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:

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 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.