Ignorance of Financial Adviser Costs

                     

There may be a big difference between what you think financial advisers  earn and what you pay them.

                       

I am not only referring to the fact that they may be getting referral fees for recommending you as a client. That would be a conflict of interest harmful to your interests.

                       

I am calculating direct cost. You will pay the adviser’s fee, on the management of your assets, It can be1% to 3%, generally 11⁄2%. That’s $1500 for every $100,000 they manage.

                       

Yet the asset-management fee may not be the only cost . You pay other charges, which include mutual fund and exchange-traded fund fees for management. And if you use a hedge fund, you may also pay about 20% or so of fund earnings.

                       

The problem is that these 1 1⁄2% management costs add up to a considerable chunk of your annual returns. After all, you’re lucky if you earn $6000, or 6% for each $100,000. The advisory fee, in other words, can be as much as 25% or more.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Government Insider Trading Rules Are Difficult to Follow

Despite media reports of Wall Street types who have been caught for insider trading, the rules are not as simple as headlines would make them appear.

                       

Many of the rules are vague. It’s easy to get caught for what was done in good faith. Often, those who are arrested and go to jail, are guilty merely of lying in one way or another in their testimony, but not for insider dealings.

                       

What has been firmly established about insider trading is this:

                       

An employee has an obligation to an employer not to divulge information received while on the job. You cannot trade on company secrets.

                       

There is nothing illegal about trying to get information about a company in which you wish to invest, provided you don’t have someone break a law or a duty, to get at that information.

                       

You can act on gossip and what you over-hear from general discussions of others, who are not restricted in the dissemination of such information.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Your Share of the Public Debt

We will soon have well over $60-odd trillion in unfunded public debt obligations. That is over $500,000 for the average family household. The figure mounts every day.

                       

That sounds worse when you figure that it is about ten times the average income of each American household. What is more, the amount grows because it is a debt that accrues interest. And interest costs are bound to eventually grow enormously.

Plus, the value of the dollar to pay debt back gets to be worth less as our obligations mount. With inflation, it may well triple or quadruple or go even higher.

Add to all this the mostly overlooked fact that public debt competes with private industry, that's seeking funds for business (and job) expansion. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Timing Securities Buying and Selling?

             

Selling securities at their high and buying at their low are everyone’s investment goals. Of the over 1,600 strategies I’ve evaluated along with their pros and cons, this could be one of the basics.

           

The idea does not work in practice. Blame it on human psychology. Or the blur of constant financial news with new buying and selling suggestions. Or your need for occasional cash for urgent needs.

           

Research shows that very few professionals can time the market, except by accident.

           

Be especially careful with bonds because you are bound to get wrong

information from “experts” about the risk of holding them during inflationary times. Investors generally get poor advice about the practical usage of duration principles, as a tool for bond profits during inflationary periods. 

So forget about any supposed ability to time the markets. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Gold Isn’t Always the Buy that Sales Ads Tout

Gold investment sales ads always mention central bank purchases but, of course, never the sales of country central banks who sell gold for needed cash.

And ads fail to give fundamental facts about gold and inflation. In the not too distant past, the 1980s, with average inflation about 6% a year, gold values dropped by about 50%.

                           

Gold has actually little relation to inflation. Instead, gold pricing is effected by any negative real interest rates and, importantly, any financial panic or fear.

So, only when interest rates run almost zero, gold has an advantage. Remember, gold pays no dividends or interest and competes with investments that do.

Further, we seldom suffer real economic panic or fear conditions.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Is Inflation NOT a Threat?

                                                                               

The Consumer Price Index has risen at an average annual rate of only 1.87% since 2008, when the administration started on its rampant deficit course. That's about half the average percentage experienced after World War II. Of course, the official rate never includes all the costs of living. Many economists don’t appear to do their own food shopping and avoid gas pumps and ever- costly consumer purchases.

The vast majority of the cash the Federal Reserve  prints may not be felt yet. The commercial  banks have them  in their excess reserves. So while  the  budget deficit as a percentage of GDP has been almost  cut in half, this is eventually going to change. Budget deficits will continue, and the reserves will be used as commercial activity rises. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Regulating Investment Advisers and Brokers

                          

Investment advisers are regulated by the Investment Advisers Act of 1940. Brokers are regulated by the Securities Act of 1934.

           

There had been a fine-line distinction in the way brokers and advisers dealt with clients. Years ago, brokers were more likely to give advice than they do today. Commissions are much lower these days. And so much information is available online.

           

Additionally, in theoretical terms, investment advisers are expected to have a broader view of the investment picture. Much of broker training has to do with securities law basics, rather than investment research. I find that in practical terms, investors ought to treat the differences academically, but also cynically.

           

However, under Dodd-Frank, the Securities and Exchange Commission attempts to make brokers more responsible for information they give, treating them as fiduciaries. That helps dry up this source of information.

           

On the other hand, advisory charges can amount up to 25% and more of your investment income each year when you pay fees of 11⁄2% or so on assets managed.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Keynesian Free-Spenders Don’t Understand John Maynard Keynes

Democrat party followers have had a long association with John Maynard Keynes. Since Franklin Roosevelt and the New Deal in the 1930s, this economist’ s teachings have been their guide.

           

But they do not always read Keynes correctly. Today’s Democrats refer to him to suit their political purposes.

           

They feel that you fight recessions by government spending money, to create jobs, by encouraging demand.

           

Experience shows otherwise, Mass spending does not produce jobs. But it does produce dangerous deficits.

           

At the same time it produces no incentives for business to expand job formation. Business expansion requires lower tax rates, not higher rates that over-spending eventually causes, that stifles business, Especially affecting smaller firms that account for the bulk of U.S. jobs.

           

The media never fully get into detail and depth when it touches on the thinking of John Maynard Keynes. To disclose what Keynes really had suggested only over a short term, and not cherry-picking from his theory. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Investing in China is a Risky Venture

Investing in Chinese corporations can be risky when government can run things its own one-party way.

                       

Also, their basic economic statistics are not accurate. As one example, new housing is an important statistic in China. But the  official housing index, the National Bureau of Statistics, is much different and much lower, than the China Real Estate Index System.

                       

And the difference far surpasses rises in Chinese wages, This poses

the likelihood of boom-like problems. Moreover, it's an important

difference because it affects the steel, cement and other basic housing construction information that analysts require.

                       

Therefore, investing in China poses information as well as political dangers of a controlled economic system.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

The Downside of the Dodd-Frank Act of 2010

Consumer protection is best accomplished by education. The subject is too complicated for bureaucrats because no one set of financial ideas and rules can accommodate every individual’s situation.

                       

Once the government gets into the act, it attempts simplifications that cannot be done, apart from insisting on the use of easier-to-read information.

                       

To create a process for the masses, the bureaucrats dumb down the process where they hurt choice and outcome for too many individuals.

                       

The Dodd-Frank Wall Street Reform and Consumer Protection Act of

2010 is a perfect example of what makes sense only to a bureaucrat. But in my observations, it may not make sense to individuals.

 Folks make dumb financial errors all the time. Correcting them by fiat can be foolish. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Prize Winners Also Pay Income Tax

Few folks know much about tax consequences of much of the financially-oriented news they see or hear. Example: Money won in a TV contest or any such prizes, is taxable as income.

                       

Furthermore,  that free vacation trip or new car gift is probably going to be

taxed at the retail value, not at the discount you could have gotten, had you bought it directly.

                       

Also, the contestants may be getting non-cash items for tax-cash payments they may not possess.

                       

Also be aware that foreclosed mortgages and any reductions in

credit card loans and other loan forgiveness, result in an income tax bite. Amounts saved are considered income. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Independent Research Achieved Little

The need for independent, rather than broker or investment banker securities research, arose because of both real and imagined problems about the work of in-house securities analysts.

                       

A settlement back in 2003, imposed by the then New York State Attorney General, provided for so-called independent securities evaluation. It was supposed to be a buffer from what was being offered by those also underwriting securities. It thus forced them to spend $460 million to finance “independent” research, on behalf of non- institutional clients.

                       

Such securities research was little used. Yes, some independence was achieved, but few investors used that source of information.

                       

However, it was a political success at the time the settlement was made.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Do You Listen to Securities Analysts?

                    

It’s difficult to know what is going on in any public business. Even insiders in a corporation don’t know how outside events will affect their business. So why should investors bother to buy individual securities after a so-called analysis?

                       

Furthermore, starting several years ago, about one quarter of securities research departments announced they were dropping coverage of small-cap stocks, while about one sixth no longer covered mid-cap stocks. A large percentage of large cap stocks are no longer reviewed because less analysts were employed.

                       

This backs up my position that it doesn't pay for an investor to consider evaluated securities. Whether they are professionally analyzed or not.

                       

An investor’s best bet is to use low-cost mutual funds or ETFs, matched to indexes. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

It’s Easier Than You Think to Learn Finance

You may already know that advisers are too expensive for you. That when they take 1 1/2% of your assets as a fee each year and you earn 5% on those assets, that’s too big a cut of your earnings each and every year.

                       

What do you do? You feel you know too little about investing?

                       

Don’t underestimate your ability. It’s easy to learn basic investing methods as I have outlined them over and over, particularly in these blogs. There are basic, simple rules and low-cost investment vehicles you can choose. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Useless and Costly SEC-Enforced Investor Reports

The Securities and Exchange Commission requires sending complicated literature that small investors do not read and cannot understand. It's unwarranted.

                       

I  refer to costly prospectuses, financial notices and material which ought to be filed, but which should be made available only for those who really are interested in reading them.

                       

All the general public requires are outlines of important information, forwarded in a manner the average investor can easily understand. (See the Earl J Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

More Bond Credit Agency Competition

Many question the power of the credit rating agencies since the sub- prime crisis when the mortgage bond AAA status proved erroneous, and when U.S. bonds lost AAA ratings from Standard & Poor’s.

                       

The federal government gives the raters a monopoly and then criticizes their work. Some solutions make little sense, Such as making rating agencies liable for any errors in judgment. That's great for lawyers and is bound to get those companies out of the business.

                       

Actually, banks and large investment companies already do their own investigations of credit risks they deal with.

                       

What about more competition as a solution? . Allowing any company with qualified analysts to practice would help. Right now, the government has permitted only a few to operate in this area. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Should Government Also Regulate Mutual Fund Fees?

                    

The government has from time to time questioned fees charged by mutual funds Should the U.S. advise how high fees ought to be?

                       

Investors themselves ought to know how to compare funds’ expenses and why to choose those with the lowest costs. Funds give this information.

                       

Management of mutual funds often has little to do with success. Lower-cost funds which follow market indexes often perform better than managed funds. The overall success factor for choosing the right fund is low cost.

                       

However, that should not be government’s function. Politics have a nasty habit of interfering with choice, and politicians are not the wisest advisers. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

If You Do Pick Up an Adviser

 I never recommend advisers because of their cost that greatly detracts from investment performance over the years.

                       

When advisers take 1 1/2% of your assets as a fee and you earn 5% on those assets each year, figure the enormous cost

yourself. On each $100,000 you have, your earn $5,000 and you pay

your adviser $1,500. That’s a big cut of your earnings each and every year.

                       

But if you insist you must have an adviser because you listen to what

the media foolishly advise, check out and verify that adviser’s past performance. And check for any federal and state citations, and the list of current clients and referrals. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Federal Reserve Critics

There always has been anger against the Federal Reserve. The idea of a quasi-government agency, the head of which is appointed by the president, independent of congressional influence, has always been suspect.

                       

The role of the twelve regional Fed banks has also been questioned. They are overseen by private-sector boards of directors, composed mainly of commercial bankers. That never pleases the Left.

Dodd-Frank financial regulation has, in effect. tilted the influence on the Fed in many ways, giving the executive branch of government much more power that it ever had.

                       

Recent actions show a bias toward administration easy money policies that foster inflation that the fed is supposed to help counter. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Financial Media Exaggeration

               

       

The media exaggerate with high-tech distribution of news, as they did when they sold only newspapers in what we still refer to as days of “yellow journalism.”

                       

That’s not just when it comes to sex and  politics. It includes members of the financial fraternity.

                       

One example: When  Madoff said he made off with $65 billion and was subsequently convicted of fraud, his case pointed out a problem in the financial media.

                       

Investigators believe the total sum involved was actually closer to $17 Billion. The sensationalist media continues to pick up the $65 billion number because it suits their needs.

Other exaggeration often has to do with the ongoing moods and sentiments of the markets.(See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

The Needed Credit-Default Swaps Market

Credit-default swaps got a bad reputation for a faulty political-scapegoating reason during the 2008 financial debacle. Yet, they are still being used, because they serve a useful, legitimate purpose.

                       

The problem with credit-default swaps is that the market is little understood. It provides a form of insurance that bonds will pay off, particularly when the bonds are being issued by governments whose credits are very shaky

                       

Without them, countries on the brink of bankruptcy such as Greece and Portugal, Spain and Italy, would have problems selling their bonds at any price. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Using the Duration Principle With “Junk” Bonds

 Comments are always timely on how professionals in the financial industry constantly get the bond market wrong. The media does a poor job on this subject.

                       

Take high yield corporate bonds, called “junk” for an unfortunate reason having to do with lower ratings. The fact they have lower ratings is compensated by higher yields. If you buy them in a fully diversified, low-cost mutual fund or ETF, and you reinvest dividends, you have factored in risk.

                       

If the default rates of the holdings were to rise to an unusual high from lower level, the higher yields would more than make up for the risk. Yet, all the media will discuss is the risk of default and not the built-in compensation.

                       

I have previously commented how the media hardly discuss how you can avoid that loss, along with any inflation hit, with proper use of bond duration.

                       

This is possible with low-cost mutual funds and use of dividend reinvestment. The media, instead, offer superfluous discussions about such instruments as TIPS to avoid inflation hazards, which are expensive and not needed. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

How Many Financial Advisers Are Really Qualified?

Is acquiring formal, expensive  finance advice essential, if anyone can learn quality basics on his own without too much effort? Particularly if an investor feels he must hire an adviser to solve what he feels are the complexities of investing?

What is it that makes advisers so expert? Is it the passing of an exam which purports to cover all of what there is to know about finance?  Can this be learned by anyone without too much effort? The answer is yes.

Do those fancy letters after an adviser’s name mean real expertise that makes a difference? Not many are really qualified to earn their keep.

Bottom line: Does it pay to spend 20% and more of your annual investment income to get that advice? My suggestions are for investors to learn the basics and avoid expensive advisers who contribute little for the costs they impose. 

Lawyers and accountants may be needed but not advisory meddlers. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

Professionals Often Stumble With Corporate Bonds

 Professionals in the financial industry constantly get the bond

market wrong. Note: I’m referring to so-called experts, not amateurs.

                       

They make up well over 80% of the market so they should know

better. And the media are usually also in error, when reporting about them.

                       

At the first sign of economic problems, there is talk about corporate defaults and the effect on the bond market. How bond prices are bound to fall because of the risk of possible defaults. And with that talk, the bond market weakens and prices do fall.

                       

But remember: The possibility of default is very quickly factored into bond prices. And the lower the price, the higher the yield, as a direct relationship.

                       

Furthermore, the media hardly ever discuss how you can avoid loss, along with any inflation hit, with proper use of bond duration. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)

The Fed and its Humphrey-Hawkins Conflict of Interest

Independent-minded economists have always come to the Fed’s defense, in its attempt to keep the Federal Reserve as free from politics as possible.

                       

But the Dodd-Frank Act has made the Fed less independent of the executive branch of government.

                       

Despite the logic for the Fed’s independence, Congress itself always has wanted to impose some influence. It has to an extent. Since 1978 the Fed has had to enforce the Full Employment and Balanced Growth Act, known as Humphrey-Hawkins. That conflicts with the Fed’s stated currency/inflation activity.

                       

The Humphrey-Hawkins Full Employment Act enforcement creates an inflating bias, and not one of dollar stability; so there is always a conflict of interest. (See the Earl J. Weinreb NewsHole® comments and @BusinesNewshole at Twitter.)