When Will the Wall Street Firm Abuse End?

If this is not proof of a Wall Street firm's shenanigans, then I do not know what is. Wal-Mart Stores, Inc. was sued in the U.S. District Court for the Western District of Missouri over Wal-Mart and certain employees who allegedly violated their fiduciary duties by selecting retail mutual funds as investment options, rather than lower fee institutional class funds. In addition, it was alleged that these same defendants breached their fiduciary duties by failing to disclose certain fund expense and revenue sharing information. In layman's terms, this means that the mutual funds being sold to Wal-Mart employees were loaded with 12b-1 fees that paid the Wall Street firm and its advisors excessive trail commissions.

Unfortunately, today there are a ton of 401(k) and Profit Sharing Plans that do this very same thing. This is your wake up call if you own a business. You cannot do these kind of shenanigans any longer. Every attorney in the country will take notice of this case and brother you better believe it when I say they will be looking at every 401(k) and Profit Sharing Plan that they can find to see similar violations of fiduciary duties. If you have yet to be sued over your 401(k) and Profit Sharing Plan, then get ready. The litigators will find you. All 401(k) and Profit Sharing Plan information is publicly available to anyone. All they have to do is look up your 5500 forms on www.FreeERISA.com.

If you are a business owner with a 401(k) and Profit Sharing Plan, or 403(b) or 457 Plan, then you better take notice of what I am saying here today. Good practices include:

• Retaining an investment consultant who can acknowledge ERISA fiduciary status in writing and that this investment consultant be reviewed annually for conflicts of interest;
• You should make available web-based investment education resources to Plan participants;
• You should eliminate any investment options that include mutual funds that pay 12b-1 fees, and funds that provide revenue sharing or similar fees to any party at interest, including the Plan's trustee or recordkeeper;
• You should consider adding passively managed funds as investment options; and
• You should comply with the Department of Labor's participant disclosure regulations.

There are more important issues than those mentioned here, but this is a good start.

When I was the Branch Manager for Charles Schwab several years ago, I had a retirement plan guy come in to talk to me and my team. He told us how wonderful his firm was and how they could put all these really good mutual funds in the 401(k)'s that they wanted to be the third party administrator on. I asked him how much it costs and he told me that it was all taken care of with revenue sharing and 12b-1 mutual funds. The guy never would tell me or disclose his fiduciary duty to me and my team. This is how these Wall Street types sold the 401(k). They would tell the employer that it "doesn't cost you a thing. It is all internal to the funds." In other words, screw the employees. I never did business with him, because I knew that what they were doing was a clear breach of fiduciary duty. Looks like it is business as usual some eight years later. Nothing much has changed, especially when you have a Wall Street firm in the mix.

If you are a business owner and want to talk about how to protect yourself from breaching your fiduciary duty, then give me a call. If I cannot help you, then I will refer you to someone who can. I promise you it will not be a Wall Street firm.

Blinded by Wall Street

A so called "Vice President of Investments" recently responded to an article online trying to state his position as a Wall Street Broker and how he was just as "fiduciary like" as Independent Registered Investment Advisers. What a bunch of baloney! He claimed his advice was suitable and he looked out for his customers. What a joke! Do you realize that most all Wall Street Brokers are Vice Presidents of Investments? This title in and of itself is totally misleading.

Fiduciary like? There is no such thing as "fiduciary like." This shows how blind these Wall Street Brokers are when it comes to doing the right thing. They have actually convinced themselves that selling products from the inventory of their Wall Street brokerage firm is perfectly okay. They have also convinced themselves that selling a client a Variable Annuity in a IRA account that pays them 6 to 8% commission and locks the client in for 10 years or more is perfectly okay. That is instead of opening a regular brokerage IRA account without a 10 year or more penalty for early withdrawal. Further, they convince themselves that it is okay to sell mutual funds that charge a 5.75% sales load, when no load funds are available to them to offer to clients.

A read an article online recently that said over 90% of the Registered Investment Advisers out there today are also affiliated with a Wall Street firm, a Bank or an Insurance Company. This means that there is only 10% of us true fiduciaries out there. So, look out. Nine out of ten people out there today giving financial advice is doing so in their firm's best interest, not yours.

In my humble opinion, the battle the fiduciary standard is going to end with Wall Street brokerage firms, Bank and Insurance Company clients getting the shaft. There is already talk on the street of how the fiduciary standard is going to be watered down to allow the same Wall Street revenue generating brokerage machine to continue. Banks and Insurance Companies will continue business as usual. People will continue to be given financial advice that favors:

1. The Wall Street firm first, or the Bank or Insurance Company first.
2. The Wall Street Broker, or excuse me...I meant Vice President of Investments.
3. I interrupt this list for an important message. I just realized that if you get your advice from a Wall Street firm that is owned by a bank and you are sold a Variable Annuity, then the Wall Street firm, the Bank and the Insurance Company all benefit before you. Yikes!!
4. Last on the list unfortunately is you.

It astounds me that anyone would ever obtain their investment advice from either a Wall Street firm, a Bank or an Insurance Company when the cards are stacked against them from the get go. Do you get your financial advice from a Wall Street firm, a Bank or an Insurance Company? Why? They do not care about you and they are not on your side. More importantly, they do not do what is in your best interests.

The good news is that there is a better option. Independent Registered Investment Advisers who have no affiliation with a Wall Street firm, a Bank or an Insurance Company. Sadly, we do not have millions of dollars that we take from clients and pay to Congress in order to get our way. We simply just keep plodding along hoping that one day, the people of America will wake up and realize that doing business with an Independent Registered Investment Adviser is the only place to obtain your financial advice.

Keep Your Assets. Take My Advice. Seriously.

Merry Christmas, Happy Hanukkah and Happy New Year. God Bless.

Multiple Seminar Attendees Get Bad Advice

It is amazing that even when you lay yourself out there for all the world to see, people still gravitate towards the advisors (don't make me laugh) who claim to protect seniors. I recently held a seminar where I showed people my background right in the seminar. I showed them how to look up my background in several different places on the web. Further, I explained to them that I am compensated by fees. Apparently some people do not care if you are honest and upfront to them. They would rather someone lie to them and take them for as much commission as possible.

Recently, I received a call from someone who attended my seminar and they wanted to know how to get a hold of one of my competitors. This senior person was confused about who she was calling and could not remember whether my competitor worked for me or the people that ran the other seminar that she went to recently. If she is already confused, sadly this means that my competitor will likely have a field day and take her for everything they can.

This competitor is not licensed as a financial advisor but rather only as an insurance agent. They blatantly promote on their web site that they sell annuities. They also claim to offer financial planning. Here is a news flash. You cannot say you do financial planning unless you are a Registered Investment Adviser. This firm is breaking this rule big time. ( I always wonder, why is it so easy for me to find these snake in the grasses, but the regulators never can seem to find them?)

They also have video testimonials on their web site (which the last time I checked were illegal.) It is very obvious in these video testimonials that the seniors in the videos were "coached" to say certain wonderful things about the annuity sales person. The whole purpose of these video testimonials is to establish trust and credibility for the seniors that view them and sell more annuities, of course.

This firm of annuity sales people claim to have an office, but I know their office to be one of those that you just rent when you have a meeting. The sad thing is that they will not tell the seniors that they are advising that the office is not really their office. Nor will they tell them that the mailing address to this rent by the appointment office is there to imply that this really is their office.

I have an ethical question for you: Do you think it is alright to operate your business in this manner and not tell prospective clients that this is really not your office?

My answer is not no, but h**l no!

A senior who needs help planning for long term care will have a problem when they have a portfolio of annuities. Most of these annuities will have a 10 year surrender charge. This is because they pay the agent the most commission when they have a 10 year surrender charge. A lot of these annuities can be converted into a guaranteed income stream, but if they are trying to qualify for public benefits, then they will have a big problem. A lot of the annuities sold out there have a minimum of 10 years that you can annuitize. However, if an Elder Care Attorney advises that the annuity can only have a 5 year term, then this will disqualify the senior from public benefits. This means that they will have to spend their all of annuity money for their long term care needs BEFORE they can qualify for public benefits. Do you really think the annuity sales person is going to admit this potential problem when they are looking at commissions of $7,000 to $10,000 or more? Keep your assets. Take my advice. They will not tell you about this at all, because if they do, then they would lose the potential commissions.

I will keep telling people my background, disclosing all conflicts of interest, explain my fees and delivering great advice while I am up against competitors like the one described above. You see what guys like me are up against? I do not mind competition, but come on man! At least be legal and ethical competition.

Stay safe out there. Watch out for your mom and dad.

Should You Invest in a Hedge Fund?

If you are an individual investor, then in my opinion, the short answer is no. The question is why should you invest in a hedge fund? It boggles my mind why people continue to want to invest in things that they cannot see, touch, feel, hear or taste. Well maybe I am going a little overboard, but most people want to invest in a hedge fund because of one of two reasons.

1. Performance
2. Hedging a portfolio against a shock to the market.

Number one is clearly bad. You should never and I mean never invest with anyone based on their performance. Suppose a hedge fund manager had great performance for the last year. This does not mean that they will have great performance for this year. Performance is the world's worst reason to invest with anyone.

Number two can be accomplished in other ways. You do not have to give your money to a superstar hedge fund manager (who is basically a gambler with your money) because there are now other options. Hedge fund managers take positions that they believe will be profitable in the future. Sometimes they are right and sometimes they are wrong. It is like investing in general. You can have good years and bad years.

I can show you 5 different examples to hedge an index like the S&P 500®. By the way, do not do this at home. This is not investment advice, rather educational in nature.

1. If you believe the S&P 500® is going to go up, then you might buy 100% S&P 500® index.
2. If you think the S&P 500® is going up, but you do not feel real strongly about it, then you could do a 130/30 long short on it. That is 130% long and 30% short the S&P 500® index.
3. Or, if you are not sure of which way the S&P 500® is going and you just want to preserve capital, then you could go 50/50 long and short. You will not make anything nor lose much besides trading costs. Your portfolio value should stay close to where it is currently valued.
4. If you are a bear on the S&P 500®, but not a total bear, then you could go 130/30 short long. Or 130% short and 30% long S&P 500®.
5. If you are a real bear on the direction of the S&P 500® and firmly believe the market is going straight down, then you can go 100% short the S&P 500® index.

What is the right answer? There is no right answer.

Obviously, there is perfect timing for each of these strategies, but also significant risk to each of them if you are wrong. Hedge fund managers do more than make these type of decisions. I wanted to explain to you the various options available to them in simplistic fashion. When they invest your money, they are making a bet similar to one of these five strategies. When they are right, they are heroes. When they are wrong, they are goats.

There is more risk to investing in hedge funds than meets the eye. The SEC recently charged two Minnesota based hedge fund managers and their firm for facilitating a multi-billion dollar Ponzi scheme. (Not again.) See this link below.

http://www.sec.gov/news/press/2011/2011-237.htm

Here is something that I want to get across to readers. Stay with visible, publicly traded investments. Do not fall for the sales pitch for non-publicly traded, exotic or offshore investments. Know where your assets are custodied. Compare your statement to that of your custodian. Be clear on who is managing your money. Know what a feeder fund is and how it functions. Most importantly, know what you do not know.

Stay safe out there.