent of assets under management for investing in widely held, exchange listed investments are not near the problem that those advisers selling exotic investments are to the regulators.

Another idea may be to allow any financial institution accounts opened by a financial adviser to be run through filters at the SEC. These filters would be looking for large personal deposits that are outside the normal deposits of that particular adviser. It seems to me that this could be done similar to the way anti-money laundering is managed. If a highly unusual deposit into a personal or business account is discovered, then the SEC could immediately begin an inquiry. Honest investment advisers would not mind the scrutiny. I know that I would not mind such scrutiny.

The SEC commissioner has said that fully one third of the regulatory actions taken this year have been against registered investment advisers. At first glance, that may sound bad. However, this means that fully TWO THIRDS of the regulatory actions taken were against FINRA brokers! Now you tell me, where is the bigger regulatory headache?

That's what I thought!

Friday, June 19, 2009

A Fiduciary Standard Watered Down

There is no doubt that the fiduciary standard for anyone who renders investment advice would be a good thing. However, in the Obama Administration's White Paper, on page 72 to be exact, there is a statement that concerns me greatly. It reads:

prohibiting certain conflicts of interests and sales practices that are contrary to the interests of investors.

You can read it here: http://www.financialstability.gov/docs/regs/FinalReport_web.pdf

What bothers me is the word "certain" in that statement. My interpretation, based on my experience, would mean that selling from broker/dealer inventory would be one of the conflicts of interest that they are referring to. Broker dealers currently are allowed to buy stocks of various companies and keep them in inventory. They typically buy companies that are widely held. When their customers want to buy that same stock, then the broker/dealers sell them the stock from their inventory. The broker/dealer may have bought the stock at a lower price and sold it from inventory to the client at a higher price. If they do not have the stock at a lower price, then they let the customer buy it outside of their inventory. The do not normally sell their inventory positions at a loss. It is easier for them to let the client buy it from the exchanges. Obviously, they stand to make more money by selling from inventory.

I believe that broker/dealers would gladly give up selling from inventory for the ability to be a fiduciary under the forthcoming watered down rules. What we will see, in regard to the fiduciary standard, is that broker/dealers and their FINRA registered representatives will be able to continue doing business as usual. They will only have to disclose their conflicts of interest, then they can continue selling commission based products instead of fee only investment advice in a client's best interest.

The tactic being pushed to the media from Mary Shapiro, SEC Chairman is that broker/dealers and investment adviser's services are "substantially identical" as far as the public is concerned.

See this article from Financial Planning's web site for comments from Mary Shapiro:

This could not be further from the truth. Besides, the fact that the consumer is not able to distinguish between a FINRA registered representative and an investment adviser is because of the "solely incidential" rule. The solely incidental rule, sometimes called the "Merrill Lynch" rule is the rule that opened the flood gates allowing FINRA registered representatives the ability to wear two hats. When they want to sell products, they slide the brokerage agreement in front of the client, all the while neglecting to mention any conflicts of interest. By wearing the FINRA hat, they do not have to disclose conflicts of interest. They can also wear the hat of an investment adviser. This is why they are known as dually registered (wearing the more profitable FINRA hat at the time of the transaction, of course.)

You rarely see a dually registered FINRA sales person as a 100% fee only investment adviser. They have to hit their sales quotas to keep their offices. Most FINRA broker/dealers have as their sales quotas upwards of $250,000 in revenue per year and higher. If you do the math, then you will see that in order to produce $250,000 in revenue as a 100% fee only advisor for the FINRA broker/dealer, then this means that this FINRA registered representative would have to bring in net new assets each and every year of $16,666,666.67. This is using 1.5% as the annual fee for the calculation. ($16,666,666.67 x 1.5% = $250,000.) Let me assure you, very few FINRA registered representatives can do this each and every year. I can promise you that FINRA broker/dealers are not going to lower their yearly sales quotas.

As a result, my educated guess is that we will see a watered down fiduciary standard that allows FINRA registered representatives to still wear two hats and still "pretend" to do things in a client's best interest. It will be even worse if FINRA itself is allowed to be the regulator of registered investment advisers. That would be the nail in the coffin for consumers of financial services. Wasn't the goal here to protect consumers?

You can read more about it in my book, Keep Your Assets. Take My Advice.

Wednesday, June 17, 2009

A Parallel Tale for Mr. President

Mr. President. I have seen on Fox News and in your recent comments that you feel that Fox is out to get you in some way. No Mr. President, I do not believe that is the case. If I may, I would like to give you a parallel example of what is really going on.

You see Mr. President, I am a financial adviser who happens to be with a Registered Investment Adviser firm. A fellow named Mr. Bernard Madoff owned a Registered Investment Adviser firm as I am sure you are aware. This Mr. Madoff character was quite an unsavory adviser and swindled not millions, but billions of dollars from very well educated, trusting and unsuspecting investors. People did not sit quietly when they discovered what had happened. There was quite an uproar from these suddenly poor investors, some of whom lost everything. Who can blame them? I pray that they are able to regroup and move forward in their lives appreciating their many gifts from God.

As a result of Mr. Madoff's shenanigans, my fellow financial advisers and I have been thrown into a pit of distrust like it or not. Everyday, we go to work doing what is in our client's best interest, like we have been doing for decades. We sacrifice our own interests for the sake of our clients, not because we have a fiduciary duty to do so, but rather because it is the prudent thing to do. You see we are in the business of helping people solve their problems and we are very good at it. We have a good way of communicating with people, not unlike yourself. Registered investment advisers are the cream of the financial advice delivery crop.

Now, I have to tell you that I read a lot of trade publications from our industry and the story is not pretty. Financial advisers as a group are suddenly being labeled as untrustworthy because of the antics of Mr. Madoff and other Ponzi schemers. These people had no other motive than to line their own pockets. Some financial advisers are getting out of the business. Others are seeking psychological help. Scores of financial advisers have lost considerable revenue and had to lay off long term employees. New and more onerous regulations are going to come down the pike and that will cost us all more money. All because of Mr. Madoff and people like him. Like I mentioned earlier, it is not a pretty situation.

Quite frankly, Mr. President, we do not like being labeled as untrustworthy. In fact, we resent it, especially since we have lived a life doing for others before ourselves. So, we can understand why you feel the way that you do about Fox News.

What I wanted to point out is how parallel our lives have become. You see, Mr. President, you are a politician. For the last decade or so, a lot of Americans have been very dissatisfied with the work of their Congressmen and Congresswomen. That train of disgust for politicians was moving down the track pretty fast when you jumped on it. Now, you are on a train full of politicians that most Americans are fed up with entirely. These politicians are spending our tax dollars in the same way that Mr. Madoff confiscated the wealth of his clients. At least we could see that he was prosecuted and thrown in jail. As Americans, we feel completely powerless with these politicians. You, Mr. President were the man with the plan for hope and change. We trusted you, because we believed in you. Not unlike the way our long time clients trust us as financial advisers.

Just as my fellow financial advisers disdain being mentioned in the same breath as Mr. Bernard Madoff, we can understand why you do not like being criticized by Fox News in the same breath with those crooked politicians. The only way for you to prove that you are a politician that does not belong on that train full of crooked politicians is to take control of that train. You should not shy away from Fox interview requests.

You see, Mr. President, me and my fellow financial advisers have to sit and listen to a prospective client blurt out question after question implying that we are distrustful. This is all because of Mr. Bernard Madoff. I have to tell you, we do not like it when people attack our credibility and we understand that you do not like it when Fox News attacks your credibility. However, Mr. President, the politicians in Washington have dragged you onto their train, like it or not. You are a politician just as I am a financial advisor and we both are tainted because of the likes of others. I am sure that you believe that you are better than the politicians in Washington. My fellow financial advisers and I believe very, very strongly that we are much better than the Bernie Madoffs of the world.

Do you see how parallel our lives really are, Mr. President? Like it or not, you are associated with unsavory characters in Washington. Like it or not, we financial advisers are associated with Mr. Madoff and these other Ponzi schemers. Like it or not, these crooked politicians are spending billions of dollars of our money and we are screaming loudly about it. The people at Fox are helping us scream a little louder. We are screaming at the train Mr. President. If you are merely a passenger on the train, then you will get screamed at too. If you do not want to be associated with those crooked politicians, then take control of the train.

If we financial advisers can sit still and be accused of being dishonest and make it through an interview, then so can you. Do you know why we can do this? Because we know the truth that we are people with integrity and we can be trusted.

Mr. President, if you do not answer the questions from the people at Fox, then would you not be like a financial adviser who refused to answer tough questions? Let me ask you. Would you want to do business with a financial adviser who would not answer your tough questions? I hope you see the parallels.

Do the right thing and do not shut out the Fox News Channel. To do so would be to shut out the American people. After all, you are the President of all of America, sir.

We all want you to succeed and we are all praying for you. God Bless you and God Bless America.

Monday, June 15, 2009

Keeping the Status Quo?

It looks like the Obama Administration is going to accept the status quo with regard to Wall Street and regulatory reform according to a recent article on the Investment News web site.


A source from the Obama Administration says that creating a new regulator for registered investment advisers "is not a core issue."

The Obama Administration is correct. We do not need a new regulator for registered investment advisers. Registered investment advisers are not the problem. FINRA is the problem. They are the root cause of the recent market meltdown due to their lack of regulatory oversight, in my opinion. Cronyism at its finest especially in their supervision of Bernie Madoff's firm.

Larry Doyle of http://www.senseoncents.com/ had on his weekly radio show Bill Singer, an attorney with Stark and Stark, one of the nation's premier Securities Related Legal Firms. The transcript for A Real Regulatory Review: An Interview with Bill Singer is available here:


This interview is an eye opener about how and why we can expect nothing but idle posturing by Congress to fool us into believing that they are doing something on behalf of investors. When in fact, they will do very little to help investors.

FINRA's Tactics Appear to Have Shifted

I would like to point out that FINRA has now set their sites on fixed annuity and life insurance sales outside their broker/dealers. Currently, if you are an insurance agent and sell fixed annuities or life insurance outside the compliance of your broker/dealer, you are regulated by the state that you do business in.

FINRA would like to force all those who sell fixed annuities and life insurance to come under the supervision of their member firms (broker/dealers.) Why? Money of course. If they "make" you as an insurance agent run all your business through your broker/dealer, then your broker/dealer will take a percentage off the top. As a result, FINRA stands to make more money.

FINRA has already made it plain that they wanted to regulate registered investment advisers. If the Obama Administration is not considering such an arrangement by labeling it as not being a core issue, then it appears that FINRA may not be getting that extra revenue from registered investment adviser regulation like they thought. In order to keep their share of the pie as large as possible, they have shifted their focus. Did they do that quickly or what?

Insurance agents and their fixed annuity and life insurance business are a new source of revenue for FINRA's broker/dealers. A lot of these FINRA broker/dealers have allowed their FINRA registered representatives to sell fixed annuities and life insurance outside their firms. However, now these broker/dealers are hurting financially as a result of the market meltdown and the fact that consumers are not as engaged in the finances. These FINRA firms must keep producing revenue some how and it appears that they have found the answer. If you are an insurance agent and a FINRA registered representative, then you just were handed your notice by FINRA to get out. Or, you can stay with FINRA and give them more of your income for doing absolutely nothing except making it harder for you to sell fixed annuities and life insurance.

It would not surprise me if they tried to force anyone who sells fixed annuities or life insurance to be a FINRA registered representative. Even if you are not FINRA registered now, their next attack may be to make anyone who sells these products fall under their supervisory jurisdiction.

With FINRA, it always has been and it always will be about the money. Do not let anyone tell you otherwise.

Wednesday, June 10, 2009

The Supreme Court Turns Out the Lights

My oh my! I truly did not think it would happen. The United States Supreme Court chose not to intervene in the Chrysler bankruptcy situation involving the Indiana bond holders. This is bad, bad news for the high yield corporate bond market. Slowly but surely, we will see bond yields increase. For bond investors holding these high yield corporate bonds, they we will see their principal values decline for these cash strapped corporations.

High yield bond issuers will feel the pinch the most. Bond investors will be very, very hesitant to put money into corporations with weaker balance sheets. This is especially true now that they know that their place in line in a bankruptcy is any where the government tells them.

You cannot go any higher than the Supreme Court and they turned out the lights.

Tuesday, June 9, 2009

A Glimmer of Hope for American Capitalism

Well well well. I was wondering when a group of bond holders would have the courage to hire an attorney and go to court over their rightful position in line as creditors. Looks like the U.S. Supreme Court will take a peek at some Indiana bond holders and their case in the Chrysler bankruptcy proceedings. See this Reuters article for details:


I am truly amazed at how well thought out the founding fathers of our great country were when they drafted our Constitution. They put in a system of checks and balances to make sure that no one branch of the federal government runs a muck with their power.

The classic chess match is at hand my friends. This is our system of checks and balances at work. The rule of law says that these creditors are first in line in the Chrysler bankruptcy. The executive branch of government takes a totally different opinion. They mistakenly believe that they can decide who gets what percentage of the New Chrysler. We shall see who is right. I believe that American Capitalism is at stake with the outcome.

The stakes are very high. If major corporations cannot go to the bond marketplace to raise capital, then we have a serious problem. What type of bond investor would put their hard earned dollars in a corporation, if the executive branch of government can come in and move you down the food chain?

Bond investors are not stupid. You do not have to tell them twice. If the Supreme Court rules against the Indiana bond holders, then Houston, we have a problem. If you think we have a financial credit problem now, then wait to see what could happen if the executive branch wins this argument. Credit for major corporations will dry up. Major corporations would have to raise their yields to attract investors which would in turn increase their borrowing costs. The end result is a huge drag on corporate earnings. More bankruptcies are sure to follow.

Keep the faith. I do believe that the Supreme Court will do the right thing for the Indiana bond holders while at the same time, provide a glimmer of hope for American Capitalism. They should rule in favor of the Indiana bond holders and stop this runaway freight train of cronyism. Let us all pray that they do.

Monday, June 1, 2009

Bankruptcy Predicted in KYATMA

My book, Keep Your Assets Take My Advice (KYATMA) predicted the bankruptcy filings for General Motors and Chrysler. I follow publications from the U.S. Treasury and the Chicago Federal Reserve. One of the email pdf files that I receive shows the auto sales for the nation. The automakers were selling about 17 million units per year, then the bottom hit. It is down to around 9 million units a year now. You cannot have a business built on the top of the scale. You have to have a business built where you can still profit on weak sales. Rosy scenarios do not work in business. You have to face the cold hard facts. I would not be surprised to see auto sales dip further from here. Consumers will not buy cars they do not want to own.

I lived in Detroit in the early 1980's for a short while. I was only 24 years old at the time. My job was General Manager of a large nightclub called Nitro. Back in the early 1980's, there were a lot of layoffs in the auto industry. However, when auto workers were laid off back then, they only had to go out and apply for a job every week and they would continue to receive most of their pay. Every week, while I was the General Manager, I would have about 30 to 40 auto workers come apply for a job. Of course, they were dressed in army fatigues, t-shirts, raggedy blue jeans and other well worn clothes. They had no intention of really getting a job. They were only complying with the requirements of their union agreement. You cannot hardly blame them for acting this way. After all, they still needed to feed their families and pay their bills.

It makes you wonder though, what kind of management would agree to such a fiasco? It boggles my mind how auto management could ever agree to such a labor agreement. I hope that when they crunch the numbers they base their profitability on 7 million cars sold instead of 17 million. If they cannot be profitable at 7 million cars sold annually, then why are they in business?

It seems like they still have this same agreement in place. All an auto worker who has been laid off has to do is go apply for a job and still get paid the bulk of their pay. Hopefully, they will change this in the new Government Motors.

Wednesday, May 27, 2009

Florida Seniors Annuity Bill Dies in Committee

How does a bill to protect Seniors from unscrupulous annuity peddlers die in committee in the Florida House? Especially, after it passed 39 to 0 in the Florida Senate? It says on the Florida House web site that the Annuity Contracts for Seniors died in committee. Which committee? The Insurance, Business and Financial Affairs Policy Committee killed it on May 2, 2009. They also said that it was indefinitely postponed and withdrawn from consideration.


Why on earth would a bill that passes 39 to 0 in the Florida Senate get totally dismissed in the Florida House? We can only speculate that the insurance lobbying efforts were powerful and successful in squashing this bill to protect Seniors.

This bill would have limited all annuity contracts to 10 year surrender charges. It would have made it a felony to twist and churn Seniors out of their money to buy Annuities. Perhaps the biggest item in the bill was that if an insurance agent had previously lost their securities license, then they would automatically lose their insurance agent's license. Apparently, there are scores of insurance agents in Florida who have lost their securities licenses, but continue to do business as insurance agents. It seems to this humble blogger that getting rid of these insurance agents would be a good thing.

The first sign of a chink in the armor was when in the Senate version, the maximum surrender charge period was expanded from 5 years to 10 years. Alex Sink, CFO for the State of Florida wanted the 5 year surrender period, but it appears the insurance lobby won out by expanding that to 10 years.

Oh, the world of politics. Should we really be surprised that this bill died in the Florida House? I think not. What we have here folks, is an example of the insurance lobby at work. Not only were they successful in killing the bill, they were also successful in giving unscrupulous insurance agents new life to continue their misdeeds.

Friday, May 22, 2009

What They Are Teaching in Law School

I went to an ethics meeting recently where the guest speaker was a law school professor. The attendees were attorneys, CPA's, CFP's, CLU's, Trust Officers and others. He talked about a lot of things, but one of the things he mentioned was related to joint tenants with rights of survivorship (JTWROS) accounts. He made the statement that he would never recommend that married couples open a JTWROS account. He said it would be better to open Tenants in Common accounts where the husband owns 50% of the undivided interest in the account and the wife also owns 50% of the undivided interest in the account. He went on to say that this was an easy way to split assets for estate planning purposes. If everything is in a joint account, then at first death, there are no assets that use the estate tax exemption. This was his reasoning. At first glance, this might make sense, but perhaps your humble blogger might be able to provide better alternative solutions.

What he did not explain to the attendees is that there are better solutions than putting married couple assets in Tenants in Common accounts. In addition, Tenants in Common accounts could own real estate and a Tenants in Common share is of an undivided interest. If one spouse were to die, then their property share would need to be sold. This might cause a loss in value, especially in a real estate market similar to today. This is not smart.

As you may or may not know, Tenants in Common accounts are subject to probate. Who benefits by probate? Attorneys, of course.

One alternative solution is to open individual accounts for the husband and wife and add payable on death clauses to them. This way you take advantage of the estate tax exemption and you bypass probate saving a minimum of 3% in most states.

Another solution is to draft Living Trusts for both the husband and the wife. There is better control of the disposition of assets and you can take advantage of the estate tax exemption. Living Trusts also bypass probate and their associated expenses.

There were some uneducated financial advisors in the room that were actually thinking about implementing the law professor's strategy of using Tenants in Common accounts. The law professor's argument was biased in favor of locking in future legal fees for the attorneys. I do not begrudge attorneys for earning their legal fees, but they should do so ethically. To me, it is just not ethical to follow the law professor's advice when better solutions are available at little or no cost.

No wonder they call Tenants in Common accounts TIC's. They can suck the blood right out of you.

Wednesday, May 13, 2009

Why Losing 20% is Better Than Losing 40%

Nobody wants to lose money. Let us assume that we have two hypothetical investors. One investor likes to invest on their own and they do not have a history of moving to cash. Instead, they choose to stay fully invested through both bull and bear markets. We will call this investor Foolly Investor.

The other investor is more conservative and does not risk as much in the stock market. This investor has read my book and limits his investments in any one asset class to 20% or less. In addition, they learned by reading my book, that they should never have more than 65% in stocks or equities. Particularly, they learned that 65% is an aggressive position and they are conservative and may only put 50% into stocks or equities. We will call this investor KYATMA Investor.

Foolly Investor was a fool to have 80 to 100% in stocks or equities. Foolly Investor's first mistake was investing based on only bull market possibilities. He failed to realize that markets not only go up, but they also go down. In addition, he did not understand the dynamics of investing with regard to the range of possible returns. Fooly Investor did not know that if a mix of investments has the potential to fall within a range of 0 to 25% on the upside, it has the potential to lose 0 to 50% on the downside. There is not an equal distribution of returns above zero and below zero. A fully invested portfolio will accelerate it's losses on the downside in a bear market environment. More people are selling in a bear market which compounds the losses on the downside. Foolly Investor only looks at the upside performance possibilities and completely neglects the possibilities on the downside.

KYATMA Investor is smart now that they have the knowledge packed into my book, Keep Your Assets Take My Advice. KYATMA Investor understands that when investing, you have to invest for both good and bad markets. In addition, you have to have a plan and a process that you follow. KYATMA Investor's plan is to diversify across many asset classes such as Large Company, Mid Cap Companies, Small Companies, International, Emerging Markets, Precious Metals, Commodities, Real Estate, Short Term Bonds, Intermediate Term Bonds, Aggregate Bonds, Treasury Inflation Bonds and Cash. In addition, he limits his exposure in each of the assets classes to the scale of limitations described in Rick's book.

KYATMA Investor ignores the recent bad press that says Asset Allocation does not work, because he understands that the people espousing that opinion have a hidden agenda. KYATMA Investor knows that a properly designed Asset Allocation does work, because he has had positive experiences in both bull and bear markets.

In the recent bear market of 2008, Foolly Investor lost 40% of his investment. KYATMA Investor lost 20%. Normally, Foolly type investors would think that KYATMA out performed Foolly by 20%, because their 20% loss minus Foolly's 40% results in a difference of 20%.

However, KYATMA's followers know their math. KYATMA followers know that if they outperformed Foolly on the downside by 20%, then this means that Foolly has to make about 40% just to catch up to KYATMA. That is assuming of course that KYATMA does not make anything while Foolly is making that 40%. KYATMA knows that if Foolly is making 40%, then KYATMA will also be making a good return. Therefore, the real number of Foolly catching up to KYATMA would be even higher than 40%.

Oh by the way, to recoup KYATMA's original investment, KYATMA only has to make 25%. Foolly has to make 66.67% to recoup their original investment.

Let us do the math, shall we?

  • KYATMA has $100,000 and Foolly has $100,000 to start.
  • KYATMA loses 20% so they are left with $80,000.
  • Foolly loses 40% so they are left with $60,000. (Foolly foolishly believes that KYATMA only outperformed him by $20,000.)
  • In order for KYATMA to get back to $100,000, they would have to earn 25%. ($80,000 x 25% = $20,000 added back to the $80,000 makes KYATMA whole at $100,000.)
  • Foolly on the other hand, had to do the calculations twice before he realized what a fool he had been. Foolly had lost down to $60,000. In order to make it back to $100,000, Foolly does his calculation and finds that he has to make 66.67%!! KYATMA outperformed him by 41.67%!!
  • Foolly grudgingly realizes that $60,000 x 66.67% = $40,000 which will get him back to his original $100,000.

Foolly Investor asked KYATMA Investor for some advice. KYATMA said, "Buy Rick's book!"

Tuesday, May 12, 2009

Understanding Performance Mistakes

Suppose a hypothetical investor meets with a financial advisor hereinafter referred to as Advisor A. Advisor A describes his investment process as based on sound Asset Allocation principles with a slant towards being conservative. Further he provides evidence that he will take large cash positions in bear markets when necessary based on their portfolio management experience. In addition Advisor A says that for the last 5 years, their performance was 5%.

Our investor is unimpressed with a 5% return. Our investor is searching for a financial advisor with a 10% return. The first mistake that this investor makes is that they have no frame of reference. That 5% may have actually outperformed the market by a significant margin, but they will never know because they were fixated on 10%.

Nevertheless, our hypothetical investor seeks out another financial advisor, Advisor B. In a meeting with Advisor B, our investor hears about a 10.41% return. Our investor gets excited because this is more in line with their investment performance objective. Advisor B tells our investor that they have a proprietary strategy using options, stocks and hedging positions in order to produce their returns. The proprietary strategy is a secret to the firm and they cannot share it for fear that the competition may try and duplicate it. Advisor B shows their track record for the last 5 years and it is 10.41%. Unfortunately, our hypothetical investor jumps all over this and opens several accounts with Advisor B. This would be a mistake without further investigation.

What is wrong with this picture?
  • Advisor B's strategy is a secret. - Bernie Madoff's strategy was a secret too.
  • Advisor B made large bets on the energy sector. - The energy sector is in a bear market now and our investor is completely unaware how this firm achieved the 10.41% return. The odds of Advisor B making 10.41% for the next 5 years would be next to impossible if they are primarily an energy sector manager and the energy sector is in a bear market.
  • Our investor made as his goal 10%. - There is no guarantee of future performance from any financial advisor. Picking a number by the investor is fraught with peril.
  • Our investor completely discounted Advisor A because the 5% return was not the 10% that they wanted to make. - Our investor made a decision not to invest with Advisor A based on an unrealistic expectation.
What our hypothetical investor should have asked:
  • Will you prepare a Comprehensive Financial Plan for me?
  • What types of investments do you recommend that I invest in?
  • What kind of strategy or strategies do you use? Please explain your strategy(s).
  • What are the fees associated with your recommendations?
  • What will be the tax implications of your recommendation?
  • What conflicts of interest do you have?
  • How are you compensated? Fees, Commissions or a Combination?
  • Can you be hired on an hourly or retainer basis?
  • How do you make investment decisions after accounts are invested initially?
  • How will additional investments be handled?
  • Have you ever gone to cash? If so, why?
  • Where will my accounts be held? What custodian or firm?
  • What protections do you have in place for the safety of my funds?
  • What licenses do you hold? What designations do you hold?
  • Have you ever had a license or designation subject to any type of disciplinary action?
  • What can you provide me as verification of a background check and the background check for all principal members of your firm? (Those with access to my accounts.)
  • Where are your written disclosures? Please provide in writing for my review.

This is a short list of good questions to ask any Financial Advisor. Of course, there are other questions to ask in addition to these. It depends on your personal situation.

I trust that you can see now why seeking a 10% return is the absolute wrong way to go about choosing a financial advisor. A Comprehensive Financial Plan is what you should demand as your starting point. You need to look at the entire balance sheet which is Assets and Liabilities. You need to understand the plan and the process that goes into designing the financial plan for your needs. Believe me, you will be much better off with a Financial Plan.

Please feel free to comment.