The SEC has finally approved changes to the standard disclosure document for Registered Investment Advisers. The final guidelines should be posted on the SEC web site sometime next week. Currently, Registered Investment Adviser firms have not had to publish the background information of the individual that advises the client, unless that individual happens to also be an officer of the firm. Going forward, this new narrative brochure as it is called will have to enclose a brochure supplement at the end of it disclosing the background of the individual dispensing the advice. Not only will potential clients see the disciplinary history and background of the officers of the firm, but now, they will also see the background of the individual trying to obtain their business.
The problem in the past has been getting access to the disciplinary background of the person trying to obtain the business from the potential client. If the person trying to obtain the potential client's business was not an officer of the firm, then a potential client would not find anything in the current disclosure Form ADV II. Now however, there will be this new brochure supplement that will have to disclose to prospective clients a resume like disclosure with information about their educational background, business experience, other business activities, disciplinary history and their qualifications such as designations and licenses.
Prospective clients will now be able to compare brochure supplements and brochures on the firm with other Registered Investment Advisers and their Investment Adviser Representatives. This in my opinion is a giant step forward in terms of disclosure and I applaud the efforts of all involved.
I can see the future implementation of this process whereby prospective clients will now be able to ask for the brochure supplement from the Investment Adviser Representative who is trying to obtain their business. Guess what? If the person trying to get a prospective client's business does not provide this brochure supplement, then odds are they are either hiding something, or they are not properly licensed as Investment Adviser Representatives.
Let's take a harder look at this situation. Assume that you go into a firm that has insurance agents in it who sell annuities and are not licensed as Investment Adviser Representatives. In addition, there are also one or more Investment Adviser Representatives affiliated with the insurance agents in some way. If a prospective client is being advised to sell their securities by the insurance agent who is not licensed, then the prospective client can ask for their brochure supplement. Of course, if they are not licensed, then they will not have this brochure supplement. In case you do not know, insurance agents cannot advise anyone to sell their securities to buy annuities unless they are also licensed as an Investment Adviser Representative or a Registered Representative.
Further, if the insurance agent in this example tells you that someone else in the firm is the Investment Adviser Representative, then why are they not the one sitting in front of you, giving you the advice and disclosing their brochure supplement to you? As a prospective client, you do not want to stand for this kind of shady relationship. It is obvious that the insurance agent and the Investment Adviser Representative are in cahoots, so to speak, and may be trying to direct you straight to annuities which may not be in your best interests.
Demand to see the brochure supplement of the person giving you the advice. If they fail to produce a brochure supplement, then run, do not walk out the door. You do not want to do business with these people.
This brings me to another point. Registered Representatives who are also Investment Adviser Representatives are known as dually registered. These dually registered advisers will have to provide these same brochure supplements. The same goes for insurance agents who are also Investment Adviser Representatives.
The end result is that this is finally something that favors prospective clients.
My advice to all prospective clients is to demand the brochure and the brochure supplement. These new documents will give you the best opportunity to learn about conflicts of interests, compensation methods, educational backgrounds, business experience, professional designations, licenses and disciplinary history of the individual trying to obtain your business. Again, if the person trying to get your business fails to produce these disclosure documents, specifically the brochure and brochure supplement, then do not do business with them. Odds are there is something wrong with their background or disciplinary history.
I look forward to creating these new documents on behalf of my prospective clients. Stay tuned.
Friday, July 23, 2010
Friday, June 25, 2010
FinReg or The American Financial Stability Act of 2010
We are almost there. Everyone has been waiting for the final version of The American Financial Stability Act of 2010 to become law. Shortly, we will be able to see it for ourselves and look for how it will impact the financial industry.
The early word is that the authority to require the fiduciary standard for broker/dealers and investment advisers will be granted to the U.S. Securities and Exchange Commission (SEC). The current status of the fiduciary standard is that investment advisers (like my firm) are already subject to the fiduciary standard. It is the broker/dealers (Wall Street firms, Banks & Insurance Companies) who are not subject to the fiduciary standard.
The SEC will have to wait six months until a study is done. This is really an opportunity for Wall Street firms, Banks and Insurance Companies to fight it and or, time to get prepared for it. The law is supposed to give the SEC the power to implement a rule related to the fiduciary standard. The SEC has commissioners who vote on such any rules, if presented. So, there is no guarantee that after the results of the study, the SEC will make such a rule. FinReg only gives them the power to make such a rule, I believe. It doesn't necessarily make it etched in stone. Also, they normally put proposed rules out for a period of time before implementation and allow people to comment on them. Then, after the comment period, the SEC reviews the comments and determines the impact that making the final rule may have on the industry.
I wonder, if it is easier for Wall Street firms, Banks and Insurance Companies to fight the implementation of an SEC rule such as the fiduciary standard, as opposed to a law passed by Congress. There is a major difference if you catch my drift. It would be much tougher to overturn legislation, in my opinion. Do not think for a minute that Wall Street firms, Banks and Insurance Companies will not be flooding the SEC with comments on any proposed rule on the fiduciary standard. It is obvious they do not want it.
The main thing you need to understand is that registered investment advisers are already subject to the fiduciary standard and they (we) only wear one hat. So, if you see a lot of resistance to the fiduciary standard in the next six months, keep in mind that is not coming from registered investment advisers.
As I have blogged about many times before, the best financial advisor to hire is an Independent Registered Investment Adviser with no Wall Street firm, Bank or Insurance Company broker/dealer affiliations. Like me.
The early word is that the authority to require the fiduciary standard for broker/dealers and investment advisers will be granted to the U.S. Securities and Exchange Commission (SEC). The current status of the fiduciary standard is that investment advisers (like my firm) are already subject to the fiduciary standard. It is the broker/dealers (Wall Street firms, Banks & Insurance Companies) who are not subject to the fiduciary standard.
The SEC will have to wait six months until a study is done. This is really an opportunity for Wall Street firms, Banks and Insurance Companies to fight it and or, time to get prepared for it. The law is supposed to give the SEC the power to implement a rule related to the fiduciary standard. The SEC has commissioners who vote on such any rules, if presented. So, there is no guarantee that after the results of the study, the SEC will make such a rule. FinReg only gives them the power to make such a rule, I believe. It doesn't necessarily make it etched in stone. Also, they normally put proposed rules out for a period of time before implementation and allow people to comment on them. Then, after the comment period, the SEC reviews the comments and determines the impact that making the final rule may have on the industry.
I wonder, if it is easier for Wall Street firms, Banks and Insurance Companies to fight the implementation of an SEC rule such as the fiduciary standard, as opposed to a law passed by Congress. There is a major difference if you catch my drift. It would be much tougher to overturn legislation, in my opinion. Do not think for a minute that Wall Street firms, Banks and Insurance Companies will not be flooding the SEC with comments on any proposed rule on the fiduciary standard. It is obvious they do not want it.
The main thing you need to understand is that registered investment advisers are already subject to the fiduciary standard and they (we) only wear one hat. So, if you see a lot of resistance to the fiduciary standard in the next six months, keep in mind that is not coming from registered investment advisers.
As I have blogged about many times before, the best financial advisor to hire is an Independent Registered Investment Adviser with no Wall Street firm, Bank or Insurance Company broker/dealer affiliations. Like me.
Wednesday, June 16, 2010
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.
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.
Tuesday, June 15, 2010
You Must Factor Liquidity Into Your Decision Making
Most people in America have been taught over the years to blindly put their money into so called "investments" by registered representatives, people who are sales persons for themselves and their firms. These sales persons hold FINRA Series 6, 7 or 22 licenses. Does your financial advisor (don't make me laugh) hold a Series 6, 7 or 22? If so, then you are a victim of their sales efforts.
I just read an article in a financial industry trade publication about Non-Publicly Traded REITs. Readers of this blog will know the Non-Publicly Traded REIT's are on my Do Not Buy List. The gist of the article was that sales are up and lots of people are buying these investments. This is not good, in my opinion.
Non-Publicly Traded REIT's generally pay large commissions to your FINRA Series 6, 7 or 22 licensed registered representative. These commissions can be as high as 8%.
Let us assume that you put $100,000 into one of these Non-Publicly Traded REIT's. The results are that $8,000 of your money, let me repeat that, your money is going into the pocket of the FINRA Series 6, 7 or 22 registered representative and the firm that they work for, in addition to the firm managing the REIT. So, far what have you received? A vague promise of diversification, the potential for a high return plus recurring income from the dividends. What you do not know is that the firm managing the REIT is structured like a Ponzi scheme. They take money in, then pay you dividends from your own money. Oh, I almost forgot. Your $100,000 is now totally illiquid.
The REIT takes your money and "invests it" (quit making me laugh) in real estate properties that are supposed to make tons and tons of money for you. Most of these REIT's have to pay real estate sales commissions every time they buy a piece of commercial real estate. Further, they usually hire a property management firm to manage the property that they bought. Of course, the manager of the REIT has a large staff of real estate experts that have to be paid. Do not forget that they have to pay your FINRA Series 6, 7 or 22 registered representative and their firm. I wonder...after all this...how much of your $100,000 is still left? Well we know eight percent of it is gone to commission, so it is at least down to $92,000. If I am being conservative, I would suspect maybe another $5,000 is gone to all the issues that I described above. This leaves you with $87,000. Oh, I almost forgot. They are paying you 6% interest on your $100,000, so that is another $6,000 knocking your $87,000 down to $81,000.
After all that, you need a 23.46% return on your money just to break even. I know what you are thinking. These REIT guys are good managers and their last REIT made 10% last year. Well they paid you 6% in income in the first year, if they did make 10%, then your are still down for the count. Also, a little known fact is that the REIT manager gets to decide how much their return is each year. How do they do that? Well, with commercial appraisals of course. How much are commercial appraisals? They are a whole lot more than residential appraisals I can assure you. Sadly, more of your $100,000 is gone.
The worst thing about Non-Publicly Traded REIT's is they have terrible liquidity. You cannot get your $100,000 back generally for 10 to 12 years. Now, do you see why this so called "investment" is on my Do Not Buy List? I hope so, but apparently there are a ton of people out there still buying them. Sales are up on these investments, it is sad to say.
Liquidity is the name of the game. This is a news flash. You can actually invest your money so that every single thing you invest it in can be accessed within a couple of days. Now, that is a novel idea. Invest with Liquidity in mind.
Here is the rule: If it is not liquid, then do not invest in it.
Yours truly,
Rick Johnson
I just read an article in a financial industry trade publication about Non-Publicly Traded REITs. Readers of this blog will know the Non-Publicly Traded REIT's are on my Do Not Buy List. The gist of the article was that sales are up and lots of people are buying these investments. This is not good, in my opinion.
Non-Publicly Traded REIT's generally pay large commissions to your FINRA Series 6, 7 or 22 licensed registered representative. These commissions can be as high as 8%.
Let us assume that you put $100,000 into one of these Non-Publicly Traded REIT's. The results are that $8,000 of your money, let me repeat that, your money is going into the pocket of the FINRA Series 6, 7 or 22 registered representative and the firm that they work for, in addition to the firm managing the REIT. So, far what have you received? A vague promise of diversification, the potential for a high return plus recurring income from the dividends. What you do not know is that the firm managing the REIT is structured like a Ponzi scheme. They take money in, then pay you dividends from your own money. Oh, I almost forgot. Your $100,000 is now totally illiquid.
The REIT takes your money and "invests it" (quit making me laugh) in real estate properties that are supposed to make tons and tons of money for you. Most of these REIT's have to pay real estate sales commissions every time they buy a piece of commercial real estate. Further, they usually hire a property management firm to manage the property that they bought. Of course, the manager of the REIT has a large staff of real estate experts that have to be paid. Do not forget that they have to pay your FINRA Series 6, 7 or 22 registered representative and their firm. I wonder...after all this...how much of your $100,000 is still left? Well we know eight percent of it is gone to commission, so it is at least down to $92,000. If I am being conservative, I would suspect maybe another $5,000 is gone to all the issues that I described above. This leaves you with $87,000. Oh, I almost forgot. They are paying you 6% interest on your $100,000, so that is another $6,000 knocking your $87,000 down to $81,000.
After all that, you need a 23.46% return on your money just to break even. I know what you are thinking. These REIT guys are good managers and their last REIT made 10% last year. Well they paid you 6% in income in the first year, if they did make 10%, then your are still down for the count. Also, a little known fact is that the REIT manager gets to decide how much their return is each year. How do they do that? Well, with commercial appraisals of course. How much are commercial appraisals? They are a whole lot more than residential appraisals I can assure you. Sadly, more of your $100,000 is gone.
The worst thing about Non-Publicly Traded REIT's is they have terrible liquidity. You cannot get your $100,000 back generally for 10 to 12 years. Now, do you see why this so called "investment" is on my Do Not Buy List? I hope so, but apparently there are a ton of people out there still buying them. Sales are up on these investments, it is sad to say.
Liquidity is the name of the game. This is a news flash. You can actually invest your money so that every single thing you invest it in can be accessed within a couple of days. Now, that is a novel idea. Invest with Liquidity in mind.
Here is the rule: If it is not liquid, then do not invest in it.
Yours truly,
Rick Johnson
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