Why Don't You Just Give Your Broker a Gun and Tell Him to Shoot You?

(From Dan Solin's blog, Huffington Post, July 14, 2009)

A reader of my blogs sent me an e-mail with a Customer Agreement from a major brokerage firm. She asked me to look it over and tell her if she should sign it.

The first thing that struck me was this clause:
"Brokerage activities are regulated under different laws and rules than advisory activities and generally do not give rise to the fiduciary duties that an investment adviser has to its clients."
The agreement pointed out that the brokerage firm "...may face certain conflicts of interest and as such, its interests may differ from yours."

These statements are typically inserted in account opening agreements.
I asked the reader this question: Why would you entrust your assets to a firm that tells you it does not have to act in your best interests and further that it may have conflicts of interest with you which it will resolve in its favor?

It gets worse:
The agreement also provided that all disputes must be resolved by mandatory arbitration. Not before an impartial panel, but one appointed by FINRA, which is essentially a trade group for the securities industry.

William Galvin, the highly respected Secretary of the Commonwealth of Massachusetts aptly described FINRA's arbitration process in testimony before a congressional sub-committee as "an industry sponsored damage-containment and control program masquerading as a juridical proceeding."

Taken together, these clauses are a sucker punch for the unwary investor. The brokerage firm is telling you straight up that they will not act in your best interest. By consigning you to FINRA's mandatory arbitration, it is unlikely that you will get justice when you try to recover for their misconduct.

Why don't you just give them a gun and tell them to shoot you?

What's your option?
Don't play by their rules. Instead, if you need investment advice, retain a Registered Investment Advisor. They are required by law to be fiduciaries. If their agreements provide for arbitration, it will not be FINRA arbitration and you can often negotiate the removal of the arbitration clause altogether.

Just be sure the advisor focuses on your asset allocation and limits your investments to a globally diversified portfolio of low cost index funds, Exchange Traded Funds or passively managed funds.

The reader sent me this note: "Amazing how 90% of the public does not understand that they are the investor sheep heading to the Wall Street butcher shop."

My sentiments exactly.

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.

There's a Hole in Your Wallet

Chances are you waste a lot of money each month. You probably recognize some of the ways you could live less expensively, but here are a few you might not:

• If you're stashing your cash in an ordinary bank checking or savings account, you're missing out. It would work harder for you by sitting in a high yield savings account. You can even get an interest-bearing checking account. Check out ETrade or ING.
  
• Your home electronics are sucking juice (more than you would think, too) when they are turned off. If you can't bring yourself to plug and unplug all the time, you can buy power strips that will stop drawing electricity when the item is turned off.
  
• Do you complacently pay your insurance bill when it comes? Rates can vary drastically from insurer to insurer. Re shopping your home and auto insurance could save you a bundle. You'll also want to examine your deductibles and coverage every so often to make sure you still need what you're paying for.
  
• Say you're a diligent saver and you automatically invest a little each month into mutual funds. Make sure you're not paying an upfront fee, or load on that fund. You might also be paying a 12B-1 marketing fee, but these are less expensive and more difficult to avoid than sales charges.
  
• If you're a smoker, you don't need me to point out how much money you're wasting, let alone the more costly medical care you're signing up for in your future. A pack-a-day smoker at $5.00 a pack spends $1,825 a year on cigarettes. If you're a junk-food or tanning bed fan, that adds up too.
  
• Do you really need all those cable channels? I've even had luck reducing my cable and cell phone bills by calling and asking. It's worth a try.
  
• Don't pay for your credit report. You're entitled to your credit report for FREE once every 12 months from EACH reporting company. That means you could be even more diligent and remind yourself to pull your report from a different company once every 4 months. Make sure you visit annualcreditreport.com to pull yours. There are many other sites out there that will be happy to charge you for the privilege.

By Amanda Bashore, CFP®

Arbashore@taaginc.com

The Golden Ticket

"Happiness is a by-product. You cannot pursue it by itself"

Sam Levenson

As we approach retirement, much time is spent daydreaming about a life of leisure when we have no one to answer to but ourselves. Happiness seems inevitable when we are in charge of our own destiny. It is common to spend the years approaching retirement creating a plan so your financial house is in order, but less common to create a mission statement describing the purpose for the next stage of your life.

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In business, a mission statement is created to describe the purpose of the organization and spells out the goals and direction for a company. With a personal mission statement, you can create an intentional direction for your life.

In the twenty years I have been advising retirees, I have found that the biggest determinant of their happiness in retirement is discovering their purpose. This can be anything from spending time with family and friends, pursuing a hobby, volunteering to starting a new career. Those who are the most thoughtful about how they will be spending their golden years seem to enjoy life to the fullest.

A wonderful web site I have recently discovered is http://www.theonequestion.com/. It includes a wealth of information from a test to discover your purpose, to links to articles, books and interviews so each of us can discover our own passion and begin to live a truly fulfilling life. It's never too late to start!

By Chris Carleton, CFP®

Baby Boomers Retiring - How Will it Affect the U.S. Economy

The Boomer generation is a demographic term for the Americans born somewhere in between 1946-1964. Based on a 2000 United States census, the Baby boomer generation is a population of roughly 83 million. To date, baby boomers range from 42 to 60 years of age. This means that the baby boomer generation is on its way to leave the labor force of the country.

Baby boomers are offsprings of a healthy, erudite and bounty living. Because of this, they have changed the perspective of growing old by reinventing themselves to pursue a new passion.

Because of the distinctive characteristics of baby boomers, they have caught much attention and are the subject of studies and surveys. And for one thing, baby boomers belong to an influential generation that significantly affects the economy of the United States.

In an investigation conducted to discover how baby boomers expect retirement, here are some of the key findings:

• For baby boomers, retirement is an occasion to dedicate themselves to the family and to enjoy their leisure time by pursuing their interests and hobbies. Anyway, they view retirement as a chance to improve their skills and find another career opportunities for their age.
  


• Baby boomers quest for both personal and career fulfillment has becomes a driving force for them when preparing and planning for retirement. They secure social security by accessing health and life plans.
  


• Baby boomers are an optimistic generation with conservative financial hopefulness.
  


• So compared with their parents, baby boomers are far more likely to be continuously working while enjoying their leisure and comparatively the boomers made more money than their parents.
  

Tracing back to the annals of American history, the US economy has predominantly prospered since the baby boomers matured to enter the labor force. Historically, they are considered to be the prime source of the work force. But now that there is the expected demographic decline of baby boomers, the Unites States Bureau of Labor Statistics expect labor shortages that must be resolved quickly. Otherwise, it will inflict dire consequences to the economy.

However, there are some solutions to address the foreseen labor shortage by targeting the other variables that affect the demographic landscape. Organizations and firms can consider retaining the older workers, correcting the gender imbalance in work designations, outsourcing and hiring immigrants.

Since the baby boomers entered the labor force, the US economy has grown faster than its overall population. And the impending decline in the participation of baby boomers to service, will mean a slower rate of labor force growth as well as impact the economy.

(with edits) from helloboomers.com March 6th, 2009

The Forgotten Man

The specter of the Great Depression has been raised repeatedly since our current recession began. After hearing all the comparisons I decided to do some research of my own.

Amity Shlae's book, The Forgotten Man – A New History of the Great Depression, does an excellent job of reviewing what the US went through from 1929 – 1940 with balanced and well-documented facts. After reading the book I am amazed that we came out of that time in history without becoming a socialist country or carrying permanent financial scars.

My first major take-away from the book was we think we know how tough it was back then, but we have NO idea. William Troeller, a 13 year old boy in Brooklyn, hung himself from the transom in his bedroom so that his remaining family would have enough to eat. His father had lost his job and the family’s gas for their apartment had been shut off for 7 months. Wide-spread hunger was severe. Deflation was so bad that money literally ran out, and many states, like New Jersey, created their own substitute currency so people would have something to pay their bills. There was a black market for paper money.

My second observation is that the history we were taught – that Hoover was the villain that got us into the Depression and Roosevelt and the New Deal saved us – is severely flawed. The boy who hung himself did so 5 years after Roosevelt was elected and the New Deal programs had been implemented. The New Dealer’s efforts, though good intentioned, caused major damage to the US economy due to their bureaucratic management of the markets. The Schechter brothers, who ran a small kosher butcher shop in Brooklyn, were almost thrown in jail and driven out of business because they allowed their clients to choose their own chicken to be butchered – a violation of the National Recovery Administration’s “Code of Fair Competition for the Live Poultry Industry of the Metropolitan Area in and About the City of New York.” The case went all the way to the Supreme Court before it was thrown out. The rules forced onto businesses by the NRA crippled entire industries and forced the shut-down of companies increasing unemployment and causing the second wave of the Depression.

The level at which Roosevelt and his staff experimented with the markets was also sobering. Every morning FDR would set the target price for gold for the United States. One morning he told an assembled group that he was thinking of raising the price of gold by 21 cents because it was a lucky number. Utility companies like Commonwealth & Southern were driven out of business by government sponsored projects such as the Tennessee Valley Authority, and shareholders lost their investments. Ironically, the cost of power went up in many areas where the government had taken over.

World War II has been cited as the reason we were able to climb out of the Depression, but I believe that change in the attitude of Americans had already begun. The US has a culture of fighting back, and it had become obvious to many that the New Deal was not working. In January 1940 an article, directed at FDR, was published in Fortune magazine entitled “We the People.” In it Wendell Willkie, the former president of Commonwealth & Southern, urged the president to “give up the vested interest you have in the Depression, open your eyes to the future, and help us build a New World.” People were tired of seeing the government beat up on business while telling the unemployed it was for their own good. Americans might allow politics and policy to fool us for awhile, but we don’t believe it forever.

By Jeannette Jones, CPA, CFP®

An Oracle Missteps

While as a rule I prefer not to forecast, an undeniable attempt by the markets at a recovery has begun, with some asset classes enjoying historic gains since early March. Even with this news, Warren Buffett, the Oracle of Omaha, has appeared in the media quite a bit with some downright depressing comments about the future of the economy. While I certainly believe that a return to “normal” will include some potentially significant bumps along the way and that a quick and easy ride back to where we were in 2007 (which was not, by any measure, normal either) is not likely, I am equally pessimistic about the uncharacteristically morose view that the world’s second wealthiest man has taken of late.

I have spoken with many people over the last few weeks that share this negative outlook, often quoting Mr. Buffett as a source for their worries and concern. While a fan of his overall career and his disciplined handling of his personal finances, I would like to offer an opinion that may not be so popular with the Warren-nation. Is it possible the Oracle has misstepped of late and is struggling to acknowledge the error of his ways?

Warren Buffett is a human being. That’s right, I said it. He plays bridge, he drives a Caddy, he has lived in the same house for 51 years. He also happens to be one of the most successful, disciplined investors of all time. Yet even with all his discipline and all the information a man of his status has at his fingertips, he has proven just as likely to succumb to the “what goes up, must move higher” mentality as any of us.

Buffett’s primary reasoning behind his most recent comments is that he is not seeing recovery on the floors of the companies in his portfolio. Is that because the economic recovery is a pump fake and we should prepare to run and hide? Or could it be Berkshire Hathaway is not nearly as diversified as one might think?

Over the last several years, look at the companies Berkshire has acquired. Acme Brick, Borsheim’s Fine Jewelry, Clayton Homes, Helzberg Diamonds, MidAmerican Energy, RC Willey Home Furnishings, NetJets. These are home builders, mortgage companies, furniture stores, fine jewelry dealers, energy companies, even private jet charter services. Berkshire got caught up in the boom in housing, luxury goods, energy and credit just like the rest of the world.

Once things turned sour, he made a multi-billion dollar bet on General Electric before it subsequently tanked even further. This is certainly not just an attempt to point out fault (I actually think with the terms he secured, this will be a good deal for Buffett in the long run), but rather an attempt to point out that no one person, not even the Oracle, has all the answers. The ability to be right time and time again is a noble endeavor, but a sucker’s bet. Greed and a sense that some companies just simply never underperform are powerful emotional pulls for even the shrewdest investor.

As the U.S. and global economies get back on their feet, and they will, even if it’s a slow, volatile comeback over several years, we must remember to not take the wins too seriously or the losses too much to heart. In the long run, smart, disciplined investors with well diversified portfolios will be rewarded, while speculators and gamblers will win some, but lose most.

By Chip Workman

Make Your Own Declaration of Independence

You don’t have to be Jefferson to create your own Declaration of Independence. Writing your own can be a great way to recommit to yourself and your financial independence this summer. Make it your half-year resolution.

We have all thought about our goals and what we want our future to look like. If you're anything like me, it will help you to write it down. Each day we make financial decisions and take steps to get there. We go to work and earn another day's pay. We pay our mortgage and can check one more payment off the list.

Start your Declaration with a mission statement. What is your goal? Is it to have enough saved to be financially independent until the end of your life? If you’re having trouble defining your goal, answer the question “How do I look in fine, ten or more years?”

Try not to just pick a number for your goal, such as stating “I want to have $1,000,000 by retirement.” Instead, try to model as closely as you can how much you will need in dollars to fund your desired lifestyle (Note: This sort of modeling can be made much easier with the help of a financial planner). Knowing what you need to save in order to fund your goals is much easier than picking a number and working backwards.

Once you have defined your goals, take it a step further and outline what you will do to work toward that goal. You could have a blanket answer to the questions by saying that you will work to fund your goals, but you might find it more useful to be specific. An example might be “I will set aside $250/month in order to have enough saved in 5 years for the boat we want.”

After you progress through defining your goals, rank them in order of importance. You might find that once you have them listed in this order, you see that your list moves from ‘needs’ to ‘wants.’ You might be surprised to see which items fall to the bottom of your list.

Finally, sign and date your declaration. Don’t just file it away, either. Keep it somewhere that you will remember to re-evaluate it each year. Perhaps you stick it in your current year’s tax file? That way you will find it next year and remind yourself of what you’re trying to do.
-It’s much easier to get there when you know where you’re going.

By Amanda Bashore, CFP®