The Gravy Train Looks Like it Will Continue

It is beginning to look like Wall Street is going to win the battle over a fiduciary standard. Registered Investment Adviser firms like ours have always been subject to a fiduciary standard. It is the Banks, Wall Street firms and Insurance companies who have not been subject to the fiduciary standard.

For those of you who do not know, a fiduciary standard of care is one where the adviser must put the interests of the client ahead of their own. Banks, Wall St. firms and Insurance companies have been subject to a much more lax standard called suitability. This basically means if they think it suits you at the time of sale, then that is all that is required. It doesn't matter if it has a 10% commission and 10 years of surrender charges as long as it is suitable for you.

Banks, Wall Street firms and Insurance companies control most of the power and influence in Washington, primarily because they generate a tremendous amount of revenue from selling products to consumers. Registered Investment Advisers or RIA's as we are known, sell advice, not products. The problem with RIA's is that we are all independent people with independent ideas. There is no one association or group that represents us.

There is a consortium of organizations grouped under the name of the Financial Planning Coalition that would like me to believe that they represent me. However, this is simply not true. This group consists of the CFP Board of Standards, the Financial Planning Association and the National Association of Personal Financial Advisors. The CFP Board regulates CFP's. The Financial Planning Association is an organization that includes CFP's, but also ChFC's and other professionals who hold themselves out as financial planners, but are not necessarily CFP's. The NAPFA is a very small organization of Fee Only advisers who have a requirement that their members are purely fee only and sell no commission based products. NAPFA is the best of the three by far.

Of these three groups, the CFP Board only has say over CFP's. There are a ton of individuals out there calling themselves financial planners, but who are under no supervision at all. I have seen numerous cases of insurance agents and bank employees who say they do financial planning, but are not registered to do so. Somebody needs to regulate ANYONE who claims to be a financial planner or who holds themselves out as a financial planner or claims to provide financial planning services. Sadly, the runaway train of bogus financial planners keeps right on rolling down the tracks.

The CFP Board is made up of CFP's who work at guess where? Banks, Wall Street firms and Insurance companies. A very small percentage are independent Registered Investment Advisers with absolutely no employment affiliation with any Bank, Wall Street firm or Insurance company. It does not take a smart person to figure out that if the primary revenue source comes from the financial advisors affiliated with these behemoth firms, then that in all likelihood is where their loyalty will lie. I have been a CFP for almost 20 years and they have yet to prove otherwise to me.

The Financial Planning Association is comprised of a similar makeup of professionals. Most all of them have employment affiliations with Banks, Wall Street firms or Insurance companies. Very few are independent Registered Investment Advisers. Again, it does not take a smart person to figure out where their loyalty lies, either.

The NAPFA is a very select and small group of professionals. The last time that I read about them, they had less than 3,000 members nationwide. I believe that the CFP Board and the FPA have close to 30,000 each. Although NAPFA is a good organization, their sheer lack of numbers probably minimizes their influence in Washington.

This Financial Planning Coalition is up against two major Wall Street organizations in SIFMA (Securities Industry and Financial Markets Association) and FINRA (Financial Industry Regulatory Authority). Both of these organizations want FINRA to oversee Registered Investment Advisers as the regulator of choice.

Somehow when most of the fraud and deceit in the financial services arena comes from Banks, Wall Street firms and Insurance companies, these powerful organizations have managed to turn the tide in their favor and portray RIA's as the enemy in Washington. When the reverse is actually true.

If you get nothing else in this article, understand this point. Registered Investment Advisers are subject to a fiduciary standard already and have been for a long time. Banks, Wall Street firms and Insurance companies have been subject to a suitability standard for also a long time. However, the Dodd-Frank legislation mandated that all financial advisers be subject to the fiduciary standard. The problem is that you cannot sell products and sell products from inventory and meet the legal definition of a fiduciary. As a result, Banks, Wall Street firms and Insurance companies are scrambling to re-write the definition of a fiduciary so it allows them to keep selling their products. In other words, they want the status quo. In addition, they want to gain control of Registered Investment Advisers. We are not the problem (RIA's.) The Banks, Wall Street firms and Insurance companies are the problem. They are the ones selling consumers all these high revenue, high commission, and no liquidity products. They do not want their gravy trains to end. Consequentially, they are lobbying hard to change the legal definition of a fiduciary and gain compliance supervision over Registered Investment Advisers.

It is all about money, power and more importantly control. They want control of the competition which are RIA's. Once they gain control, then they can exert burdensome compliance rules that make the cost of being a Registered Investment Adviser much more expensive. This is the end game in my opinion.

Unfortunately, as a group, Registered Investment Advisers are left to rely on the ethical morals of the people in Washington to protect us. Fat chance that will happen. Sadly, RIA's are the ones that are in the best position to protect consumers. If FINRA ends up in control of RIA's and succeeds in changing the definition of a fiduciary, then consumers will be the ones who lose.

As with everything else in life, we will adapt and move forward. However, it does not mean we will like it. As a consumer of financial services, you had better be very wary of anyone who is affiliated with a Bank, Wall Street firm or Insurance company. They are out to sell products and make as money as possible from consumers. Damn be the consequences.

RJ

Remember When I Said...

Remember when I said not to buy Non-Public REIT's? Once again, yours truly has proven without a shadow of a doubt that Non-Publicly Traded REIT's have several issues and deserve being on my Do Not Buy List.

Here is an article link from today's Wall Street Journal proving my point.

http://online.wsj.com/article/SB10001424052702303627104576414132610932502.html?mod=WSJ_hpp_MIDDLE_Video_Third

What disturbs me is they always seem to find someone who put in a lot of money into these investments. This particular couple, bless their heart, put in $200,000. Unfortunately, according to the article, this represented a substantial portion of their savings. If only they had read my book, Keep Your Assets. Take My Advice., then they would have known not to ever invest in Non-Publicly Traded REIT's in the first place, especially for retired people with no working income opportunities any more. Further, they would have known not to put more than 20% into any one investment. Apparently, they put way more than 20% into this investment.

The problem here is the business model of FINRA broker/dealers. They are in business to:

1. Generate revenue for the brokerage firm. Did I say this was this first priority? Well, if I did not, it is worth repeating. Their first priority is to generate revenue for the brokerage firm.
2. Generate revenue for the FINRA registered representative. Notice the first two choices neglect the client or investor.
3. Last but apparently least is the client or investor.

Why would anyone want to do business with a FINRA brokerage firm, especially if number 1 and number 2 take priority over clients or investors? It blows my mind after the 2008 Wall Street market melt down.

I keep trying to hammer these three points home. Why? The Wall Street Journal article's last paragraph is telling. These are the quotes from the investor:

"I should know better," he said. "I more or less relied on what the investment people were telling me."


These FINRA registered representatives are only giving advice based on their business model and their priorities listed above. This was all perfectly legal, because these FINRA registered representatives have this "suitability" loophole where they can do this all day long.

Why people do a nickel's worth of business with FINRA brokerage firms and their FINRA registered representatives is beyond me. Especially when an independent registered investment adviser firm will do things in a client's best interest, and who has a fiduciary liability to give their advice in a client's best interest.

Are you learning anything yet? I hope so.

More Vindication for My Do Not Buy List

My last blog post was vindication for a item on My Do Not Buy List. Just a scant two days ago, I blogged on Regulation D Private Placements and their dubious listing on My Do Not Buy List. Today, more vindication! Another item that I have on My Do Not Buy List gets noticed by both the SEC and FINRA.

The SEC and FINRA have come out with a warning about Structured Products which has been on My Do Not Buy List from day one. Although, in elite circles, they are sometimes called Structured Investments and this is how I list them on my handout. (See link at the bottom of this article.) After all, no one wants to be sold a product. See article here about the joint statement from the SEC and FINRA on Structured Products:

http://www.sec.gov/news/press/2011/2011-118.htm

This article includes a list of questions that investors should ask before investing in these Structured Products. All you have to do is take one look at the complexity of this list of questions and you will quickly agree with me as to why it should be on My Do Not Buy List. See the list of questions here:

http://www.sec.gov/investor/alerts/structurednotes.htm

The bottom line is that if it is on My Do Not Buy List, then you can rest assured that you should not ever invest in it. For your own handout of My Do Not Buy List, click this link below:

http://www.marianfs.com/documents/Do_Not_Buy_List.pdf

Feel free to forward to others for their protection.

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.

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.

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.

FINRA Comes Up Shy of the Goal Line

FINRA, the Financial Industry Regulatory Authority in charge of protecting investors (yea right) is going to put brokers who've had their securities licenses suspended or revoked back in the FINRA Broker Check system starting November 30th, 2009. Previously, if you were a broker who lost your securities license, then all you had to do was wait two years and FINRA would automatically remove your record from the FINRA Broker Check system. Apparently, FINRA felt a little bit of heat after the Madoff Scandal by not having these rogue brokers in their system. You tell me. Why on earth was this loophole ever allowed in the first place?

Supposedly there are approximately 15,000 of these rogue brokers running around. That means there are about 300 per state if you do the math evenly across the fifty states. Of course, you can probably surmise that states such as California, New York, Florida & Massachusetts have more than 300 of these rogue brokers running around acting unethical still today. Then, if you further imagine that most of these rogue brokers huddle where the money is, then you probably have a good chance of doing business with one of these creeps if you live in South Florida, or Southern California or similar high net worth areas.

Take heart rogue brokers, especially those with criminal convictions. You have nothing to worry about. FINRA will not let anyone know that you have a criminal record. They are actually excluding the criminal convictions of rogue brokers in the FINRA Broker Check system. FINRA does not think it is relevant apparently. If this is not ass backwards, then I do not know what is. This just goes to show you that FINRA does whatever they want to do and protecting consumers is not one of the things they do, despite what their frilly commercials say.

I know a few rogue brokers and I am anxiously awaiting November 30th to see if these unethical people show up in the FINRA Broker Check system as advertised. I will have to see it to believe it. They put Bernard L. Madoff back in the FINRA Broker Check system to my surprise. The last time that I looked, he was not in there. Now that it doesn't matter, they put him back in there. Where were they when it did matter?

FINRA Special Committee Report

The Special Committee that FINRA put in place to review their failures related to the Stanford and Madoff cases is now available for download. You can get it here:

http://www.finra.org/web/groups/corporate/@corp/documents/corporate/p120078.pdf

Here is a quote from the Executive Summary:

"FINRA’s examinations of the Madoff and Stanford firms did not uncover these frauds."

Lately, I have been jumping up and down over FINRA's failures. In this report, they actually claim no knowledge of Madoff being a registered investment adviser firm. Their reasoning was that Madoff claimed to have no customers, so there was nothing to examine. Madoff made FINRA examiners believe that he was only operating as a trading and market making firm.

Frankly, I find it hard to believe that everyone at FINRA can lay claim to the fact that Bernard Madoff did not have any clients as far as FINRA knew. It was common knowledge that Bernard Madoff and his wife often attended private parties of the rich and famous at which he solicited clients. Ask Donald Trump if he was ever solicited. It defies logic that FINRA examiners who were well entrenched examining multiple New York broker dealers were not aware of Bernard Madoff having clients. This simply does not compute.

Another quote from the report:

"FINRA examiners did not have direct access to the Madoff firm’s IARD entries."

Here again, FINRA is trying to bolster their position that they did not have access to Bernard Madoff Investment Securities LLC, the registered investment adviser firm. I found a FINRA Broker Check report on Bernard Madoff Investment Securities LLC. Here it is:

http://www.firstcoastplanning.com/Madoff FINRA Broker Check Report.htm

Open this report up and look at the bottom of the far left column on page 3. It says:

"This firm is a brokerage firm and an investment adviser firm. For more information about investment adviser firms, visit the SEC's Investment Adviser Public Disclosure website at http://www.adviserinfo.sec.gov ."

Wait a minute. I am going crazy here or what? Did the Special Committee Report from FINRA not say that they did not know that Bernard Madoff Investment Securities LLC was a registered investment adviser? If what they say is true, then why does the FINRA Broker Check report on the firm, (not the person) Bernard Madoff Investment Securities LLC say that they know he is a registered investment adviser firm. It is right there in black and white.

Interestingly though, there is no FINRA Broker Check on Bernard Madoff the person. Normally, a record of a registered principal of a broker dealer is on the FINRA Broker Check site for two years. Where oh where did Bernie's FINRA Broker Check report go?

This brings me to another point that I reiterated before about the gaps in the FINRA Broker Check system. After two years, if you are working for a registered investment adviser firm and not a broker dealer, then there is not a record that you ever existed in the FINRA Broker Check system. Not only that, if you had your FINRA registered securities licenses suspended and it has also been more than two years, then there is no record in the FINRA Broker Check system. None.

My question is why was there ever such a huge loophole which is totally against the investing public? Supposedly, FINRA is "thinking" about correcting this gap.

Isn't it funny how a few weeks prior to the release of this Special Committee Report that FINRA is all over the airwaves with a commercial on how they are protecting investors? I know what they are doing. I have seen this public relations game plan before today used by other firms. Banks use this strategy all the time. When bad PR is coming out, then you blast the airwaves with warm and fuzzy commercials intent on softening the backlash against the firm.

The question is...do you feel better about FINRA watching out for you as an investor?

I for one do not.

Bernard Madoff is Missing from FINRA Broker Check

I wonder why after going to Saveandinvest.org (see prior post) and following through to the FINRA Broker Check site, I simply cannot find any information on Bernard L. Madoff. There is no information available. I know his name. I know his firm CRD # 2625. I know his individual CRD # 316687. I know the name of his brokerage firm, Bernard Madoff Investment Securities, LLC. However, for some strange reason, I cannot find a FINRA Broker Check report on Mr. Bernard L. Madoff.

This points out a gaping problem in the FINRA Broker Check site in my opinion. Anyone and everyone who has ever had disciplinary actions while a FINRA registered representative and after they leave FINRA firms, should have their backgrounds disclosed. Just because he is in prison, makes no difference. Think about the people who maybe were just barred from the industry. All they have to do is wait for FINRA to drop their disciplinary history from the FINRA Broker Check site after two years, then they can go back to stealing money from investors.

Please tell me where I am wrong.

Are You Kidding Me? Saveandinvest.org

This morning while reading the newspaper, my wife pointed out that there was a commercial on television talking about protecting investors with direction to a web site call http://www.saveandinvest.org/. My first thought was... "have we finally found something good for investors?" To my dismay, it is a re-direct to FINRA's web site. FINRA is the organization behind the failure to catch Bernie Madoff, though you would not know it based on what is going on right now.

Here is the problem with FINRA and their Broker/Check site. If you were a licensed FINRA registered representative and you had your securities licensed revoked more than two years ago, then you do not have to worry about being found on the FINRA Broker Check site. FINRA gladly removes your entire corrupt licensing history automatically for you. They gladly protect their bad apples with this process.

Now, when I and everyone who has ever had a FINRA license knows this, it is incomprehensible to me that FINRA would put up a re-direct web site call http://www.saveandinvest.org/ with the pretense of protecting investors. Are you kidding me? They are not protecting investors. They are protecting their former members with bad disciplinary histories.

Bernard Madoff and FINRA

Bernard L. Madoff was the name of his NASD broker/dealer before he changed the name to Bernard Madoff Investment Securities LLC on January 1, 2001. Bernard Madoff broker/dealers were registered as broker dealers with the NASD/FINRA from March 25, 1960 until they closed him down on June 17th, 2009, the official closure date. What I would like to see is who from FINRA visited Bernard Madoff Investment Securities, LLC as a regulatory and enforcement person during the last 15 years. Apparently, someone from the NASD visited him. In the enclosed FINRA Broker Check report, it shows disciplinary actions initiated by the NASD(FINRA's predecessor organization) on July 6, 2005, February 26, 2007, February 27, 2007 and August 27, 2008. As you can read in this report, the issue was related to quotes. Apparently, he was not submitting quotes to the stock exchange for all of these purchases he was doing. Couldn't these FINRA gurus ask themselves the question, "maybe he is not submitting quotes to the exchange because he is not really doing any trading."

I am deeply afraid that the 400 odd page report lambasting the SEC is what was put forward to keep the limelight off of FINRA. FINRA has made overtures publicly that they want to be the self regulatory organization for investment advisers and broker/dealers. They did such a good job with Bernard Madoff Investment Securities, LLC. I guess they think they earned it.

Harvey Pitt Former SEC Commission is an Apologist for FINRA?

I was stunned last night watching Fox Business with David Asman. He had on his show two Madoff victims, Sue and Dominic Ambrosino, Larry Doyle of senseoncents.com and former SEC Commissioner Harvey Pitt.

The tide is beginning to turn against FINRA. Larry Doyle has long spoken out against FINRA on his blog at www.senseoncents.com. Last night on Fox Business, LD mentioned the fact that FINRA had money in Auction Rate Securities in 2007, but inexplicably got their own money out before the Auction Rate Securities collapse. I guess they are an investor watchdog, but not when it comes to saving their own bacon.

Sue and Dominic Ambrosino are wise to FINRA and their culpability in the Madoff Scandal. They pointed out that FINRA has not been too transparent about whether they too lost money with Madoff. The latest FINRA Annual Report does not disclose whether they did or did not lose money with Madoff or one of his feeder funds. Word on the street is that they did lose money as a result of Madoff.

Former SEC Commissioner Harvey Pitt, not one of the best SEC Commissioners we ever had by the way, seemed to me to have been given talking points. He kept trying to hide the fact that FINRA and its predecessor organization was responsible for the Madoff mess. Pitt kept trying to keep the blame squarely on the SEC. This was stunning to witness from my perspective.

David Asman pointed out that Mary Shapiro was the former head of FINRA and now she is the head of the SEC. I have nothing against Ms. Shapiro, but it seems like they got someone at the helm of the SEC who can probably keep FINRA out of it. However, time will tell. FINRA is guilty as sin in my opinion. You cannot convince me that FINRA did not look the other way when it came to Bernie Madoff.

As a former NASD Registered Principal, I had my office gone through with a fine tooth comb by an ex-NASD Examiner for several years. Of course, I always had good exams. I can guarantee you, the guy that examined my office would have easily discovered the Ponzi scheme Madoff was running.

There is something amiss with regard to FINRA being able to dodge the Madoff scandal up until now. Hopefully, with Fox Business getting a little nosy, the truth will come out about FINRA and their cosy little relationship with Bernie Madoff.

Stay tuned.

A Blast From the Past

About 4 and 1/2 years ago, the Securities and Exchange Commission put out a request for comments on whether to allow broker/dealers an exemption from being registered as a registered investment adviser. Back then, the SEC ruled that broker/dealers were exempt. This has obviously turned out to be a huge mistake as the events of the last year will attest. I thought it would be interesting for my readers to go back and see my position as I wrote it. Seems like I knew what was in store for the future. My response from February 3, 2005 is in blue type. I will add some final comments at the end of this blog article.

Subject: File No. S7-25-99
From: Richard A Johnson, CFP, CMFC, RFC
Affiliation: Rick Johnson Family Office, LLC

February 3, 2005

Although there are many issues to discuss with this proposed rule, I shall limit my comments to a few key points.

1 The use of titles by broker/dealer registered representatives: Financial Advisor, Financial Consultant, Investment Consultant and other similar terms are a major source of confusion for investors. I believe that any individual holding themselves out as a financial planner, financial consultant, financial advisor, investment consultant or other similar term should have to register under the Advisors Act of 1940. This is regardless of whether or not they have discretion over an account or not.

Further, registered representatives of broker/dealers should only be able to use terms that include the word representative in its description. For example, financial representative, or investment representative. In addition, senior broker/dealer representatives could have a title similar to these senior financial representative, senior investment representative, or financial representative II. The point is that registered representatives should have at least the word representative on their business card, if they want to rely on the exemption for registration under the Advisors Act. Those who desire to put financial planner, financial advisor, financial consultant or similar term should have to register under the Advisors Act.

2 The commission is mistaken if it believes that fee based investment advice is one of the best ways of delivering value to an investor. I see a scenario where broker/dealers will be given a green light to put every client that they can into a fee based brokerage account. This truly benefits the broker/dealer in stabilizing their revenue stream. But what about the client? Is the Commission naive enough to believe that broker/dealer clients who were neglected in the past because they had already been sold B shares, CDSC annuities and the like will suddenly be taken better care of by being in a fee based account? Specifically, I am referring to a clients second and third year of being in a fee based account. If a client has given the broker/dealer all their money, then how much attention do you truly believe they will be getting in years two, three and beyond? If history lends us a clue, we only have to look at how these same clients were treated when they had already been sold every possible commissionable investment. They were put aside for new clients of the firm. The same thing will happen if you allow a green light to the broker/dealers to sell fee based accounts without being registered as investment advisors.

Financial Planners/Registered Investment Advisors have a fiduciary responsibility to not only give the initial advice, but also to continuously give advice. Broker/Dealer representatives would not have the same standard.

3 Further, what value does the client receive from a broker/dealer sold fee based account when the client is not trading very often. Wouldn't they be better off in a commission account over the longer term? However, again I believe the Commission would be naive to believe that broker/dealers are not going to pressure their sales force to constantly add fee paying clients to its roster. It is the firms interest which will override the clients interest.

As a former branch manager of a major broker/dealer, I can tell you that I had significant pressure to put clients into fee based accounts. Sadly, with my knowledge as a CFP, I knew full well that clients were not going to be taken care of properly over the long haul in these accounts, because the broker/dealer was not interested in taking care of clients. They were interested in taking care of their own revenue.

You tell me if this is a conflict of interest or not. As a branch manager, I had a 67,000,000 target in my last quarter, yes that's right, I said quarter. If I brought in a million dollar account, then I was credited with 1,000,000 to my asset target of 67,000,000. However, if I took that same 1,000,000 account and put them in a fee based account, then I was credited with an additional 1,250,000 in asset credit towards my target. Now where do you think my focus was as a manager? To make sure clients were getting great financial advice, or to make sure that I reached my asset target? I was crazy not to take advantage of putting everyone that I could into fee based accounts, when I received 225 percent towards my asset target. Wouldn't you agree? Again, where is the client in all this? Neglected that is where.

Broker/Dealers should register under the Advisors Act to insure that clients receive not only initial advice, but ongoing advice held to a fiduciary standard.

Thank you.

Proof once again that I know my stuff. It sure is telling now that there is a call for a fiduciary standard for broker/dealers and their registered representatives.

The broker/dealers won their lobbying efforts back then, and I fully expect them to win their lobbying efforts again. In other words, the fiduciary standard will have loopholes in favor of the broker/dealers that they will be able to drive their Mack Trucks through. They have all the political clout in Washington D.C. Clients unfortunately do not stand a chance. Wait and see.

Thanks.

Regulatory Regime?

SEC Chairman Mary Shapiro continues to work the media in regard to the harmonization of "regulatory regimes." I do not know about you, but when I hear the word regime I think of places like North Korea, Iran, Venezuela, Cuba and the Taliban. I am not sure if we need a regulatory regime.

She keeps referring to brokers and investment advisers as being "virtually identical." I believe this is the end game. The powers to be want to meld the broker dealer world with the investment adviser world into a unified regulatory structure.

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090619/REG/906199968/1094/INDaily01

It is funny when regulators fail in their duty to protect investors they suddenly become the mouthpiece for what is wrong with the regulations. Their patented answer is always "we were under staffed and under funded." If only they had more employees and more money, then that certainly would have solved everything. I beg to differ.

I think the problem lies in training. A trained eye would have been able to look at the account statements produced by Bernard Madoff Investment Securities LLC (FINRA regulated for 28 years) and determine within a few minutes that they were fraudulent. It was obvious to me that a template method was used to produce those statements. A template is a blank statement where the template is put into the printer while someone prints bogus information from a spreadsheet to perfectly fit the columns in the template statement.

Last summer, I met a couple whose broker had done something similar. This broker cut and pasted financial firm logos in an unusual manner in letters and emails. This broker sent out numerous communications from a financial firm that he was not even affiliated with to these clients. All you have to do is go to FINRA broker check and see that this broker was not registered with the company that he was purporting to be a broker with. I was able to spot it in about two minutes. I worked with a federal regulatory person to help put this broker out of business. Luckily, we caught him after he had duped only three investors and I believe a lot of the damage was reversed. Oh by the way, this unscrupulous broker was a FINRA registered representative. Imagine that! That came as no surprise to me, of course.

Make no mistake. I am not here to beat up on the SEC Chairman or the regulators in general. They have a tough job and it is not getting any easier for them. My take on it is that better training (forensics) should be the focus.

Further, if the regulators focus on those brokers or advisers who sell exotic products, then they are likely to find most of their criminals in these areas. For example, highly exaggerated performance claims, 12% promissory notes, 12% CD's, Private Equity, Illiquid Real Estate Limited Partnerships, Structured Products and various Alternative Investments. Most of the problems involving criminals revolve around appealing to greed by promising high returns. Registered investment advisers out there charging a percent of assets under management for investing in widely held, exchange listed investments are not near the problem that those advisers selling exotic investments are to the regulators.

Another idea may be to allow any financial institution accounts opened by a financial adviser to be run through filters at the SEC. These filters would be looking for large personal deposits that are outside the normal deposits of that particular adviser. It seems to me that this could be done similar to the way anti-money laundering is managed. If a highly unusual deposit into a personal or business account is discovered, then the SEC could immediately begin an inquiry. Honest investment advisers would not mind the scrutiny. I know that I would not mind such scrutiny.

The SEC commissioner has said that fully one third of the regulatory actions taken this year have been against registered investment advisers. At first glance, that may sound bad. However, this means that fully TWO THIRDS of the regulatory actions taken were against FINRA brokers! Now you tell me, where is the bigger regulatory headache?

That's what I thought!

A Fiduciary Standard Watered Down

There is no doubt that the fiduciary standard for anyone who renders investment advice would be a good thing. However, in the Obama Administration's White Paper, on page 72 to be exact, there is a statement that concerns me greatly. It reads:

prohibiting certain conflicts of interests and sales practices that are contrary to the interests of investors.

You can read it here: http://www.financialstability.gov/docs/regs/FinalReport_web.pdf

What bothers me is the word "certain" in that statement. My interpretation, based on my experience, would mean that selling from broker/dealer inventory would be one of the conflicts of interest that they are referring to. Broker dealers currently are allowed to buy stocks of various companies and keep them in inventory. They typically buy companies that are widely held. When their customers want to buy that same stock, then the broker/dealers sell them the stock from their inventory. The broker/dealer may have bought the stock at a lower price and sold it from inventory to the client at a higher price. If they do not have the stock at a lower price, then they let the customer buy it outside of their inventory. The do not normally sell their inventory positions at a loss. It is easier for them to let the client buy it from the exchanges. Obviously, they stand to make more money by selling from inventory.

I believe that broker/dealers would gladly give up selling from inventory for the ability to be a fiduciary under the forthcoming watered down rules. What we will see, in regard to the fiduciary standard, is that broker/dealers and their FINRA registered representatives will be able to continue doing business as usual. They will only have to disclose their conflicts of interest, then they can continue selling commission based products instead of fee only investment advice in a client's best interest.

The tactic being pushed to the media from Mary Shapiro, SEC Chairman is that broker/dealers and investment adviser's services are "substantially identical" as far as the public is concerned.

See this article from Financial Planning's web site for comments from Mary Shapiro:
http://www.financial-planning.com/news/schapiro-fiduciary-standard-sec-2662329-1.html?ET=financialplanning:e447:1882177a:&st=email

This could not be further from the truth. Besides, the fact that the consumer is not able to distinguish between a FINRA registered representative and an investment adviser is because of the "solely incidential" rule. The solely incidental rule, sometimes called the "Merrill Lynch" rule is the rule that opened the flood gates allowing FINRA registered representatives the ability to wear two hats. When they want to sell products, they slide the brokerage agreement in front of the client, all the while neglecting to mention any conflicts of interest. By wearing the FINRA hat, they do not have to disclose conflicts of interest. They can also wear the hat of an investment adviser. This is why they are known as dually registered (wearing the more profitable FINRA hat at the time of the transaction, of course.)

You rarely see a dually registered FINRA sales person as a 100% fee only investment adviser. They have to hit their sales quotas to keep their offices. Most FINRA broker/dealers have as their sales quotas upwards of $250,000 in revenue per year and higher. If you do the math, then you will see that in order to produce $250,000 in revenue as a 100% fee only advisor for the FINRA broker/dealer, then this means that this FINRA registered representative would have to bring in net new assets each and every year of $16,666,666.67. This is using 1.5% as the annual fee for the calculation. ($16,666,666.67 x 1.5% = $250,000.) Let me assure you, very few FINRA registered representatives can do this each and every year. I can promise you that FINRA broker/dealers are not going to lower their yearly sales quotas.

As a result, my educated guess is that we will see a watered down fiduciary standard that allows FINRA registered representatives to still wear two hats and still "pretend" to do things in a client's best interest. It will be even worse if FINRA itself is allowed to be the regulator of registered investment advisers. That would be the nail in the coffin for consumers of financial services. Wasn't the goal here to protect consumers?

You can read more about it in my book, Keep Your Assets. Take My Advice.

Keeping the Status Quo?

It looks like the Obama Administration is going to accept the status quo with regard to Wall Street and regulatory reform according to a recent article on the Investment News web site.

http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20090614/REG/306149969

A source from the Obama Administration says that creating a new regulator for registered investment advisers "is not a core issue."

The Obama Administration is correct. We do not need a new regulator for registered investment advisers. Registered investment advisers are not the problem. FINRA is the problem. They are the root cause of the recent market meltdown due to their lack of regulatory oversight, in my opinion. Cronyism at its finest especially in their supervision of Bernie Madoff's firm.

Larry Doyle of http://www.senseoncents.com/ had on his weekly radio show Bill Singer, an attorney with Stark and Stark, one of the nation's premier Securities Related Legal Firms. The transcript for A Real Regulatory Review: An Interview with Bill Singer is available here:

http://www.senseoncents.com/2009/06/a-real-regulatory-review-sense-on-cents-interview-with-bill-singer/

This interview is an eye opener about how and why we can expect nothing but idle posturing by Congress to fool us into believing that they are doing something on behalf of investors. When in fact, they will do very little to help investors.

FINRA's Tactics Appear to Have Shifted

I would like to point out that FINRA has now set their sites on fixed annuity and life insurance sales outside their broker/dealers. Currently, if you are an insurance agent and sell fixed annuities or life insurance outside the compliance of your broker/dealer, you are regulated by the state that you do business in.

FINRA would like to force all those who sell fixed annuities and life insurance to come under the supervision of their member firms (broker/dealers.) Why? Money of course. If they "make" you as an insurance agent run all your business through your broker/dealer, then your broker/dealer will take a percentage off the top. As a result, FINRA stands to make more money.

FINRA has already made it plain that they wanted to regulate registered investment advisers. If the Obama Administration is not considering such an arrangement by labeling it as not being a core issue, then it appears that FINRA may not be getting that extra revenue from registered investment adviser regulation like they thought. In order to keep their share of the pie as large as possible, they have shifted their focus. Did they do that quickly or what?

Insurance agents and their fixed annuity and life insurance business are a new source of revenue for FINRA's broker/dealers. A lot of these FINRA broker/dealers have allowed their FINRA registered representatives to sell fixed annuities and life insurance outside their firms. However, now these broker/dealers are hurting financially as a result of the market meltdown and the fact that consumers are not as engaged in the finances. These FINRA firms must keep producing revenue some how and it appears that they have found the answer. If you are an insurance agent and a FINRA registered representative, then you just were handed your notice by FINRA to get out. Or, you can stay with FINRA and give them more of your income for doing absolutely nothing except making it harder for you to sell fixed annuities and life insurance.

It would not surprise me if they tried to force anyone who sells fixed annuities or life insurance to be a FINRA registered representative. Even if you are not FINRA registered now, their next attack may be to make anyone who sells these products fall under their supervisory jurisdiction.

With FINRA, it always has been and it always will be about the money. Do not let anyone tell you otherwise.