Investor Watchdog – Finance Education

BofA Merrill Adding 2,000 Brokers

By: Jack Waymire | February 3, 2010 | Deceptive Sales Practices, Sales Representatives

The Financial Times reported BofA Merrill Lynch plans to hire 2,000 brokers over the next 12 months. They will hire inexperienced brokers rather than pay big upfront fees for established professionals. These brokers will market investment products to BofA’s 17 million mass-affluent customers who need wealth management services.

Alois Pirker, research director at Alte Group LLC thought this was a smart strategy, “If you don’t leverage the opportunity, you might as well split (BofA and Merrill) up again.”

I have a different take. BofA has developed a relationship with its customers delivering traditional bank services and not investment services. Now it wants to generate more revenue from these relationships – Mr. Pirker called it “leverage the opportunity.”

Leveraging relationships is good for BofA and bad for its customers when it adds 2,000 newly minted brokers to sell bank, investment, and insurance products. In my opinion, these brokers should come with the following warning label: “I am a brand new broker. I don’t know how to help you achieve your financial goals. But, I have been trained to sell you bank products.” This is not wealth management; this is product sales disguised as wealth management.

This is a common bank strategy. Build trust with traditional bank services and then use the trust to sell investment and insurance products. BofA customers beware. Make sure you ask brokers for documentation that describes their experience and other sources of investment expertise before you buy what they are selling.

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Roadmap to Financial Reform

By: Matthew Arndt, CFA, CPA, CFP | February 1, 2010 | The Politicians, The Regulators

It’s conceptually simple: take away any government protection for stockholders, management and creditors of large financial institutions to help shrink their appetite for risk-taking. For instance, in the case of the Bear Stearns debacle stockholders should have been wiped out; management should have been fired; and the bondholders should have suffered significant losses. Instead, stockholders received a renegotiated price of $10 per share; incompetent management was retained; and as it stands, the debt-holders of Bear Stearns stand to receive all interest payments and 100 percent of principal. This latter approach does not instill market discipline or uphold capitalistic ideals.

By not having consequences for taking risk, our current approach to protecting banks facing insolvency will only create moral hazard which implies that financial institutions deemed “too big to fail” can continue to count on public support at critical times. This perceived public “safety net” will only encourage excessive speculation at large commercial banks and will undermine the stability of our financial system unless sensible reform is implemented. There needs to be a mechanism by which any failing institution allowed to receive public aid would be subjected to an orderly dismantling where taxpayers would not be exposed to excessive losses in the event there is a bankruptcy. Creating considerable negative consequences for those involved in risk-taking at banks will go a long way to stabilizing our financial system.

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Financial Advisors Could be Politicians

By: Jack Waymire | January 29, 2010 | Deceptive Sales Practices, The Politicians

I was reminded the other night, watching President Obama’s State of the Union message, that politicians and low quality financial advisors use the same deceptive sales tactics.

First, Obama told people what they wanted to hear. They wanted to lower unemployment; he will lower unemployment. They wanted economic growth; he will create growth. Financial advisors use the same tactics when they tell investors they deliver high returns for low risk.

Second, Obama did not communicate any strategy for achieving many of his lofty “goals.” His strategic initiatives were deliberately vague so there is no measureable accountability. Less ethical financial advisors use the same tactic when they claim they can produce high investment returns, but provide no audited track records for past results. They hope you buy their claims so they can sell you their products.

Third, Obama added spin to make his agenda sound more realistic. He pays his public relations gurus a lot of money to produce spin that people will buy. The most important point about spin is that it is not true. An example of financial spin occurs when advisors show investors the track records of hot products. Then they tell investors they know how to identify hot funds before the performance occurs.

Fourth, Obama delivered his messages with as much conviction as possible. Conviction is a sales tactic that makes claims and spin more believable. Naive voters and investors tend to trust people who really “believe” what they are saying. TV evangelists are the epitome of conviction.

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The Big Money Market Fund Freeze

By: Matthew Arndt, CFA, CPA, CFP | January 28, 2010 | Investor Information, The Regulators

All those invested in Money Market Funds beware. In a nearly unanimous vote the SEC has made it legal for Money Market Funds to have the ability to suspend redemptions if they see fit. So as it stands if there were another financial meltdown, money market investors would NOT be able to withdraw their money if the Money Market Fund decides to exercise this right. Isn’t a Money Market Fund deposit suppose to be highly liquid investment comparable to a cash deposit? Wouldn’t this sort of rule impose significant hardship on investors who rely on their ability to redeem shares at a moment’s notice? Who in the hell are these guys at the SEC working to protect? Guys like Madoff? This is truly a head-scratcher!

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The American Aristocrats

By: Jack Waymire | January 27, 2010 | Investor Information, The Politicians, Wall Street Ethics

There are aristocrats�in the U.S., but membership in this exclusive club is not based�on bloodlines, it is based on money and political power. The new aristocrats are�key executives of major companies who�control the money and Washington politicians who�control the power. Politicians need money to gain and retain�power.�Executives need favorable regulations�to maximize profits and bonuses. They�work together.�Their intermediaries are called lobbyists.

The executives’ companies�are organized�into “special interest groups” so they have even more�power.�They�pool their resources because they have the same needs and interests.�For example, they�want�weak regulations with numerous�loopholes that�allow companies�to�maximize�profitability, not to mention the executives’ seven, eight, and nine figure�incomes.�This could not happen without the collaboration of the politicians. They sell votes on critical legislation for�money.�They get away with it year after year because they are�powerful aristocrats.�Unfortunately, voters and consumers are disorganized and weak.

You have seen the�devastating impact of the aristocracy. Twice in the past decade�(2000-2002, 2007-2008) Americans lost trillions while Wall Street made billions. These devastating events�were�engineered by Wall Street executives and their political allies. But, nobody goes to jail if you have enough money and the right connections.

There is a good chance you�feel powerless to do anything about the new aristocracy.�It has�huge�amounts of money and power. In addition, you have your own interests to protect. This creates�the�vacuum that is occupied by the new aristocrats.

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The Phony War on Wall Street

By: Jack Waymire | January 27, 2010 | The Politicians, Wall Street Ethics

The politicians are incensed about the economic damage that was caused by Wall Street greed and stupidity. As�ususal�politicians are telling�an outraged public what it wants to hear: “We will enact new regulations that will prevent this type of economic�meltdown�in the future.”�The finance, insurance, and real estate industries contributed $85 million to federal lawmakers in the 2010 election cycle, according to the nonpartisan Center for Responsive Politics. According to�Consumer Watchdog, the 23 members of�the Senate Banking�Committee received $42 million in campaign contributions�between 2005 and 2009.

Politicians accepted�millions of dollars from the biggest special interest group in the U.S. to do what?�There are three answers. First, kill any legislation that impacts the revenues and profits of the financial services companies. Second, if they can’t kill the legislation, water it down, so it sounds like real change, but has no significant impact on company revenues or profits.�Third, delay any decisions on new regulations until it is no longer an important issue for most consumers.

Wall Street and the politicians know Americans have short memories. Our primary concerns are more personal than the regulations that govern Wall Street. However, in the absence of meaningful, new�regulations,�the trillions of dollars of losses that�we�experienced twice in the past decade (2000-2003 and 2007-2008) will happen again. Just wait a few years.

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