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.

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.