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

Click here to receive free and immediate email alerts of the latest forecasts.

How Technology Is Killing Off Lame Financial Advice – Bloomberg 10-15-14

Salient to Investors:

  • Computers are learning to pick investments, rebalance portfolios, adjust risk levels and minimize taxes more quickly, more reliably, at a quarter of the cost and with flashier graphics than financial advisors.
  • Many new “robo-advisers” are relying on flesh-and-blood advisers becuase they find that a human with a sophisticated computer system can be better at winning trust than an algorithm alone.
  • William Trout at Celent said robo-adviser brands are burning through millions of dollars in cash, but digital tools are getting more sophisticated and clients are realizing they do not need wood paneled offices to impress them.

Read the full article at http://www.bloomberg.com/news/2014-10-15/how-technology-is-killing-off-lame-financial-advice.html

Click here  to receive free email alerts of the latest forecasts.

The Dumb Money Is Getting Smarter Every Day – Bloomberg 09-17-14

Salient to Investors:

  • Amateur investors are giving up on trying to beat the market, while even the most sophisticated investors are rejecting strategies that require advanced math and managers with million-dollar salaries. ICI reports the average expense ratio on an equity mutual fund is down 25% in 10 years.
  • Boston Consulting estimates the market share of index funds and ETFs has doubled since 2003.
  • Target-date funds are taking over retirement plans, and are the favorite of young workers.
  • Grant Easterbrook at Corporate Insight said that the new online advisors eliminate a million features that only 5% of the user base actually wants.

Read the full article at http://www.bloomberg.com/news/2014-09-17/the-dumb-money-is-getting-smarter-every-day-.html

Click here to receive free and immediate email alerts of the latest forecasts.

Nobel laureate: Everyone should have a financial adviser – InvestmentNews 12-05-13

Salient to Investors:

Nobel Laureate Robert Shiller said:

  • People make better decisions with financial advisers.
  • A lack of good financial advice was one of the problems that led to the financial crisis. Many Americans went into unsupportable debt to buy homes, which a good financial adviser would not have let them do.
  • Financial advice is particularly critical for low to moderate income families, on a par with medical advice, and should be made available to those without the resources to pay for it.
  • The government should compensate advisers who help lower-income people with financial problems.
  • Tax deduction for some investment costs subsidizes the wealthy because low-income Americans do not itemize deductions.
  • Investor overconfidence can put advisers in a tough spot because people do not like to be told they are wrong.
  • Financial advisers should pursue a second degree in psychology to better manage behavioral tendencies that lead some clients to make poor financial and investing decisions.

Read the full article at http://www.investmentnews.com/article/20131205/FREE/131209947

Click here to receive free and immediate email alerts of the latest forecasts.

Nobel Laureate Robert Shiller said:

People make better decisions with financial advisers.

A lack of good financial advice was one of the problems that led to the financial crisis. Many Americans went into unsupportable debt to buy homes, which a good financial adviser would not have let them do.

Financial advice is particularly critical for low to moderate income families, on a par with medical advice, and should be made available to those without the resources to pay for it.

The government should compensate advisers who help lower-income people with financial problems.

Tax deduction for some investment costs subsidizes the wealthy because low-income Americans do not itemize deductions.

Investor overconfidence can put advisers in a tough spot because people do not like to be told they are wrong.

Financial advisers should pursue a second degree in psychology to better manage behavioral tendencies that lead some clients to make poor financial and investing decisions.

Ken Fisher Warns: RIA World Gone in 10 Years – ThinkAdvisor 11-21-13

Salient to Investors:

Ken Fisher at Fisher Investments said:

  • Ending QE would be the most bullish thing we can do because it is not a stimulus – it flattens the yield curve and slows things down. We are doing well despite QE, not because of it. Historically, a steeper yield curve is more bullish for the economy.
  • Bernanke’s goal has been not to increase the quantity of money but to build bank balance sheets, which he has done very successfully. QE does not increase the quantity of money, which has gone up less in this expansion than in any economic expansion in our lifetime.
  • The Fed lies a lot. It has never been incumbent on central bankers to be open, transparent and tell the truth. If they did, somebody would trade ahead of them and profit.
  • The economy is in a slow but steady recovery. Markets move in advance of the economy – the stock market is one of the strongest leading economic indicators, which always predict the economy 6 months out. We have never, ever had a recession while LEI was high and rising.
  • The market looks at health care and doesn’t care.
  • If and when QE ends, long rates will rise and short rates remain low because the Fed keeps them there. The steeper the yield curve, the more eager banks become to lend.
  • Since 2008, the Fed has been using demand-side monetary policy which does not work. No bank will ever lend a penny when both short and long rates at zero.
  • Bonds will be flat or slightly negative in total return.
  • Fed chairs’ prior activities have not been predictive of what they will do.
  • Sam Peltzman at University of Chicago said people risk more when there are rules in place that make them think they are safer, and risk less when those rules are taken away.
  • Congress passes bills and worries about their details later: but the details end up getting honed to benefit those who are the most successful at lobbying.
  • During the whole shutdown the market did fine. Markets move in advance of such events.
  • We are slowly entering the back half of the bull market. John Templeton said bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. We have one foot in skepticism and one in optimism.
  • Everything takes a long time in bull markets. We are 5 years into this one and have not reached optimism so we have years to get to euphoria.
  • Twitter had a spectacularly successful IPO but most of the other IPOs that same week did badly, a sign there is no real optimism and euphoria.
  • Earnings are at all-time highs and progressing at a moderate rate, while revenues are growing at a respectful rate. Q4 will be slightly stronger than people expect, with 70% of earnings exceeding expectations.
  • The chance of a market crash in 2014 is remote – 2014 will be a good year. The biggest threat to the market in 2014 is unknown, and would most likely be caused by stupid government policy.
  • We are in a long bull market, so large, high quality stocks will reward. Pharma, tech, some energy, consumer staples. Midsize banks and non-European foreign banks take in deposits and make loans are attractive.
  • US stocks have outperformed the world but that will begin to equalize as emerging market stocks rebound and European stocks play catch-up.
  • Implementation of Dodd-Frank would result in RIAs being absorbed by broker-dealers within a decade.
  • The big broker-dealers have seen huge increases in concentration of market share – 20 firms have all the money and will keep getting more because they have all the lobbying power.
  • Many broker-dealers claim to be fee-only advisors when in fact they are not.

Read the full article at http://www.thinkadvisor.com/2013/11/21/ken-fisher-warns-ria-world-gone-in-10-years?ref=hp&utm_source=Triggermail&utm_medium=email&utm_term=Financial+Advisor+Insights&utm_campaign=Post+Blast+%28wealthadvisor%29%3A+FINANCIAL+ADVISOR+INSIGHTS%3A+Ken+Fisher+%E2%80%94+The+%27Naive%27+RIA+World+Is+At+Risk+Of+Being+Taken+Over+By+Broker-Dealers&page_all=1

Click here to receive free and immediate email alerts of the latest forecasts.

Fareed Zakaria GPS – CNN 08-18-13

Salient to Investors:

Fareed Zakaria said:

Both the American left and right are concerned about the declining mobility of the American dream. Countries that invest more heavily in children’s health care, nutrition, and education, well-being more generally end up with a much stronger ladder of opportunity and access than America.

For over a decade, Northern European countries have done much better than the US at moving poor people up the ladder.

Miles Corak says Canada is a very valid comparison for the United States because it is much like America. The percentage of foreign-born Canadians is higher than Americans, and people in Canada and Australia have twice the economic mobility of Americans.

Many of the factors that seem to explain the variation across countries also explain the variation across the US.

The Harvard-Berkeley study found that cities with strong families, civic support groups and a community-service orientation do well on social and economic mobility. E.g. Salt Lake City, which is dominated by Mormons, has extremely high mobility rankings. America in general fares badly because it has many more broken families, single parents and dysfunctional domestic arrangements than Canada and Europe.

The Harvard-Berkeley study found that cities where the poor live far from the middle class do much worse than those that are more mixed.

Social capital cannot be rebuilt in five years. Cities cannot be quickly redesigned to integrate them or to create greater density.  This leaves public policy.

America spends much less on the education and well-being of poor people, especially poor children, than any other rich country and that retards their chances of escaping poverty. The OECD says the US is one of only 3 rich countries that spends less on disadvantaged students than others, largely because education funding for elementary and secondary schools in the US is tied to local property taxes.

Poor neighborhoods end up with badly funded schools. The US spends most of its education funds on college education or is otherwise directed towards those already advantaged in various ways.

In 2009, for every 100,000 citizens, 760 Americans were in prison; 5 times the rate in Britain, 8 times the rate in Germany and South Korea, and 12 times the rate in Japan. Federal prisons account for 14 percent of our total inmates, and the most serious charge for nearly half of all inmates is a drug offense versus 20 percent in state prisons,.

The federal prison population has increased every year since 1980, whereas state prison populations have been declining in recent years. The overall prison population is down in each of the past 3 years, in both red and blue states, partially because budgets were collapsing, but partly because of a growing acknowledgment that the war on drugs has failed.

The Drug Policy Alliance says the US has spent a trillion dollars on the drug war in the last four decades but there has been no real change in addiction rates. Americans are not more prone to drugs or crime than citizens of other countries

Cass Sunstein at Harvard Law School said Obama is friendly to business and the number of rules issued in the first term of the Obama administration were lower than the number in the first term of the Bush administration, which was not regarded as regulation-happy. Sunstein said the cost of regulation in the first term of the Obama administration is very much in accord with standard numbers of the last 25 years.

Kent Greenfield at Boston College said it is easy to be overwhelmed with choice, making us open to manipulation by people who know more about our own tendencies than we do. Studies that when that part of the brain is activated, people get really short-term oriented, but very creative in satisfying those choices.

Author Sheena Iyengar said that when people encountered more choice, they might actually be less motivated to make a choice. Iyengar recommends that when making a choice, some is good but more is too much, and to be choosy about choosing: which tasks are worth doing, and which are not worth your time.

Watch the video at http://globalpublicsquare.blogs.cnn.com/category/gps-episodes/ or read the full transcript

at http://transcripts.cnn.com/TRANSCRIPTS/1308/18/fzgps.01.html

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

Click here to receive free and immediate email alerts of the latest forecasts.

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.

Guy Walks Into Citigroup Branch, Loses $40,000 – Bloomberg 07-18-13

Salient to Investors:

Jonathan Weil writes:

The reason it’s a good idea to separate securities firms from commercial banks is to protect consumers from brokers selling schlock investments.

There are countless tales of banks cross-selling unsuitable investments to unsophisticated customers. Many people trust the advice they get from their local bank branch, even if they normally would never set foot in a brokerage firm.

The banking industry has a long history of preying on unsuspecting depositors by selling them garbage securities without regard to suitability – a big reason Glass-Steagall was originally enacted during the Great Depression.

There were $61 billion in settlements between large banks and the SEC over sales of auction-rate securities, the market for which crashed in 2008.

The best way to keep the sharks from preying on the customers in the bank lobby is to not let them in there in the first place.

Read the full article at  http://www.bloomberg.com/news/2013-07-18/guy-walks-into-citigroup-branch-loses-40-000.html

Click here to receive free and immediate email alerts of the latest forecasts.

The Intelligent Investor: Saving Investors From Themselves – The Wall Street Journal 06-28-13

Salient to Investors:

Jason Zweig writes:

  • Good advice rarely changes, while markets change constantly.
  • People need good advice, but want advice that sounds good.
  • The advice that sounds the best in the short run is always the most dangerous in the long run.
  • Everyone wants the magical low-risk, high-return investment that can double your money in no time. Everyone chases the returns of whatever has been hottest and to shun whatever has gone cold.
  • The financial universe is set up to deceive us. Most financial journalism, like most of Wall Street, is dedicated to a basic principle of marketing: When the ducks quack, feed ‘em. Like telling people to buy Internet stocks in 1999 and early 2000, to “flip” houses in 2005 and 2006, to dump stocks and buy leveraged inverse ETFs that made explosively risky bets against stocks in 2008 and 2009, and since 2008, to buy bonds and high-dividend-paying stocks and minimum-volatility stocks.
  • Psychologist Paul Andreassen found that people who receive frequent news updates on their investments earn lower returns than those who get no news – the media ignores those findings.
  • Benjamin Graham said the investor’s chief problem, and worst enemy, is likely to be himself.
  • Regression to the mean is the most powerful law in financial physics. Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.
  • Approximately 99% of the time, the single most important thing investors should do is absolutely nothing.
  • This time is never different. History always rhymes. Human nature never changes.
  • Become more skeptical of any investment that has recently soared in price, and become more enthusiastic about any asset that has recently fallen in price.

 

Read the full article at  http://blogs.wsj.com/moneybeat/2013/06/28/the-intelligent-investor-saving-investors-from-themselves/

Click here to receive free and immediate email alerts of the latest forecasts.

NYC Pension Chief Seeks $500,000 Managers Not Wall Street – Bloomberg 05-30-13

Salient to Investors:

New York City’s retirement system is the only one of the 11 biggest US public-worker pensions that refuses to manage any assets internally.

The typical fees for hedge funds and private-equity and real-estate firms is 2 percent of assets plus 20 percent of profits.

Last year, three city pension funds paid more than $1.2 million in fees on a $160 million investment in a real-estate fund – the fund has returned 0.3 percent since 2004.

Miller Samuel and Douglas Elliman Real Estate said the median sales price of a two-bedroom condominium in Manhattan was $1.6 million in Q1, 2013

Read the full article at http://www.bloomberg.com/news/2013-05-31/nyc-pension-chief-seeks-500-000-managers-not-wall-street.html

Click here to receive free and immediate email alerts of the latest forecasts.