In light of JP Morgan’s $2 Billion blunder this is a very crucial question we all should be asking ourselves. If a bank can’t even manage its own finances, what makes you think they can manage your finances?
This isn’t the Wild West. This is an institution that takes customer deposits that are explicitly insured by U.S. taxpayers and is suppose to operate conservatively lest it suffers a major “blow up.” Continue reading
Based on Investor Watchdog research, people are very dependent on the ethics of financial planners, financial advisors, and money managers. They “hope” these professionals provide ethical advice that helps them achieve their financial goals. This “hope” has a major adversary. Wall Street firms want to minimize the ethical standards that apply to the legions of sales representatives (reps) that sell their products.
Investors have a tough time measuring advisors’ competence and trustworthiness because they do not have track records or mandatory disclosure requirements. Wall Street likes it this way. In fact, financial service firms spend millions of dollars per year on lobbyists who minimize industry standards for the ethical treatment of investors. Continue reading
I believe more and more investors are following in the footsteps of the very affluent who, in turn followed in the footsteps of institutional investors (pension funds).
A Rothstein Kass study in January 2009 and an Investor Watchdog study (www.InvestorWatchdog.com) in December 2011 showed similar trends as investors moved assets away from Wall Street firms.
The Kass study tracked the movement of 100 very affluent investors. 40% moved their assets to Family Offices ($10 million minimum). 30% chose a bank trust department. 26% selected an independent advisor. 10% selected a Wall Street advisor. 9% chose to manage their own money.
The Investor Watchdog study showed 16.3% moved to Wall Street advisors and 3% for banks. The big difference in bank usage is attributable to the use of private client trust services by the ultra-wealthy.
The Wall Street franchise continues to erode.
The big money management firms seem to be getting bigger so I don’t think so.
The big firms have two major advantages that they exploit with their marketing. They have revenues that permit them to spend a lot of money are marketing. It takes more than $100 million to build a brand name in America.
Their marketing prowess enables them to become brand names. A certain percentage of investors believe they are safer when a brand name firm invests their assets.
These investors are making two major mistakes. First, size is not a good indicator of investment acumen. Chances are the company is better at marketing financial services than producing exceptional returns.
Second, investors who believe they are safer must have missed the headlines that documented billions of dollars of fines that big companies have paid for cheating investors. It is fairly well known that company executives are paid huge bonuses for short-term earnings. They are not paid to help investors achieve their financial goals.
Due diligence is the process investors use to gather and evaluate financial advisor information before they sign a contract or invest assets.
Full disclosure is a financial advisor business practice that is based on the professionals’ willingness to provide complete, accurate information to investors. Based on these descriptions, there are three types of advisors.
High quality advisors practice full disclosure because they have nothing to hide. Your questions can cover Education, experience, certifications, compliance record, criminal record, conflicts of interest, and investment expenses.
Then there are advisors who practice partial disclosure. They volunteer information that makes them look good and they withhold information that makes them look bad. These advisors are dangerous because you don’t what information is being withheld and more importantly why it is being withheld.
The last group of advisors practice non-disclosure. They use personalities and sales skills to market investment and insurance products. They hope you do not ask them meaningful questions and if you do they use four deceptive sales tactics to avoid providing truthful responses: Omission, misrepresentation, exaggeration, and verbal responses so you have no documentation.
In modern America, there are two ways to achieve this financial goal.
One is the traditional way. Come up with a great idea. Develop a strategy for achieving goals. Raise some capital. Execute the strategy. Make changes as necessary. Raising capital is iffy because most investors do not want to risk capital on unproven ventures. In fact, most entrepreneurs have to give up a lot of equity to get the capital they need to develop an idea into a business that has revenues and profits.
Then there is the non-traditional way. Become a politician and vote for regulations that apply to the people who elected you, but not you (Insider Trading, IPOs). Then use the exemptions to become a millionaire.
Also, people will give you money, lots of money, to help you get elected. And, you do not have to pay them back. They are willing to fund your campaign to get favorable treatment when you are elected. Their payback is regulations that enable them to make more money and retain more of that money after tax.
Politicians don’t give up equity to raise money, they give up their integrity.
The political route seems easier and safer. Maybe universities should start offering classes on how to become a millionaire by getting elected to public office.
And, we wonder why our country has problems.
I say “absolutely not” if the agent’s primary business is selling auto, home, or health insurance. It is a different story if the agent’s main business is selling variable annuities and other investment products inside insurance contracts. Even then you should be questioning the agent’s experience, registrations, and certifications.
You might be asking, “Why do auto insurance agents sell investment products?”
Because they work for greedy insurance companies who are run by executives who put their companies need for profit way ahead of their customers’ need for competent financial advice.
Visualize this! A group of executives are sitting around a conference table one day and one of them says “Our biggest asset is our three million customers. What else can we sell them that will generate new revenue streams for the company? This new business will have great profit margins because we already have the distribution system in place?”
The executives all nod their heads in agreement. New revenue streams mean increased profits and increased profits mean bigger bonuses. As usual, customers are just a means to an end.
Don’t kid yourself! This is how all of the big casualty insurance companies got into the financial services business. They decided to leverage their customer relationships by cross-selling additional products. Apparently mutual fund products and car insurance products have a lot in common.
You may like your car insurance agent, but that does not mean he is qualified to recommend investment products – in particular for assets you are accumulating for retirement.
Buyer beware!
What is full transparency when you buy investment advice, recommendations, and products?
Transparency occurs when investors are provided an easy-to-read document that contains all of the facts they need to make an informed decision when they select advisors and invest their assets.
Wall Street spends millions of lobbyist dollars per year fighting transparency. Corrupt politicians who are more interested in Wall Street money than serving the interests of the American public make sure regulations favor companies and not investors.
What is Wall Street afraid of? In a nutshell, companies are afraid investors would not buy what they are selling if they knew the truth. Transparency would damage revenues and profits of companies and the bonus compensation of the executives who run the companies. Wall Street’s solution is to keep investors in the dark.
So what are they hiding?
How about financial advisors who lack experience, education and certifications? Or, advisors who have numerous investor complaints on their compliance records?
How about financial advisors who use deceptive tactics in verbal sales pitches so investors have no written record of what was said to them.
How about investment products that that have excessive expenses and poor performance?
How about “beat the market” investment products that have never beaten the market?
In January, 2012, Investor Watchdog is going to begin providing free tools that investors can use to obtain the information they need to select and monitor quality advisors who are willing to practice full disclosure. Watchdog tools will also expose advisors who withhold important information from investors.
Watchdog tools have the potential to change the game in favor of investors.
If you are like a lot of investors you lost 50% of the market value of your assets due to the market meltdown that occurred in late 2007 and 2008 – the Dow dropped more than 7,000 points.
That is very bad news. Even worse news is the number of years it will take to recover those losses. Do the math. You have one dollar and its value drops to fifty cents. You are down 50%. However, you need a 100% rate of return to grow fifty cents back to the original dollar. Your assets have to double from their depressed values.
Unfortunately, that is not all of the bad news. You really need more than 100% to fully recover.
Let’s assume the securities markets average a 20% per year return, which would be exceptional performance over a long period of time. Allowing for some compounding, you should have your dollar back in 4.5 years.
Or, maybe not! You also have to recover 4.5 years of investment expenses which could another 10% or more to your recovery amount. Plus, you need additional return to offset the impact of five years of inflation that reduces the purchasing power of your assets, in particular retirement assets.
You may need a 120% gain to offset a 50% loss.
Your best strategy for reducing future losses and speeding up recovery periods is to make sure your advisor is competent and ethical and he/she provides sophisticated investment services that manage risk as well as pursue performance.
Wall Street companies cheat investors to maximize earnings, share prices, and executive bonuses.
When they are caught, companies pay fines to make the problem go away.
The latest example is Citigroup’s agreement to pay a $285 million fine to settle an SEC action that stated it sold investors $1 billion of a CDO then bet against the performance of the CDO. Investors lost $700 million and Citigroup made $160 million.
Citigroup is one of the biggest financial institutions in the world. If you can’t trust Citigroup, who can you trust?
Citigroup agreed to pay the fine without admitting guilt. If they didn’t do anything wrong why did they agree to pay the fine?
First of all, fines are a cost of doing business for Wall Street firms. They probably have a contingency fund to pay fines.
Second, they want the “problem” to go away as quickly as possible to minimize adverse publicity.
Third, Wall Street knows investors have very short-term memories. Very shortly, Citigroup’s alleged fraud will be yesterday’s news and it will be business as usual. I bet not one investor pulled their Citigroup accounts because the “problem” did not impact them.
What about the investors who lost the $700 million? Can they still afford to retire when they want to? Can they maintain their desired standard of living during retirement?
What about the executives who made millions from their decisions to package toxic assets and sell them to investors?
What about the fiduciary responsibility to always put investor interests first? I know the answer to this one. Brokerage firms are not held to fiduciary standards. Shame on FINRA and the SEC.