Monday, January 24, 2011

SEC Staff Study on Investment Advisers and Broker-Dealers

Click the link for the Study on Investment Advisers and Broker-Dealers. 

Everybody has opinions and I am no different. The views expressed herein are the opinions of Rick Johnson.

It appears to me that the SEC Staff is biased toward keeping the status quo. They recommend against eliminating the broker-dealer exclusion from the definition of "investment adviser" in the Advisers Act. They also recommend against applying the duty of care and other requirements of the Advisers Act to broker-dealers. The SEC Staff apparently believes that what registered representatives do is essentially the same thing as what investment adviser representatives do. I for one, beg to differ.

Investment Advice from a Wall Street firm

If you as a client were to walk into a Wall Street firm for investment advice, you will most likely be sold some combination of these products:

Mutual Funds
Variable Annuities
Unit Investment Trusts

Let me delve a little deeper into why I do not think this is good for investors. Wall Street firms routinely buy large blocks of shares of stock that they in turn sell to their customers. They may have bought the stock that they recommend to you at $30, but sell to you as a recommendation at $35. As an investor, you may be misled into believing that all the Wall Street firm made from the stock recommendation was the $29.95 they charged in trading commissions. Did you know this?

When mutual funds are recommended, in a lot of cases, the Wall Street firm recommends a favorite set of mutual funds. Technically, their compliance department only approves a limited number of mutual fund families that their registered representatives can recommend. Wouldn't you know it, the stock mutual funds that they recommend have a 5.75% sale commission on them.

When a Wall Street firm sells you some bonds, they charge a markup. Legally, they can charge you up to 5% markup on the bond. You as the investor do not see it, because it is built into the price of the bond. For example, if a bond's price is 100 to the Wall Street firm, they may sell it to you at 102.50. The registered representative usually doesn't bother to tell you this when he is recommending it. Most of the time, the registered representative probably does not even know what his Wall Street firm is making on each bond. However, I can guarantee you one thing. They are making money on the bonds they sell to investors.

Variable Annuities carry high commission charges and ten years or more surrender penalties. Oh, I almost forgot. They have high expenses, too. Did you know that you could pay a registered representative 6 to 8% in commissions if you buy a Variable Annuity from them? Did you know that there are Variable Annuities with no sales charges, no surrender penalties and low expenses? I wonder why your Wall Street firm registered representative did not tell you this?

Personally, I cannot stand to see Unit Investment Trusts in an investor's portfolio. Right away, I know that the investor may be locked into this investment for a period of time and there may be significant restrictions on selling the UIT as they are called. Most of these UIT's have a sales commission of 3.95% or so. They may defer some of it, because after all, they know that their investors are locked in to the investment anyway. This does not seem like much of a benefit to investors to me.

Strangely enough, I searched the entire SEC Staff Study and could not find one reference to quotas. Each Wall Street firm's registered representative has what is known as a revenue quota, or "nut to crack." This was an egregious omission in my opinion. Most of the large Wall Street firms require their registered representatives to produce $250,000 to $300,000 in revenue for the firm. How do they do this? By selling investors stocks, mutual funds, bonds, Variable Annuities and Unit Investment Trusts. It is really very simple to understand. Registered representatives for Wall Street firms have to produce revenue to keep their jobs. As a result, they sell products that make them the most revenue, not because they want to, but because they have to, otherwise they risk losing their job. Before you start feeling sorry for them, ask yourself "How does selling me products that pay high commissions benefit me and my goals, needs and objectives?" The truth is that it does not benefit you. It benefits the Wall Street firm first and their registered representative second. Investors are third on that list, unfortunately.

The last sentence of the Executive Summary of this SEC Staff Study says, "The Staff developed its recommendations with a view toward minimizing cost and disruption and assuring that retail investors continue to have access to various investment products and choice among compensation schemes to pay for advice." If you analyze this statement with with I just explained above you will see that the SEC Staff believes it is okay for you to be sold various investment products, (described above) choice among compensation schemes to pay for advice. (I think they mean commissions and fees.) I am curious as to their use of the word "schemes" in that sentence.

They are right about the investors having a choice. You can refuse to do business with any Wall Street firm whose first priority is themselves. This includes Banks who own most Wall Street firms today, too.

Monday, January 17, 2011

Never Pass Up an Opportunity

Yesterday, my wife called me and said she was picking up the girls from the mall and was going to drop off a few of them at our house, pick me up, then drop the last one off before we headed on to our Catholic Parish. We usually go to five o'clock mass, in case you're wondering.

As was typical, we were going to be late by five minutes or so. Normally, I do the driving, but this time I let my wife drive. After we dropped off the last girl, we were on our way to church. However, right at the corner, before we turned right to go to our church, there was Jim. Before I explain what happened this Sunday, let me explain a little bit about Jim.

I met Jim one day over by our neighborhood Starbucks sitting on a bench. He is a big man who walks up and down this area of our neighborhood quite often. His hair is a mess and I do not think he has shaved his beard in quite some time. I think that when Jim receives a gift of cash from someone, he gets to eat that day. Jim, you see, is homeless. I've seen Jim with worn out clothes and shoes. Every now and then, he will have on a different coat or clothing. You see, he depends on the generosity of others for his day to day needs. He never bothers anyone. He doesn't ask for anything. You will never see him holding up a sign asking for money. Jim simply believes that God will take care of him. Believe it or not, he is a man of great faith. On this particular day, I walked up to Jim and asked him if I could give him some money. The first thing out of his mouth was "God Bless You." He wanted to know my name, so I told him. We had a brief chat that day. However, when I looked into Jim's eyes that day, I recall thinking that I was looking into the eyes of Jesus.

Luke 10:3 And turning to his disciples, he said: Blessed are the eyes that see the things which you see.

Usually, I go around with little or no money in my pocket. I cannot tell you how many times, I will see Jim and not have a dime on me. One day, when my wallet was empty, I went through a nearby ATM and got some cash and tried to find Jim again, but I just simply could not find him. He had walked away before I could find him. I was discouraged that day and was looking for another opportunity.

On this recent Sunday, I told my wife to stop so I could give Jim some more money. I rolled down the window and said to Jim, "Hi Jim. God Bless You" and handed him some money. Jim seemed a little surprised that I knew his name. He probably did not recognize or remember me, but that is perfectly alright with me.

I truly believe that this recent Sunday was one of those times when you are given an opportunity or choice to do something for someone else. You can either do something about it, or let the opportunity pass by. I often wonder how many times other people get this same opportunity and choose to pass right by Jim as if he was not there. I'm sure Jim is used to lots of people passing him by everyday. Yet, he never asks for anything. He relies solely on the generosity of others and his faith to get him through each day. He is grateful for those who help him. However, I can tell you that there is no greater feeling than doing something for others, no matter how small it may seem at the time.

Of course, while I was in mass, my thoughts and prayers were for Jim.

Someday soon, you will have an opportunity similar to mine. What will you do?

Monday, January 10, 2011

Brother, Oh Brother Did They Name Their Printer Company Right

Being a small businessman, every now and then, I like to improve my office efficiency. I was in need of a color laser printer that could also fax, scan and copy. After a diligent search, I settled on a Brother printer. I was excited to get it out of the box. I went through the whole process and walla! It did not work. I was getting this message of "Drum Error." This message generally means that your toner needs to be replaced. I just opened them. How can they possibly need to be replaced? They are brand stinking new!

I hate to take stuff back to the store. The printer should work right out of the box, but unfortunately for me it did not work. So, I did all the typical stuff it said to do in the User's Manual, yet nothing helped. I sent an email to their support department and they returned an email that basically told me to do everything that I already did.

Today I decided to call their Customer Service department. Keep in mind, I have had this printer all of two days. The first lady was real nice and helpful. I did everything that she said and it still did not work. Of course you know that I was not speaking to tech support yet. This lady was the pre-tech support person. I have to have had a problem that she could not fix, before I was sent to the real tech support person.

Finally, I was sent to the real tech support person. Now, what you will not find on their web site anywhere is what he asked me to do.

  1. Remove all the toner cartridges.
  2. Put the yellow toner cartridge in the black slot, then tell him what the LED screen says. It said No Toner. (Did he say put the yellow toner in the black slot? Why didn't I think of that?)
  3. Then, he asked me to take out the yellow one and put in the cyan toner cartridge in the black slot. It also said No Toner.
  4. Then, he asked me to take out the cyan one and put in the magenta toner cartridge in the black slot. Again, it said No Toner.
  5. Finally, he asked me to take out the magenta one and put the black toner cartridge in the black slot. It said "Drum Error."
The result of all this was that this confirmed for him that my black toner cartridge was bad. He is sending me a new one.

Now, I ask you, would you have had any idea to do the five things that he asked me to do? Of course, not, unless you are a Brother tech support person.

I think they need to put these 5 things on their web site or in their User Manual. What do you think?

I will know later if replacing the black toner cartridge worked or not. I hope it does, I would hate to have to set the machine on fire while making a You Tube Video for the whole world to see.

Thursday, January 6, 2011

Are you looking for a way to keep up with all your accounts? I mean your checking, savings, investments, credit cards, mortgages, HELOC's and loans. If so, then you ought to take a look at They have a really nice and simple site that can download everything into one place for you. If you have all your password log in's handy, then it probably will only take about ten minutes to setup. What is nice about it is the fact that you will have a quick overview of everything financial in your life. Who doesn't need that?

One of the nice features in it is the budget area. It shows you how much you normally spend per month in different areas like groceries, restaurants and the like. Then, it compares your day by day spending to a moving bar. If you are spending less in a category, then you will be behind the daily bar. If you are spending more in a category, then you will be ahead of the bar. If you are ahead of the bar, then you will know that perhaps you are spending too much in that area. A simple little process of keeping you on track is what most people need. We do not need any more complexity in our lives, do we?

A lot of Certified Financial Planners, like me, recommend it because it allows us to look at your whole financial picture (when you give us permission) and see if we can offer suggestions for improvement.

Take a look at if you have not already. I think you will like the simplicity of it, plus the fact that it helps you keep it together.