Thursday, February 17, 2011

Help Me Understand Why This Keeps Happenning

After you have been doing what I have, for as long as I have, I hate to say it, but...the things that I wrote in my book, Keep Your Assets. Take My Advice™ are more relevant than ever. Let me take you through the thought process of all too many investors.

I speak to people who may come to our firm as a result of a bad experience some place else. Without fail, it is because they lost money at either a bank or a Wall Street firm. Typically, the story goes like this:

"I had some money with a big brand name bank guy who put me in a portfolio of mutual funds. When I started with him, I had over $800,000. When 2008 hit, all he kept telling me was to "Hold on. It will come back." (Where have I read that before? Oh yea. My book.) Of course, I lost all the way done to under $400,000. So, I moved my account away from my big brand name bank guy and went to a Wall Street firm guy. (Where have I heard that before? Oh yea. My book.) The Wall Street firm guy was no better. He knew I did not like mutual funds, so he put me in stocks. The problem was that he never watched them. He made some bad stock picks. There were no stop loss orders, puts or anything to protect my money. Over a year later, I am still around $400,000. So, this brings me to your firm to find out what you can do for me. Here are my demands if you will. I need to make a lot of money to make back what I lost. (Where have I heard that before? Oh yea. My book.) I want to be aggressive, but I want to also protect my money from losing anything. I need about $1,200,000 to retire and I want to do it in a few years. What can you do for me?"

Of course, I am thinking to myself...didn't this guy read my book? Apparently not. If he did he would know that you never do your investment business with a bank or Wall Street firm. The price for this fictional character was $400,000. If I were to walk up to you and say "give me $800,000 and let me turn it into $400,000 for you," then you would think that I was crazy. However, this is exactly what you are risking when you go to a bank or Wall Street firm. This is not atypical, but rather is very typical of what happens to people who get their investment advice from a bank or Wall Street firm.

When you, as a client, walk into a bank or Wall Street firm with $800,000, then they are going to do everything they can to maximize their commission revenue from that amount. They have no incentive to keep that $800,000 up or to grow it. Why? Because they already made the most that they could make when you walked in the door with the $800,000.

Then, after you take your account to the Wall Street firm, you give them to opportunity to maximize their commission revenue on the $400,000 or so you have left. The Wall Street guy is kicking himself wishing that he met you when you had $800,000, because he would have been able to double what he made on the $400,000.

Get this point if you get nothing else the rest of your life.

The banks and Wall Street firms do not care about the success or failure of your account. They have no incentive to care. All they care about is maximizing the most commission revenue that they can from you. Period. Point blank. End of story.

A registered investment adviser on the other hand has its compensation aligned with the success or failure of your accounts. If your $800,000 goes down, then their compensation also goes down. If it goes up, then their pay also goes up. Now, let me ask you a question. If your compensation had the opportunity to increase the more successful you were at making investment decisions for your clients, then wouldn't you put a lot of effort into what you do? This is my point exactly.

Conversely, if your compensation as a registered investment adviser went down if your client's accounts went down, then wouldn't you do everything you can to make sure that their investment portfolio was focused in the right areas given the current market environment? Further, wouldn't you treat that account as if it were your own? Is this sinking in yet?

Registered investment advisers who are paid on the success or failure of a client's investment account are more apt to be on top of things as opposed to a bank or Wall Street firm who has already gouged you for all they can get on the front end.

Here is an example of something that I did to prove my point that registered investment advisers will make a move to protect client assets. If I had a client with $800,000 and I let their account go down to $400,000 then, I would have let my compensation be cut in half. This is not smart. It is stupid.

I moved my clients to cash on October 6, 2008 and back into the market, May 8, 2009. Go look at a chart of the S&P 500 during that time period. Find October 6, 2008 on the chart and imagine you were 100% cash. Then, find May 8, 2009 on the chart and imagine you got back into the market at that point. Then, tell me if this was good or not.

Here is another problem with my fictional but based on real life example. This fictional guy went to a bank. He lost money, then went to a Wall Street firm where he didn't do anything but tread water. Between the two, it cost him $400,000 and a several years of getting towards his retirement goal. I say several years because his retirement goal is $1,200,000. In order to turn $400,000 into $1,200,000, you need a 300% return. Yikes! (Where have I read this before? Oh yea. My book.) As my luck would have it, my fictional client expects me to turn his $400,000 into $1,200,000. Would you agree that the fictional client's expectations are a little out of whack? Believe or not, people like this, do not think they are being unreasonable at all. Obviously, they now have a very low opinion of financial advisors in general, so now I am guilty until proven innocent. Now you know why I hate banks and Wall Street firms.

Here is your first clue about the people giving investment advice at banks and Wall Street firms. They are not "financial advisors." They just use the title to convince people to do business with them. Why do you think the SEC is looking at requiring all financial advisors (people at banks and Wall Street firms) to do what is in a client's best interest and to be held to a fiduciary standard of care?

Registered investment advisers are already held to a fiduciary standard of care and look out for the best interests of their clients.

The root of the problem is these "financial advisors" at the banks and Wall Street firms. They are raking people over the coals everyday. People fall for their glitzy ad campaigns thinking that banks and Wall Street firms care about them. But, the truth is they do not care at all about anything but maximizing their revenue.

Unfortunately, there is no way to be aggressive and not lose money. This strategy does not exist, even in a hedge fund environment. Investing equals risk. Investing aggressively equals more risk and the chance of more losses. So, what is a registered investment adviser to do with a client like this?

Teach them the finer points of life. Specifically, ten points to live by. An investor creed if you will.

Rick Johnson's 10 Point Investor Creed (Better know as the good, the bad and the ugly.)
  1. Doing business with a bank is bad.
  2. Doing business with a Wall Street firm is bad.
  3. Doing business with someone whose first priority is to maximize their commission revenue is bad.
  4. Expecting a 300% return in a few short years is bad.
  5. Investing aggressively and protecting your money from losses is ugly.
  6. Doing business with a registered investment adviser is good.
  7. Doing business with someone who has your best interests at heart is good.
  8. Doing business with a Certified Financial Planner® who also works at a registered investment adviser firm and is not affiliated with a bank or Wall Street firm is good.
  9. Having a well thought out plan for your future designed by a professional whose compensation is tied to your success or failure is good.
  10. Never allowing yourself to fall victim to a "financial advisor" at a bank or Wall Street firm again is good.
I believe these ten points are some of the best advice you could every receive.

I trust you can now see the light.

Monday, February 14, 2011

Is Going After Barry Bonds a Good Use of Taxpayer Dollars?

The Major League Baseball Home Run King, Barry Bonds is being hounded by some prosecutors who apparently want to make an example out of him. Is this really a good use of taxpayer dollars? Like they say in the Microsoft phone commercials..."Really?"

Here is how I see things. There clearly was a "steroid era" in MLB. Several players have admitted to steroid use and others, including Mr. Bonds have not admitted to knowingly using steroids. I have a problem with a couple of issues.

  1. Assuming a player used steroids during the time period in question, it was not against Major League Baseball rules.
  2. Before Coca-Cola had its cocaine additive removed from its soft drink, almost all Major League Baseball players in that era drank Coca-Cola with cocaine. Cocaine is now an illegal drug, as we all well know.
Here is my beef. During Barry Bonds' career, he was given several drug tests. Supposedly, he passed all of them. However, because of an agreement with the players union, there were some tests that were sealed and agreed upon with Major League Baseball never to be unsealed. This is proof positive that Major League Baseball knew that the release of these tests may harm the reputation of Major League Baseball.

There may have been a rumor (as a result of the leakage of these tests) that Barry Bonds may have failed a test. This is only a rumor. Even if it were true, if this test or tests were leaked in violation of an agreement with Major League Baseball, then in my opinion this is tantamount to a violation of due process. You will find the due process clause in the Fifth Amendment to the U.S. Constitution. Therefore, it should not be admissible in court or held against him in the world of public opinion.

Baseball Writer's of America are what is often called, "baseball purists." This means that they hold the statistics that make up the game of baseball in a idolised manner. The problem with this logic is that there is no pure baseball statistics that have survived Major League Baseball. My proof is that from 1891 to 1903, Coca-Cola had cocaine as one of its ingredients. Every Major League Baseball player at the time, more than likely drank a bottle of Coca-Cola from time to time. As a result, these players were playing baseball "on cocaine." You may be thinking that cocaine was not illegal during that time period. My point exactly. Steroids were not against Major League Baseball rules during the "steroid era" time period.

From a "purist" standpoint, all the records of every baseball player who played during this time and drank Coca-Cola should have an asterisk by their name in the record books. Of course, we do not know how many players drank cocaine laced Coca-Cola at the time, but maybe we need a congressional hearing on the subject. Similar, if you will to the congressional hearings on the "steroid era." We know how effective the "steroid era" hearings were, don't we? They managed to tarnish the reputation of some baseball players and the members of congress at those hearings may falsely believe that they elevated their status among the "purists." In reality, it was just a colossal case of wasting taxpayer dollars. These congressional hearings did not accomplish anything other than start a witch hunt against Mr. Bonds and also Mr. Roger Clemens. By the way, I feel the same way about Mr. Clemens as I do Mr. Bonds. There are no asterisks assigned to baseball players records as a result of these congressional hearings. The baseball purists did not win.

As far as Mr. Bonds is concerned, he is being discriminated against because he is black and he beat Babe Ruth's home run record. Stupid people point to the fact that he gained a significant amount of weight during his career and this is proof of steroid use. I compared my weight to Barry Bonds' weight during the same age assumptions and found that I gained just as much weight as Barry Bonds during the same years. So, the weight argument is idiotic and just something stupid people want to believe.

Secondarily, any baseball player that has ever broken Babe Ruth's records has been belittled and discriminated against. I cite Hank Aaron and Roger Maris as examples. Both men suffered unbelievable insults and indignities for their efforts. Mr. Bonds is a black man. He also had a love hate relationship with the press. This occurred because he told a reporter something one time and that reporter printed a lie. After that, Mr. Bonds soured on speaking to the press and for a long time, he refused to speak to them at all. This is another factor in why there are people who are against him. The press prints all this bad stuff and most of America reads it and believes it. Now, when he needs support, he can find little, because the baseball writers and the press continue to "pay back" Mr. Bonds for blowing them off over the years of his career.

It is kind of similar to the truth in media problem that we have today. We now see clearly that some media outlets spin stories so that their viewers or readers succumb to their desired outcome. This is what has happened to Mr. Bonds. He was sabotaged by the baseball writers. Of course, we know the baseball writers are without sin, don't we?

Thirdly, I have played baseball in the past myself for more than 20 years in the Men's Senior Baseball League. I know that "puffed up" players, those that lift a lot of weights, are not good baseball players. I also know baseball talent when I see it. There are some players who have special talents and their are others who are not as good. I can tell you that if you play baseball year after year, then you get better at it. In my case, I always had speed, but over the years, my hitting improved significantly and my fielding did as well. Why? Because I worked hard at it, not unlike Mr. Bonds. Without a doubt, Mr. Bonds is one of the most talented baseball players that ever lived. His bat speed and the shortness of his stroke is what generated the power. No steroid on the planet is going to give him or anyone else this talent. Either you have it or you do not. Mr. Bonds has the talent and it is not because of any steroid use. It is because he learned it and harnessed it by working hard. You see working hard for something that you want is a good trait in America. This is a common American value that a lot of us strive to achieve.

As you watch, the proceedings of the upcoming Barry Bonds taxpayer waste of money court proceedings and hear the press and baseball writers give you their opinions, keep in mind the fallacy in what you are witnessing. In this day and time, we should not be wasting taxpayer dollars on trying to prove that Mr. Bonds allegedly lied. What is the point? The point is to treat him like Hank Aaron and Roger Maris.

Is this good for baseball or America for that matter? Personally, I do not believe so.

I hope Mr. Bonds wins his case. It is not going to matter whether he wins or loses to some baseball writers. They will continue their racist rants against Mr. Bonds regardless whether he is proven innocent or found guilty. I believe that proves my point about the "purists." They are wrong. They are never going to get an asterisk in the record books, so they should just shut up and quit whining about it.

Just so you know, there is no bigger fan of Major League Baseball and baseball in general than me. Mr. Bonds is the Major League Baseball Home Run King. I'm sorry you baseball purists do not believe so.

Tuesday, February 8, 2011

Investor Coach vs. Financial Planner

I read trade publications from the financial services industry from several different sources. Some of the publications that I read to stay on top of things are:

The Journal of Financial Planning
Financial Advisor Magazine
Investment Adviser Magazine
Senior Market Advisor
Futures Magazine
Benefits Selling Magazine
Journal of Indexes
The Register
Life Insurance Selling

I also read information from blogs such as:

fi360 Blog
RIABiz Today
Calculated Risk

I also subscribe to Bob Veres' newsletter entitled, Inside Information which is a fabulous read for people in my industry.

The point that I wanted to make is that I am on top of what is going on in the financial services industry.

I have noticed an unfortunate trend by some to abandon calling yourself a "Financial Planner." In addition, they have begun to try and discredit Financial Planning and Financial Planners altogether. It is in investors interest that this effort does not succeed.

You see, if you call yourself a "Financial Planner," then you are regulated by either the states that you do business in or the United States Securities and Exchange Commission (SEC). You have to be registered as an Investment Adviser Representative and affiliated with a Registered Investment Adviser in order to use the terminology of offering "financial planning services," "financial plans" or calling yourself a "Financial Planner."

Something that bothers me is that as long as you are properly registered, then you can call yourself a "Financial Planner" even if you do not hold the Certified Financial Planner™ license like me. This is ridiculous in my opinion, but I will save this argument for another day.

If this fact is not bad enough, I am now seeing a trend towards Investment Adviser Representatives and Registered Investment Adviser firms shifting away from using the "Financial Planner" title. As a mentioned earlier, they have resorted to bashing the designation and are proclaiming that financial planning is dead. They have discovered something new. Something fashionable. Something that lends them credibility in the world of advice. This new term is "Investor Coach."

Investor Coach? I wonder what the qualifications are for you to call yourself an "Investor Coach?" None. That's right. None. Nada. Zilch.

You may be asking yourself, like me, what's up with this? Almost every state has rules revolving around the misleading use of financial designations. You may have heard in the past that there were significant problems revolving around the use of senior designations. The states nipped this activity in the bud by passing regulations to ban the use of designations that did not meet certain national standards. The states did a good job in this area.

However, the people touting the use of "Investor Coach" have apparently found a regulatory loophole. Since, "Investor Coach" is not a professional designation, it is not subject to the state regulations. Pardon me, but I beg to differ.

I believe very strongly that if an advisor suddenly becomes an "Investor Coach" without any training from a nationally accredited institution and no continuing education requirements, then he or she is being misleading to the investing public.

Calling yourself an "Investor Coach" is no different than calling yourself a "Senior Advisor." There are no qualifications around the use of "Investor Coach," nor are there any continuing education standards. Therefore, from my compliance viewpoint, it is easy to see that using the term "Investor Coach" is a violation of most every states regulations for financial service professionals.

Are you using this terminology in your financial services business? If so, then I would advise you to quit doing so immediately.

So, let me ask the question to potential investors. Would you rather work with an "Investor Coach" who is skirting the rules or a Certified Financial Planner™ who is regulated and abides by the rules? If your "Investor Coach" is skirting the rules on the use of misleading designations, then it kind of makes you wonder what other rules are they skirting? Just a thought.

Be careful out there.