Thursday, April 26, 2012

Financial Advisors: legit or con artists? Part II

What can accurately be pointed out regarding the structure of the financial planning/advice industry is that it closely resembles a pseudo pyramid scheme, not unlike the business model developed by Richard DeVos and Jay Van Andel in the late 1950’s when they established what would eventually become Amway, in which network marketing is the primary means of generating business. Network marketing basically entails selling products to those you know, or to those whom the financial advisor (FA) has some manner of relationship, to include blood relatives, friends, associates and most importantly the referrals obtained from these relationships. In other words, for network marketing to work, the FA must ‘pimp’ their family and friends and foist their products and services on the people they are closest to, and then subsequently twist their family member’s and friend’s arms for referrals.

Of course, it differs from a true pyramid scheme; while a genuine pyramid scam generates revenues from new investors into the structure to subsequently line previous entrants’ pockets, the nature of commissions and fees from the financial services industry are indeed generated by consumers who are more or less satisfied with the product they purchase, which is advice. This advice can be good, bad or mediocre, and after a period of time, perhaps nonexistent. Amway has been dogged over many decades by accusations of being a pyramid scheme, but the technical structure they have put in place does not cross that line, however close to the line that legal call may lay.

From 1959 until the late 1990’s, Amway used network marketing to advance Amway’s reach into virtually every corner of America. Once nearly total saturation of their network marketing plan was obtained in North America by around 2000, Amway focused on new markets internationally, as nearly every family in North America had an Amway connection, and no new network marketing was possible going forward in a nearly total saturation of the North American market place.

While the comparison between the business model of Amway and that of most if not all financial services companies is inexact, the basics of both models remain the same: to survive in either environment (Amway or the financial services industry), the sales professional must spread the word of the ‘value’ of their services throughout their own social network rather than more traditional approaches used by businesses in the past such as media advertising. The larger the circle of friends, family and associates (or what is referred to within the industry as a ‘warm market’), the more likely that individual will succeed in gathering assets. In time, a similar saturation as happened with Amway will ultimately occur within the U.S. financial services market, with nearly every American family having a social connection to one financial advisor or another, and expansion using network marketing will no longer be a viable business model within the financial services industry.

As to the assets that FA’s seek from their family, friends and associates, these assets will then be transferred by the FA to his/her licensing sponsor (the brokerage firm) and held in stewardship on behalf of the client by the firm and the FA as ‘assets under management.’ Subsequently, under the FA’s ‘professional management,’ this arrangement supposedly justifies the accompanying fees, commissions, trails, transaction costs, etc. Parts of those fees, commissions, etc. are kicked back to the individual financial advisor. Give or take, the FA will receive 50% of the fees, commissions, etc., and often much less.

One of the less obvious and yet disturbing facts mentioned previously about working with an FA to manage one’s assets is this: in any downturn in the market, equities, commodities and certain income funds lose value and decrease the amount of principal within a client’s portfolio. This unfortunate event, however, never goes into negative territory as far as the brokerage house’s income statement or the FA’s wallet is concerned. Commissions paid to the FA by the client may decline in a downturn, but they never, ever go into the red as do the portfolio returns of the client. In good times and bad, the brokerage house and the FA gets paid regardless of the performance (or lack thereof) that their ‘professional management’ yields within their client’s portfolios; much like the brokerage partners of ‘Duke and Duke’ in the 1983 film ‘Trading Places,’ starring Eddie Murphy and Dan Ackroyd. When Randolph and Mortimer Duke (played by Ralph Bellamy and Don Ameche respectively) were explaining how the commodities brokerage business worked to neophyte Billy Ray Valentine (portrayed by Eddie Murphy in this film), Billy Ray replied ‘sounds like you guys are a couple of bookies to me.”

This observance by Billy Ray is not entirely inaccurate.

Monday, April 23, 2012

"Financial Advisors:" legit professionals or snake oil salemen? Part I

What is the value provided by a financial advisor?  Do they really know how to manage your money better than you can, or are they just slimy, shaky, fly-by-night snake oil salesmen? 

Indeed, what kind of bang does the consumer of financial advice get for their buck? Some question the value consumers gain in doing business with financial professionals, while others ponder the nature of the commissions and fees withheld by these professionals for their services provided and how these commissions and fees are connected to the underlying motivation financial advisors have in offering the sales of various securities and insurance products to trusting consumers. Exactly what does the consumer gain in the long run from using the services of a financial advisor?

Truth be known, people who use these charlatans are worse off in the long run.

Overall, a financial advisor functions within an industry that is regulated by FINRA, and to a lesser extent the federal government via the SEC, and by the individual states regarding insurance products and services. Anyone offering advice, sales of securities or financial or insurance related products needs to possess a valid license from each authority to legally transact business within the industry. The purpose of these licensure requirements rises from the many and varied past abuses of the public trust by charlatans and rapscallions posing as ‘advisors,’ offering nebulous products that on the surface sounded good as described by these slick hucksters, but in reality provided little if any actual value in exchange for the hapless consumer’s hard earned cash. Have things changed all that much from those days to what we see within the financial services industry now, given that the industry is reigned in to some extent by extensive regulation?

Not really.

Regarding the credibility of each advisor, what exactly do they know about the future and how this will affect your financial position? The answer: absolutely nothing. Nobody has a crystal ball, and the fact that they predict likely performance based on what happened in the past with each instrument they hawk is always disclosed by their catch all (and mandatory) phrase: ‘past performance is not a guarantee of future results.’ In other words, they are flat out guessing about how your portfolio will look going forward given the general history of the products and services they sell you, when in reality they have no more information about what will happen in the future to the value of the products they shill than anybody else.

What exactly do financial advisors know that you don’t know when it comes to how a security will perform in the future? Again, nothing. One advisor (a Certified Financial Planner, or CFP)  emailed me the following: ‘…you may want to increase your international exposure. Inflation is coming and the value of our dollar will fall, which is good for international. The government printed up so much money to stimulate our economy that inflation is bound to happen. Also, I know you don’t want bonds, but you may be able to get stock like returns from International bonds in the future. Do this in your IRA or annuity though. International bonds spin off phantom income which accountants don’t like.’ Sounds like this guy knows his economic theory, doesn’t it? Is this CFP a credentialed economist? 

No. Although there are a few FA’s that have formal educations in finance and economics, most FA’s are not financial experts or economists, and have no real education in economic theory. This guy likely just read some financial journal article in which the esteemed author opines that rampant and out of control inflation is inevitable. Accordingly, this FA positions this opinion as the bogeyman to be defeated by his international bond proposal. In truth, this ‘Certified Financial Planner’ has absolutely no clue whether our dollar will rise or fall or whether rampant inflation will occur in the future, because no one knows for sure.  This 'advice' from the aforementioned CFP was given to me in June of 2009.  Had I taken his advice and bet the farm on international bonds nearly three years ago, I would be walking around with a barrell and suspenders, I'd be dead broke, just like Jon Corzine of MF Global who bought into this international bond snake oil sale, and bet his farm (and everybody else's at MF Global) on it.  International bonds, particularly European based bonds are almost worthless now, and they are so risky their yield is through the roof to entice some stupid schmuck to buy them.  And nobody is touching them right now with a 10 foot pole.   

This particular CFP based his sales pitch back then on a singular economic opinion. Unfortunately, the field of economics is not called the ‘dismal science’ for nothing: much of the science of economics is dedicated to economic theory which is far more subjective than objective. Because the real world application of these economic theories by politicians currently in power rarely produce exact results on any nation’s actual economic activity, the old saying certainly rings true: ‘if you lay all of the economists in the world end to end, they would never reach a conclusion.’ Or this one: ‘economists have accurately predicted nine of the last five recessions.’ And certainly one of my favorite economist jokes goes something like this:

Q: What's the difference between an economist and a befuddled old man with
Alzheimer's Disease? A: The economist is the one with the calculator.

"Financial Planners:" pros or snake oil salesmen? Part II is forthcoming....stay tuned.

Wednesday, April 18, 2012

Better get your tin cup and pencils now, you senior citizens

We keep hearing this from the more fiscal conservatives among us: 'we are spending our children and grandchildren into bankruptcy.'  If I've heard that once, I've heard it a thousand times.

While it is clearly true our liberal politicians are spending money we don't have like drunken sailors, and sinking our country into a debt crisis, our children and grandchildren will not be the ones paying for it, at least not directly.  This is the dirty little secret that nobody seems to want to hear: our children and grandchildren will not inherit our current debt: they will simply see to it that none of the fruits of their future labor, whenever they get into the job market, will be transferred to pay for debts that they themselves did not incur.

Unless things change, and we get our debt and public employee pension chaos in order, our kids and grandkids will not support this ongoing moral corruption in perpetuity.

They just won't do it.  They did not sign these contracts for pensions and other transfers to retirees and pensioners.  They will insist that these old folks go after the people who made the promises, and get the money from them, and leave the kids and grandkids bank accounts alone.

But Fredd, those people who made all of these immoral promises and contracts are all dead by the time the piper needs to be paid.  Exactly my point.  Do you think that our children and grandchildren, who will grow up to be men and women (angry men and angry women) will just sit by and let their earnings be confiscated and given to old people who no longer work, these old geezers who lounge by their Boca Raton swimming pools sipping their Mai Tai's, at the expense of the next generation?  The next generation or two is most certainly going to say nuts to that. 

But Fredd, these oldsters were promised their Medicare, Medicaid, Social Security, free medicine for the rest of their lives, and both public and private pensioners have binding contracts.  So what?  What is going to stop the future generations from pulling the plug on those promised checks?  Virtually nothing.  Things change.  And if you are somebody who depends on receiving a check every month to maintain a certain standard of living in your retirement, you are the one who will be paying in one way or another the debt that these pundits are saying will be covered by our kids and grandkids.  If somebody else controls your income stream in retirement OTHER THAN YOU, your future is iffy at best, my old geezer friends. 

Not a chance in hell will our kids and grandkids just sit by and watch their incomes go to fund geezers laying around in their retirement hammocks in Boca Raton.  Does the French Revolution ring a bell with anyone?  King Louis XVI and his aristocrats and religious poo bahs were all living the good life, as established by a centuries old monarchy and aristocracy.  All of the wealth of France was at these chosen few's disposal.  By law.  The Royal French Law of the Land awarded this wealth to the few.

But the peasants with the pitchforks didn't like the way things were legally arranged, because legally they were getting Royally screwed (pun intended) and so they changed things.  And so it will go with OUR current legal contracts with unions, governments and the like: our kids and grandkids did not incur all of this debt, and they will simply not pay it any more.

You geezers who don't control your own retirement funds are the ones who are going to be left holding the bag.  Once your checks stop showing up in the mail box (and they will, I guarantee it), your days of comfy, cozy retirement are over.  Better get yourselves some tin cups, some pencils and find yourself a street corner to work. 

And you geezers better do it soon, as there is going to be a run on tin cups, pencils and street corners to work.

Tuesday, April 10, 2012

The Perfect World

Once upon a time, in a land far, far away, there was a civilization that was perfect: no crime, no hunger, no greed, none of the citizens of this land had any want or need ever go unfulfilled.

Nobody was more important than anyone else (since that would be illegal), so there were no feelings of inferiority among the masses.  Nobody was deemed smarter or duller than anyone else (again, illegal to claim to be smarter, or point out anyone as dumb), and so nobody ever felt alienated and alone.  Nobody had more material wealth than their neighbors (you guessed it: illegal), so that everyone was happy and content.  Everyone was equal in every way in this fair and just land.

Life in this culture was idyllic and perfect. 

But it wasn't always so.  In order to achieve this heaven on earth, much work had to be done, much thinking by those who were a little more average than the masses (not smarter, that's illegal you see), and the programs that these noble and decent civil servants established eventually transformed the imperfect previous culture into one that suited all the citizens.

The more average (not above average, that would be illegal) leaders first decreed that those who unfairly earned more than average would yield that windfall in earnings to the government via taxes.  Those that earned less than average wages would be given the windfall earnings by the government after it had been taken from the greedy ones who unfairly earned it initially.  And everyone was at peace once all citizens had no more or no less than anyone else. 

And so it went with all 'unfairness' that went on before, the more average leaders ensured that unfairness was illegal, and in the fullness of time, they achieved a perfect society.

And everyone lived happily ever after.

This foolish story sounds like a children's fairy tale, doesn't it? Where in the name of fairness there was not a tear to be found in any eye, at any time, ever.  But it's not a fairy tale.  This is the thinking of modern day Western liberals.  Much of Europe seeks to achieve this utopia via idiotic legislation, and now the American Left is seeking to achieve this Nirvana as well through the same hare brained legislation as Europe. 

Capitalism sometimes creates winners and losers, you see, and liberals can't stand the unfairness of someone winning at the expense of someone losing.  So they want to get rid of it, and install a Marxist/Socialist Nirvana that will eliminate anyone ever losing again.

But these same liberals can't understand that this same capitalism that they detest in the long term allows EVERYBODY to win given their natural talents, abilities and gumption for life.  Instead, they seek to tear down the successful to average levels, and give those  supposedly ill gotten gains to the down trodden via massive wealth transfer programs to ensure we achieve Utopia in the fullness of time.

What liberals choose to ignore, however, is the results of their wealth transfer schemes over the vastness of mankind's experience: it has never worked anywhere or at any time in human history. 

But this will not stop them from trying.....

Monday, April 2, 2012

How to fight liberalism without becoming an 'activist'

Nobody with any common sense wants liberals gaining any more ground than they already have.  We are in debt up to our eyeballs because of liberal victories over the last 60 or more years that take taxpayer money from producers and give it to non producers.

Conservatives do not want this horribly expensive and non sustainable trend to expand.  But to actively get engaged against liberals is also not exactly the track that most responsible folk want to travel, either.  There are, however, many ways to combat liberalism without becoming an activist, and accordingly paint a huge target on yourself:

  • Stop tolerating liberals in your life.  If you have liberal friends, who you know are politically active and vote to take your property, cash and freedom away via the ballot box, shun them.  Dump them.  Why put up with a 'friend' who seeks your destruction?  Life is short, get rid of your liberal 'friends.'  People who seek your destruction and to enslave you are not your friends.
  • If you own a business and employ a known liberal, who actively votes against your interests and those of the country, get rid of them.  Set them up for failure with lofty (and unachievable) goals, allow them to fail, and fire them for non-performance.  Happens all the time.  Dump these enemies of the country, and let them fend for themselves.  Or, if you don't want to go through all of the hassle of the above process, and you and the liberal have an 'at will' arrangement, just flat out fire them, period. No need to give them a reason, they really don't deserve any more of your time (or paychecks). 
  • What about family members who are liberal?  Unlike liberal friends and employees, whom you can dump at your leisure, family members tend to show up down the road and harass you.  Simply ignore them, don't attend their weddings, bar mitzvahs, funerals, etc.  And when they show up and get in your face, shove a pie in theirs.  After a while, they will get the hint and leave you alone. 
  • If you work for the government, and simply can't ignore the overwhelming presence of stupid liberals, quit and start your own business.  You can do it, lots of people start businesses all the time.  If you say that you can't leave your pension behind, just remember: your pension is underfunded anyway, and the likelihood of you collecting on it in your golden years is iffy anyway.  And if you still can't bear to leave, you are a liberal yourself and there is no hope for you.
Why do we allow liberals to destroy the foundation of our country and bankrupt our futures?  And why in God's name, right after election after election, do we continue to sit down with them for lunch, go golfing with them, and consort with these enemies in all manner of ways?

Stop talking to liberals.  They will never convert to conservatism, and will vote to destroy the country each and every opportunity they get.  Dump them, wherever they show up in your lives.  Let them fend for themselves, and leave them to hobnob solely within the liberal community.

Just do it.  And you don't have to become an activist to take part in the ultimate defeat of liberalism.