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.

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.

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.