Posts tagged ‘RIA’

Wall Street Meets Greed Street

For investors, the emotional pendulum swings back and forth between fear and greed. Wall Street and large financial institutions, however, are driven by one single mode…and that is greed. This is nothing new and has been going on for generations. Over the last few decades, cheap money, loose regulation, and a relatively healthy economy have given Wall Street and financial institutions free rein to take advantage of the system.

Not only did the financial industry explode, but the large got much larger. The FCIC (Financial Crisis Inquiry Commission), a government appointed commission, highlighted the following:

“By 2005, the 10 largest U.S. commercial banks held 55% of the industry’s assets, more than double the level held in 1990. On the eve of the crisis in 2006, financial sector profits constituted 27% of all corporate profits in the United States, up from 15% in 1980.”

 

What’s more, the obscene profits were achieved with obscene amounts of debt:

“From 1978 to 2007, the amount of debt held by the financial sector soared from $3 trillion to $36 trillion, more than doubling as a share of gross domestic product.”

 

Times have changed, and financial institutions have gone from victors to villains. Sluggish economic growth in developed countries and choking levels of debt have transitioned political policies from stimulus to austerity. This in turn has created social unrest. Who’s to blame for all of this? Well if you watch the evening news and Occupy Wall Street movement, it becomes very easy to blame Wall Street. Certainly, fat cat bankers deserve a portion of the blame. As one can see from the following list, over the last few years, the financial industry has paid for its sins with the help of a checkbook:

CLICK TO ENLARGE

The disgusting amount of inequitable excess is smeared across the whole industry in this tiny, partial list. Billions of dollars in penalties and disgorged assets isn’t insignificant, but besides Bernie Madoff and Raj Rajaratnam, very little time has been scheduled behind bars for the perpetrators.

Whom Else to Blame?

Are the greedy bankers and financial institution operators the only ones to blame? Without doubt, lack of government enforcement and adequate regulation, coupled with a complacent, debt-loving public, contributed to the creation of this financial crisis monster. When the economy was rolling along, there was no problem in turning a blind-eye to subversive activity. Now, the greed cannot be ignored.

At the end of the day, voters have to correct this ugly situation. The general public and Occupy Wall Street-ers need to boycott corrupt institutions and vote in politicians who will institute fair and productive regulations (NOT more regulations). Sure corporate financial lobbyists will try to tip the scales to their advantage, but a vote from a lobbyist attending a $10,000 black-tie dinner carries the same weight as a vote coming from a Occupy Wall Street-er paying $5 for a foot-long sandwich at Subway. As Thomas Jefferson stated, “A democracy is nothing more than mob rule, where fifty-one percent of the people may take away the rights of the other forty-nine.”

Investor Protocol

Besides boycotting greedy institutions and using the voting booth, what else should individuals do with their investments in this structurally flawed system? First of all, find independent firms with a fiduciary duty to act in your best interest, like an RIA firm (Registered Investment Advisor). Brokers, financial consultants, financial advisors, or whatever euphemism-of-the-day is being used for an investment product pusher, may not be evil, but their incentives typically are not aligned to protect and grow your financial future (see Fees, Exploitation, and Confusion   and Letter Shell Game).

There is a lot of blame to be spread around for the financial crisis, and the intersection of Wall Street and Greed Street is a major contributing factor. However, investors and voters need to wake up to the brutal realities of our structurally flawed system and take matters into their own hands. Only then can Main Street and Wall Street peacefully coexist.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

www.Sidoxia.com

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at the time of publishing SCM had no direct position in MS, UBS, C, JPM, WFC, SCHW, AMTD, BAC, GS, STT, Galleon, RBC, Subway, Amer Home, Brookside Captl, Morgan Keegan, or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

November 27, 2011 at 11:37 am 8 comments

Beating off the Financial Sharks

There is blood in the water and financial sharks will do their best to consume any weak, floating prey. Now, greater than ever, investors are looking for answers in these perilous economic waters, so it behooves investors to arm themselves with the knowledge and questions necessary in dealing with financial predators.

Unlike other professions, like medicine, law, or accounting, the hurdle in becoming a “broker,” “advisor,” “financial consultant,” or other glorified title is much lower than some other professions. Basically, if you pass an exam or two, you are ready to do business and handle the financial future of virtually anybody.

Not all practitioners are evil, and there is a segment of investment professionals that take their craft very seriously. Separating the wheat from the chaff can be very challenging, so here is a list to follow when reviewing the management of your finances:

1)      Experience Matters: Find an advisor with investment experience. Someone who has actually invested money. Don’t partner with a financial salesperson good at shoveling high-cost, high-commission products and strategies. When you fly in a plane, do you want an inexperienced stewardess or veteran pilot flying the plane? If you were ever to need surgery, would you want the nurse using the knife, or a trained, educated surgeon? Your investment future is a serious proposition, but many investors do not treat it that way.

2)      Education and Relevant Credentials Matter: Find an advisor with credible, relevant investment credentials. Not all investment letters are created equally, and interpreting the alphabet soup of financial industry designations can be thorny. Two credentials in the investment industry that rise to the top are the CFA (Chartered Financial Analyst) and CFP® (Certified Financial Planner) designations. Less than 10% of the industry has one of these credentials and less than a few percent have both. An advanced degree like a master’s degree wouldn’t hurt either.

3)      Low-Cost & Tax Efficiency: Find an advisor who uses a low-cost, tax-efficient strategy, including the integration of passive investment vehicles, such as exchange trade funds (ETFs), index funds, and/or individual securities that are invested over long-term investment horizons (read more about passive investing). Not only are low-cost products important, but low-cost activity is vital too – meaning there should be no churning of the account with high commissions or transaction costs.

4)      Find an Advisor Who Eats Cooking: It is important to find an advisor who eats his/her own cooking (i.e., he/she is invested in the same investment products and strategies as the client). Commissions can often be the number one motivation for the advisor, rather than what is best for the client’s future. When offered a new investment product, one way to cut to the chase is by asking, “Oh, that’s great you will make an immediate $10,000 commission off the sale of this product to me, but do you own this same investment in your personal portfolio?” It is crucial to have someone in the bunker with you as you invest.

5)      Fee-Only – The Way to Go: Find a “fee-only” advisor with a transparent fee structure who can honestly answer what fees you are paying. A fee-only investment advisor mitigates the conflict of interests because if the client portfolio declines, then the investment manager’s compensation is also reduced. There is a built-in incentive for the advisor to preserve and grow the client portfolio in accordance with the client’s risk-tolerance and objectives.

6)      Find an RIA (“Fiduciary Duty”): Find out if the advisor is working with an RIA advisory firm (Registered Investment Advisor), which is required by law to have its advisors make investment decisions in the sole interest of the client. Most brokers/advisors/financial consultants (or other euphemism) – working at firms such as UBS, Merrill Lynch, Wells Fargo/Wachovia, Edward Jones, and Morgan Stanley/SmithBarney, have a much lower “suitability” standard in managing client money.

7)      Don’t Become Chopped Liver: Find out how many clients the advisor serves. Some brokers attempt to service a client list of 100 or more (many brokers have hundreds of clients). Typically the highest revenue-generating clients are given service, and the smaller accounts are treated like chopped liver or swept under the rug.

8)      Get References: You will likely not be forwarded bad references, but see if you can get beyond, “Johnny is such a nice broker” talk and find out how the portfolios have performed versus the relevant benchmarks. Getting this data can be difficult, but you can ask the advisor for an anonymous sample of an appropriate portfolio that you would be invested in.

9)      Background Check:  With proper research, investors can become more comfortable with the professional chosen and the status of the firm employing the manager/professional. Several government and professional regulatory organizations, such as the National Association of Securities Dealers (NASD), the Securities & Exchange Commission (SEC), your state insurance and securities departments, and CFP Board keep records on the disciplinary history of the investment and financial planning advisors. Ask what organizations the professional is regulated by and contact these groups to conduct a background check.

Getting all this information may take time, but protecting yourself from the masses of financial predatory sharks is imperative. Compiling data from the checklist will act as a shark cage, helping safeguard you from potential harm.

Remember, it’s your financial future, so invest wisely!

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at time of publishing had no direct positions in UBS, Merrill Lynch (BAC), Wells Fargo/Wachovia (WFC), Ameriprise (AMP), Edward Jones, and Morgan Stanley/SmithBarney (MS). No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

February 9, 2010 at 11:00 pm 4 comments


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