Why Wall Street shouldn’t get its way in the fight over financial advisers – TheGuardian.com 08-13-15

Salient to Investors:

If you ask your adviser to whom he or she owes their first legal duty of care, and you don’t get an immediate answer “you, as my client” then the chances are that they are not acting as a fiduciary. You can’t be a part-time fiduciary.

The first legal duty of financial advisers at firms like Merrill Lynch or Morgan Stanley is to their company and their work for you is covered by a looser “suitability” standard. The bait-and-switch nature of the “suitability standard” allows financial firms to publicize their devotion to their clients only to back away from them in arbitration hearings or lawsuits over conflicted advice and costly, inappropriate products. Wall Street advertising phrases like “ethically obligated” and “should make you feel” should trigger alarm bells – they are not the same as legally obligated and count little in an arbitration.

A fed study concluded that financial advisers who steered clients into more expensive or less attractive investment products ended up costing investors in IRA accounts between $8 billion and $17 billion in underperformance.

Those who argue that the high costs of accepting the fiduciary rule means it will become too costly to serve middle-class investors are trading on fear. Many firms have already cut back on their willingness to provide financial advice to smaller clients – nearly 4 years ago Merrill Lynch told its advisers that they would not be paid for working with new clients with less than $250,000 in assets.

Read the full article at http://www.theguardian.com/money/us-money-blog/2015/aug/13/financial-advisers-wall-street-fiduciary-standard-obama-administration

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Lies, Damned Lies & Statistics – The Burning Platform 07-18-15

Salient to Investors:

The annual CPI reported figure of 0.1% is a lie and has become a manipulated statistic using academic theories to systematically under-report the true level of inflation – between 4% and 10% – in order to cut annual cost of living adjustments to Social Security and other government benefits, and over-estimate the true level of GDP. True inflation in essentials combined with declining real wages and increasing debt burdens has left the average household with little or no money to spend.

Artificially low inflation figures allows big corporations to keep wage increases to workers low and the Fed to keep the discount rate far lower than it would be in an honest market. Wall Street banks, who own and control the Fed, get free money from the Fed, charge 18% on credit card balances, pays virtually nothing on deposits, and have raised bank fees.

BLS says food inflation was 1.8% over the past year, despite beef, eggs, chicken, coffee, sugar, candy, etc all rising at well above this level. The BLS assumes people switch from beef to pork when the price of beef soars, in effect building in a lower standard of living for people in their model. The BLS assigns food eaten away from home a weighting of only 5.8% when everyone knows this is much higher. The BLS assumes food and shelter account for less than 50% of your expenses: rent 3.5%, owner’s equivalent rent 3.0%, insurance 3.1%, water, sewer, trash 4.7%, household operations 3.6%. Despite a rental market on fire since 2012 and builders erecting apartments at a breakneck pace. Real rents in the real world have grown by 14% since 2012 vs. the BLS statistic of 9%. Case Shiller and NAR data shows house prices up between 5% and 10% in the last year and up by 25% since 2012. Mortgage rates have risen to 4% from the low 3% range. Property taxes are soaring.

BLS says the owners equivalent rent accounts for 24% of the CPI calculation, the same as in 2007, despite home ownership dropping to 22-year lows.

The large increases in rental rates and surge of rental households reflects a much higher inflation rate than reported by the BLS. The Center for Housing Studies reports over 49% of all renter households spend more than 30% of their income on housing, more than 25% spend more than 50% of their income on housing. The median US renter household spends 33% of their income on housing versus BLS rating of only 7.2% in the CPI calculation.

The share of renters aged 25–34 paying more than 30% of their incomes for housing increased from 40% to 46% over the past decade, and the share paying more than 50% percent of income rose from 19% to 23%. The share of renters aged 25–34 with student loan debt rose from 30% in 2004 to 41% in 2013, with the average amount of debt up 50% to $30,700.

The BLS reports annual health insurance premium inflation of only 0.7% despite the annual cost of employee sponsored health insurance being up 6.3% from last year, and the employee portion rising by 8.0%. Price Waterhouse Coopers and McKinsey report healthcare insurance premiums rising 6% to 10% across the US. The US median household income is $52,000, while employees are averaging $4,000, or 7.7% of income, in annual health insurance.

The BLS reports transportation costs rose only 1.2% in the last year despite Edmunds reporting a 2.6% increase. BLS says used car prices fell in the past year  despite Edmunds reporting a 7.1% rise. The BLS assigns a 5.7% rating to transportation costs despite Edmunds reporting the average annual car payment is $5,748 per year, or 11% of that median household income. Same story with tolls and public transportation.

Inflation in college tuition is driven by federal student loans to people who are not intellectually capable of completing college level material. The $1.4 trillion of student loans will never be repaid.

Deja Vu? Edward Bernays said in 1928 that in almost every act of our daily lives, we are dominated by a relatively small number of people who pull the wires which control the public mind.

Read the full article at http://www.theburningplatform.com/2015/07/18/lies-damned-lies-statistics/

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Drillers Piling Up More Debt Than Oil Hunting Fortunes in Shale – Bloomberg 09-07-14

Salient to Investors:

  • Most oil drillers are spending money faster than they make it; an average of $1.17 for every dollar earned in the 12 months ended on June 30, 2014.
  • Only 7 US-listed firms in the Bloomberg Intelligence’s E&P index made more money than it cost them to keep drilling. 56 index companies owed $190.2 billion at the end of June, versus $140.2 billion at the end of 2011. S&P rates the debt of 41 of the companies as below investment grade.
  • Tim Gramatovich at Peritus Asset Mgmt said the shale industry is absolutely going to blow sky-high.
  • Many companies use two sets of numbers to describe their outlook. Proved reserves to the SEC and resource potential estimates to investors and lenders. No one including the SEC regulates what companies say at investor conferences, in press releases or on their websites.
  • Ed Hirs at Hillhouse Resources said discrepancies between proved reserves and resource potential are common in the industry, and investors can get duped.

Read the full article at http://www.bloomberg.com/news/2014-09-08/halcon-s-wilson-drills-more-debt-than-oil-in-shale-bet.html

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Dark Pools Here to Stay, Says Broker Conflict Researcher – Bloomberg 06-29-14

Salient to Investors:

Robert Battalio at Notre Dame said:

  • Dark pools have existed forever: shut them down and new forms will arise elsewhere because money managers are too fond of them.
  • Order flow will always have multiple venues to execute on because one size does not fit all.
  • Brokers favor their own needs over customers’, often sending stock orders to exchanges that pay the most.

Dark pools et al account for almost 40 percent of US equity volume.

BlackRock said dark pools are an invaluable execution tool for large orders and stocks that may be more difficult to trade because of wide spreads or low liquidity.

Niamh Alexander at Keefe, Bruyette & Woods said clients have become much more cautious and careful about where their order flow is going.

Read the full article at http://www.bloomberg.com/news/2014-06-30/dark-pools-here-to-stay-says-broker-conflict-researcher.html

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Why Drug Lords and Criminals Are So Risk-Averse – Bloomberg 02-21-14

Salient to Investors:

Convicted felon Sam Antar says stock-picking sets you up as a mark for the unscrupulous because investors live on hope and it is the criminal’s job to take advantage of that hope. Antar said criminals are as short-sighted, if not more so, as the rest of us – nobody ever plans on failure and prisons are full of people who never planned on being there.

The number of FBI white-collar crime prosecutions has fallen by half since the 1990s. 

Read the full article at http://www.bloomberg.com/news/2014-02-21/why-drug-lords-and-criminals-are-so-risk-averse.html

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How Investors Lose 89 Percent of Gains from Futures Funds – Bloomberg 10-07-13

Salient to Investors:

Managed futures turned out to be good for brokers and fund managers but not for investors.

During the decade ended in 2012, over 30,000 investors put $797 million in a managed-futures fund called Morgan Stanley Smith Barney Spectrum Technical LP, which already had $341.6 million invested during the previous 8 years. In the decade ending in 2012, the fund made $490.3 million in trading gains and money-market interest income, but investors for the whole decade lost $8.3 million because all of the profits were consumed by $498.7 million in commissions, expenses and fees paid to fund managers and Morgan Stanley. Investors in Vanguard’s 500 Index Fund would have earned a net cumulative return of 96 percent in the same period.

In the $337 billion managed-futures market, return-robbing fees are common. 89 percent of the $11.51 billion of gains in 63 managed-futures funds went to fees, commissions and expenses during the decade from 1/1/2003 12/31/2012. The funds held $13.65 billion of investor money at the end of 2012. 21 of those funds left investors with losses. Interest income from T-bills and other debt investments totaled $2.34 billion and without those gains, the combined 10-year earnings of $1.3 billion after fees in the 63 funds would have been converted to a loss of more than $900 million. As interest rates have fallen to historic lows since 2008, managed-futures funds have suffered their largest declines ever.

29 Morgan Stanley and Citigroup managed-futures funds had an aggregate deficit of $1 billion in the 4 years ended on 12/31/13, while fees totaled $1.5 billion.

Bart Chilton at the CFTC said the big news is that the fees are so outlandish, they can actually wipe out all of the profits.

Brokers have an incentive to keep clients in managed-futures funds because they receive commissions annually of up to 4 percent of assets invested. Investors pay as much as 9 percent in total fees each year, including charges by general partners and fund managers.

Thomas Schneeweis at the University of Massachusetts Amherst said people put money into managed futures because their brokers recommend them. Schneeweis said everything is marketing – these things are sold, not bought.

James Cox at Duke University said brokers that do not clearly tell investors about the drastic effect of fees should be considered fraudulent. Cox said the government is to blame for allowing these products to be offered with inadequate disclosure.

The 7,752 investors in Bank of America Merrill Lynch’s Systematic Momentum Futures Access LLC fund faced losses of $135.3 million, after fees, from 2009 to 2012.

The Grant Park Futures Fund LP marketed by UBS reported a net investor loss of $68.6 million during the decade ended on 12/31/12, after fees and commissions of $427.7 million.

Managed-futures funds often rely on charts produced by BarclayHedge – no connection to Barclays Plc – which reports a 29-fold gain through 2012 for managed futures overall since 1980. BarclayHedge does not deduct billions of dollars of fees charged by funds and uses only information volunteered by managed-futures traders. Traders can stop providing data if their system starts to lose money or collapses.

Managed-futures funds are a subset of hedge funds. Hedge funds typically charge a 2 percent management fee and 20 percent of investor profits each year, while a managed-futures fund often charges 7 to 9 percent of assets and 20 percent of any profits each year.

The National Futures Association does not require managers to disclose the effects of fees on investor profits over time.

Despite being commonly promote as protection against stock market declines, managed futures are non-correlated, meaning their performance does not track that of any other investments, either positively or negatively.

The SEC has no category listing managed-futures funds, as it does for mutual funds or corporate filings. Like hedge funds, managed-futures funds have not been required to file with the SEC as a matter of course, though an SEC rule has mandated that any partnership with more than 500 investors and $10 million in assets — even a hedge fund — must file quarterly and annual reports but do not have any obligation to disclose how fees in recent years ate up all trading gains.

The Futures Portfolio Fund, which started in 1990 and was marketed by 140 firms, including Wells Fargo and Ameriprise Financial, gathered $2 billion from more than 17,000 investors during the decade ended 12/31/2013. It had net returns after fees of just $84.3 million, for a 3.6 percent compounded annual growth rate.

Pension funds, college endowments and other institutions invest in managed futures, but individuals bear the brunt of the fees.

The Strategic Allocation Fund provided a 10.5 percent compounded annual rate of return to investors in its first decade of trading through 12/31/2003. From 2003 to 2012, more than 15,000 investors put a total of $4.5 billion into the fund, recruited by Merrill Lynch, UBS and other. The fund’s earnings of $2.43 billion shrank to $158.8 million after fees and expenses of $2.27 billion, resulting in a 0.6 percent compounded annual rate of return for the decade and versus an annual return of 7.1 percent, including dividends, for the S&P 500 during the same period.

Gerald Corcoran at R.J. O’Brien & Assoc. and a director of the Futures Industry Association said investors are going to lose money in managed futures over time and most retail investors should not be in managed futures. Corcoran said managed futures serve wealthy investors and are an important part of a diversification of a sophisticated portfolio.

Keith Stafford at Arthur Bell, CPAs specializes in auditing hedge-fund and managed-futures data and is constantly amazed by the poor performance of managed futures for individual investors and asks why anyone would invest in them – it’s a racket.

So incomplete are the disclosures for managed-futures funds that investors sometimes cannot even find out the names of the people managing them. BlackRock refused to name the CTAs it hired for the BlackRock Global Horizons I partnership, even after the SEC requested that information in 2009. The SEC insisted and BlackRock began making the disclosures. Its fund lost $10.2 million for investors in the decade ended 12/31/2013 after paying fees, commissions and expenses of $170.3 million.

From 2003 through 2012, the S&P 500 delivered more than twice the gains of the BarclayHedge CTA Index – 98.6 percent versus 47.9 percent.

In the secretive world of managed futures, managers often keep millions of dollars of investment gains even as their clients suffer losses.

Read the full article at http://www.bloomberg.com/news/2013-10-07/how-investors-lose-89-percent-of-gains-from-futures-funds.html

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You Can’t Afford Your Broker, at Any Price – Bloomberg 08-13-13

Salient to Investors:

Megan McArdle writes:

The Department of Labor is reported to be moving toward making brokers et al “fiduciaries” to their clients, so they would have to offer advice in your best interest, and avoid conflicts of interest such as accepting fees to put you into low-return, high-fee investment vehicles. Fiduciaries must avoid conflicts, but brokers are only required only to disclose them.

Industry professionals warn that if given fiduciary status, much of their revenue will disappear, and if they are not allowed conflicts, like earning higher fees on some investments, they will no longer be able to afford to service small accounts:

John Taft at RBC Wealth Mgmt said a completely conflict-free relationship does not work in practice across most of the brokerage industry.

When your broker’s firm underwrites an IPO of stock, they earn far more by selling those shares to you than selling you something else. When your broker buys you a bond out of the firm’s inventory, rather than on the open market, they also tend to make more money.

Assistant Secretary of Labor Phyllis Borzi said the brokerage industry is effectively saying: ‘If you don’t allow us to continue to give conflicted advice, we won’t be able to give any’.

Fiduciary relationships are expensive, and changing the status of brokers will raise the direct cost of having a broker give you advice. However, brokers essentially are arguing that they cannot afford to give you honest advice and that their livelihood depends on being able to steer you into investment vehicles that pay them kickbacks. This is free advice you cannot afford.

Most people erroneously believe that they already have a fiduciary relationship with their brokers. They do not, by and large, understand how much of a brokerage firm’s income comes from steering them into the investment-of-the-month, which is why brokers find it relatively easy to do so.

Wall Street will fight the Labor Department hard on this issue, but in the long run, it will be better for them and their clients if they lose.

Read the full article at  http://www.bloomberg.com/news/2013-08-13/you-can-t-afford-your-broker-at-any-price.html

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The Department of Labor is moving toward making brokers and related jobs “fiduciaries” for their clients, the Wall Street Journal reports. Basically, they would have to offer advice with your best interest at heart, and should avoid conflicts of interest — such as accepting fees to put people into low-return, high-fee investment vehicles. Think of your doctor or your lawyer: You’re pretty glad they can’t take money to steer you in a certain direction, aren’t you?

But industry professionals warn that if they’re given fiduciary status, a lot of their revenue will disappear, meaning that they will no longer be able to afford to service small accounts:

The heart of the matter: Fiduciaries should avoid conflicts, but brokers are generally required only to disclose them.
“Having a completely conflict-free relationship doesn’t work in practice across most of the brokerage industry,” says John Taft, head of RBC Wealth Management in the U.S., which manages $250 billion.

For example, when your broker’s firm underwrites an initial public offering of stock, he and the firm earn far more by selling some of those shares to you than selling you something else. When your broker buys you a bond out of his firm’s inventory of your broker’s firm, rather than on the open market, the firm also tends to make more money.

Industry groups have argued that if brokers can’t have any conflicts, like earning higher fees on some investments than on others, then they no longer will be able to afford handling small accounts.

“The [brokerage] industry is saying, in effect, ‘If you don’t allow us to continue to give conflicted advice, we won’t be able to give any,’ ” Assistant Secretary of Labor Phyllis Borzi, who oversees retirement benefits, told me. “But there are lots of people out there who are already acting as fiduciaries, and they’re not bankrupt. They’re making money.”

I’m generally sympathetic to arguments similar to the ones the industry is making. And that’s the case here, to a certain extent: I believe that Assistant Secretary Borzi is wrong, and the industry is right, about the likely outcome of this rule change. Fiduciary relationships are expensive, and changing the status of brokers will raise the direct cost of having a broker give you advice.

On the other hand, when I hear that brokers won’t be able to service small clients any more, my basic reaction is “Good.” Essentially, brokers are arguing that they can’t afford to give you honest advice; their livelihood depends on being able to steer you into investment vehicles that pay them kickbacks. Sorry, commissions and referral fees. And where do the fees come from? Why, your pocket, ultimately; there’s a reason your broker has to be paid to tell you that this is a good idea. This sort of free advice you can’t afford.

Unfortunately, the very reason that these conflicts of interest are valuable enough to buy brokers homes in nice suburbs is that most people erroneously believe that they already have a fiduciary relationship with their brokers. Oh, they may not put it in quite those terms. But they do not, by and large, understand how much of a brokerage firm’s income comes from steering them into the investment-of-the-month. Which is why brokers find it relatively easy to steer them into the investment-of-the-month.

This relationship encapsulates everything that people think is wrong with Wall Street. And people are starting to notice. If Wall Street wants to keep operating without its clients marching on them with pitchforks and torches, this sort of thing needs to change. They’re going to fight the Labor Department hard on this, but in the long run, it will probably be better for them — and their clients — if they lose.

SEC Door, Spinning Mightily, Smacks Investors – Bloomberg 08-04-13

Salient to Investors:

William D. Cohan writes:

The appalling but unsurprising news that Robert Khuzami, the former enforcement director at the SEC is joining a prominent Wall Street law firm at a $5 million-plus salary is the latest example of the corrupt relationship between money and power in the US.

Senator Carl Levin said this about Deutsche Bank’s mortgage group in a 2011 report: “Because the fees to design and market CDOs ranged from $5 to $10 million per CDO, investment bankers had a strong financial incentive to continue issuing them, even in the face of waning investor interest and poor quality assets, since reduced CDO activity would have led to less income for structured finance units, smaller bonuses for executives, and even the disappearance of CDO departments, which is eventually what occurred.”

Khuzami’s enforcement division was particularly toothless, and the SEC, under Khuzami’s watch, gave Deutsche Bank a pass.

The revolving door between Washington and the SEC is won’t change soon.

If anything was guaranteed when Robert Khuzami went to Washington, it was that his tenure there would result in a very happy ending – for him. Too bad it comes at the expense of the rest of us.

Read the full article at http://www.bloomberg.com/news/2013-08-04/sec-door-spinning-mightily-smacks-investors-william-d-cohan.html

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Goldman Sachs and the Price of a Can of Beer – Bloomberg 07-26-13

Salient to Investors:

The New York Times reported that every time an American opens a can of soda, beer or juice they pay a fraction of a penny more because of a maneuver by Goldman Sachs and other financial players that ultimately costs consumers billions of dollars. The allegation is that investment banks have moved into the aluminum market in order to rig it and force prices up.

What’s mostly going on is that the price of aluminum for future delivery has risen above its price in the spot market, creating an arbitrage opportunity. Users of aluminum are having to pay higher premiums for delivery as though there were a shortage, despite high stocks in warehouses.

Both the US CCFTC and LME are looking into complaints.

LME data is quirky, because some inventory is not counted as inventory because the LME has not officially certified its existence, giving sophisticated players an opportunity to mislead the market and game the system. LME’s standard contract allows warehouses to charge fees long after the owner has asked for delivery, giving the warehouse owner a reason to stall.

Read the full article at  http://www.bloomberg.com/news/2013-07-26/goldman-sachs-and-the-price-of-a-can-of-beer.html

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Warren’s Mistake About Wall Street Risk-Taking – Bloomberg 07-21-13

Salient to Investors:

William D. Cohan writes:

Senators Elizabeth Warren and John McCain are wrong in believing that the 2008 financial crisis was caused by commercial banks taking undue risks with depositors’ money, though it is true that they courted too much risk,

Causes of the financial crisis were many and complex. Key was institutional investors’ justifiable loss of confidence in the quality of assets on the balance sheets of the large Wall Street investment houses. The big Wall Street investment banks were far too reliant on cheap, short-term financing and the go-to saviors were the big, diversified commercial banks.

The one exception to this narrative was Citigroup, which failed in large part because, under the leadership of Robert Rubin, it abandoned any semblance of risk-taking discipline.

Since the mid-1980s, many investment banks went from being private partnerships-to being public companies with no personal exposure, and the financial system has been subject to one crisis after another. Wall Street’s problem is not risk-taking but the incentives to engage in it – big bonuses for taking foolish chances with other people’s money, but no criminal, civil or financial liability when things go wrong.

To prevent the next crisis, we should change how people on Wall Street get rewarded. Glass-Steagall kept financial calamity at bay for 60 years by making risk-takers pay when things went wrong.

Read the full article at  http://www.bloomberg.com/news/2013-07-21/warren-s-mistake-about-wall-street-risk-taking.html

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