Thursday, December 9, 2010

Calling All Financial Advisor Bloggers!

Evidently, my blogging audience is rather small, because if anyone was reading my blog, then they would know not to invest in anything on my Do Not Buy List. Unfortunately, there will always be crooks out there who con people out of their money. It has been a year since I introduced my Do Not Buy List to the world. Based on what has happened in the last year, it is painfully evident to me that my message is not getting out to the masses. Therefore, I would like to call on all the other Financial Advisor Bloggers out there to reiterate, retweet, repeat and respect my Do Not Buy List.


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

Why do I have these things on the Do Not Buy List? You will have to go back to my December 2, 2009 blog post to find out. All you have to do is put in 'Do Not Buy List' in the Blogger Search box and you will find it.

Also, what you may find very interesting is how many violations of my Do Not Buy List occurred in the last year. Do a Blogger Search on my Blog for 'Remember When I Said' and you will see all the times during the last year that I pointed out people who fell for things on my Do Not Buy List. These articles are proof positive that items on my Do Not Buy List are indeed things that you do not want to invest in, ever.

Stay safe out there. Be smart about what you are doing with your money.

Monday, December 6, 2010

Remember When I Said...

Remember when I said do not invest in Private Placements? Regular blog readers of mine will be educated by my Do Not Buy List. Private Placements are illiquid, high risk investments anyway, but the main problem with them is that most of the time, the people selling them are ripping people off.

Now I am not saying that the people behind this Private Placement are necessarily ripping people off, but I would rather let you decide. Read the following article for details:

Apparently, this group was able to raise over $10,000,000 by cold calling people about this offer. What I want to know is who are these poor people who fall for this line of bull? Come on people! Here are the multiple red flags involved in this situation:

  1. This is a solicited investment. This means someone who has a financial interest in getting you to buy it is calling you cold. They do not know you and they do not have your best interests at heart.
  2. This is a Private Placement. Private Placements are highly illiquid and extremely risky. Did I say highly illiquid? This means that you put your money in for in most cases as long as a decade with no chance of getting your principal back before then. Who can stick money away for ten years today? Never mind the fact that you are never getting it back. 
  3. These type of investments appeal to your greed. The sales pitch is to make outlandish promises about returns and appeal to your sense of greed.
  4. You probably agreed to invest in the Private Placement without ever even reading the prospectus. (In this case, the promoter alleging left out some very pertinent details in the prospectus, so reading the prospectus would not have saved you.)
  5. I have never heard of even one Private Placement that was profitable. Not even one!
The moral of the story is Do Not Buy a Private Placement. Ever!

Wednesday, November 24, 2010

Budget Deficit Spin Doctors

I just about fell out of my chair yesterday when I heard a Democratic pundit on TV say that "you cannot fix the deficit problem by cutting spending alone." Come again? As a Certified Financial Planner with a ton of number crunching experience, I find that statement to be totally false.

If I am spending $50,000 a year, but my cash flow from income is only $45,000 a year, then I can reduce my spending by $5,000 a year and solve my deficit problem. I didn't have to raise my income in order to do this which is the equivalent of the Democrats wanting to raise taxes.

This is as simple of a mathematical computation as it takes to solve a spending/deficit problem. The Democratic pundits on TV just do what they always do and that is mislead people into believing their spin on things.

Truth be told, you can reduce the deficit of this country by only reducing spending and not having to raise any taxes. Of course if you truly were to reduce spending in government, then this means that you would have to run it like a business and lay people off from their jobs. Or, better yet, take advice from a Certified Financial Planner and cut spending where you can. The problem is that the Democrats and some Republicans want to protect their turf. These people have never had to be on a budget. Why should they start now? Their thinking is to just stick it to the American people like they have always done.

Unfortunately for Democrats and Republicans alike, the American people are paying attention. In the past, nobody paid much attention to Congress, but now they have taken notice. If they simply raise taxes and do not cut spending, then the American people will do the cutting in terms of Congressmen in the next election.

Tuesday, November 23, 2010

Are You Kidding Me?

Are you kidding me? Where in the heck do these alleged 'advisors' find these poor people who fall for this line of bull? Once again, yours truly has been proven correct. Right in my local area, a lady allegedly sold Promissory Notes guaranteeing returns of between 15 and 20% for the last seven years. Are you stinking kidding me? What kind of person (in their wrong mind obviously) would give anyone a penny to invest in something like this? I will let you answer that question.

Remember when I said that Promissory Notes were nothing but Ponzi Schemes? Check the Archives of my Blog for my Do Not Buy List posting.

The Ponzi scheme that I am describing above was alleged to be as high as $100,000,000. Okay, let us ponder this for a moment. One hundred million dollars divided by an average investment of say $100,000. This means that there could have been as many as 1,000 people who invested in this alleged Ponzi scheme. A thousand people! Are you stinking kidding me?

Forgive me, but are there that many greedy people out there? I know. I know. Some of the people who fell for this were simply stupid, but the truth is that most of them were greedy and stupid. Yet, they will be the first in line yelling for their money back. Somehow, I do not feel much sympathy for them. It is not like they invested in the stock of a major corporation or a mutual fund. They should have known that this was too good to be true. Come on, man!

Do not try and tell me that these people were duped by this Ponzi scheme. Totally untrue! They were greedy and believed what they wanted to believe. You will never convince me otherwise.

Another clue for the clueless is when your 'advisor' suddenly owns two houses, expensive jewelry, a new art collection, exclusive pianos, high dollar automobiles and is taking extravagant vacations to exotic places. When you see changes such as these, it may mean that you and your money will soon be parting ways.

Remember, Promissory Notes = Ponzi scheme. Never forget it.

Wednesday, November 10, 2010

A Lesson About Stepping Up in the Clutch

If you were to listen to the investment pundits on television, then they would tell you that there is going to be runaway inflation. They all say the same thing. The Federal Reserve is printing money like it is going out of style so, as a result, you can expect runaway inflation.Well, I have news for you. Ben Bernanke and the Federal Reserve Board is not going to let inflation get anywhere near a runaway train. I think they will succeed in keeping interest rates low for an extended period of time.

I read a great article from Scott Minerd, the Chief Investment Officer at Guggenheim Partners, LLC. the article was entitled, 'The Urban Legend of the Bond Bubble.' In his view, we are in for more of a period like the 1940's. This was a period when the 10 year U.S. Treasury Bond averaged a paltry yield of under 2.00% for the entire decade of the 1940's. He believes that we are in a similar situation today. I tend to agree.

Think about the fact that the Great Depression took a long and I mean long time to recover. They tried everything to get the economy moving. It took a World War to put people back to work. After all, the real problem of the Great Depression was a lack of jobs. Which reminds me of the situation today. It is a similar lack of jobs.

Ponder, if you will that in order to create jobs, you have to incentivize the private sector of the economy with access to capital to grow, low interest rates and low taxes. Lest we not forget we need someone willing to buy what we are selling, also. This was the same problem created by the Great Depression.

I will certainly agree that we are able to recover much more quickly from the Great Recession than they did after the Great Depression. Our country is much more technologically advanced and productive today. However, I think we will see the yield on the 10 year U.S. Treasury move closer to 2.00% than 3.00%.

One thing that I have learned over the years is that the smartest guys in the room are not the smartest guys in the room. They are just winging it. Sad, but true. They are just better at winging it than most people.

Let me tell you a baseball story involving yours truly that happened several years ago. I played in the Men's Senior Baseball League World Series in Phoenix, Arizona one year and our first game was against the defending World Series Champions. You have never seen the male ego in hyper drive unless you see this event. This World Series Champion team heralded from the great city of Chicago. They had the best players that Chicago had to offer on this team. They had several ex-Major League players and most all the others had played in the Minor Leagues or had stellar college baseball careers.

Our team was a team primarily from Central Arkansas. We had one guy who played AAA and that was about it. The rest of us were just a bunch of country boys who liked to play baseball. Yet, here we were in the first game of the World Series against the defending champions. These guys were shuttling players in and out between innings. They had about 25 players with them and I think we had about 14 on our team. Intimidation was in the air. You could feel it. They were dead set on repeating as World Series Champions. You could tell by the way they were acting. They were confident.

In the fifth inning, they were winning 3 to 1. Us poor old Arkansas guys managed to get the bases loaded, then it was my turn to bat. Chicago called time out and brought in ex-Major Leaguer Tom Gorman to pitch, a former Minnesota Twin. His catcher was Bart Zeller who played with the Chicago Cubs in his career. Then there was me, waiting on the on deck circle for my opportunity at the plate. There was no disputing what my teammates expected me to do for the team. They obviously wanted me to get a hit and knock in some runs. At the same time, Chicago's team had great confidence in shutting this inning down by bringing in the pitching ace Tom Gorman. This guy was blowing some serious gas. He was throwing low nineties easy. Somebody was going to win this battle and somebody was going to lose. The odds favored Chicago by a country mile.

I was watching him warm up and he appeared to have two pitches. A slider which he was not able to get over during warmups and a fastball that was buddy you better believe it, fast.

This is a point in your life where you say, "Am I going to step up or am I going to let this intimidate me?" The first pitch was a slider in the dirt. I could see by the look on Tom Gorman's face that he didn't have confidence in that pitch, so I figured he would come with the fastball and try to blow it past me. I guessed right. I hit an opposite field grand slam off of him and we went ahead 5 to 3. You would not believe how demoralized those Chicago guys were after that grand slam. They just could not believe that a guy like me, who only played baseball as a kid up to age 15, could hit a grand slam off their ace. Ever hear that baseball is 90% mental and 10% ability? It's true, although I can hang with the best of them in baseball ability.

We went on to win the game and some of the guys on my team were telling me for days afterwards that "that ball is still going!" Chicago never recovered the rest of the week. They failed to repeat as World Series Champions. Although we did not win the World Series, it was certainly a gratifying experience to beat the World Series Champions and to do it in such a dramatic way.

Which brings me back to my point. A lot of times when I watch some of my peers on television giving advice, I sit back and notice that these guys are just winging it. They are not the smartest guys in the room. Yet, a lot of people put a ton of credence into what they say. My advice would be to be careful about listening to these advisors.

I just smile to myself knowing that I can play with the big leaguers, come through in the clutch and I am probably a little smarter than they will ever know.

Monday, November 1, 2010

Where Have I Been?

Well, sorry folks that it has been one month since my last post. We transitioned to a new Practice Management program from Morningstar and there has been a lot of tedious data entry catching up to do on my part. Therefore, I have been unavoidably detained from my blogging keyboard. Please forgive. I expect to become a little more regular here soon.

Stay tuned.

Friday, October 1, 2010

Lots of Illiquidity

I have been seeing advertisements for the sale of real estate unimproved residential lots at distressed prices. Danger! Danger! Did you know that once you buy the lot, you cannot ever refinance the loan? Did you also know, that you cannot borrow against a lot if you pay for it in cash? There is no real loanable value until you build a house on the lot. I bet you did not know these facts, did you?

You know how I feel about liquidity. You need lots of liquidity, not lots of illiquidity. Get it...lots of illiquidity?

Residential real estate lots are totally worthless unless you have a loan or cash in hand to build your home on the lot immediately. Otherwise, do not tie up your money. If you are not ready to build on that lot, then wait until you are ready to build on the lot.

I think I will add this to my Do Not Buy List.

Monday, September 27, 2010

Metrics America

Poor ol' Metrics America. The executives at major corporations are still managing their companies via metrics or numbers. This is the masterful management skills of Corporate America in a nutshell. The Regional V.P. gets an email saying that his regions numbers are not hitting their metrics. So, the RVP sends out an email to his management team telling them that they are not hitting their metrics. Upon receiving these emails, the managers send out an email of their own to their employees that they have not hit their metrics. All this does is make employees fear for their jobs.

This is the brilliant strategy used by most of Corporate America right now in how they run their companies. Is it just me or is this an idiotic way of management?

People are people, not metrics acheiving machines. This unfortunate style of management and I hate to even call it management, is a totally ridiculous way of running a major corporation. Corporate America has been runnning their businesses in this manner for the better part of a decade now. Guess what fellows? It doesn't work.

A much better way of managing people is to first have respect for them. You would do far better as a company if you respect your people and quit threatening to fire them everyday because of some email management received from their RVP. I think what you are now finding out the hard way is that you are having a hard time keeping employees. There is a lot of turnover when you run your company on metrics. Why? Because people do not hit metrics every month, quarter or year. They get fed up with the metrics and quit, or say "screw it" and wait to be fired. You idiots in management actually believe that after treating your employees this way, that somehow you can coerce them into acheiving their metrics. You have got to be kidding me!

Corporate America and their management is like a hamster on the wheel. No matter how fast the hampster runs in the wheel, he never goes anywhere. Corporate America cannot improve their businesses based on this style of management.

Another thing that Corporate America mistakenly continues to do is to bring in sales consultants. After quarter after quarter of not hitting their metrics, the Executives come to a miraculous conclusion that their employees are not hitting their metrics. So, their solution is to bring in an outside sales consultant. The problem to them is obvious. Their employees need sales training. If they knew how to sell properly, then the metrics would be better, or so they think. These Executives are just plain stupid. They have no management skills. They are the ones that need to be fired!

I just recently saw an ad from a firm in the financial services industry. They are bringing in a sales consultant to help their employees boost their metrics. Let me save you some money. No sales consultant in America can boost the sales of your employees. I have seen them all. They all are abject failures. I do not care what they say or what you may believe.

You have to treat your employees with respect. Encourage them. Do not threaten them. You cannot have 12 people on a team and expect all twelve of them to reach the same metrics! That would be like having a baseball team where everyone on the team is required to hit .300 and hammer 30 home runs a year. It doesn't happen on the baseball field and it doesn't happen in Corporate America. Baseball managers know their personnel and try to get the most out of their players based on their own ability, not the ability of their best player. If they told all their players that they had to hit .300 and belt 30 home runs each year or they will be fired, then how good a team do you really believe this would be? It would be awful, because the players would not be able to acheive such a metric. This is exactly what Corporate America is doing. They expect every employee to acheive a metric based on the best player on the team. It is not going to happen and they are totally missing the point.

Think of how successful Corporate America could be if they worked towards the goal of getting the best out of their employees on an individual basis. What if they knew each person's ability and worked with them instead of against them to help them attain their best? This is the foundation for success in Corporate America. Get your head out of the metrics and out of those worthless sales consultant books.

If you want to hire someone to evaluate your operations, then hire me. I will free you from the metrics nightmare way of management.

My eBook

I was in a Barnes & Noble the other day and a young fellow showed me The Nook eBook Reader. I had him pull up my book, Keep Your Assets Take My Advice, It is Easier to Climb Out of a Shallow Hole. There it was! Right before my eyes! Of course you know this also means that I am on the Amazon Kindle and the Apple iPad. This is absolutely the most economical way to purchase my book. It is less than $5.00 as an eBook. Now you have no excuse for not buying it.

Tuesday, August 31, 2010

Upcoming Changes to Registered Investment Adviser Disclosures

The SEC and the States have come out with their joint effort on the Final Rule for Registered Investment Advisers known as IA-3060. This final rule has a couple of clauses in it that will dictate more disclosures for both Registered Investment Adviser firms and their Investment Adviser Representatives.

The firms will now have to explain the risks associated with what they primarily invest in for their clients. Form ADV II Part 2A (Brochure), Item 8.C. of the rule reads says "If you recommend primarily a particular type of security, explain the material risks involved. If the type of security involves significant or unusual risks, discuss these risks in detail."

In my case, I primarily recommend Exchange Traded Funds or ETF's. My interpretation of this clause is that I will need to provide a summary of the significant types of risks in detail. To me, this means a summary of items like Stock Market Risk, Country/Regional Risk, Emerging Markets Risk, Currency Risk, Index Sampling Risk, Interest Rate Risk, Income Risk, Credit Risk, Sovereign Debt Risk and Stock Exchange or OTC (Over-the-Counter) Risk. It also means that ETF's are not guaranteed or insured. This new disclosure requirement is good in that it makes people understand more about the risks of investing in general.

Another interesting item in the required disclosure for the actual person giving the investment advice. In the past, you did not have to disclose your disciplinary history unless your were an officer of a Registered Investment Adviser firm. Now, as a result of this new SEC rule, all disciplinary history will not have to be disclosed in writing in the Brochure Supplement. This is surely going to "separate the wheat from the shaft" so to speak. My experience is that there are numerous financial advisers and insurance agents who have had some type of complaint on their record. I personally will be curious to see how they explain themselves and their records going forward.

Also, there is a clause that says if you say that you have a financial designation to your clients, then you must disclose the requirements for obtaining that designation. This means the minimum qualifications to obtain the designation. Although this will also add more pages to the required disclosure Form ADV Part 2B (Brochure Supplement) for Investment Adviser Representatives, it will give the client the ability to look at the designation and see if it is "something of value" as stated in the SEC rule. The end result is that the Investment Adviser Representatives with financial designations will have more pages of disclosures than those who do not hold a financial designation.

All in all, these new items will be beneficial for clients who are looking at Registered Investment Adviser firms (Brochure) and their Investment Adviser Representatives (Brochure Supplement), although you may have twenty plus pages to read.

Friday, August 20, 2010

Why Do Bankers Rule the Mortgage Market?

There has been a lot of talk lately about what to do with Fannie Mae and Freddie Mac. Should the government get rid of them altogether? The banks say no. Have you ever wondered why they say no?

Currently, FHA guarantees loans including the very popular 30 year mortgage with as little as 3.5% down. When a bank loans you the money for a house, they turn around and package your loan with other similar loans and sell them on the secondary market. At this point, they become mortgage backed securities. In recessionary times, the government steps in and buys these mortgage backed securities, because the banks do not want to hold onto the responsibility of the loan in case of default. This is a situation where a bank has a financial incentive to sell the loan, but not to be responsible in case of loan default. In other words, they have no risk. If they have no risk, because of the government stepping in, then they have no incentive to do proper loan underwriting. Therefore, today, the banks are jumping up and down saying that they are not going to take the risk on 30 year mortgages. The banks are putting political pressure on Congress to continue to snap up these 30 years mortgages.

Now, let us examine this in a little more detail. What if the government quit stepping in on the bank's behalf? Then, the banks would probably not offer 30 year mortgages. If you could no longer get a 30 year mortgage, then what kind of mortgage could you get? Mortgage interest rates would temporarily go up, but if you look at things today, this will not really be a problem. If people are not willing to buy a house now with rates under 5%, then why would a bank think that people are going to rush out and borrow money at higher rates? They will not, believe me. However, once things settle down and the banks realize that they actually need the consumer to make money, then they will realize that they have to offer residential loans, like it or not.

Even if the banks do what they threaten to do and abandon the mortgage market altogether, I still believe that American Capitalism would take over and somebody would step up and offer 30 year mortgages. The banks are frankly too stupid to stand idly by and watch some other firm make the money on mortgages. Look what happened with credit default swaps. Once one bank starting making money with these instruments, then all the other banks followed suit. What did we poor consumers end up with? A bailout.

Personally, I do not think that banks should be allowed to underwrite a loan and pass off the risk. This is totally ridiculous. If they approve the loan, then they should keep the risk. Period.

Conversely, if banks take the risk, then they will underwrite the loans a little tougher. Yes, this means less people in housing and higher down payments, but this is the way it should be. There is no right to a house. I do not know about your neighborhood, but not too far from my house, there are some really nice apartments that are way better than anything that I ever lived in when I was younger. They have garages, exercise rooms, pools, whirlpools, saunas and even restaurants in some. Apartments are not so bad anymore.

This is a serious conflict of interest here when the bank can lend the money, but not be responsible for the loan. When did we agree to this? In reality, when we allowed the same people to stay in Congress for years and years. These terrible people have caused the problems that we are having today. Fat chance that these same people will do anything to fix it. They do not work for the American people. They work for the banks. It is patently obvious by now.

It may take an election or two, but we need to vote them out of office. It is really the only hope we have as Americans to get back control of our country.

Monday, August 9, 2010

Demand to See their Form ADV Part 2 (b) Brochure Supplement

The SEC has come out with their final rule on the much needed revamp of the Form ADV. In the past, a lot of pertinent background history could fall through the cracks as far as retail investors were concerned. Imagine if you received investment advice from someone who worked at a large Wall Street firm. Well, if this was the case, then the old Form ADV II did not have to disclose the background history of the person dispensing the investment advice. It only was a requirement to disclose the background history of the principal officers of the Wall Street firm. A glaring gap in disclosures that the SEC has now closed in conjunction with the states.

Now, with the new Form ADV, there will be a Part 2 (a) and a Part 2 (b). Both Parts will be in a new narrative form with easy to read language instead of the former check the box format. In addition, Part 2 (b) will be a new Brochure Supplement that will have to disclose the background of the person dispensing the investment advice to you.

Caution: If there are two people talking to you about investment advice in a meeting, then you should demand (that's right, I said demand) to see the Brochure Supplements of both people. If they only produce one Brochure Supplement, then this should raise a red flag with you. This might be indicative of one of the people giving you advice not actually being licensed, or they could be hiding their Brochure Supplement. Why would they do this? They may hide their Brochure Supplement because it contains their bad background. To get around this, they may bring to the meeting someone else in their office who has a cleaner background for disclosure.

I would be very concerned if someone whom you know to be insurance licensed is advising you to sell all of your investments in order to buy their annuities. Especially, if they do not produce a Brochure Supplement and instead produce a Brochure Supplement of someone else in the meeting or not in the meeting at all. First of all, an insurance agent who is not registered as an investment adviser cannot advise you to sell any of your investments without being licensed. It is against the rules of most, if not all, states in the country. Secondarily, doing business this way should raise a red flag with you. If they are hiding this, then what else are they hiding? Also, if they give you a Brochure Supplement of someone who is not even in the meeting, then I highly recommend not doing business with this firm. They are hiding something for sure.

Of course, it makes further sense that if an insurance agent is advising you to sell your investments to buy their annuities and they do not produce a Form ADV Part 2 (a) to Part 2 (b), then they are violating state rules and regulations in giving you that advice. You probably did not even know that.

Another thing to watch out for is if you only receive Form ADV Part 2 (a) and you do not receive a Part 2  (b) at all. This also is against these new SEC and state rules regarding full disclosure.

Even though, this new rule revolving around the new Form ADV Part 2 (a) and Part 2 (b) is a giant step forward, there are still reasons to stay on your toes. Now that these two Parts will be in a narrative format, it will be much easier to read and I would highly recommend that you do so.

Friday, July 23, 2010

Remember When I Said...

Remember when I said that Promissory Notes are strucutured just like Ponzi schemes and you should never invest in them?

Once again, proof positive that I am right and you should never invest in any Promissory Notes. Here is a story about some CPA's selling Promissory Notes that turned out to be a Ponzi scheme! What did I tell you about Promissory Notes? They are structured just like Ponzi schemes. Is it really a surprise that they turn into Ponzi schemes? Not if you read this blog or you have read my book.

See this Press Release from the U. S. Securities & Exchange Commission for the full story:

I will keep blogging about this as long as I can blog. Be careful out there.

No Place to Hide

The SEC has finally approved changes to the standard disclosure document for Registered Investment Advisers. The final guidelines should be posted on the SEC web site sometime next week. Currently, Registered Investment Adviser firms have not had to publish the background information of the individual that advises the client, unless that individual happens to also be an officer of the firm. Going forward, this new narrative brochure as it is called will have to enclose a brochure supplement at the end of it disclosing the background of the individual dispensing the advice. Not only will potential clients see the disciplinary history and background of the officers of the firm, but now, they will also see the background of the individual trying to obtain their business.

The problem in the past has been getting access to the disciplinary background of the person trying to obtain the business from the potential client. If the person trying to obtain the potential client's business was not an officer of the firm, then a potential client would not find anything in the current disclosure Form ADV II. Now however, there will be this new brochure supplement that will have to disclose to prospective clients a resume like disclosure with information about their educational background, business experience, other business activities, disciplinary history and their qualifications such as designations and licenses.

Prospective clients will now be able to compare brochure supplements and brochures on the firm with other Registered Investment Advisers and their Investment Adviser Representatives. This in my opinion is a giant step forward in terms of disclosure and I applaud the efforts of all involved.

I can see the future implementation of this process whereby prospective clients will now be able to ask for the brochure supplement from the Investment Adviser Representative who is trying to obtain their business. Guess what? If the person trying to get a prospective client's business does not provide this brochure supplement, then odds are they are either hiding something, or they are not properly licensed as Investment Adviser Representatives.

Let's take a harder look at this situation. Assume that you go into a firm that has insurance agents in it who sell annuities and are not licensed as Investment Adviser Representatives. In addition, there are also one or more Investment Adviser Representatives affiliated with the insurance agents in some way. If a prospective client is being advised to sell their securities by the insurance agent who is not licensed, then the prospective client can ask for their brochure supplement. Of course, if they are not licensed, then they will not have this brochure supplement. In case you do not know, insurance agents cannot advise anyone to sell their securities to buy annuities unless they are also licensed as an Investment Adviser Representative or a Registered Representative.

Further, if the insurance agent in this example tells you that someone else in the firm is the Investment Adviser Representative, then why are they not the one sitting in front of you, giving you the advice and disclosing their brochure supplement to you? As a prospective client, you do not want to stand for this kind of shady relationship. It is obvious that the insurance agent and the Investment Adviser Representative are in cahoots, so to speak, and may be trying to direct you straight to annuities which may not be in your best interests.

Demand to see the brochure supplement of the person giving you the advice. If they fail to produce a brochure supplement, then run, do not walk out the door. You do not want to do business with these people.

This brings me to another point. Registered Representatives who are also Investment Adviser Representatives are known as dually registered. These dually registered advisers will have to provide these same brochure supplements. The same goes for insurance agents who are also Investment Adviser Representatives.

The end result is that this is finally something that favors prospective clients.

My advice to all prospective clients is to demand the brochure and the brochure supplement. These new documents will give you the best opportunity to learn about conflicts of interests, compensation methods, educational backgrounds, business experience, professional designations, licenses and disciplinary history of the individual trying to obtain your business. Again, if the person trying to get your business fails to produce these disclosure documents, specifically the brochure and brochure supplement, then do not do business with them. Odds are there is something wrong with their background or disciplinary history.

I look forward to creating these new documents on behalf of my prospective clients. Stay tuned.

Friday, June 25, 2010

FinReg or The American Financial Stability Act of 2010

We are almost there. Everyone has been waiting for the final version of The American Financial Stability Act of 2010 to become law. Shortly, we will be able to see it for ourselves and look for how it will impact the financial industry.

The early word is that the authority to require the fiduciary standard  for broker/dealers and investment advisers will be granted to the U.S. Securities and Exchange Commission (SEC). The current status of the fiduciary standard is that investment advisers (like my firm) are already subject to the fiduciary standard. It is the broker/dealers (Wall Street firms, Banks & Insurance Companies) who are not subject to the fiduciary standard.

The SEC will have to wait six months until a study is done. This is really an opportunity for Wall Street firms, Banks and Insurance Companies to fight it and or, time to get prepared for it. The law is supposed to give the SEC the power to implement a rule related to the fiduciary standard. The SEC has commissioners who vote on such any rules, if presented. So, there is no guarantee that after the results of the study, the SEC will make such a rule. FinReg only gives them the power to make such a rule, I believe. It doesn't necessarily make it etched in stone. Also, they normally put proposed rules out for a period of time before implementation and allow people to comment on them. Then, after the comment period, the SEC reviews the comments and determines the impact that making the final rule may have on the industry.

I wonder, if it is easier for Wall Street firms, Banks and Insurance Companies to fight the implementation of an SEC rule such as the fiduciary standard, as opposed to a law passed by Congress. There is a major difference if you catch my drift. It would be much tougher to overturn legislation, in my opinion. Do not think for a minute that Wall Street firms, Banks and Insurance Companies will not be flooding the SEC with comments on any proposed rule on the fiduciary standard. It is obvious they do not want it.

The main thing you need to understand is that registered investment advisers are already subject to the fiduciary standard and they (we) only wear one hat. So, if you see a lot of resistance to the fiduciary standard in the next six months, keep in mind that is not coming from registered investment advisers.

As I have blogged about many times before, the best financial advisor to hire is an Independent Registered Investment Adviser with no Wall Street firm, Bank or Insurance Company broker/dealer affiliations. Like me.

Wednesday, June 16, 2010

Obama' Speech Contradicts Thinking on Financial Regulation

I watched President Obama's speech intently last night, as did a lot of Americans. We were all hoping for good news on the plugging of the oil leak five thousand feet down. Let's face the facts. As long as that leak continues, no one is going to be happy.

My take on the speech was a little different than most would imagine. It is not a political ideology that I write about here, but rather a correlation that I noticed in his speech. I found it rather ironic when he was talking about how the oil industry has been allowed to police themselves and this was a bad thing, it sounded just like the way the financial markets are regulated. Here are his Oval Office remarks from last night where he is talking about the Minerals Management Service:

"Over the last decade, this agency has become emblematic of a failed philosophy that views all regulation with hostility -- a philosophy that says corporations should be allowed to play by their own rules and police themselves. At this agency, industry insiders were put in charge of industry oversight. Oil companies showered regulators with gifts and favors, and were essentially allowed to conduct their own safety inspections and write their own regulations."

Did he just admit that an agency of the Federal Government was a complete and abject failure? Yet he wants bigger government. Sorry, I digressed.

While he was reading his speech, I was thinking to myself...this sounds a lot like FINRA, the Financial Industry Regulatory Authority. FINRA is a for profit company by the way. FINRA was in charge of regulating Bernie Madoff and countless other fraudsters. FINRA is a self regulatory organization which as the President says about the Mineral Management Service, "industry insiders were put in charge of industry oversight." This is exactly how our unscrupulous financial advisors are regulated. The people tied to the industry are involved in FINRA. They are without a doubt industry insiders. How is that working for us? Why isn't the President demanding change in the Financial Industry with regard to self regulation like he is in regard to "Big Oil"?

I am not one to normally look to other countries for answers, but I found it curious that the "Brits" have eliminated all forms of commissions from investment products. This causes all the financial firms to guess what, do what is in the best interests of the clients. What are we doing these days? Beating up on BP. Maybe we ought to step back a take a look at what they are saying not only with regard to BP, but also with the elimination of commissions for selling financial products.

These Wall Street guys are fighting this with every thing that they have, which is mostly money they obtained from their clients. For now, it appears that clients are going to end up on the losing end.

Today, as I write this, I received an email from Investment News. Here are some of the headlines:

Thirty-year scam financed adviser's 'sordid' secret life

Ex-Ameriprise adviser gets five years for fraud; ordered to repay B-D $2.7M

Falling Starr: A timeline of a celebrity financial adviser's alleged fraud

This is just in one day! Most of America has no idea how many of these scams are going on right now. These fraudsters are like cockroaches. They are everywhere!

Ponder this thought if you will. Does it really make sense for there to be a self regulatory (for profit company) in charge of regulation over the majority of "financial advisors"? (Series 6 or 7 registered representatives) Forgive me, but it does not appear to be working very well.

The for profit thing is kind of curious too. Whenever FINRA needs to make money, all they have to do is find one of their members to slap with a big fine. This seems kind of goofy to me that they would be a for profit company as a self regulatory organization.

Congress is hammering out the details of Financial Reform legislation over the next couple of weeks. If FINRA really wanted to, they could influence the legislators with their demand for the Fiduciary Standard. Executives at FINRA have publicly stated that they are in favor of a fiduciary duty to clients. Back door, cigar filled rooms tell a different story. It is no surprise to me that the Fiduciary Standard is absent from the upcoming legislation.

FINRA regulated Brokerage Firms do not want this Fiduciary Standard at all. The sad truth is that Wall Street will be able to continue business as usual using a Suitability Standard instead of a Fiduciary Standard. In a nutshell, this means that they can continue to do what is best for their firm first, before doing what is best for their clients. The end result will be the continued sale of high commission, high revenue generating products with poor liquidity features that are absolutely awful for everyday investors. Until we eliminate the scourge of commissions from our landscape, then investors will be taken to the cleaners over and over again.

Investors can do something about it however. Only do business with Independent Registered Investment Advisers. This means only do business with people who do not have a Series 6 or Series 7 license.

Tuesday, June 15, 2010

You Must Factor Liquidity Into Your Decision Making

Most people in America have been taught over the years to blindly put their money into so called "investments" by registered representatives, people who are sales persons for themselves and their firms. These sales persons hold FINRA Series 6, 7 or 22 licenses. Does your financial advisor (don't make me laugh) hold a Series 6, 7 or 22? If so, then you are a victim of their sales efforts.

I just read an article in a financial industry trade publication about Non-Publicly Traded REITs. Readers of this blog will know the Non-Publicly Traded REIT's are on my Do Not Buy List. The gist of the article was that sales are up and lots of people are buying these investments. This is not good, in my opinion.

Non-Publicly Traded REIT's generally pay large commissions to your FINRA Series 6, 7 or 22 licensed registered representative. These commissions can be as high as 8%.

Let us assume that you put $100,000 into one of these Non-Publicly Traded REIT's. The results are that $8,000 of your money, let me repeat that, your money is going into the pocket of the FINRA Series 6, 7 or 22 registered representative and the firm that they work for, in addition to the firm managing the REIT. So, far what have you received? A vague promise of diversification, the potential for a high return plus recurring income from the dividends. What you do not know is that the firm managing the REIT is structured like a Ponzi scheme. They take money in, then pay you dividends from your own money. Oh, I almost forgot. Your $100,000 is now totally illiquid.

The REIT takes your money and "invests it" (quit making me laugh) in real estate properties that are supposed to make tons and tons of money for you. Most of these REIT's have to pay real estate sales commissions every time they buy a piece of commercial real estate. Further, they usually hire a property management firm to manage the property that they bought. Of course, the manager of the REIT has a large staff of real estate experts that have to be paid. Do not forget that they have to pay your FINRA Series 6, 7 or 22 registered representative and their firm. I wonder...after all much of your $100,000 is still left? Well we know eight percent of it is gone to commission, so it is at least down to $92,000. If I am being conservative, I would suspect maybe another $5,000 is gone to all the issues that I described above. This leaves you with $87,000. Oh, I almost forgot. They are paying you 6% interest on your $100,000, so that is another $6,000 knocking your $87,000 down to $81,000.

After all that, you need a 23.46% return on your money just to break even. I know what you are thinking. These REIT guys are good managers and their last REIT made 10% last year. Well they paid you 6% in income in the first year, if they did make 10%, then your are still down for the count. Also, a little known fact is that the REIT manager gets to decide how much their return is each year. How do they do that? Well, with commercial appraisals of course. How much are commercial appraisals? They are a whole lot more than residential appraisals I can assure you. Sadly, more of your $100,000 is gone.

The worst thing about Non-Publicly Traded REIT's is they have terrible liquidity. You cannot get your $100,000 back generally for 10 to 12 years. Now, do you see why this so called "investment" is on my Do Not Buy List? I hope so, but apparently there are a ton of people out there still buying them. Sales are up on these investments, it is sad to say.

Liquidity is the name of the game. This is a news flash. You can actually invest your money so that every single thing you invest it in can be accessed within a couple of days. Now, that is a novel idea. Invest with Liquidity in mind.

Here is the rule: If it is not liquid, then do not invest in it.

Yours truly,

Rick Johnson

Friday, May 28, 2010

The Critical Difference - What It Means For Someone to Work in Your Best Interests

The Critical Difference of Working With Registered Representatives, Bank Reps, Insurance Agents and Independent Registered Investment Advisers - What It Means For Someone to Work in Your Best Interests

Most of America has money in retirement plans, investment accounts and insurance products. Think about it. If you go see a registered representative at a brokerage firm, or at a bank, or an insurance agent, no matter what level of experience or designations that they hold, odds are that they will want to sell you something. The reason for this is that they have a revenue quota to keep their office perks and their job. If they fail to reach their revenue quota, then they can lose their job. If you are sold products that benefit these registered representatives and their firms, then how does that help you? The truth is that your needs are always way down on the totem pole with this business model of Banks, Insurance Companies and Wall Street firms.

Independent Registered Investment Advisers do what is in your best interest. Not all of them will do it, however. How many Independent Registered Investment Advisers will work with you knowing that you do not have $500,000 to invest? If you simply tell them that you need help getting out of debt, then watch as they tell you about their account minimum of $500,000 and let you walk out the door.

A lot of these Independent Registered Investment Advisers only want to work with customers who have money and lots of it. The thinking goes it is better to have 1 person with $1,000,000 than 10 people with $100,000 each. It is easier to manage one person as opposed to ten people. Most all Independent Registered Investment Advisers work from this business model, with the exception of one that I know of and that is me.

The Taking Control Plan is how you should run your financial life. If you start at the right side of this Money Flow, then you are benefiting the firm selling you products. If on the other hand, you take my advice and start at the left side of this Money Flow, then you are benefiting you and your family.

This should be an "ah ha" moment for you. The light bulb should be shining bright now.

If you build the solid foundation first, by paying your everyday expenses, controlling your discretionary spending with the Under Control Accounts, then setting up Individual Savings Accounts for specific short term goals like vacations or home improvements, then you can begin to build a bigger emergency fund. In today's environment, forget 3 to 6 months of expenses. Today, I recommend 9 to 12 months of expenses in case of job loss, accidents or medical issues that would cause a longer strain on your financial situation. Once you have tackled all of these, then and only then should you move on to fully funding your retirement plans and taking excess cash flow and adding it to investment accounts.

Wall Street firms, banks and insurance companies want you to buy their stuff which means starting on the right side of this Money Flow. How does this help you if you have debt, your discretionary spending is not under control and you have no money saved for vacations? You have to be smart today. Really smart.

With The Taking Control Plan, you benefit first. Isn't this truly advice in your best interests? This is what I do for you.

Not me first, but you first.

Wednesday, May 19, 2010

Stub Quotes Contribute to May 6th Trading Drop

The SEC and CFTC came out with a report today showing their preliminary analysis of the factors leading to the trading activity on May 6th. One of the repeated phrases in the report is "stub quotes." Stub quotes are minimum quotes that market makers put on the other side of trades to "legally" maintain a two sided market for equities. For example, they may put out a Ask quote (Buy Order price) on a stock at $53.75, but instead of putting in a Bid price (Sell Order price) close to the Ask price like $52.75, they instead put in a "stub quote" of $.01. They never expected any trades to hit their stub quote prices. I am sure they thought this was a good way to comply with the other side of the market (Sell side), because who in their right mind would want to Sell their position for a penny a share?

One thing investors who invest on their own need to understand is that Stop Loss Orders will not protect you in a market like the one we experienced on May 6, 2010. I am afraid that a lot of people found this fact out the hard way.

Some people try and protect their positions by putting in Stop Loss Orders. These trade orders are triggered once the price of the stock goes through the stop price. Once it goes through the price, then it becomes a Market Order. In this case, the stub quote for the stock was $.01. So, this meant if you had a Stop Loss Order in at $47, then when it passed through $47, it became a Market Order. This means it goes to the Market Maker at his Sell price! In this case, his sell price was a penny a share! Yikes!!

You may be thinking that this is not fair. The Market Maker in these stocks never imagined a situation where people would be selling at their stub quote prices. Murphy's Law comes to mind here. If there is a possibility that something can go wrong, then it will. In this case, this is what happened.

Think about it from the Market Maker's point of view. If they put out a stub quote of 1 cent a share, then they are actually helping keep the price of the stock up, because this one cent a share Sell price would dissuade investors from selling their stock. They never imagined that what happened on May 6th would actually happen.

The other side of the coin is the shrewd traders who saw these stub quotes and placed Buy Limit Orders. There were several firms that placed orders to Buy these volatile stocks slightly above the stub quote price. For example, they may have placed an order to Buy a stock at $1.00 a share when it normally trades at $50 a share or higher. Since they put in a Buy Limit Order, their orders were filled. Buy Limits are executed at the price requested, in this example, $1.00 a share.

Several of those extreme Buy Limit Orders were filled, but later busted by the SEC. The SEC busted trades that exceeded 60% of their previous 2:40 pm price. However, there were several firms who profited by placing their Buy Limit Orders above the 60% busted trade threshold. In other words, instead of being greedy and putting in their Buy Limit Order at $1.00, they put in their Buy Limit Order at $35 which was within the SEC's 60% threshold. On a $50 stock, they just made a 30% return in a few seconds. These Buy Limit Orders were filled and not busted by the SEC.

You may be thinking that this is not fair either. Well, this is an example of Flash Order Trading. These Buy Orders were most likely not done by some trader at a firm sitting by the computer, but rather by a computer algorithim trading program that is programmed to put in Buy Orders if they see disparate price movements in stocks.

Of course, all the TV pundits are now saying, "..anyone who puts in a market order is a fool." Hindsight is 20/20 I know, but there is no way these TV pundit (idiots in my opinion) knew that a scenario like May 6th would happen. They are just trying to act smart when in reality they are not.

We live in a complicated world today folks. The joint SEC-CFTC report exposes the fact that they cannot trace every single trade order without going to introducing brokers for the information. Personally, I think in order to properly find the culprit, the SEC needs the ability to review every single trade, every milisecond of every single day. Stay tuned, this may take several more weeks, or even months before we see a final report from the SEC-CFTC committee on this issue.

In the meatime, are you sure you want to invest on your own?

Where Art Thou Fiduciary Duty to Clients?

I had an industry email flash come across my screen saying that the Senate Bill on Financial Reform is expected to pass tomorrow. Then, later I heard that the Democrats are in last minute meetings trying to secure the 60 votes needed for cloture. This prompted me to go view the latest version of the bill, Senate Bill 3127 with amendments.

We have heard within the last week that the fiduciary standard of care would be applied to broker/dealers with an exception for Variable Annuities. Looks like the insurance companies were able to get fiduciary duty exempted from their activities, because Variable Annuities are only sold by insurance agents who also have securities licenses. So, it is with great anticipation that I went to the Senate Banking Committee's web site to find the latest version of the bill.

I pulled up the latest version of S. 3127, then I did a search for the word fiduciary. Guess what? There is no mention of the word fiduciary in regards to consumer protection. I am not kidding. I am dead serious.

I guess since the insurance lobby won out on the Variable Annuity issue, then it must have ticked off the lobbyists for the Banks and Broker/Dealers. I'm sure they complained that the Insurance Company lobbyists should not be exempted from the fiduciary duty to consumers while they were subject to it. The Bankers and Wall Street lobbyists, it appears to me, have managed to get rid of the fiduciary duty to consumers  altogether. Banks, Insurance Companies,Wall Street firms and their lobbyists have once again destroyed any chance of getting fiduciary duty protections for consumers, in my humble opinion.

Of course, this is no surprise to me. As I have blogged about over and over again, it is impossible to have a fiduciary duty to clients if you have a revenue quota at your Bank, Insurance Company or Wall Street firm. If these firms had to live by a fiduciary duty to consumers, then they would not be able to require their representatives and agents to meet their revenue quotas. As always folks, it is all about the money.

As long as consumers keep trusting, or excuse me, allowing Banks, Insurance Companies and Wall Street firms to take their money, then they can all count on plenty of lobbying funds for Congress. Let's face the facts. Once this bill passes, it is extremely doubtful that we will see any other massive piece of legislation that will include protections for consumers. As always, Banks, Insurance Companies and Wall Street firms win and the consumer loses. If you do not believe me, look at the credit card reform legislation. Did it help consumers? No. It only helped the credit card companies.

Consumers can win if they make one minor change. Quit doing business with anyone affiliated with a Bank, Insurance Company or Broker/Dealer. Instead only do business with Independent Registered Investment Advisers like me. Independent means no affiliation with any Bank, Insurance Company or Broker/Dealer. None. Nobody. No one. Not a single soul. Not any. Not a single person. Not one iota.

Never again fall victim to the shenanigans of Wall Street. Hey, that sentence is on the cover of my book, Keep Your Assets. Take My Advice. Have you read my book yet? You can find a link to Amazon or Barnes and Noble at the top of this blog page, right under the picture of my book. Thank you very much.

Wednesday, May 12, 2010

The Twenty Minutes of Hell

I hate to see people get hurt on highly volatile days as was the case last Thursday with the wild swings of the stock market. However, I am sure that a lot of people did get seriously damaged financially. I am already hearing stories of people who sold out as a result of being emotionally involved in what was happening last Thursday. There have been stories in the Wall Street Journal about how several people got hurt, some losing over $100,000.

If you put in a market order at the wrong time during that infamous “twenty minutes of hell” stretch, then you could have received back only 1 cent per share on your investment. Market orders go in at the then current price. If you failed to notice the current quote, then you would have been affected severely. People who are emotionally involved and in a hurry often fail to look at the quote when they are selling.
I saw several investments with quotes of only one cent a share on positions that should have traded in a more narrow range. It was one of the craziest things that I have ever witnessed in regard to the stock market and its volatility.
The SEC has come out publicly and said that they could not find the cause of the sudden precipitous drop in the stock market that day. If they do not know after conferring with the major stock exchanges, then perhaps we have a wee bit of a problem here. How can anyone trust the markets if they know the possibility of a repeat scenario can happen?

The SEC just announced today some specific measures to address this critical issue. They revolve around circuit breakers and busting trades. The circuit breakers have no possibility of working when the majority of trades are traded off of the exchanges via computer trading programs.

I do not know anything more than the SEC does, however, I knew that something was probably wrong with some computer trades and the last thing you want to do is try and sell under these kinds of conditions. Further, when the SEC announced that they would bust trades, then that means that those who bought would not get their expected profits and those who sold would not experience their significant losses. It also means that the losses in the market would be put back during that time period. In other words, if the market dropped 1000 points and they were going to put back 60% of that, then this means that 60% of the loss would have to be “bought back.” What I mean is that 600 points in the DJIA would have sell orders eliminated and this would in effect act like 600 points worth of buy orders by the SEC ordering the busting of the trades. Therefore, I knew the market would go back up rather quickly as a result. So far this week, it has recouped over 500 points on the DJIA, just as I suspected.

Doesn’t this make sense? It does make sense when well thought out thought processes factor into decision making as opposed to emotional ones. Granted, I know everyone does not possess the same instincts or intellect, but if you make a promise to yourself not to sell when you are emotional, then you will be better off in most cases.

Believe me when I say it, I have gone to cash before for our clients, but I didn’t do it in a panic. You cannot make decisions to go to 100% cash in a panic like last Thursday. All you will do is regret it.

You cannot let your emotions get the best of you in a situation like this even when we have never before seen a situation like this one.

Lesson learned I hope.

Monday, April 26, 2010

The Taking Control Plan

The Taking Control Plan is a six step process that focuses on eliminating debt, keeping discretionary spending under control, establishing savings accounts for specific goals, building your emergency funds, moving on to fully funding your retirement accounts, then finally taking excess income and adding it to your investment accounts.

The Taking Control Plan Money Flow:
  1. Fixed Expenses Account
  2. Under Control Account(s)
  3. Savings Accounts
  4. Investment Account(s) for Emergency Funds
  5. Fully Funded Retirement Account(s)
  6. Excess Income to Investment Accounts
For a graphical view of the The Taking Control Plan Money Flow, follow this link: TheThe Taking Control Plan Money Flow

For a PowerPoint Presentation on the The Taking Control Plan, follow this link: Taking Control Power Point Presentation

Most people have been trained differently when it comes to handling debt, building emergency funds, adding to investment accounts and retirement accounts. The old and very ineffective solutions for debt management have been things like refinancing one credit card to another with a lower rate, or perhaps taking out a home equity line of credit and moving the credit card debt over to the home equity line of credit. The worst in my opinion is trying to be on a budget. Budgets are boring and nobody wants to be on a budget. These old ineffective solutions are not very smart strategies.

Those of you that know me, understand that I am totally unemotional when it comes to coming up with the best plan to get out of debt. It does not make sense to contribute to retirement accounts when you have credit card debt at 19.95% interest for example. You would have to exceed 19.95% on your retirement accounts in order for this to make any kind of sense and you would have to do it consistently. This is not feasible, it is not realistic and it is simple not smart.

You really should think about The Taking Control Plan and how it makes so much sense in helping people get out of debt, achieve their short term savings goals and also systematically increase their retirement accounts and investment accounts. The Taking Control Money Flow is important to making this work. It all needs to be done in order. There is a method to my madness, if you will.

Instead of my trying to explain it all in this blog post, I would prefer if you follow the links above where it will make more sense.

If you are in FL, KY, IN or TX, then I can help you right away with The Taking Control Plan. The fee for this valuable service can be as low as $50 a month. This is a very reasonable fee to have total control over your financial life.

If you are in other states, then we need to discuss how I may still be able to assist you through de minimus exemptions or by obtaining additional licensing in advance. You can go to my website at and click on the Contact button where you can submit me a brief contact request.

Remember the ultimate goal: Get out of debt, achieve Savings Goals, build emergency funds, fully fund Retirement Accounts and add excess income back into your Investment Accounts. It all make tremendous sense and I think you will agree after you review the above links.

Thank you very much.

Monday, April 19, 2010

How FINRA Registered Representatives Steal Your Money

It is now gettting to the point where I can almost guess how a typical Wall Street firm invests their client's accounts. It is patently obvious that they invest client's money in a manner that always benefits the firm and the FINRA regulated registered representative. Never does it benefit the client, in my opinion.

A case in point. I just received an account transferred from a major Wall Street firm. In this account, there were 7 mutual funds. On the surface you might think this was properly diversified if you only go by the names of the funds. The asset classes involved were:

Large Growth
Large Value
Small Cap Growth
Small Cap Value
High Yield Bond
Core Bond
International Value
Health Care Sector

There are however, a couple of problems. FINRA says that if you invest in mutual funds, that you should invest all the proceeds within one mutual fund family in order to get the commission breakpoints for the client. The breakpoints means that the client can pay less in commissions if they invest in one mutual fund family.

In this case, we have 7 mutual funds and 6 different mutual fund families. The reason this was done is because the FINRA regulated registered representative wanted to earn the highest possible commission that they could. Therefore, the way they invested this partcular client's money, the FINRA regulated registered representative earned the full 5.75% in commission on each mutual fund. If this FINRA regulated registered representative, instead would have put them all with one family, then they would have earned significantly less commission.

This is so typical and something that I see so often it is criminal in my opinion.

The other problem that I have with this is that the Wall Street firms have commission production quotas for all of their FINRA regulated registered representatives. No doubt, this client was the victim of someone trying to meet their Wall Street firm's quota.

The problem with quotas and revenue production requirements are that they benefit the Wall Street firm first, the FINRA regulated registered representative second and supposedly the client last. In this case however, this account was very poorly diversified and heavily weighted to equities, so it was of no benefit to the client in my opinion.

As readers of my book know, if you have 80 -100% invested in equities, then you can be assured that you will have significant volatility and a portfolio primed to take a big fall. Even after the recent comeback of the equities market, this account was still down almost 30%. Thirty percent! Like I said, this kind of advice is criminal in my opinion.

While this client was with this Wall Street firm, there is no doubt that churning inside the account occurred. Churning is where one 5.75% mutual fund was sold and another one from a different mutual fund family was bought. The purpose of course was to generate more commissions for the Wall Street firm and the FINRA regulated registered representative.

Welcome to the world of SUITABILITY. According to FINRA, this is all perfectly acceptable and meets their definition of SUITABILITY. If you are doing business with a Wall Street firm and a FINRA registered representative, then you can bet your bottom dollar you will be low man on the totem pole.

There is a better way. Work with independent registered investment adviser firms whose investment adviser representatives are subject to a FIDUCIARY standard. A FIDUCIARY standard is where the investment adviser discloses all conflicts of interests in writing, in advance and does things in your best interest. Wall Street firms have the money, so they blanket the airwaves with touchy feelly ads trying to convince you that they will look out for you. Sadly, most of America falls for these ads and does business with these Wall Street firms at a significant cost to their financial future.

No dual registered representatives either. A Wall Street firm's FINRA regulated registered representative may tell you that he or she is also an investment adviser representative for a registered investment adviser. However, this is a trap. The indisputable fact is that it makes no difference whether a FINRA regulated registered representative is also an investment adviser representative for a registered investment adviser. The reason is that these people still have commission and revenue quotas. They still have to meet their quotas to keep their job. Once again, this means the Wall Street firm benefits first, the FINRA regulated registered representative and dually registered investment adviser representative benefits second and you, the poor client last. My point is the client does not benefit at all by working with these Wall Street firms.

You need to get out while the getting is good. Move to a totally independent registered investment adviser firm with no Wall Street firm affiliation. You will be glad that you did.

Thursday, April 15, 2010

Lost Ball in the High Weeds - Dodd's Financial Reform Legislation

It is very interesting to see how the media portrays Senator Chris Dodd's Financial Reform Legislation. Even, the media outlets in the financial services industry have no clue. Let me help the people who do not know how to read or who are too lazy to read the bill.

As I reported in a prior blog post, there are a confusing array of new bureaucratic organizations that will be created with this bill. Just what we need, more government bureaucracies.

See my March 16th, 2010 post entitled, "More Bureaucracies and More Studies"

These are the new government bureaucracies that are in the Dodd Bill.

Financial Stability Oversight Council
Office of Financial Research
Orderly Liquidation Authority Panel
Office of National Insurance
Investor Advisory Committee
Office of Investor Advocate
Bureau of Consumer Financial Protection
Consumer Advisory Board

I just have to wonder. Since Senator Dodd is retiring from the Senate, do you think he may have created an agency, advocacy, board, committee, council, panel, office or bureau that he may himself want to be a part of in his retirement? No. Say it ain't so. Would he?

Perhaps some of his cronies will be appointed to one of these agencies, advocacies, boards, committees, councils, panels, offices or bureaus. Do you notice when the government writes legislation and they are trying to create more bureaucracies, then find themselves in a predicament. They cannot name all of their groups Councils, or Committees. They have to come up with different names like panel, advocacy, office or bureau. How stupid do they think we are?

Take a look at the last four on the list. Now, you tell me...which one of these will have more authority and which one of these will really protect consumers? The Investor Advisory Committee or the Office of Investor Advocate? Perhaps, the Consumer Advisory Board will have the most authority, but wait, the Bureau of Consumer Financial Protection has the best name. After all, it has the word bureau in it which is where we derive the term bureaucracy.

Now, we have not even started our blog discussion on the budgets for each of these groups. I can just imagine the waste of federal money that will be lost in these agencies, advocacies, boards, committees, councils, panels, offices or bureaus. Another example, of your federal tax dollars at work people.

If you think the above list contains a lot of bureaucracies, then look at all of the studies that are to be done required in the Dodd bill.

1. GAO study and report on accredited investors
2. GAO study on self-regulatory organization for private funds
3. SEC Commission study and report on short selling
4. GAO study of non-admitted insurance market
5. Study on treatment of credit card banks, industrial loan companies, and certain other companies under the Bank Holding Company Act of 1956
6. Study and report on implementation related to Security-Based Swap Markets
7. Study and rulemaking regarding obligations of brokers, dealers, and investment advisers
8. Study regarding financial literacy among investors
9. Study regarding mutual fund advertising
10. GAO study and Federal agency review of required uses of nationally recognized statistical rating organization ratings.
11. SEC study on strengthening credit rating agency independence
12. GAO study on alternative business models
13. GAO study on the creation of an independent professional analyst organization
14. GAO study of increased disclosure of Municipal Securities to investors
15. GAO study on the Municipal Securities markets.
16. Study of funding for the Government Accounting Standards Board.
17. GAO study on proprietary trading
18. GAO study on the effectiveness and impact of various appraisal methods

People, this is how the government keeps the juggernaut going with endless studies that need endless amounts of funding. Ridiculous.

These people in Congress who write this garbage are "lost balls in the high weeds." We need to vote them ALL out of office this fall.

I believe in the American Voter. This fall, we will start the process to take back our country.

Stay tuned.

Thursday, March 25, 2010

Remember When I Said...

That Promissory Notes are nothing but Ponzi Schemes? I know that I am beginning to sound like a broken record on this subject, but apparently there are people out there that still are not listening. Low and behold the SEC has charged a New Mexico realtor with fraud and obtained an emergency order to stop him from continuing to sell these Promissory Notes. Of course, he is innocent until proven guilty, but the SEC says he offered investors high returns from 10 to 25% over one to three years. Are you kidding me?

I am truly sorry that people lost their money, but come on people? This was a too good to be true example, if there ever was one. Can you honestly look me in the face as an investor that invested in this garbage and tell me that you thought it was possible to earn 25% over a three year period? Oh but Rick, it was real estate and this guy was a well know realtor in the community. Hogwash. You know better.

The investors who bought into this garbage have to take responsibility for their poor judgment. Read my lips. Promissory Notes are nothing but Ponzi Schemes. Promissory Notes are on Rick's Do Not Buy List, so I am better off not falling for the Promissory Notes trap.

Here is the link to the SEC Press Release on this case. Read it and weep.

Monday, March 22, 2010

The Financial Planners Act of 2010

Once again, Wall Street has managed to get their loopholes in yet another piece of legislation. The Financial Planners Act of 2010 defines what financial planning is and requires anyone who holds themselves out as financial planners to be registered as a "registered financial planner" and subject to a yet to be named financial planner oversight board. This is already a requirement of the Investment Advisers Act of 1940.

The definition of financial planning is defined in this FP Act and anyone who works for a broker/dealer, bank or insurance agency can offer financial planning services, as defined, without having to be a registered financial planner. There is even a loophole that they can have the Certified Financial Planner designation on their business card, but still not be considered as holding themselves out as a financial planner. Or, they could have the Chartered Financial Consultant designation or the Personal Financial Specialist designation and as long as they do not hold themselves out as financial planners, then they do not have to do things in the best interest of the client.

Forgive me but doesn't this seem a*% backwards? Take for example, someone like me who is a Certified Financial Planner and also an Investment Adviser Representative for a Registered Investment Adviser. I am required to do things in a client's best interest. I pay fees to keep my CFP designation. I pay fees to be an Investment Adviser Representative and fees to be a  Branch Office of a Registered Investment Adviser and yet more fees to be a Registered Investment Adviser firm. With this new act, I will now have to pay more fees to be a "registered financial planner." However, the loophole financial planners who do not have to register will not be subject to the ethics and disciplinary oversight of this new board. Yet, they can put CFP on their business card just like me. Of course, this will in no way shape or form confuse clients, will it? How is a client to know who is a registered financial planner and who is not? Will I be allowed to put registered financial planner on my business card and marketing materials? I doubt it. The confusion will persist for clients in trying to figure out if a CFP is also a registered financial planner.

It doesn't take a smart person to figure out that if I can get by with a loophole, then I am going to try and get by with the loophole. Why should I pay more fees and be subject to an oversight board if I just avoid holding myself out as a financial planner? I suspect the broker/dealers will not allow their registered representatives to hold themselves out as financial planners. I further suspect that insurance companies will not allow their agents to hold themselves out as financial planners. Finally, I am sure that banks will do the same. The end result is the people who are already holding themselves out as financial planners and are already registered as investment adviser representatives will now be registered financial planners.

When you think about it, is any real meaningful thing being accomplished here? Other than adding another layer of bureaucracy, I do not think so.

Hopefully, at some point in time with proper education of consumers it will mean something to be a registered financial planner. Time will tell.

Wednesday, March 17, 2010

Remember When I Said...

Regulation D offerings were on my Do Not Buy List? Apparently, the regulators agree with me. At the bottom of this article, you will find a couple of instances where firms were touting Regulation D offerings to investors. Low and behold, they turned out to be Ponzi schemes.

Here is the article:

I'm telling you. You do not want to invest in anything on my Do Not Buy List. Unless of course, you want to lose all your money.

Here is the link to the Do Not Buy List in case you missed it.

Stay smart out there.

Tuesday, March 16, 2010

More Bureaucracy and More Studies

Come on. Did you really think that Wall Street firms were going to allow any legislation to be enacted that changed the game for them? Neither did I.

The Senate bill put forth by Senator Dodd is called the Restoring American Financial Stability Act of 2010. There is a whole lot more bureaucracy in it. Look at the new government entities that will be created if this passes.

Financial Stability Oversight Council
Office of Financial Research
Orderly Liquidation Authority Panel
Office of National Insurance
Investor Advisory Committee
Office of Investor Advocate
Bureau of Consumer Financial Protection
Consumer Advisory Board

Take a hard look at the above list and tell me who is in charge? Does the Investor Advisory Committee have more authority than the Bureau of Consumer Financial Protection? Or, does the Consumer Advisory Board have more authority than the Office of Investor Advocate. Or, does the Office of Investor Advocate have more authority than the Bureau of Consumer Financial Protection. Of course, it is easy to figure this out, isn't it?

Then, let us not forget the very effective use of tax dollars that call for a study to be done. (Yes, I am being facetious.)

GAO study and report on accredited investors
GAO study on self-regulatory organization for private funds
SEC Commission study and report on short selling
GAO study of non-admitted insurance market
Study on treatment of credit card banks, industrial loan companies, and certain other companies under the Bank Holding Company Act of 1956
Study and report on implementation related to Security-Based Swap Markets
Study and rulemaking regarding obligations of brokers, dealers, and investment advisers
Study regarding financial literacy among investors
Study regarding mutual fund advertising
GAO study and Federal agency review of required uses of nationally recognized statistical rating organization ratings.
SEC study on strengthening credit rating agency independence
GAO study on alternative business models
GAO study on the creation of an independent professional analyst organization
GAO study of increased disclosure of Municipal Securities to investors
GAO study on the Municipal Securities markets.
Study of funding for the Government Accounting Standards Board.
GAO study on proprietary trading
GAO study on the effectiveness and impact of various appraisal methods

The poor GAO. Those guys will be doing studies for years. Well, look at the bright side. They will have job security. Hey, wait just a minute. Is this giving job security to government workers, instead of the private sector? Unfortunately, it is true. No private sector study jobs will be created by this bill, I do not believe. It appears that it all will go to the government.

This paints a clear picture of why we should vote these people out of Congress, don't you agree? This type of bill is purely ridiculous. All it does is create more bureaucracy and cost the taxpayer yet more out of their pocket. We have not even seen the Health Care bill yet. I wonder how many new bureaucreacies and studies it creates?

Vote them out. Vote them all out.

Thursday, March 11, 2010

Credit Default Swaps Worry Me

Typically, in a normal transaction where you are betting on the direction of a stock, you can buy a call, which means that you think the price of the stock will go up. Conversely, someone on the other side will buy a put, because they think the stock will go down. One of them will be right and the other will be wrong.

What if you wanted to make a bet against Greece's Sovereign Debt? For example, you would buy a Credit Default Swap that you think Greece's Sovereign Debt is going to default. If you are right, then you get paid by a counterparty, like AIG.

The problem arises when you do not have to own any of Greece's Sovereign Debt. You can speculate all day long that Greece may default. If you have a ton of money, theorectically, you could buy tons of Credit Default Swaps and by doing so, you are in effect putting undue pressure on Greece's Sovereign Debt. As a result, speculation could in effect destroy the credit rating of Greece's Sovereign Debt.

Personally, I do not think that anyone should be allowed to speculate in this manner. This is exactly what got AIG in trouble. All these speculators bought Credit Default Swaps and AIG was the one selling them. There were so many speculators with tons of money who bought tons of Credit Default Swaps, that there was no way for AIG to pay them all their speculative gains. Therefore, the U.S. Government came to the rescue.

As of today, nothing has changed in regard to this type of Credit Default Swap speculation. As a result, I expect to see history repeat itself.

This is like if I wanted to short a stock, I could do so and not have to find someone who will allow me to bet against their stock. If I can go "naked," then I could speculate wildly on just about any stock. You are supposed to only be able to short stock if you can borrow it. The problem with the Credit Default Swaps is that they are going "naked." They do not have to borrow or own, for example, any of Greece's Sovereign Debt. Therefore, in my opinion, they could take down Greece's Sovereign Debt with a ton of speculative bets.

I do not know about you, but I do not like this situation at all.

Stay tuned.

Thursday, March 4, 2010

Section 7103. Establishment of a Fiduciary Duty

Okay. They are finally getting close to passing this law, but it includes a study that may delay its implementation for a few years. It seems that the government wants disclosure for retail customers, but they do not know what a retail customer is, so they have to have a study. In addition, they want disclosure for retail customers, but they have to have a study to determine what to put in that disclosure to retail customers.

Right now, their definition of a retail customer is:

(A) receives personalized investment advice about securities from a broker or dealer; and
(B) uses such advice primarily for personal, family, or household purposes.

Of course they are not sure about this, so there will be a study to determine the proper definition of a retail customer.

A couple of things jump out at me in this definition. Registered Investment Advisers must be exempt, because they are not listed in Section (A) above. (See page 1278 of 1705 lines 7, 8 & 9)

I guess that a retail customer is something that only brokers or dealers work with, not investment advisers according to this bill.

The second thing that I noticed is that in Section (B) above, there is no provision for "businesses, charitable organizations, pension plans, or trusts." I guess the House Financial Services Committee does not think that these need the same protections as their definition of retail customers.

Another curious thing that I find in this bill is that the term "customer" does not include an investor in a private fund managed by an investment adviser, where such private fund has entered into an advisory contract with such adviser. Excuse me, but would not the scandulous Mr. Bernard Madoff be considered a manager of a private fund? Or, would not the feeder funds that feed Mr. Bernard Madoff money, be allowed to continue business as usual as a result of this exemption?

Of course, the more I read into this Section 7103, the more errors that I find. Now, I see later in the bill that they added investment advisers to the definition of a retail customer. See page 1280 line 10. This must be a staffing mistake. Why is it not on page 1278, but it is on page 1280? Looks like the makings of a Technical Corrections Bill that will follow. Unless of course, someone reads this blog and fixes it beforehand.

Later in the bill, brokers or dealers are going to be subject to not only FINRA rules, but also the same rules that investment advisers are subject to upholding. Wall Street firms must have slipped on this one. I am surprised that they did not lobby out of this one. After all, there are a ton of brokers out there and dealers too, who have blemishes on their record. Routinely, these brokers and dealers have not had to tell their customers about their backgrounds. Apparently, now, if they are subject to the same rules as investment advisers, then they will not only have to tell their customers about their backgrounds, they will have to do so in writing. This goes for insurance agents and insurance company broker/dealers. This will be a interesting development. I know several advisors who have fines, suspensions and the like on the records, but they never tell their customers about them. What do you want to bet that these type of unscrupulous advisers fail in their efforts of full disclosures?

This rule ends with the granting of the SEC to obtain a study to determine what a retail customer is, what potential conflicts of interest are presented, the differences between investment advice from various providers like brokers, dealers or investment adivsers. Then, after the completion of the study, the law gives the right to the SEC to implement the rules.

The major points of this study that they need to clarifiy are the following:

1) what is a retail customer? (I'm not kidding.)
2) what is the range of products and services sold or provided to retail customers and are the sellers under the watchful eye of the SEC?
3) how are these products or services sold to retail customers, what are the fees and conflicts of interests that may arise as a result?
4) what should customers receive prior to purchasing these products or services and who is the appropriate person or entity to provide such information?
5) they want to ensure that reasonably similar products and services are subject to similar treatment and disclsoure requirements.

Did you notice that I did not mention anything about a fiduciary duty? Well, the Wall Street firms may believe that they have dodged a bullet, but guess what? The fact that this bill, like I mentioned above, subjects brokers or dealers to the same rules as investment advisers, this means that they will be subject to the fiduciary duty requirements. Whoops! Wall Street needs some new lobbyists. They failed to catch this one.

Boy. I do not know about you, but I feel a lot safer now for "retail customers," don't you? I sure am glad we have the government to take care of us. Yes, I am being facetious.

Remember When I Said...

Promissory Notes are nothing but a Ponzi scheme? Well, once again, yours truly has been proven correct. Of course, the folks in this press release are innnocent until proven guilty in a court of law. Here is the link:

It seems that this couple promised returns of 9 and 16 percent to investors. That right there should have been your first clue that this was bogus. Oh but, Rick it was a real estate investment. Well, that certainly makes all the difference...NOT! No it does not. It does not matter what it is as far as I am concerned. Promissory Notes are nothing but Ponzi schemes. They are structured EXACTLY like a Ponzi scheme. Investors put in money and are paid interest on their own money. As long as new investors keep coming in, then investors keep getting paid. However, when the stream of new investors stop, then the original investment somehow mysteriously disappears into "an investment." Like a great real estate investment. Of course, you cannot get your money back, because the "investment" has to have time to grow. After all, they told you this going in. Don't you remember?

Get this people. Promissory Notes = Ponzi Scheme. Do not EVER invest in a Promissory Note. If you do, plan on being a victim.

Be smart out there.

Thursday, February 18, 2010

The Johnson Amendment

No. Not this Johnson. Senator Tim Johnson, a Republican from South Dakota who has put forth an amendment to peform a study on the Fiduciary Duty. An 18 month study no less.

Didn't the SEC already do a study on the fiduciary issue called the Rand Report? As a matter of fact they did in 2008. A lot of good it did as we all know by now.

Once again, the consumers of America are getting pushed aside due to political posturing on both sides of the isle. Get this people. Wall Street has all the money to pay for lobbyists and consumers do not. Therefore, it would take "an act of Congress" to change the status quo in Washington, D.C. right now. I am not holding my breath. They are not going to pass any meaningful legislation around fiduciary duty protections for consumers. As I stated in a prior post, as long as you have revenue quota requirements from Wall Street firms, you can never have a fiduciary duty for consumers. It is simply impossible. There is no way you can argue the point otherwise.

If you are a consumer, then do not expect much to happen in your favor. Unless of course you do business with a financial advisor who really does things in your best interests and has no relationship whatsoever with a Wall Street or FINRA firm. These fine folks are called Registered Investment Advisers.

Tuesday, January 26, 2010

Remember When I Said...

In a prior blog post, I listed my Do Not Buy List of products typically sold by broker/dealers and their registered representatives, but sometimes sold by unscrupulous investment advisors and non-registered people purporting to be investment advisors. The main reason that they sell these is because they typically pay large up front commssions in the 8 to 10% range of the initial investment.

With this article, you will receive a bonus education regarding investments on my Do Not Buy List. Two of the investments on my Do Not Buy List, both Promissory Notes and Private Placements are mentioned in the article. See this link for the sad story:

Once again, I have been proven correct that these so called "investments" belong squarely on my Do Not Buy List. By the way, do not buy means do not buy ever!

One of these days, people may actually save themselves the misery and listen to what I have to say.

Friday, January 22, 2010

Same Old Song

The Democratic party received a stunning wake up call this week when Scott Brown won election to the U.S. Senate. However, I am dismayed that we are hearing the same old song. When Democrats do not like something, they vilify it. They disparage it. They throw insults. Those who do not follow their liberal agenda are attacked over and over again.

Today's speech by the President fit the Democratic playbook to a "T." He attacked the big banks as those who caused the problem. He is going after them to make sure that we will not have the "too big to fail" problem again. On the surface this sounds fair, but if you peel back the onion a little, then you will find that it is superficial.

What I mean is...if the government doesn't step in and prop up the banks the next time they do something "stupid," as the President put it, then market forces will solve the problem.

Do not get me wrong. I am not a big fan of Wall Street firms. However, there is plenty of blame to go around here. This is exactly what the Democrats like to do, play the blame game, instead of accept responsibility for their own actions. The Democrats are the ones who passed the legislation forcing banks to accept mortgages from people who could not afford them. Somehow, they have skirted responsibility for that major snafu.

I truly believe that the Democrats are now attacking the big banks, because it deflects criticism away from themselves. They know that most Americans do not have a very high opinion of Wall Street banks. Therefore, in their effort to try and shore up support for the Democratic Party, they trot out the same old song. Make someone or some group your enemy, then attack, vilify and disparage them.

If I could give some political advice to the people advising the Democrats, then I would simply say...

"It is jobs and the economy stupid."