Should Regulators' Audits Be Geared to Finding Ponzi Schemes Like that of Madoff?

No, no link. You're probably tired of reading all those Madoff stories already. And the other guys, Nadel, Cosmo, et al.

I believe it is fair to say that the SEC and the states' routine compliance audits focus on routine and rather mundane procedural compliance matters. Do you have the proper files, are they current, do you avoid various specific fiduciary or suitability no-no's? Have you done whatever the last guy to hit the newspapers and embarrass the agency was guilty of doing? I other words, are you honest but guilty of sloppy record-keeping? Are you guilty of whatever the latest hot-button issues are?

I would submit that it would be a good and reasonable goal to get beyond that kind of predictable bureaucratic thinking. A suggested goal, which would require legislation and funding: In the types of investment vehicles where Ponzi-scheme bahavior has occurred, regulate them. Require the types of accounting and other controls under discussion. Third-party, arm's-length portfolio valuation and client reporting. If portfolio holdings are illiquid or unmarketable, require regular, more frequent disclosure, and conservatively value them. If that impacts fees, too bad! Audit them. Regularly. And make those auditors utterly independant of political interference.

Here's an idea the hedge funds will just love! Tax them to pay for the cost of regulating and auditing them to keep them clean.

So, what do you think? Should SEC and other regulatory audits of entities such as hedge funds be designed to do this, to get beyond the usual regulatory issues, to do more, to reasonably minimize the opportunities of men like Madoff and these other bad actors we've been reading about to hurt good people and wonderful charities?

WSJ (subscription) "A Cool Million No Longer Buys You a Luxe Retirement"

Yes it's old news, in a sense, but don't give up!

If you are young, a few simple actions will make your future much more comfortable. Use your opportunities for tax-deferred investing. Put enough into your 401(k) to get any available employer match. Contribute to your IRAs, both traditional and spousal.

Go beyond tax-deferred. If you can, put something, say, one hundred dollars a month away, for the very long haul, not to buy a flat-panel TV. To get started, put the money in a savings account. Then, when practical, in a taxable brokerage account. Learn how to invest the taxable account money for the long haul, not the fast buck, not as "mad money", and in a tax-efficient way.

Avoid becoming financial-services road-kill. Avoid load funds like the plague. Like the plague. No-load mutual fund accounts, at the fund, are one good way. Companies such as Vanguard and T. Rowe Price are known for low expenses and good investor-friendly values. That's not a commercial, just the truth. I'd suggest avoiding the mutual fund companies which advertise over and over all the day long on CNBC and Bloomberg. Big ad budgets are paid for in high expense ratios! You want financial service pros whose highest priority is good client outcomes, not client-gathering marketing. Never go to an investment "seminar" even to get the free meal. It will really, really cost you. Don't invest through variable life or variable annuities, they're usually heavily-commissioned, "fee and expense you to death", poorly-performing, all around sorry deals. As you might have guessed, I don't like them much. Stir well, wait patiently while it simmers for twenty-five or thirty years, and voila! Magnifique! If at some point along the way you want a financial advisor, find one with low fees who doesn't sell commissioned investment junk products, and emphazises good fiduciary standards.


Getting Going - WSJ.com

In today'a WSG: Brit Hedge Fund GLG Settles Short-Selling Accusations

The SEC's claim is that GLG, which purely coincidentally is going public itself, made illegal short sales in connection with 14 public offerings.

You know, you could almost do a "Hedge Fund Scandal of the Day".

I have a modest little proposal ...

Might I suggest: Before anyone invested in a hedge fund, what if they asked for and require written statements by authorized persons that the fund has not and will not violate short selling rules, has not engaged in and will not engage in or collude with other hedge funds in attempts to manipulate the market, has not and will not falsify its reporting to clients, will not lose most of their money and abscond with whatever is left, or engage in any other illegal practices whatsoever, and that the fund will disclose upfront how much leverage it will use and will not exceed that amount of leverage. Perhaps the fund should also be required to produce objective proof of its claimed superior trading skills!

Just a modest proposal. We might also add sort of a scarlet letter concept, a simple English one page disclosure of every regulatory scrape the fund or its executives have ever been in, however they might have been resolved.


GLG Settles Short-Selling Accusations - WSJ.com

Back Again! Equity Index Annuities' Sold to Old People Generating Lawsuits

The fact that these things have significant commissions has absolutely nothing to do with that salesman's desire to sell you one. Whether you will be happy with it several years from now -- well, he'll still have his commission, won't he? You need an investment advisor who is a good fiducuary. Hat tip to the always interesting Kirk Report.



Equity index annuity insurers are facing more lawsuits - InvestmentNews

Bloomberg: "Merrill Rule Decision Will Force Key Disclosure" -- John F. Wasik

More on the decision. Wasik writes: "When you venture into the murky waters of financial advisers, do you know who is a trained planner representing your best interest and who is a salesman?"

The one representing your best interest is, in other words, a fiduciary. The one who is a salesman is a broker.



Bloomberg.com: Opinion

Bloomberg's Mysak on the Lazard Scandal -- 'Fiduciary Duties Violated', 'kickback scheme'

Mr. Mysak says this one will provide more reading in the days to come.

None of this kind of thing would happen if people could find a way to settle for a good honest profit. "We can get more..." the first step on the road to fiduciary disaster.



Bloomberg.com: Lazard Scandal of 1990s Tells Tale

Appeals Court Strikes Down SEC’s ‘Broker-Dealer Rule’, aka 'The Merrill Rule'

This is really, really important. Brokerage services, which may involve "incidental" advice, are the service of buying and selling. You can spin that, you can invent new names for the same old deal, you can work hard to keep the client willing to pay, but it still is buying and selling. Brokers are not, repeat, NOT fiduciaries. A fiduciary advisor places your interests ahead of getting a big commission or his own needs. He makes a good living because enough clients are wise enough to find him. The built-in conflicts of interest for a commission or "fee-in-lieu-of-commission" (wrap account) industry dictate that it is that way. Investment advisory services are a completely distinct thing. It's about time. The Financial Planning Association is happy. The big brokerages are going to have to change some things and perhaps change some thinking. it will be interesting to see how they spin it to the public. it's about the public, really, not the advisors and the brokers. People should be able to know what they are paying for: Trading, or advice. Of course, an appeal by the brokers to the US Supreme Court is possible, and would stave off implementation. Whether that would be well received by the investing public is open to question.

Quiz: Do you know what type of arrangement you have with your broker or investment advisor? Are you clear on the difference between paying for investment advisory services and say, a wrap account? a low-fee advisor will typically charge you less than the typical charge for a wrap account, or for a separately-managed account ("SMA") deal, two types of deals pitched often by brokers.



UPDATED BREAKING NEWS: Appeals Court Strikes Down SEC’s ‘Broker-Dealer Rule’: Financial Planning Association wins lawsuit to nix Merrill Rule and subject all fee-based accounts to regulation by the Advisers Act of 1940.

Barry Barnitz' Financial Page blog: Hidden Fees in 401(k) Plans

Barry tells you what the issue is succinctly. Follow the link to read, or at least skim the underlying paper. 'Gird up your loins' if you aren't into reading technical financial discussions. But if you have a 401(k), and if you need it to work well for you, it's a major part of your future financial well-being. Start now, by at least looking over the paper.

I've advised people on subfund choices and allocation for their 401(k)s, and from this advisor's perspective, some are so much better, and some are so "less better". It's your retirement, and good advisors and smart clients have to find ways to make these things work optimally, as imperfect as they are, in short, make them work as well for you as they have for the financial services industry.

So, what do you do right now, with your plan as it is now, whether good or not so good? You learn. Learn about the disclosed and the undisclosed fees, at least well enough to know what a 12b-1 fee is, and to get the concept that these things are not neatly itemized for you in anything your plan provider sends you. Shock your 401(k) contact person by asking for the prospectus(es) for your fund choices. Get it. Gird up your loins again and read the thing. Go to the notes if you have to, to get the specifics, and get them correctly. You could politely email the people in your company who make decisions about the 401(k) provider. You might politely let them know if you think the fund choices are not great. Ask them, 'What is a fiduciary doing paying out 12b-1 fees, anyway?' Not all plan providers work that way. If there are no low-cost index funds, ask 'why the heck not?' If there is an index fund or two, but the expense ratio is higher than any index fund you ever saw, ask (in a nicer way) why they gave you such a crappy choice. You also do not need six or seven essentially identical (say, US large-cap growth) funds. You need one excellent fund, with low expenses, in major asset classes. You don't need "bear market" funds, internet funds, technology funds, long-duration or high-yield (junk) bond funds (uncompensated risk, per the academics,) or annuity choices (high fees and crappy performance--read the paper Barry links to.)

If you don't want to do such things, you might get a low-fee advisor who knows what the word "fiduciary" means, and cares enough to try to be a good one! Ask how the advisor has structured his business to be a good fiduciary. It's hard to stump financial services types, but that might do it! If you find one, he or she can help some with that 401(k).

Good investing!


Financial page: Congressional Testimony on Hidden Fees in 401(K) Plans

Listen to the Lady! Townhall.com: "Advisers make worse choices than independent investors, study says"

Townhall.com::Advisers make worse choices than independent investors, study says::By Lynn O'Shaughnessy

Rebut this article? Be offended? Me, the Unknown Advisor? Heck, she's right! In my opinion the study's right!

Fair warning, the writer's opinions are reflected in what follows; I believe them to be reasonable.

The twin focii of her article and arguably the study are higher expenses and inferior returns in association with poor asset allocation. All I will say is that a sales-oriented, higher-fee advisor is likely not worth the money, any more than the kind of broker the study analyzes is worth his load fees, 12b-1 fees, wrap fees, or whatever other pricey ideas he is pushing. She and the study could do a better job of using precise, defined language however.

I will try to. But please bear in mind that the discussion is still on a rather simplified and general basis, and that long chapters of material have been written on these subjects.

Brokers, registered reps, "account executives", "financial consultants/planners/advisors, etc.", holders of series 7 securities licenses, do not have to learn anything very special at all about asset allocation to pass the test. They learn the basics, the very, very basics about asset allocation. Their advice is considered to be "incidental" in nature, by the regulators, compared to what you legally are paying them for, the trading, the buying and selling to invest your money. The primary standard they have to meet to be on the right side of the regulatory apparatus is one of "suitability", which has little really to do specifically with whether their stock picks as a whole constitute a portfolio which will achieve your investment objectives. They just have to be "suitable", which is a horse of a different color. What is "suitable"? It is any of the multitudinous things not already ruled "unsuitable" by the NASD. Got it? No? It is often stated as "know your client, know your product". If the client is an elderly widow living off her investments, who has no way to make up large losses and the product gleaming in the broker's eye is some illiquid, non-marketable security with a lovely thirty or forty percent off the top commission/sales charge, it could be unsuitable. (Don't laugh, such things exist, and they're nothing to laugh about.) There are supervisory people who oversee suitability and other compliance issues. Lest I be too hard on the brokers, many of them are good people, and really want to do well for their clients, and struggle to keep their clients' interests and their own, and their employers', in balance. My concern is that I just think their industry's business model is problematical, and rewards the wrong behavior and the wrong people too much of the time. Then those wrong people show up in the newspaper.

"Investment Advisors", as in holders of series 65 or 66 securities licenses, must meet what is known as a "fiduciary" standard. That has been defined various ways but is concerned with placing the client's interests first, even when it hurts. It is a higher standard of responsibility, and if you deal with an advisor, find one who is earnestly serious about high fiducuary standards. If he is so, he is trying hard to do his work the right way. It ain't sexy, but a good advisor who is a good fiduciary will quit the business before he will take advantage of a client. How serious a particular advisor is about this varies. There have been advisors out there with language in their advisory agreements which substantially weakens their fiduciary responsibilities. CFPs have high disclosure standards, and advisors who are members of NAPFA have very high ethical codes to work by. Compliance shortcomings of advisors show up in the newspaper too.

My only rebuttal to the article, if it really is such , is that a low-fee advisor with high fiduciary standards and a better-than-average grasp of asset allocation and the things which have really been shown to work in investing offers pretty good value for his or her fee. The clincher is that that advisor will try hard to stop you from making frankly horrible mistakes with your money, like panicking and selling around the bottom, when the chips are really down.

A final thought: If an advisor promises to get you out of the market before it gets bad, I would steer clear. Financial advisors can't foretell the future. If they'll promise the impossible to get your business, that does not 'augur well'!

The Two Smartest Guys at Marketwatch?

And Paul Farrell is the other. He and Jaffe consistently offer pretty classy content. Think about what he says in this column!



Ten New Year's resolutions for us irrational investors - MarketWatch

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The Bonus Checks are Flying on Wall Street. Did You Contribute?

Disclaimer: Nothing anywhere in the Unknown Advisor blog is to be construed as as offer to sell any investment product or advisory service or any financial service whatsoever. The material here is for general informational purposes only.

The Unknown Advisor is ready to blog. Today's editorial:

If you did not see the story on Bloomberg, it is titled Never in the history of Wall Street have so many earned so much in so little time. It's a good read, and a reminder for investors.

Every dollar that the huge brokerages make, comes out of someone's pocket. Your pocket, perhaps. As investors, you and I both need to look for ways to invest in cost-efficient ways. And no, we don't begrudge someone a good living. Especially if the service is good. But you want a good living too. And if too much of your portfolio returns are going to an intermediary, you might not have the good retirement you're hoping for, have worked for. All too often, Wall Street's business seems to be making money, lots of it, from investors, rather than for investors or along with investors.

You owe it to yourself, you must either learn how to be a good do-it-yourself investor, without paying for things like load funds' sales charges, old-line full-service high commissions, expensive wrap accounts or separately-managed account arrangements, or greedy advisors with unduly high advisory fees, or the guys who just stick you in some load fund and get on with looking for someone else to do the same thing to. They exist, they are too common. Just say "No, thank you." and escape. Or firmly show them the door.

If you do not have the time, the energy, or the knack, you should get yourself an investment advisor, but if you do, tenaciously search out one with extremely high fiduciary standards and relatively low advisory fees. If they indicate that you do not have sufficiently high assets to be worth their time, (politely, let's hope,) ask them for a recommendation of a good fiduciary advisor who will work for you.

Stock brokers are not fiduciaries. People who sell you load funds, heavily-commissioned variable insurance products or heavily-commissioned annuities are not fiduciaries. People who sell you limited partnerships are not fiduciaries. All of these are really just salesmen. They may be nice salesmen. If they put your interests first, they will not meet their goals and will soon be unemployed salesmen. Fiduciaries, real fiduciaries, put your interests first, and know enough about the lamentable investment performance of those kinds of things to decide not to be commission-junkies, and to look for ways to work in the investments realm which allow them to give clients things which have a better chance to work well. I guess you could say they have a serious case of scruples.

It has been said that the best financial advisors have the lowest advisory fees and the worst advisors have the highest fees. I didn't say it first, but I wish I had. It's counter-intuitive, but true, in the Unknown Advisor's opinion.