The agent was pretty happy. Sales of these "insurance products" typically generate up-front commissions ranging from 5%-10%.

I have this theory about market beating advisors and brokers. When they talk about "retirement planning", it means they are planing to retire with your assets. When they talk about "wealth management", it means they are managing to transfer your wealth to them.

You don't have to be a nun or a teacher to be a victim.

But it helps.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.

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May 05, 2009

The Farce Called FINRA Has No Shame

The Financial Industry Regulatory Authority (FINRA), is the "non governmental" regulator for U.S. securities firms. FINRA runs the mandatory arbitration system for the resolution of all disputes between brokers and their clients. Many believe (and I am one of them) this process is biased and rigged against investors.

FINRA's Board of Governors is a who's who of the securities industry. Prudential, Merrill Lynch, Pershing and other industry insiders are well represented. They "govern" their fellow brokers the same way the SEC "governed" Bernie Madoff.

FINRA's kangaroo court is currently processing cases brought by investors who purchased auction rate securities. These investors were told ARS were "as good as cash." It turns out the markets were rigged (much like FINRA's arbitrations) by the market makers, who made huge underwriting profits packaging and selling these "investment" products. The ARS markets froze in February, 2008 leaving investors holding more than $100 billion.

We now learn that FINRA itself bought more that $860 million of ARS. Unlike investors who are stuck with these bonds, FINRA dumped all its holdings less than six months before the market for them froze up.

What remarkable foresight!

FINRA is the ultimate insider. Is it really possible it did not know the market for ARS was in deep trouble when it got rid of its ARS?

In October, 2007, Mary Schapiro, formerly the head of FINRA, gave a speech in which she said that "individuals bought auction-rate securities even as institutional investors were dumping their shares." Shapiro posed "the question" as follows: "Was that information freely shared with individual investors?"

At the time, FINRA's own sale of its ARS was not publicly disclosed.

Ultimately, it will fall to the SEC to investigate the propriety of FINRA's conduct. That could present a problem. Mary Schapiro is now the head of the SEC. How vigorously will she investigate her own behavior?

In the meantime, gullible investors will proceed with their FINRA arbitrations, clinging to the false hope of a fair hearing.

And pigs will fly!

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.

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April 28, 2009

A New Twist on the 401(k) Shell Game

Recently, I made a proposal to the head of Human Resources at a large industrial corporation to replace its 401(k) plan. Its plan was the typical one: mostly actively managed funds, many confusing choices, high fees (both disclosed and undisclosed).

My plan was starkly different: low, fully transparent fees, no "revenue sharing" (kickbacks) from fund families to the fund advisor, a small number of low cost passively managed, pre-allocated portfolios and Target Retirement Funds.

I reviewed the data showing the folly of investing in any actively managed fund, including a recent study demonstrating that during the past five years, nearly three-fourths of active managers failed to equal -- much less beat -- their indexes. This data is consistent with many other studies which demonstrate that, over a ten year period, less than 5% of active funds will beat their index.

She was not impressed.

"Take a look at our funds", she said. Compare them to the indexes over a ten year period and show me the results.

I did so, and I was shocked by the results. Over 60% of the active funds in her plan beat the comparable indexes over the past decade. How could this be?

Then it dawned on me. With the benefit of hindsight, an ethically challenged advisor could research those funds that have a stellar historical record and add them to the plan, while dropping those that have underperformed. He could then use the data to show a dazzling long term performance, even though the "out performing" funds had only recently been added to the fund options.

To test this theory, I asked the prospective client to obtain a list of all funds that were in the plan for the past ten years, and to indicate the dates when they came in and dropped out.

Here was the response: Their current plan advisor won't provide this information.

These people are really slick. It's amazing they get away with it.

But they do. And employees are the ones who suffer.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.

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April 21, 2009

The Solin-Cramer Smackdown: The Real Story

In case you missed it, Cramer and I went head-to-head during my appearance on CNBC's Power Lunch on Friday. You can see the video here.

I was asked what alternatives there were to investing in 401(k) plans. I replied that investors needed better education so they could make intelligent choices outside these plans. I then said "One of the things you could do is give us more 'In Bogle we Trust' and much less 'In Cramer we Trust'."

Cramer's unscripted, bug-eyed rant followed.

His point was that Bogle's advice has been wrong for the past decade: "In all due respect, the S&P is flat literally for ten years. That's John Bogle's world." He went on to compare "Bogle's world" to his world in which he claimed credit for advising investors when to get in and out of the markets.

The facts tell quite a different story.

As I noted after Cramer stormed off the set, either Cramer has no understanding of "Bogle's world" or he intentionally distorted Bogle's advice.

Bogle's views on investing are well documented.

He advocates determining your asset allocation and investing in a globally diversified portfolio of low cost index funds.

Cramer's assertion that Bogle suggests investors confine their investments to the S&P 500 is false. The S&P 500 does not represent an appropriate asset allocation for anyone. It is far from globally diversified. It is too risky for any individual investor. No one who knows anything about investing would suggest that investors confine their investments to an S&P 500 index fund.

Building on this distortion, Cramer asserts that the S&P 500 is "flat literally for ten years." Actually, it lost 26.5% for the ten years ending December 31, 2008.

How have followers of Bogle's actual advice fared during this period?

A moderate portfolio of 60% stocks and 40% bonds earned 36% for the ten years ending December 31, 2008.

Now that we have the results of the real "Bogle's world", let's look at Cramer's record.

Barron's conducted two studies of Cramer's stock picks.

In the first study dated August 20, 2007, Barron's concluded that "over the past two years, viewers holding Cramer's stocks would be up 12% while the Dow rose 22% and the S&P 500 16%."

Barron's revisited Cramer's stock picking skills in a second article dated February 9, 2009. Once again, Barron's concluded that Cramer's picks "underperform the markets by most measures."

Cramer also was selective about his market timing skills. As noted by Barron's, in the Spring of 2007, Cramer was the "chief cheerleader" for the bull market and "was giddily exhorting the Dow Jones Industrial average towards 15,000, with no troubles in sight." If he is going to take credit for his good calls, he should acknowledge the bad ones.

Investors have a choice. They can follow Bogle's advice and capture market returns, less low costs, with 100% certainty. Or they can be deluded into thinking that self-styled gurus like Cramer have the ability to beat the odds and pick stock winners.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.

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April 14, 2009

Hot Stock Picks for a Rallying Market

I have some hot stock tips for you.

I know you are troubled by the economic pickle we are in, but not to worry. This is the time to be "dollar cost averaging out of safe assets" and "into more risk assets --equities and corporate bonds."

Which stocks, you say?

I am so glad you asked. Here's a list:

Johnson & Johnson (JNJ)

Pfizer (PFE)

Wyeth (WYE)

IBM (IBM).

I also have picks for you in the health insurer and service sectors, but you have enough to get you started.

Don't take my word for these pearls of wisdom. They come directly from Bob Doll of Blackrock. Doll has a very impressive title. He is the Vice Chairman, Global Chief Investment Officer--Equity of Blackrock.

Doll gave investors the benefit of his views on CNBC on April 9, 2009.

Blackrock is no rinky dink operation. It manages over $1.31 trillion and has offices in nineteen countries. I can only imagine the resources Bob can call upon prior to publicizing his stock picks to eager investors hungry for market timing and stock picking advice from a real investment pro.

Since Bob is comfortable going on TV and telling investors now is the time to get back into the markets, surely he was able to predict the current crises and warn investors last year to flee to the safe assets he now suggests we all abandon.

Not exactly.

Bob did an interview with Nightly Business Report's anchor Susie Gharib on January 7, 2008.

The Dow was at 12, 827.

Bob predicted the U.S. would "narrowly escape a recession..." This would be good news for investors because Bob's crystal ball told him stocks would hit new records. For those investors who wanted to know what sectors would benefit most from the big rally, he suggested large companies and growth stocks, as well as emerging markets. Bob's "best advice" for investors in 2008 was to engage in "dollar cost averaging" and to "stick to the higher quality companies, the U.S. multinationals and don't give up on the emerging markets."

Susie ended the interview by complimenting Bob on his "interesting list of predictions."

The Dow closed on April 10, 2009 at 8083. Investors who dollar cost averaged into stocks got clobbered.

It is not surprising that Bob's predictions were so wrong. Predicting the direction of the markets is not easy. Take bank stocks for example. They were down over 55% from January 1, 2009 through March 9, 2009.

But look what happened from March 9, 2009 through March 23, 2009. Bank stocks were up over 65%.

Here's the real kicker. If you were out of the market on March 20, you would have missed out on almost 50% of that gain.

Raise your hand if your broker or advisor told you how important it was for you to be invested on March 20.

What continues to amaze me is how successful advisors and brokers are at convincing investors they should pay them to manage their money based upon their ability to predict the unpredictable. No amount of contrary data seems to undermine this flawed premise, including evidence of terrible past predictions.

You have to ask: When will investors realize that investing with those who claim a skill they don't have is harmful to their financial health?

I have an "interesting prediction."

Very soon.

The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.

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