Investor Special Reports

Are you a believer in Solar Wind Power? Do you also believe that investing in solar companies is a good thing? Further, do you believe that you might become rich by doing so? Well, think again.

I received one of those "Investor Special Reports" in the mail from a so-called "expert on solar." This was like a 12 page or so newsletter formatted information sheet on this solar wind turbine maker. It was very convincing how they presented the company. The goal was for investors to rush out and by the company's stock. I am sure many people will, or should I say many people will foolishly do so, because this newsletter appealed to their greed.

Personally, I think it is foolish to invest in one stock. Nevertheless, I thought that I would do some research on the stock to see what I could find. The first thing that jumped out at me is that this was a penny stock trading for less than $0.60 a share. Major red flag.

The second major red flag came when I looked at their SEC filings. Their accounting firm had resigned, because they felt that the company was not "going to make it as a going concern." Another major red flag.

As I shifted through more SEC filings, I discovered that the company has $731.00 in cash on hand as of April 2011. Seven hundred thirty one dollars? Are you kidding me? Final major red flag.

Three strikes and you're out!

What is sad is that most people will make their investment decision based on two things.

1. The price of the stock is so low, then will believe that they can buy a lot of shares and most likely will do so, thinking they can't lose much money.
2. They will make their decision based on the newsletter without spending a minute researching the stock.

This appears to me to be the new twist on an old classic; the "pump and dump" of a stock. The idea is for the newsletter to bring in the greedy fools. The insiders wait a little while, then dump their stock at a profit. After that happens, then the stock crashes down to probably less than $0.10 and most of the the investors will end up losing over 80% of their money.

Remember the name of my book?

Keep Your Assets. Take My Advice.

If my book title is not more apropos in this situation, then I do not know when it would be.

How is it possible for an RIA not to work in your best interests?

I have always been a big fan of Socrates and the Socratic method of arriving at decisions. Socrates would always ask questions of people to try and get them to justify their positions. In all cases, Socrates would act less informed and question his pupil repeatedly to teach them that they were actually ill informed and the position that they have taken was without merit. Most times these people took the advice of someone else and did not really have a position of their own. With this in mind, let us ask some questions to see if we can arrive at the answer of how it is possible for an RIA (registered investment adviser) not to work in your best interests.

I have to wonder about some of these big registered investment adviser firms out there who are getting other registered investment advisers to outsource their investment management to their mega firm. There are several of these big independent firms that manage billions of dollars of other investment advisers' clients. The thing that goes against the grain for me is all of the extra fees involved.

I was looking at the Form ADV 2A and 2A Appendix of a large $14 billion dollar firm which is growing like a weed and attracting a lot of registered investment adviser money. In effect, it is the feeder fund concept that several registered investment advisers got into hot water about in regard to Bernie Madoff. They referred their clients to Bernie Madoff and did not do their due diligence. That is another story altogether. Today, I wanted to forget about the feeder fund aspect for a moment and just focus on the fees.

This big $14 billion dollar registered investment adviser firm has several different programs available, such as mutual fund asset allocation, ETF asset allocation, strategic ETF asset allocation and so on. Their fees are as high as 1% on some of these accounts for smaller investors with less than $250,000. Then, you have to add whatever the adviser who referred the client to them charges on top of that figure which is usually in the 1% - 1.5% or more range. Do not forget the actual expenses of the investments themselves. According to the Investment Company Institute's latest FactBook, the average equity mutual fund has an expense ratio of 0.99%.

So, if the big mega firm charges 1%, perhaps the adviser goes easy on you and only charges 1%, then you are in the mutual fund portfolio that charges another approximate 1% in expenses. It doesn't take a smart fellow to figure out that this is about 3% a year. I've actually seen worse than 3% believe it or not.

It is great for the adviser who refers his client to this big fourteen billion dollar outsourcing firm. The adviser no longer has to mess with a bunch of back office headaches and can probably cut his overhead. Further, it probably frees up more of the adviser's time. They do not have to worry about how they are going to invest their client's money any more. They hired someone to take that off their plate. Did you notice how beneficial it was for the adviser?

Conversely though, how beneficial is it for the client? Could another adviser not offer a similar mutual fund asset allocation portfolio that they manage for 1 - 1.5% instead of outsourcing to the big mega firm? It would seem to me that the client would reap the benefits of a 1% savings if this was the case.

What about if the adviser managed a portfolio of ETF's on behalf of the client? ETF's have lower expenses and may actually save the client another 0.50 to 0.75% in expenses if the adviser managed these ETF's on behalf of the client, instead of outsourcing it to a mutual fund portfolio at the big 14 billion dollar mega firm.

But, there is a problem by going with a local adviser who picks the investments his or herself. What happens to the client's money if the adviser is injured or disabled? This obviously presents a problem. Sometimes this is the advisers justification for going to the big mega adviser. This does make some sense, however I beg to question if there are other big mega advisers who perhaps charge a more reasonable fee for outsourcing money management to them? The answer is yes. I can think of one in particular that charges a maximum of 0.41% for their money management expertise and that fee grades down from there depending on the total assets managed. They are a big mega money manager who does an excellent job. So, with this alternative, you may be able to get a client's portfolio of ETF's to be roughly around 1.5% to 1.75% all in. This alternative would save the client of the other big fourteen billion dollar mega firm about 1.25 to 1.5% a year, would it not?

So when the title of this blog asks how can an RIA not work in your best interests, then I have provided an answer. When an RIA knows full well that he can find a comparable mega firm for significantly less per year, but chooses to still use the higher priced mega firm, then this is a undisclosed conflict of interest. Unless of course, they explain that there are other mega firms who may charge lower fees in their disclosure documents and you as a client know this and agree to this in writing.

Also, if an adviser can manage the money themselves for their clients instead of outsourcing it, then they will save the clients money in fees. Granted a backup plan is necessary if something were to happen to the adviser, but this can be planned like anything else. A local adviser should have a repeatable process of investing that most any other adviser can look at and implement. (We do.) If not, then you probably do not want to do business with that adviser. Especially if they are just shooting from the hip.

So, the bottom line is when you are advised to go with a big fourteen billion dollar mega firm, you might want to shop around for other mega firms if this is the direction you want to go in. You could save yourself a lot in fees and get a comparable service, if not better.

If you want a big mega firm managing your money for a reasonable fee, then let me know. I can help. Of course, you will receive full disclosure in advance. This offer is only available for clients in states that we are licensed in or maintain an exemption from licensing. Contact me at rick@marianfs.com for full details.

Rising Interest Rates & Its Effect on Fixed Income Investments

How long have we been listening to pundits on television tell us that interest rates are going up? One pundit on Fox Business actually said today, "you would be an idiot to buy bonds right now." This guy is the actual idiot in my opinion. He is broad brushing all of fixed income as being bad. As is true of most television pundits, he is flat out misguided.

Let's think about the possible rise in interest rates by the Federal Reserve for a moment. What is the main reason for them to raise interest rates? Historically, it has been to keep inflation in check. Well what has to happen for there to be inflation? Wages have to go up and the economy has to be expanding. My question to you is are we in the kind of economic environment where the economy is growing at a strong pace, personal incomes are rising and prices are also rising. Well, right now, only one out of three of these is happening, albeit modestly. This of course would be inflation.

In reality, we really have low inflation right now with some spikes like in energy and food. These two economic sectors are generally highly sensitive and volatile and usually spike up, then pull back. This is exactly what has happened. So, as of today, I would say that we had a short term spike in inflation, but it does not appear to be a strong upward trend.

Even assuming you believe the White House's take on the economy which I personally believe is way to optimistic, we still have horrible problems with housing and unemployment. The strength of this economy is not going to do much of anything without drastic action. The Democrats will lie and spin like they always do and the Republicans will pretend that they do not spend taxpayer dollars like drunken sailors. Both political parties are a train wreck in my opinion and the future is bleak for any meaningful change for at least until the next election.

A case in point is to look at both parties budget plans for the next 10 years. The President's plan expects to spend $27 trillion over the next 10 years. The Republicans expect to spend $26 trillion with Representative Paul Ryan's budget. In the grand scheme of things, that's not much of a difference over a ten year period.

So, when you think about interest rates rising, they typically rise faster in a strong economy. Are we there yet? Nope. High unemployment, a huge amount of housing inventory and little inflation are not the cornerstones of a scenario where interest rates are going to go up in a hurry. When they do go up, it is more likely to be a gradual increase and not necessarily a shock to the markets.

When a gradual raising of interest rates happen, it has the most effect on short term interest rates and less effect on long term rates. With a caveat, preferred stocks and high yield bonds typically pay the largest price when interest rates go up. Believe it or not, municipal bonds typically are not affected like high yield bonds are for example. The dividends tend to offset the increase in rates.

Do you really and I mean really think the Federal Reserve Bank is going to raise interest rates more than 1% any time soon? Forget about the idiot people that you see on television. Think for yourself.

Personally, I do not see interest rates going up a full 1% for probably at least one year or more. The only thing that would change my mind would be if Congress and the President eliminated the IRS, instituted a flat tax of less than 20% and lower the corporate income tax to 25%. The likelihood of all that happening in the next 12 months is slim to none. Therefore, I would not worry about interest rates going up more than 1% in the next 12 months.

Let's check back in 12 months and see if I was correct, shall we?

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.