I spoke to “Frank,” who wanted a second opinion about his “investment guy”. The guy in question was a fee-based advisor (score one) who charged Frank 1% for his $800,000 portfolio. “He’s a nice guy, but I’m not exactly sure what he does and what value he provides.”
Frank went on to describe that his investment guy (“IG”) did not actually manage his accounts, but used a variety of managers that outside experts determined were the “best” for IG’s clients. Frank said the reason he wanted to talk is that IG became a bit testy when asked about the added cost of using the extra layer of advice. “All I wanted to understand was what IG was actually doing for his 1%.”
This is one of the more confounding questions for investors who choose to work with an advisor. If you are paying an advisor 1% to manage your accounts, then ostensibly, the advisor is actually doing something, not simply putting your money into a fund of funds. To some extent, advisors who do not actually manage your money are not much better than their commission-based brethren. Do you really need to pay an advisor 1% to tell you to maximize your employer-sponsored retirement plan?
The conversation made me think about a recently-published book called, “Full of Bull: Do What Wall Street Does, Not What it Says, to Make Money in the Market” by Stephen McClellan. McClellan was a top-ranked analyst on Wall Street for 32 years and in his retirement, he has blown the cover off of many Wall Street institutions and labels individuals as naïve investors who “take Wall Street literally.” The book is designed to “expose the puzzling, deceptive, conflicted behavior of Wall Street that so disadvantages individual investors.”
McClellan speaks to Frank’s issue: investors should understand that their broker or adviser is NOT an investment expert, but a salesman paid to sell his firm’s product, whether a mutual fund or the amorphous category of “investment management.” One way to discover exactly what your adviser is selling is to ask a specific question: do you manage the money yourself or do you hire sub-advisors to make the decisions? If he or she gives you some jive-talk about how the firm has engaged other firms to identify and select the best investment managers, then you know that you are paying a bunch of money for calculations that you can do yourself online, because the “adviser” doesn’t want to or can’t manage money himself. As Frank asked, where’s the value in that arrangement?
Friday, May 2, 2008
Thursday, May 1, 2008
May Day or Mayday?
Today is the first of May or “May Day” which is also known as International Workers' Day. Given the economic news yesterday, I was wondering whether some might be thinking that today should not be seen as a commemoration of the Haymarket Riot of 1886 in Chicago, which came to signify the social and economic achievements of the international labor movement, but rather the emergency code word used internationally as a distress signal. (The later term derives from the French
venez m'aider, meaning 'come to my aid'/"come [to] help me.)
Although the month of April was a winner for US stocks (up approximately 4-5%, depending on the index), it appears that people are still feeling doubtful about the economy. Consumer confidence is at multi-year lows and yesterday Fox News released the results of its Dynamic Poll, which compared how people are feeling now versus how they felt in August, 2001--the last time we were in a recession.
The results show that people are pretty down right now--54% believe that we are in a recession and 38% say it’s a downturn—but that’s just semantics—92% are not feeling particularly upbeat. Back in 2001, the numbers were 23% and 50% respectively. So people think the economy is in the tank, yet the Commerce Department said that gross domestic product rose at a seasonally adjusted 0.6% annual rate January through March, equal to the fourth-quarter rate. It wasn’t great, but it least it was positive. Pessimists might note that it was the weakest two-quarter performance since 2001, when the economy was in recession.
The Fed evidently got the nuance of the mixed messages when it delivered the results of the FOMC meeting. As expected, the central bankers cut the target for the federal funds rate by ¼ point to 2%. But the statement accompanying the decision indicated that while the Fed still sees the economy under great stress, noting that “Economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress.”
But the economy is not falling off a cliff and therefore, the Fed dropped the phrase “downside risks to growth” remain, suggesting that inflation risks have escalated and will be important in the decision-making matrix in the near-term. The Fed also said it "will act as needed to promote sustainable economic growth and price stability," but it no longer feels it necessary to do so in a "timely manner," suggesting that the anxiety of the past few months has receded.
All of this Fed speak does seem encouraging, but so too is the reality that many people are not feeling too good. Again, according to the Fox News poll, when asked “How are you and your family doing financially?” the responses were as follows:
Great 15%Okay 61%Lousy 23%
For some, today is a celebration, while for others, it is a scary time. Depending on your situation, you can decide whether to celebrate May Day or to scream “Mayday, Mayday, Mayday!”
venez m'aider, meaning 'come to my aid'/"come [to] help me.)
Although the month of April was a winner for US stocks (up approximately 4-5%, depending on the index), it appears that people are still feeling doubtful about the economy. Consumer confidence is at multi-year lows and yesterday Fox News released the results of its Dynamic Poll, which compared how people are feeling now versus how they felt in August, 2001--the last time we were in a recession.
The results show that people are pretty down right now--54% believe that we are in a recession and 38% say it’s a downturn—but that’s just semantics—92% are not feeling particularly upbeat. Back in 2001, the numbers were 23% and 50% respectively. So people think the economy is in the tank, yet the Commerce Department said that gross domestic product rose at a seasonally adjusted 0.6% annual rate January through March, equal to the fourth-quarter rate. It wasn’t great, but it least it was positive. Pessimists might note that it was the weakest two-quarter performance since 2001, when the economy was in recession.
The Fed evidently got the nuance of the mixed messages when it delivered the results of the FOMC meeting. As expected, the central bankers cut the target for the federal funds rate by ¼ point to 2%. But the statement accompanying the decision indicated that while the Fed still sees the economy under great stress, noting that “Economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress.”
But the economy is not falling off a cliff and therefore, the Fed dropped the phrase “downside risks to growth” remain, suggesting that inflation risks have escalated and will be important in the decision-making matrix in the near-term. The Fed also said it "will act as needed to promote sustainable economic growth and price stability," but it no longer feels it necessary to do so in a "timely manner," suggesting that the anxiety of the past few months has receded.
All of this Fed speak does seem encouraging, but so too is the reality that many people are not feeling too good. Again, according to the Fox News poll, when asked “How are you and your family doing financially?” the responses were as follows:
Great 15%Okay 61%Lousy 23%
For some, today is a celebration, while for others, it is a scary time. Depending on your situation, you can decide whether to celebrate May Day or to scream “Mayday, Mayday, Mayday!”
Wednesday, April 30, 2008
A Break in the Action
Today the Federal Reserve convenes the Federal Open Market Committee (FOMC) meeting and we will find out whether the central bankers will cut interest rates for the seventh consecutive meeting. The current rate cut cycle started last September, when short-term rates stood at 5.25%. At that time, the FOMC noted that “Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally.” In retrospect, that may be one of the biggest understatements that the central bank ever made!
Seven meetings later, the fed funds rate is 2.25% and according to the futures markets, there is an 80% probability of a 25 basis points (1/4 point) cut to 2%. It is also likely that the accompanying statement will mention the possibility of a pause in the current rate cut campaign. The committee is likely to note that upside risks to inflation are now nearly as important as the downside risks to growth, a view voiced by various Fed officials recently. This has led Fed-watchers to reduce expectations from a 50 basis point cut to a 25-point cut.
Some believe that the cycle will end today, but I think that the Fed has to leave the door open for a variety of outcomes. There is still far too much risk in declaring the “all-clear” sign to investors. With food and energy prices soaring, a weak US dollar and rising inflation expectations, the Fed is grappling with two real and opposing forces: upside risks to inflation and concern about downside growth caused by the housing downturn and tight credit.
To balance these opposing forces, the Fed must be praying for the US economy to be weak enough to dampen inflation, forestalling any pass-through of price increases. Unfortunately, the Fed does not have any control over supply shocks, like those that continue to plague the crude oil market. Concurrently, the central bank does not want to see the country mired in a sluggish state for too long as threats from tight financial conditions, declining housing demand, falling home prices, and supply-induced spikes in energy prices, continue to lurk.
That’s why the opportunity to take a breath could not come at a better time---just as Uncle Sam is distributing $115 billion of stimulus checks, which is estimated to add 1% to Gross Domestic Product and as exports continue to add to growth. It seems that a break in the action is warranted this time around.
Seven meetings later, the fed funds rate is 2.25% and according to the futures markets, there is an 80% probability of a 25 basis points (1/4 point) cut to 2%. It is also likely that the accompanying statement will mention the possibility of a pause in the current rate cut campaign. The committee is likely to note that upside risks to inflation are now nearly as important as the downside risks to growth, a view voiced by various Fed officials recently. This has led Fed-watchers to reduce expectations from a 50 basis point cut to a 25-point cut.
Some believe that the cycle will end today, but I think that the Fed has to leave the door open for a variety of outcomes. There is still far too much risk in declaring the “all-clear” sign to investors. With food and energy prices soaring, a weak US dollar and rising inflation expectations, the Fed is grappling with two real and opposing forces: upside risks to inflation and concern about downside growth caused by the housing downturn and tight credit.
To balance these opposing forces, the Fed must be praying for the US economy to be weak enough to dampen inflation, forestalling any pass-through of price increases. Unfortunately, the Fed does not have any control over supply shocks, like those that continue to plague the crude oil market. Concurrently, the central bank does not want to see the country mired in a sluggish state for too long as threats from tight financial conditions, declining housing demand, falling home prices, and supply-induced spikes in energy prices, continue to lurk.
That’s why the opportunity to take a breath could not come at a better time---just as Uncle Sam is distributing $115 billion of stimulus checks, which is estimated to add 1% to Gross Domestic Product and as exports continue to add to growth. It seems that a break in the action is warranted this time around.
Tuesday, April 29, 2008
Seeking Guidance
I am often asked where people can turn for help with their investments as well as their more general wealth management questions. It came up last night when an interview aired on WJAR-NBC-10 (to see the segment in full, go to http://www.turnto10.com/northeast/jar/home.html) and I mentioned one of those $10 words that most people hate: FIDUCIARY.
My friend Kristine likes to say that words like “fiduciary” are scary so I need to find another way to describe it, so here goes. When seeking financial guidance, whether it is investment management or more general planning issues, it is preferable to work with a professional who is legally bound to put your interests first and that’s what a fiduciary means. After all, why would you want to engage someone who actually does not have to do this? And yet, that is the de-facto choice that so many people make. While they believe that they are hiring someone to provide advice, they are actually working with an individual who is not bound by the law to put you first, and is instead can sell you assets that are simply “suitable” for someone like you but may put another entity’s interests before yours.
As Alina Tugend noted in the New York Times on April 26, 2008 (“Pick a Planner Who Can Spell ‘Fiduciary’”) “while most people hire a financial planner more casually than they might, say, choose a hair stylist, you really should go into it as if you are selecting a marriage counselor.” Tugend correctly advises, there are a myriad of folks who hold themselves out as experts or counselors or advisors, so it is up to you to ask the correct questions so that you understand who you are hiring and what you are getting out of the relationship.
In general, there are three types of people in the financial services industry: investment advisers, salesmen (either investment or insurance) and hourly financial planners. The hourly planner is easy: you pay a certain rate and receive advice on specific planning issues, like retirement, college, estate, etc. In my experience engaging an hourly consultant for portfolio questions may not be the greatest idea because the advice by its very nature must be dynamic. A salesperson sells you anything from a mutual fund to an insurance product and is usually paid by commission. The salesman is often not going to provide ongoing advice, unless he or she can earn another commission by doing so.
The last category is an investment adviser (IA), which according to the NYT, “is a legal term that describes people who are in the business of giving advice about securities, stocks, bonds, mutual funds and annuities. Anyone who manages $25 million or more in securities generally must be registered with the Securities and Exchange Commission. In most states, advisers who manage less than that should be registered with their state’s regulatory agency.” Full disclosure: I am registered as an IA and so is my firm, so my bias is clear—I believe that those professionals who take the time to register and are legally bound to work in the best interests of their clients are preferable to others. “Investment advisers have a fiduciary duty, while brokers and financial planners may or may not. It’s a confusing legal situation, so the best bet is to ask anyone you are considering hiring straight out, ‘Are you a fiduciary?’”
Of course, the other question that you should always ask is how the professional gets paid. According to Tugend, “Most experts I talked to said to be leery of financial advisers who work on commission because they have an incentive to get clients to trade and buy on the highest-commission products — an inherent conflict of interest.” Then again, there may be certain situations when a transaction-based or hourly planner could be appropriate. In general, if you are seeking ongoing wealth management, it usually makes sense to choose a fee model which calculates a percentage of assets under management.
Just like if you were hiring a lawyer or doctor, ask the potential adviser/broker about his or her experience and education. “A minimum, say the experts, is a degree as a certified financial planner, which means the adviser has a certain level of education and experience, as well as attends continuing education classes. Certified financial planners are also bound by a code of ethics that includes fiduciary duty.” Finally, make sure that you actually like the person. The relationship between an adviser and client is an intimate one. In addition to all of this information, trust your gut.
My friend Kristine likes to say that words like “fiduciary” are scary so I need to find another way to describe it, so here goes. When seeking financial guidance, whether it is investment management or more general planning issues, it is preferable to work with a professional who is legally bound to put your interests first and that’s what a fiduciary means. After all, why would you want to engage someone who actually does not have to do this? And yet, that is the de-facto choice that so many people make. While they believe that they are hiring someone to provide advice, they are actually working with an individual who is not bound by the law to put you first, and is instead can sell you assets that are simply “suitable” for someone like you but may put another entity’s interests before yours.
As Alina Tugend noted in the New York Times on April 26, 2008 (“Pick a Planner Who Can Spell ‘Fiduciary’”) “while most people hire a financial planner more casually than they might, say, choose a hair stylist, you really should go into it as if you are selecting a marriage counselor.” Tugend correctly advises, there are a myriad of folks who hold themselves out as experts or counselors or advisors, so it is up to you to ask the correct questions so that you understand who you are hiring and what you are getting out of the relationship.
In general, there are three types of people in the financial services industry: investment advisers, salesmen (either investment or insurance) and hourly financial planners. The hourly planner is easy: you pay a certain rate and receive advice on specific planning issues, like retirement, college, estate, etc. In my experience engaging an hourly consultant for portfolio questions may not be the greatest idea because the advice by its very nature must be dynamic. A salesperson sells you anything from a mutual fund to an insurance product and is usually paid by commission. The salesman is often not going to provide ongoing advice, unless he or she can earn another commission by doing so.
The last category is an investment adviser (IA), which according to the NYT, “is a legal term that describes people who are in the business of giving advice about securities, stocks, bonds, mutual funds and annuities. Anyone who manages $25 million or more in securities generally must be registered with the Securities and Exchange Commission. In most states, advisers who manage less than that should be registered with their state’s regulatory agency.” Full disclosure: I am registered as an IA and so is my firm, so my bias is clear—I believe that those professionals who take the time to register and are legally bound to work in the best interests of their clients are preferable to others. “Investment advisers have a fiduciary duty, while brokers and financial planners may or may not. It’s a confusing legal situation, so the best bet is to ask anyone you are considering hiring straight out, ‘Are you a fiduciary?’”
Of course, the other question that you should always ask is how the professional gets paid. According to Tugend, “Most experts I talked to said to be leery of financial advisers who work on commission because they have an incentive to get clients to trade and buy on the highest-commission products — an inherent conflict of interest.” Then again, there may be certain situations when a transaction-based or hourly planner could be appropriate. In general, if you are seeking ongoing wealth management, it usually makes sense to choose a fee model which calculates a percentage of assets under management.
Just like if you were hiring a lawyer or doctor, ask the potential adviser/broker about his or her experience and education. “A minimum, say the experts, is a degree as a certified financial planner, which means the adviser has a certain level of education and experience, as well as attends continuing education classes. Certified financial planners are also bound by a code of ethics that includes fiduciary duty.” Finally, make sure that you actually like the person. The relationship between an adviser and client is an intimate one. In addition to all of this information, trust your gut.
Monday, April 28, 2008
A Bit of Wall Street Nostalgia
I was with a bunch of people in lower Manhattan for a charity walk-a-thon and after we were finished, I asked some of the participants if they wanted to see some of the sights of the financial district. Before you know it, I was playing tour guide to a dozen people who were born and raised within thirty miles of Wall Street, but had never seen the exchanges.
We started by walking to the World Financial Center so that we could observe the progress of the World Trade Center site -- I still can’t quite get myself to call it Ground Zero. The area looks like a massive construction zone, but I was able to provide some perspective by describing some of the events of that day. I reminded the group that the Commodities Exchange, where I worked for three and a half years, was housed in 4 World Trade Center, which was destroyed on 9-11. I recalled having breakfast at Windows on the World with my brother-in-law (they validated parking!) at least once a month. The COMEX and the NY Mercantile Exchange had already moved to a new location before 9-11.
We walked over to the two nearby churches that were miraculously spared during the terrorist attacks. Trinity Church and St. Paul’s are gorgeous structures set amid the massive buildings of the financial district. St. Paul’s was turned into a makeshift memorial shrine following September 11th and served as a place of rest and refuge for recovery workers at the WTC site. I have fond memories of Trinity Church, because it served as my own refuge during busy days.
After Trinity, we walked to the American Stock Exchange, where my father worked for three decades. I grew up at the AMEX, visiting Dad often and held my first job on Wall Street as a high school senior there. The AMEX got its start in the 1800's and was known as the "Curb Exchange" or simply “The Curb” until 1921 because it met as a market at the curbstone on Broad Street near Exchange Place. Its founding date is generally considered as 1921, the year when it moved into new quarters on Trinity Place.
As we made our way to the New York Stock Exchange, I told the history of the oldest and largest stock exchange in the US, which is located on Wall Street. It traces its origins to 1792, when 24 brokers and merchants gathered under a Buttonwood tree at the tip of Manhattan and signed an agreement to trade securities. “The Buttonwood Agreement” eventually grew into the place where representatives of buyers and sellers met and shouted out prices at one another in order to strike a deal. They were trading shares of “stocks” or “equities,” which represent ownership of public companies.
The current exchange building was unveiled on April 22, 1903 and was noted for its masterful architecture. The six massive Corinthian columns across its Broad Street façade impart a feeling of substance and stability --- the very embodiment of the nation’s growth and prosperity. While it is difficult to visit the interior of the building in the aftermath of 9-11, seeing the structure still thrills me. As a young college student clerking for my godfather, I walked into the building as most might enter a house of worship. It was not that I confused the two, but I had respect for all that the building represented.
As I stood before the massive building, I found myself a bit sad. The hey-day of physical exchanges has long passed with the advent of computer-based trading. There is certainly better execution and increased efficiencies now, but nothing can match the exhilaration of walking onto a trading floor and seeing capitalism come to life. Now you know that at heart, I am an old-fashioned and nostalgic gal!
We started by walking to the World Financial Center so that we could observe the progress of the World Trade Center site -- I still can’t quite get myself to call it Ground Zero. The area looks like a massive construction zone, but I was able to provide some perspective by describing some of the events of that day. I reminded the group that the Commodities Exchange, where I worked for three and a half years, was housed in 4 World Trade Center, which was destroyed on 9-11. I recalled having breakfast at Windows on the World with my brother-in-law (they validated parking!) at least once a month. The COMEX and the NY Mercantile Exchange had already moved to a new location before 9-11.
We walked over to the two nearby churches that were miraculously spared during the terrorist attacks. Trinity Church and St. Paul’s are gorgeous structures set amid the massive buildings of the financial district. St. Paul’s was turned into a makeshift memorial shrine following September 11th and served as a place of rest and refuge for recovery workers at the WTC site. I have fond memories of Trinity Church, because it served as my own refuge during busy days.
After Trinity, we walked to the American Stock Exchange, where my father worked for three decades. I grew up at the AMEX, visiting Dad often and held my first job on Wall Street as a high school senior there. The AMEX got its start in the 1800's and was known as the "Curb Exchange" or simply “The Curb” until 1921 because it met as a market at the curbstone on Broad Street near Exchange Place. Its founding date is generally considered as 1921, the year when it moved into new quarters on Trinity Place.
As we made our way to the New York Stock Exchange, I told the history of the oldest and largest stock exchange in the US, which is located on Wall Street. It traces its origins to 1792, when 24 brokers and merchants gathered under a Buttonwood tree at the tip of Manhattan and signed an agreement to trade securities. “The Buttonwood Agreement” eventually grew into the place where representatives of buyers and sellers met and shouted out prices at one another in order to strike a deal. They were trading shares of “stocks” or “equities,” which represent ownership of public companies.
The current exchange building was unveiled on April 22, 1903 and was noted for its masterful architecture. The six massive Corinthian columns across its Broad Street façade impart a feeling of substance and stability --- the very embodiment of the nation’s growth and prosperity. While it is difficult to visit the interior of the building in the aftermath of 9-11, seeing the structure still thrills me. As a young college student clerking for my godfather, I walked into the building as most might enter a house of worship. It was not that I confused the two, but I had respect for all that the building represented.
As I stood before the massive building, I found myself a bit sad. The hey-day of physical exchanges has long passed with the advent of computer-based trading. There is certainly better execution and increased efficiencies now, but nothing can match the exhilaration of walking onto a trading floor and seeing capitalism come to life. Now you know that at heart, I am an old-fashioned and nostalgic gal!
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