Category Archives: Advisors

Watching the “market” squeeze the “false credibility” out of the “experts” these past few days has been entertaining if nothing else.  After Monday’s drop the message was that “everyone should have seen the correction coming.”  For example, the lead story in the New York Times read “Signs, Long Unheeded, Now Point to Risks in U.S. Economy.”  OOPS!

I never have liked the term “correction” to explain a move in the market indices.  By definition it implies that the market “got it wrong,” being under or over valued.  So looking at the market as I write this, I guess the past few days the market “over corrected” and has now “corrected” the “correction.”  You can see how this starts to become a bit silly, but it also shows how little credibility should be given to the “talking heads” and journalist posing as “experts.”

But alas, they are not the problem.  As Pogo once said, “we have found the enemy and it is us!”  Investors, both large and small, demand an explanation regarding what has happened in the past, but more importantly, a forecast of what to expect in the future.  The first demand, an explanation of what has already happened, that’s not worth much.

The second demand, a forecast of what the market will do in the future, that would be invaluable, if only it was accurate.  Anyone who could make accurate forecasts consistently, would have unlimited wealth and not be spending their time on CNBC or Fox Business News sharing their forecast with us.

For you advisors, about a year ago, four years into a bull market, I suggested you hold a “fire drill” for your clients.  If you did, great, if not perhaps this would be a good time.  For you investors, not speculators, you are in it for the long run, so don’t waste your valuable time stressing about the market.  Enjoy your life knowing with certainty, that you will have a successful investment experience.

I have shared with many of you, stories of my brief experience as a stockbroker for a major wire house back in the mid 80’s.  My experience was brief because it was apparent, from day one, that the lack of ethics and the exploitation of investors were ingrained in the firm’s culture.  My favorite “take away” from the many “sales meetings” was:  “if you can’t sell it with a clear conscience, we will find someone who can.”  (By the way, these sales meetings were always held in the basement far from the ears of customers.)  There were other cultural rules to be followed but the message was always clear, I was there to make money for the firm.  I was not there to provide investment advice, even if that was the advertised role of the broker.  It was apparent investors needed an alternative.

Fortunately investors do have a better alternative today, the “fee-only advisor.”  Being a part of the development of this new profession I came to know a great number of this new breed and many of them were “converts” from the “dark side” as I love to call it.  This conversion was easy because they had a conscience and wanted to work with a “clear conscience.”  As the years went by, I would hear stories about their experiences on the “dark side,” and they would always tell me that their experiences were similar to mine even if it was 10, 15, 20 years later.  In other words, nothing has really changed.

Thanks to research conducted by some folks at the University of Notre Dame you don’t have to take my anecdotal evidence that the Wall Street culture has not changed.  I came across this from a New York Times article yesterday summarizing the research.  Over 1400 Wall Street employees participated in the confidential survey.

You can and should read the survey but here are a couple of highlights:

1.    Of those earning more than $500,000 annually, 34% have witnessed, or had first hand knowledge of, wrongdoing in the workplace.

2.    51% of these folks believe their competitors are engaged in unethical or illegal activities to gain an edge in the market.

3.    32% of employees with less than 10 years experience would likely use non-public information to make a guaranteed $10 million if there was no chance of getting arrested for insider trading.  So much for a new breed of stockbroker.

4.    Nearly one third of respondents believe the compensation structure could incentivize employees to compromise ethics or violate the law.

There is more but you get the idea.  But here’s the kicker, the reporter writing the article was trying to make the point that Wall Street has not learned its lesson, even after the last recession.  I disagree; Wall Street learned its lesson decades ago.  Keep politicians, who make the laws, beholden to you while they are in office, and reward them, after they leave office.  Wall Street has no incentive to change the culture.  There is too much money to be made.  No one ever goes to jail and the billions in fines are insignificant relative to their bottom line.

Note:  nytimesdealbookmay182015

The death of “conflicted investment advice” may be at hand.  When commissions were banned in both the U.K. and Australia, I applauded their Regulators, who took a stand for investors against the Financial Industries in their respective countries.  It was a long time coming but it is now a reality.

Having witnessed these developments I began to speculate whether or not such a ban could ever be implemented in the U.S.  Being aware of the strong financial ties between Wall Street and politicians of both parties, I have been skeptical that such reforms could ever become law in the U.S.

However the debate has begun.  The arguments against banning commissions are twofold:

1.    “The small investor will be left out of the advice market.”  Excuse me?  That should be one of the main objectives of any legislation.  Small investors are exploited more than others because they are sold the products with the highest commissions.  Otherwise it is not worth the sales person’s time.  Once people realize they are being ripped off, they will be motivated to invest some time learning how to invest their savings.  I used to say, if people would spend as much time making investment decisions as they do when making decisions about which car to buy, they would have a much better investment experience.

2.    “Thousands of jobs will be lost in the Financial Services Industry.”  This brings back memories of when I would write about “conflicted advice” in Investment Advisor Magazine.  I would get emails (maybe it was “hate mail”) accusing me of destroying the sender’s career.  My response would be, “if your career is based on ripping people off, perhaps a new career may be needed.”

Both of these arguments are what I would expect.  They put the Financial Services Industry’s interest ahead of the investors’ interest.  Wall Street is not going to roll over without a fight.  There is too much money at stake.  Rather than simply ban commissions, they will likely settle for a slight tightening of the rules regarding their fiduciary responsibility that requires them to put the investors interest first and no doubt the training syllabus for new brokers will include a course on “how to comply with the law while still maximizing commission income.”  If that is all the reform does, enforcing such a rule will be cumbersome and expensive.

Simply banning commission would be a much more effective way to protect investors and be a lot less expensive to all parties involved.

One of the supposed benefits of investing in a Hedge Fund, is the opportunity to make money in both up and down markets.  This goal is appealing to two types of investors.  First, those who do not have the discipline to stick with a “buy and hold” strategy and secondly, it’s alluring to those who believe in “magic.”

With Hedge Funds, transparency is limited, but this lack of transparency is widely accepted by Hedge Fund investors.  Perhaps it’s because it’s hard to believe in “magic” if the data shows that there is no “magic.”  There is however, enough data to show that the collective performance of hedge funds over the past 10 years, falls short of market rates of return that are easily earned with index funds and other passive strategies.

The standard pricing structure of a Hedge Fund, that is 2% per annum, plus 20% of any gain, seems to be acceptable to those using Hedge Funds.  Do the math:  An investment of $1 billion in a Fund that earned 10% would yield a fee of $40 million.  It’s absolutely ludicrous.  But in spite of this fee structure, the Hedge Fund industry continues to grow, as does the wealth of the Hedge Fund managers.  It is not unusual for a successful Hedge Fund manager to take home over a billion dollars in one year.

So are these Hedge Fund billionaires bad guys?  Not really, there are just very good at moving other people’s money into their own pocket.  And who are these “other people?”  Hedge Fund investors fall into three groups:  Wealthy individuals, Pension Plan sponsors, and those managing University Endowments.

It may be foolish to invest in Hedge Funds but wealthy investors can do whatever they like.  After all, it is their money.  But the last two, Pension Plan sponsors and Endowment committees, are managing “other peoples money.”  The money in Pension Plans belongs to current and former employees, not those making investment decisions, and if Endowment Funds underperform, students and others will be asked to make up the difference.

My former colleague, Rex Sinquefield, once said that Hedge Funds are “Mutual Funds for stupid people.”  That’s a bit harsh, but perhaps Pension Plan sponsors and members of the Investment Committee of Endowment Funds are not stupid, they just fail to understand and/or they refuse to accept the Fiduciary responsibility they have when investing other people’s money.  It may not be their money but it must be quite an ego trip to have control over how the money is invested.