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.
Friday, June 25, 2010
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
Friday, May 28, 2010
The Critical Difference - What It Means For Someone to Work in Your Best Interests
The Critical Difference of Working With Registered Representatives, Bank Reps, Insurance Agents and Independent Registered Investment Advisers - What It Means For Someone to Work in Your Best Interests
Most of America has money in retirement plans, investment accounts and insurance products. Think about it. If you go see a registered representative at a brokerage firm, or at a bank, or an insurance agent, no matter what level of experience or designations that they hold, odds are that they will want to sell you something. The reason for this is that they have a revenue quota to keep their office perks and their job. If they fail to reach their revenue quota, then they can lose their job. If you are sold products that benefit these registered representatives and their firms, then how does that help you? The truth is that your needs are always way down on the totem pole with this business model of Banks, Insurance Companies and Wall Street firms.
Independent Registered Investment Advisers do what is in your best interest. Not all of them will do it, however. How many Independent Registered Investment Advisers will work with you knowing that you do not have $500,000 to invest? If you simply tell them that you need help getting out of debt, then watch as they tell you about their account minimum of $500,000 and let you walk out the door.
A lot of these Independent Registered Investment Advisers only want to work with customers who have money and lots of it. The thinking goes it is better to have 1 person with $1,000,000 than 10 people with $100,000 each. It is easier to manage one person as opposed to ten people. Most all Independent Registered Investment Advisers work from this business model, with the exception of one that I know of and that is me.
The Taking Control Plan is how you should run your financial life. If you start at the right side of this Money Flow, then you are benefiting the firm selling you products. If on the other hand, you take my advice and start at the left side of this Money Flow, then you are benefiting you and your family.
This should be an "ah ha" moment for you. The light bulb should be shining bright now.
If you build the solid foundation first, by paying your everyday expenses, controlling your discretionary spending with the Under Control Accounts, then setting up Individual Savings Accounts for specific short term goals like vacations or home improvements, then you can begin to build a bigger emergency fund. In today's environment, forget 3 to 6 months of expenses. Today, I recommend 9 to 12 months of expenses in case of job loss, accidents or medical issues that would cause a longer strain on your financial situation. Once you have tackled all of these, then and only then should you move on to fully funding your retirement plans and taking excess cash flow and adding it to investment accounts.
Wall Street firms, banks and insurance companies want you to buy their stuff which means starting on the right side of this Money Flow. How does this help you if you have debt, your discretionary spending is not under control and you have no money saved for vacations? You have to be smart today. Really smart.
With The Taking Control Plan, you benefit first. Isn't this truly advice in your best interests? This is what I do for you.
Not me first, but you first.
Most of America has money in retirement plans, investment accounts and insurance products. Think about it. If you go see a registered representative at a brokerage firm, or at a bank, or an insurance agent, no matter what level of experience or designations that they hold, odds are that they will want to sell you something. The reason for this is that they have a revenue quota to keep their office perks and their job. If they fail to reach their revenue quota, then they can lose their job. If you are sold products that benefit these registered representatives and their firms, then how does that help you? The truth is that your needs are always way down on the totem pole with this business model of Banks, Insurance Companies and Wall Street firms.
Independent Registered Investment Advisers do what is in your best interest. Not all of them will do it, however. How many Independent Registered Investment Advisers will work with you knowing that you do not have $500,000 to invest? If you simply tell them that you need help getting out of debt, then watch as they tell you about their account minimum of $500,000 and let you walk out the door.
A lot of these Independent Registered Investment Advisers only want to work with customers who have money and lots of it. The thinking goes it is better to have 1 person with $1,000,000 than 10 people with $100,000 each. It is easier to manage one person as opposed to ten people. Most all Independent Registered Investment Advisers work from this business model, with the exception of one that I know of and that is me.
The Taking Control Plan is how you should run your financial life. If you start at the right side of this Money Flow, then you are benefiting the firm selling you products. If on the other hand, you take my advice and start at the left side of this Money Flow, then you are benefiting you and your family.
This should be an "ah ha" moment for you. The light bulb should be shining bright now.
If you build the solid foundation first, by paying your everyday expenses, controlling your discretionary spending with the Under Control Accounts, then setting up Individual Savings Accounts for specific short term goals like vacations or home improvements, then you can begin to build a bigger emergency fund. In today's environment, forget 3 to 6 months of expenses. Today, I recommend 9 to 12 months of expenses in case of job loss, accidents or medical issues that would cause a longer strain on your financial situation. Once you have tackled all of these, then and only then should you move on to fully funding your retirement plans and taking excess cash flow and adding it to investment accounts.
Wall Street firms, banks and insurance companies want you to buy their stuff which means starting on the right side of this Money Flow. How does this help you if you have debt, your discretionary spending is not under control and you have no money saved for vacations? You have to be smart today. Really smart.
With The Taking Control Plan, you benefit first. Isn't this truly advice in your best interests? This is what I do for you.
Not me first, but you first.
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