Click the link for the Study on Investment Advisers and Broker-Dealers.
http://www.sec.gov/news/studies/2011/913studyfinal.pdf
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:
Stocks
Mutual Funds
Bonds
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.
Showing posts with label Mutual Funds. Show all posts
Showing posts with label Mutual Funds. Show all posts
Monday, January 24, 2011
Wednesday, December 2, 2009
Do Not Buy List - When Are You Going To Get This?
If you are an investor, chances are that a broker or financial advisor (and I use that term very loosely) will ask you to invest in something illiquid. They will promise some kind of benefits like tax savings, high current income or great performance. The truth however is that your broker or financial advisor has a financial incentive to sell you that investment and chances are that they will make at least 8% in commissions from selling it to unsuspecting people like you.
What I thought that I would do is create a short "Do Not Buy" list to help investors. Of course, broker/dealers and their reps will hate my guts for blogging about this subject, but personally, I do not care. The investor is more important.
DO NOT BUY LIST
Private Placements
Structured Investments
Non-Publicly Traded REITS
Non-Publicly Traded Limited Partnerships
Promissory Notes
Regulation D Offerings
Exchange Traded Notes (ETN's)
Precious Metals (The physical commodity)
Floating Rate Bank Loan Mutual Funds
A Shares Mutual Funds (unless commission waived)
B Shares Mutual Funds
C Shares Mutual Funds
EXPLANATION AS TO WHY THESE ARE ON THE DO NOT BUY LIST
Private Placements - These are illiquid, not in your best interest and carry a high degree of losing your money. Generally pays the broker 8 to 12% in commission to sell it. Example - Investment in a new movie or business.
Structured Investments - These have liquidity restrictions, are not in your best interest and because of the liquidity restrictions, you have no way of getting out of a declining market. Generally pays the broker 3 to 5% in commission to sell it. People invested in these watched helplessly as their investments dropped 40 to 50% last year. Example - Dow 30 Trust.
Non-Publicly Traded REIT's - These are highly illiquid, not in your best interest and carry a high degree of losing your money. Generally pays the broker 8% to 9% in commission to sell it. Why should you buy a Non-Publicly Traded REIT when there are plenty of Publicly Traded REIT's available? The answer is that it benefits your broker. As far as I am concerned, that does not benefit you the investor, therefore there is no reason whatsoever to ever buy it. Example - pick one, any one sold by brokers.
Non-Publicly Traded Limited Partnerships - These are highly illiquid, not in your best interest and carry a high degree of losing your money. Generally pays the broker 8% to 9% in commission to sell it. Example - tax credits or equipment leasing.
Promissory Notes - These are highly illiquid, not in your best interest and carry a high degree of losing your money. Generally pays the broker 8% to 12% in commission to sell it. In almost all cases, the investor loses all their money when they invest in these promissory notes. There is no guarantee of anything. The person or entity cannot raise funds through normal lending channels, so they turn to this option. If several lenders turned them down, then why should you be the one to give them the money? Promissory Notes are a mini-Ponzi scheme in my mind. They lure investors in and pay them interest from the other investors principal, then invest the bulk in their "can't fail" business. Sounds like a ponzi scheme to me. Example - Most often, it involves some type of business venture that "can't fail."
Regulation D offerings - These are highly illiquid, not in your best interest and carry a high degree of losing your money. Lots of people get paid to sell it. it depends on each offering. Yes, you get some stock, but with restrictions and no guarantee that it will be worth anything at all. Example - stock offering of a company that "may" go public in a year or two like a bank.
Exchange Traded Notes - These are structured investments traded on an exchange. Do not confuse these with Exchange Traded Funds, because they are completely different. This is basically a basket of investments that is held for a length of time in the hope that they will mature at a higher value. They do have some liquidity features, but other alternatives are available that are better like Exchange Traded Funds. Example - India or China ETN.
Precious Metals - Have you been watching television lately? There are loads of commercials suggesting that you buy physical gold or silver. Let me ask you a question. Have you every heard of these companies before you saw their commericials on television? That is what I thought. And you were thinking about sending them a check? Come on. You can buy gold and silver in Exchange Traded Funds that are fully liquid and publicly traded. There is no need to hold the actual physical metals. Besides, if you buy the physical metals, then you will have holding fees and trust companies fees. Go with Exchange Traded Funds instead. Example - GLD, SLV.
Floating Rate Bank Loan Funds - These are mutual funds based on a pool of bank loans. They have liquidity restrictions where you cannot get out of them except a little at a time. This fact kills the deal for me. I do not like anything that I cannot only get 25% of my money out at a time. What if the returns on floating rate bank loan funds turn south? You are stuck. Dumb, dumb investment. Example - Floating Rate Bank Loan Mutual Fund.
Mutual Funds in Class A, B or C Share Classes - Mutual funds are a dying breed. More and more fund companies who refuse to go to Exchange Traded Funds will lose their assets. In the past, I would say buy no-load mutual funds instead, but now with the advent of Exchange Traded Funds, these ETF's are a much better alternative. The liquidity restrictions on these are self imposed sometimes. If you paid the upfront commission on an A share mutual fund, then you may want to give it more time to get back to even. B and C shares are starting to go away, because the fund companies cannot get the loans necessary to pay the brokers their commissions. The point is that A, B or C class shares of mutual funds benefit everyone except you! You do not need them, when ETF's present a much better alternative. Example - Class A, B or C shares mutual funds.
There is your Do Not Buy List. Most everyone that would sell you these investments on this list are brokers with a brokerage firm that earns commissions from sales. Commissions from sales benefit the firm, not you. When are you going to get this? Let me say it again. When are you going to get this? Quit buying this garbage from brokers that only benefits them and their firms. Stop it now.
If you own any of these investments already, then you may want to go see a registered investment adviser who does things in your best interest. They may be able to devise a strategy to get you out of some of this garbage before it is too late. These registered investment advisers should have no affilliation with a brokerage firm. None at all. No ifs ands or buts.
What I thought that I would do is create a short "Do Not Buy" list to help investors. Of course, broker/dealers and their reps will hate my guts for blogging about this subject, but personally, I do not care. The investor is more important.
DO NOT BUY LIST
Private Placements
Structured Investments
Non-Publicly Traded REITS
Non-Publicly Traded Limited Partnerships
Promissory Notes
Regulation D Offerings
Exchange Traded Notes (ETN's)
Precious Metals (The physical commodity)
Floating Rate Bank Loan Mutual Funds
A Shares Mutual Funds (unless commission waived)
B Shares Mutual Funds
C Shares Mutual Funds
EXPLANATION AS TO WHY THESE ARE ON THE DO NOT BUY LIST
Private Placements - These are illiquid, not in your best interest and carry a high degree of losing your money. Generally pays the broker 8 to 12% in commission to sell it. Example - Investment in a new movie or business.
Structured Investments - These have liquidity restrictions, are not in your best interest and because of the liquidity restrictions, you have no way of getting out of a declining market. Generally pays the broker 3 to 5% in commission to sell it. People invested in these watched helplessly as their investments dropped 40 to 50% last year. Example - Dow 30 Trust.
Non-Publicly Traded REIT's - These are highly illiquid, not in your best interest and carry a high degree of losing your money. Generally pays the broker 8% to 9% in commission to sell it. Why should you buy a Non-Publicly Traded REIT when there are plenty of Publicly Traded REIT's available? The answer is that it benefits your broker. As far as I am concerned, that does not benefit you the investor, therefore there is no reason whatsoever to ever buy it. Example - pick one, any one sold by brokers.
Non-Publicly Traded Limited Partnerships - These are highly illiquid, not in your best interest and carry a high degree of losing your money. Generally pays the broker 8% to 9% in commission to sell it. Example - tax credits or equipment leasing.
Promissory Notes - These are highly illiquid, not in your best interest and carry a high degree of losing your money. Generally pays the broker 8% to 12% in commission to sell it. In almost all cases, the investor loses all their money when they invest in these promissory notes. There is no guarantee of anything. The person or entity cannot raise funds through normal lending channels, so they turn to this option. If several lenders turned them down, then why should you be the one to give them the money? Promissory Notes are a mini-Ponzi scheme in my mind. They lure investors in and pay them interest from the other investors principal, then invest the bulk in their "can't fail" business. Sounds like a ponzi scheme to me. Example - Most often, it involves some type of business venture that "can't fail."
Regulation D offerings - These are highly illiquid, not in your best interest and carry a high degree of losing your money. Lots of people get paid to sell it. it depends on each offering. Yes, you get some stock, but with restrictions and no guarantee that it will be worth anything at all. Example - stock offering of a company that "may" go public in a year or two like a bank.
Exchange Traded Notes - These are structured investments traded on an exchange. Do not confuse these with Exchange Traded Funds, because they are completely different. This is basically a basket of investments that is held for a length of time in the hope that they will mature at a higher value. They do have some liquidity features, but other alternatives are available that are better like Exchange Traded Funds. Example - India or China ETN.
Precious Metals - Have you been watching television lately? There are loads of commercials suggesting that you buy physical gold or silver. Let me ask you a question. Have you every heard of these companies before you saw their commericials on television? That is what I thought. And you were thinking about sending them a check? Come on. You can buy gold and silver in Exchange Traded Funds that are fully liquid and publicly traded. There is no need to hold the actual physical metals. Besides, if you buy the physical metals, then you will have holding fees and trust companies fees. Go with Exchange Traded Funds instead. Example - GLD, SLV.
Floating Rate Bank Loan Funds - These are mutual funds based on a pool of bank loans. They have liquidity restrictions where you cannot get out of them except a little at a time. This fact kills the deal for me. I do not like anything that I cannot only get 25% of my money out at a time. What if the returns on floating rate bank loan funds turn south? You are stuck. Dumb, dumb investment. Example - Floating Rate Bank Loan Mutual Fund.
Mutual Funds in Class A, B or C Share Classes - Mutual funds are a dying breed. More and more fund companies who refuse to go to Exchange Traded Funds will lose their assets. In the past, I would say buy no-load mutual funds instead, but now with the advent of Exchange Traded Funds, these ETF's are a much better alternative. The liquidity restrictions on these are self imposed sometimes. If you paid the upfront commission on an A share mutual fund, then you may want to give it more time to get back to even. B and C shares are starting to go away, because the fund companies cannot get the loans necessary to pay the brokers their commissions. The point is that A, B or C class shares of mutual funds benefit everyone except you! You do not need them, when ETF's present a much better alternative. Example - Class A, B or C shares mutual funds.
There is your Do Not Buy List. Most everyone that would sell you these investments on this list are brokers with a brokerage firm that earns commissions from sales. Commissions from sales benefit the firm, not you. When are you going to get this? Let me say it again. When are you going to get this? Quit buying this garbage from brokers that only benefits them and their firms. Stop it now.
If you own any of these investments already, then you may want to go see a registered investment adviser who does things in your best interest. They may be able to devise a strategy to get you out of some of this garbage before it is too late. These registered investment advisers should have no affilliation with a brokerage firm. None at all. No ifs ands or buts.
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