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Book Review – Backstage Wall Street

Apr 30th, 2012
by jblankenship.
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This was a good book, I truly enjoyed reading it.  The primary reason that I enjoyed it so much is because it’s the book I have been hoping to find from someone like author Joshua Brown: a book that tells the truth about what’s really going on on the seamy side of Wall Street (which is the only side, to be truthful).

Joshua Brown (TheReformedBroker.com) provides a unique perspective – that of someone who has been involved in the “inside” of wirehouse broker-dealers, but who has since seen the light and moved on to a career in independent investment advice.  As such, Mr. Brown has seen the worst of the worst, in terms of how these institutions treat the investing public.  Once he became aware of how it all worked, through a great degree of soul-searching (and a whole lot of gumption), stepped away from it all and has never looked back.

In Backstage Wall Street, Brown lifts the veil of secrecy around how the process works, explaining how the back-room dialers constantly call folks and work through a script to get the recipients of the call to agree to fork over money.  It’s understood that if the person picks up the phone, the longer the broker can keep the person on the phone the better the chance of selling something – no matter how bad it is.  This business is similar to the three-card-monte guy on the street, but worse: by working under the seemingly staid letterheads of large corporations, there is the impression that the callers are giving advice.  In the end, all they are doing is pushing a sale, and the guy calling you doesn’t care if it’s a good thing he’s selling you or not – only that he’s making a sale.

I found the book to be informative mostly in that it is confirmation of what I’ve learned through the years and believed to be true about these outfits.  Joshua Brown has done a great job in exposing the underbelly of the financial industry, and I believe he truly enjoys the position this has put him in.  As noted, he has been referred to as the “merchant of snark” by the New York Times for his expose’, and this snarkiness comes through in his book, making it a fun read in addition to an informative book.

If you have any involvement in the financial services industry as a profession, you probably know (or have an inkling about) many of these things already.  Brown’s insights and presentation make the book worth the read nonetheless (and you’ll probably learn a thing or two along the line).

If you use a broker to “help” with your investments, you owe it to yourself to read this book – asap.  If you have ever found yourself wondering just why it is that your “investment guy” makes one recommendation over another – you need to read this book.  If you have money invested anywhere at all other than bank CD’s, you need to read this book.  I am certain that your eyes will be opened, and you’ll be a better consumer as a result of it.

Book Review – Freedom From Wealth

Nov 14th, 2011
by jblankenship.
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Freedom From Wealth

This book is an excellent resource for folks who have been accumulating wealth over their lifetimes – wealth that is more than they need to live off of.  Granted this isn’t everyone, but it’s probably a lot more of you than you think.  You don’t need to be a Bill Gates to have these sorts of issues in your path.

When you’ve worked your entire life to build up your wealth, you likely want to leave some of it to your children and grandchildren, but is it best to just hand it all over to them at your passing?  What if you also hoped to make a difference in the world with your money – perhaps with charitable activities, or to help your offspring to establish their own place in the world, or to leave a legacy, a way that your name can live on?

The first part of this book, fully half of the text, helps the reader to understand some of the issues that are necessary to address in order to be successful with such intents.  It’s important to develop strategies and employ the proper resources so that you can ensure that not only will your dreams be fulfilled, but also that your children and grandchildren will not become constrained by the wealth you’ve passed into their care.

That’s what the title is all about.  The authors, Charles A. Lowenhaupt and Donald B. Trone, have many, many years of experience in working with families as they transfer wealth over multiple generations, and this experience has shown that without proper planning, the wealth itself (and fulfilling the goals of the original wealth accumulator) can become a burden to the successive generations.  By putting the appropriate strategies into place, the heirs of the original wealth accumulator can carry out the intended plans and achieve their own life goals without feeling that the wealth itself is a burden.

The book begins with a full chapter devoted to the question “What is wealth for?”.  The answer isn’t as easy as you think.  The easier question for most folks who haven’t really thought about it much is “What is wealth NOT for?” – as in,

  • I don’t want it used for taxes.
  • I don’t want it squandered.
  • I don’t want my spouse to take it in a divorce.
  • I don’t believe in charity, so I don’t want it to go to charity.
  • I don’t want my children to have it too young.
  • I don’t want my lawyers to use it up in fees.

So – what wealth is for is something altogether more than the sum of all the things it’s not for.  Clearly, part of it is to provide sustenance to the owner of the wealth – but that may only be a small part of the overall accumulated wealth.  What else does the wealth holder hope to accomplish?  Do your heirs understand your hopes and dreams?  More importantly, do they agree with your hopes for your wealth?

The remainder of the book is a workbook of sorts that will help the reader to walk through the process of developing the strategy to achieve his or her life (and beyond life) goals.  This matter isn’t a simple undertaking; depending upon the size and complexity of the wealth portfolio, it will likely be in the best interest of the holder of wealth to hire appropriate resources (advisors and the like) the assist in the process.  This book can be a very good first step in the process.

Book Review: Saving Capitalism from Short-Termism

Sep 19th, 2011
by jblankenship.
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image[2]

How to Build Long-Term Value and Take Back Our Financial Future

This is a great book. I got a lot out of the sections that bring to the surface a lot of the issues that we’ve been seeing in our economy.  These issues have been written about in countless places, but author Alfred Rappaport also proposes workable options that could be put into place to resolve these issues, a step that has been lacking in other places I’ve seen these issues discussed.

But I’m getting ahead of myself.  The issues I’ve referenced above are the sort of systemic issues we’re seeing in economy in general and specifically the financial services industry.  Included in these issues are the wild short-term fluctuations we have been seeing in the markets, in part due to the ways that CEOs are compensated, how investment managers are compensated, and how those compensation systems influence behaviors and methods of management.

Specifically, in today’s world CEO compensation is typically tied to earnings, on a quarter-over-quarter and year-over-year basis, which tends to cause the CEO to forego longer-term investments and moves in favor of moves that result in short-term earnings increases.  Once or twice this kind of activity might not cause much problem, but always opting for the short-term over long-term value creation has resulted in the kinds of wildly-fluctuating markets that we’ve seen in the past couple of decades.

Along the same lines, investment managers, specifically fund managers, tend to be compensated similarly with short-term views.  I’ve written about this in the past in an article explaining how many managed mutual funds wind up being closet index funds due to the nature of the compensation system, but I didn’t go into how managed funds could use a different method of compensation to resolve this.

These issues have been around for quite a while – oddly enough I recently found reference to the accounting shenanigans that are still in use today, in a book written in the early 1970’s, Super Money by Adam Smith.  Clearly the problem has been going on for a long time, and resolving it is going to take major changes.

Mr. Rappaport takes the situation a step further by providing real, workable examples of ways that the compensation systems could be re-aligned to provide long-term value from both the standpoint of the CEO and the investment manager.  The resolutions aren’t simple, and putting them into place will require buy-in from CEOs, corporate boards, and others stakeholders in the overall process.  Since the systems that we’re using have been in place for so long, it’s going to take guts from everyone involved – but the payoff should be enormous.

The payoff that Rappaport refers to is the creation of long-term value, which is in the best interest of all involved parties.  Just think of it!  An economy where we’re focused on longer-term values, rather than living and dying with each quarterly earnings report.  Massive fluctuations day-to-day fluctuations in the markets would be a thing of the past, and investing would become much less “exciting” – more like an actual saving activity than the crazy, topsy-turvy world we’ve had to get used to.

It’s a tall order to be certain, but the ideas that Mr. Rappaport has detailed are within reason and workable, but as I mentioned before they require buy-in from all stakeholders.  The ideas also require a sea-change in thought processes but as of now, they’re the only valid option that I’ve seen put forth.  I think anyone who is in a position to help put these ideas into play should read this book as soon as possible.

The above book review is part of a series of reviews that I am doing in an arrangement with McGraw-Hill Professional Publishing, where MH sends me books with the only requirement being that I read the book and write a review – like it or not.  If you find the information in this review useful, let me (and McGraw-Hill) know!

What Can Be Done to Save Social Security?

Sep 9th, 2011
by jblankenship.
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lifering
Image by Lady_Helena via Flickr

This is, of course, one of the most volatile questions on the political landscape these days.  We have some constituencies claiming that the whole plan is a Ponzi scheme and we should get rid of it altogether – and many others aiming to make radical tax increases in the system to improve solvency, or pushing back the age(s) for receiving benefits to reduce drag on the system.

True, the system is in dire straits – not bankrupt, but needing attention.  Current projections indicate that at current pace, funds allocated to the system will run out sometime around 2036 unless something changes.

Increasing taxes is never popular, and current political winds have shown just how far the dream of no increases in taxes will be pushed.  In addition, extending the age limits during a time when unemployment is at record highs only exacerbates that issue – with older workers hanging on longer, younger workers can’t fill those jobs.

And eliminating the system altogether just isn’t workable.  Roughly 55 million Americans are currently receiving benefits – many with little else to live on in retirement.  A great many more are coming on the rolls every day, as the Baby-Boom generation hits the magic age(s).

Privatization, although once very popular, has lost its luster in recent years due to the market’s fluctuations.  The fact is that the majority of folks are just not very good at managing their own money – and the stakes are too high to give them a shot at what could be their only sustenance in retirement.  401(k) plans are great, but the facts are scary:  the Employee Benefit Research Institute’s (EBRI) March 2011 report showed that nearly half (46%) of all surveyed Americans who have saved anything at all have less than $10,000 saved (not including homes or defined benefit pension plans).  What’s worse is that over a third (36%) of those surveyed figured that if they saved up $250,000, that should be enough to retire comfortably, when in actuality that figure might cover the individual’s healthcare needs only.  And further, EBRI has indicated in countless reports year after year that when a 401(k) plan is in place, the actual returns achieved are dismal compared to the market average, due mostly to reactionary moves by investors operating without proper guidance.

So what can be done?  Means testing, for one thing.  Donald Trump doesn’t need Social Security, and neither do his young children – but they’re eligible (and are likely receiving it).  That’s not to say that eliminating the Donald and his peers from the recipient rolls will balance out the system; many more Americans will likely have to forego at least a part of the benefit that they’ve been expecting.

We’ve had a form of means testing in place since 1983 – via the taxability of Social Security benefits.  And since the limits haven’t been adjusted since that legislation was put into place (actually since the 1993 legislation), this means test is becoming more and more “taxing” to folks with any additional income on top of Social Security every year.  But it probably doesn’t go far enough.

Another item that could be dealt with is the payroll tax ceiling – currently at $106,800 – that could be liberalized a bit without too much ruckus.  Granted, this does mean a new, or rather increased, tax, but when you weigh that against the alternatives, it’s not a bad option to consider.

All in all, the Social Security system has its problems, to be sure. It is, after all, a form of social insurance – meaning that some folks will get far less from the system than they put into it, and others will get far more from it than they put in.  But we’ve got it in place and it’s working (pretty well anyway), so we just need to make some adjustments to make sure that the system can make it through the rough patches.

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Make a Long-Term Plan and Stick to It.

Jun 22nd, 2011
by jblankenship.
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stick stick stick stick stick stick stick
Image by SMN via Flickr

In his Preface to the Fourth Edition of Benjamin Graham’s legendary book The Intelligent Investor, Warren Buffett wrote the following:

To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information.  What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.  This book precisely and clearly prescribes the proper framework.  You must supply the emotional discipline.

I’ve seen the same sentiment boiled down and paraphrased a bit, also attributed to Mr. Buffett (although I couldn’t find the original source) as:

It only takes two things to make money – having a plan and sticking to it – and of those two, it’s the sticking to it that most investors struggle with.

Either way, the point is relatively clear – investing successfully, per se, is not rocket science, there are many sources you can use to develop your plan; or rather, your “intellectual framework for making decisions”.  The difficult part is keeping your emotions in check when your investments have gone to extremes, high or low, so that you can stick to your plan.  The whole reason for developing a plan in the first place is to help you to navigate the tough times.

The same goes for your overall financial goal plans – such as retirement plans or college savings.  Developing a plan is not exactly simplicity – there are many issues to be dealt with to ensure that the plan itself is sound, including investment allocation, tax concerns, coordinating various sources (Social Security, taxable accounts, IRAs, 401(k)s, pensions, etc.), timing of contributions and withdrawals, and so on.  These things are quantifiable, although the weaving together of these issues can be very complex.

The place where most financial and investing plans go awry is when difficulties arise, and you begin to question the plan.  It’s understood, in part because you can often find yourself facing these difficulties in a vacuum, without any idea whether what you’re experiencing is common for all folks in your position or if you’re doing better, or if you’re doing worse.  You may have no idea if the plan you’ve developed is appropriate for weathering the current storm, or if the reason you’re experiencing poor results is due to some problem in the plan itself.

This is where a good financial advisor can be worth her or his weight in gold.  If the advisor you’ve chosen is properly qualified, he or she can draw upon voluminous knowledge and experience to help you understand what the plan needs to include to weather the storms.  The second part, and according to Buffett the most important part, is staying with the plan even when things aren’t rosy all around.  A good financial advisor, one who will operate as a fiduciary, undertakes the duty to maintain calm and to ensure that emotions are not driving the decisions.

Note: Not all financial professionals undertake this responsibility in their work with clients.  Ask the questions, and if the financial pro you’re talking to won’t explicitly accept the responsibility to help you stay on track when things get rough, you need to look elsewhere for a new advisor.  Try www.NAPFA.org for starters.

Most often this “sticking-to-it” part becomes the most difficult when there is great volatility on the downside in the markets.  You don’t have to go very far back in time to recall some of those dark days… we saw such a dramatic downturn in the markets between Summer 2008 and Spring 2009.  Those were scary times, to say the least.  I remember sending out messages to my clients every few weeks during those days, repeating the mantra to stay with the plan, don’t panic. Maintaining perspective and remembering that the plan is for long term is the key – I can remember conversations where we discussed the concept that we’ve invested with the aim of using the money many years from now, and since what’s happening today is the short term, we need to maintain our positions.

That leads us to my final point on this quote: One thing that the rephrased quote above leaves out (versus the original) that I think is just as critical is where Mr. Buffett specifically refers to investing “successfully over a lifetime”.  Mr. Buffett has many times stated

I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.

… meaning of course, that moving in and out of the market based upon “timing”, gut feelings, or crystal ball predictions, is not the way to be successful.  Having long-term plans with solid investments, not the “get rich quick” type of investment, is the way to success.

So – here’s another rephrasing with my adjustment:  Have a well-thought-out long-term plan to help you make decisions for your future (investing or otherwise), and stick to it. And hire a financial advisor to help you with both, because you’ll need the guidance, knowledge, and discipline to help you through tough times.

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Book Review: Uncertainty is a Certainty

Jun 17th, 2011
by jblankenship.
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uncertaintyisacertainty

This was a surprising and refreshing book.  The full title is Uncertainty is a Certainty, Fables for Fiduciaries. The author, Guerdon T. Ely, has done the near impossible: the very topic of fiduciary duty has been known to induce a near coma-like status in even the most devout financial professional, but Ely has distilled the critical concepts into a very easy-reading tome that keeps the reader interested, even engaged, in his explanation of what is required of the fiduciary.

For the uninitiated, a fiduciary is a financial professional who has the responsibility of handling financial affairs for another entity – it could be a trust, a pension plan, or an individual or family.  There is a set of rules that explain the duties of a fiduciary, known as the Uniform Prudent Investor Act, or UPIA for short (we certainly love our acronyms in this industry, don’t we?).

This bit of law, originally adopted in 1992, serves as the default guide for a fiduciary in managing the financial affairs which he or she is responsible for.  There are many different components of the law that are complicated to understand – enough that a great many financial professionals would have a hard time explaining some of the concepts, even though they may be required to follow these tenets.

Guerdon Ely uses stories from his own experience to relay and interpret these key concepts. These stories cover such wide-ranging topics as meeting a group preschoolers; working as a beekeeper; and being behind the scenes at professional golf tournaments. By catching up the reader into the world of his story, before you know it he’s deftly explained a key tenet of the UPIA – in a way that’s easy to understand and retain.

A couple of examples include:  Using a boyhood story of being dared to go higher and farther to explain the concept of risk tolerance; meeting Alice Cooper and Clint Eastwood by happenstance on a golf course to help explain how illusory image has become the bane of our financial industry; and time spent backpacking around the country as a twenty-something young man to help explain the benefit of focusing on efficiency and value in dealing with financial matters.

I’d say that the audience for this book is primarily financial professionals – whether or not you’re required to have a fiduciary standard of care for your clients.  But at the same time, folks outside the industry can benefit from this book as well, since a good understanding of the concept of the fiduciary can serve as a protective shield as you explore your options for service in the financial industry.

Either way, if you have even a passing interest in the UPIA and it’s concepts, I think you owe it to yourself to pick up a copy of this book and read it.  You won’t be disappointed, I promise you.  And it’s likely that you’ll learn something you didn’t know – which is always valuable.  I truly enjoyed this book, and I recommend it to all who may have an interest in the topic.  You can visit the website for Uncertainty is a Certainty by clicking the link.

Advice on Social Security Benefits

Apr 1st, 2011
by jblankenship.
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I get a lot of questions about when to take benefits, how to use File & Suspend most efficiently, and when to begin Spousal Benefits.  And unfortunately, I am often at a loss for giving a specific answer to the individual, because I just don’t have enough information.

NY - Hyde Park: Franklin D. Roosevelt Presidential museum
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Social Security planning has very many factors that must be considered – for example:

  • It’s important to consider earnings if you’re filing early and continuing to work (see Social Security Earnings Tests for more information), as this can impact the amount of benefits you actually receive.
  • Your health status and longevity are critical to the equation as well – since delaying strategies often rely on your longevity to achieve payback (more information in the articles Your Payback from Social Security and Coordinating Social Security Spousal Benefits).
  • Of course, your marital status is important to the equation as well.  If you’re married, you have to think about Spousal Benefits and Survivor Benefits in addition to your own benefit.  And if you’re divorced or widowed, additional considerations must be brought into the equation as well.
  • Probably the most important of all – do you need the money right now?  Too often this factor is overlooked in our zeal to “get our money back”.  As you’ll see in this article on delaying benefits, it can be very worth your while to delay receiving benefits – but again, this shouldn’t be done blindly.

Each individual’s circumstances has other factors to consider as well.  Your overall retirement plan has to be the context against which these factors should be considered.

As you take these factors and others into account, it’s important to perform break-even analysis on your benefits at various ages, along with that of your spouse (if you have one).  Then it’s up to you to decide what makes the most sense in your situation.  If you have a trusted advisor that you can work with to help you with your analysis, all the better.

And lastly, if I can help you with this analysis, this is what I do for a living.  As always, I am happy to help you understand the nuances of the various programs and all – the only thing I ask of you is that you pass the word along to your friends and acquaintances.  It’s my hope that when questions about Social Security and other financial issues come up, I can help.

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4 rules to break – for now

Feb 11th, 2011
by jblankenship.
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As you may know if you’ve been reading here for very long, from time to time I review financial rules of thumb – today I’ve got a bit of a twist on the “principles of pollex” concept:

Here’s a very interesting article that I found today that tells about some of the old, time-honored sage pieces of advice that aren’t necessarily true – for the time being.

Enjoy – I’ll be back next week!

http://www.smartmoney.com/spending/budgeting/4-traditional-money-rules-to-break–for-now-1296858154544/

Lifetime Income Disclosure

Jan 28th, 2011
by jblankenship.
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lifetime supply by Christina Welsh (Rin)There is a piece of legislation hanging around in the Senate that makes a good deal of sense, and really shouldn’t cause too much grief to implement in the long run.

This particular bill, introduced by Senators Bingaman (D-New Mexico), Isakson (R-Georgia), and Kohl (D-Wisconsin), is called the Lifetime Income Disclosure Act, and it proposes that the administrators of ERISA-approved retirement plans provide for their participants a disclosure of the “annuity equivalent” of the total benefits that each participant or beneficiary has accrued within the retirement plan.

What this means is that, for likely the first time for most folks, an estimate would be provided to them with their statement that outlines what that lump sum means in terms of real, annualized income replacement in retirement.

Specifically, the government would establish certain assumptions about the annuity value of a lump sum, given the participant’s age, and from those assumptions a lifetime income stream valuation would be derived.

This could be an important provision giving folks an eye-opener into what they could expect from their 401(k) plan when they retire.  Most folks won’t actually purchase the annuity described for many reasons, one being that in order to purchase an annuity you must deal with an annuity salesman.  But this illustration of the potential income value is a good step in the right direction for folks to gain a better understanding of their present position.

Of course, just knowing this fact won’t necessarily resolve our retirement savings shortfalls, but maybe it would help to inspire folks to save more and spend a little less.  Every little bit can help.

If you agree with me that this provision makes sense and if you’re inclined to do so, write or call your representatives in Congress and tell them so.  Unless you speak up, they won’t hear you.

Photo by Christina Welsh (Rin)

The F* Word Rocks

Nov 22nd, 2010
by jblankenship.
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f word by Justin.Beck(*F is for Fiduciary)

Much has been said and written in the past year about standards to which advisors are held.  This has been primarily due to the recent passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which included a provision requiring the SEC to study the oversight of brokers and Registered Investment Advisers (RIAs).

While there are many nuances to the oversight differential, it really boils down to one thing:  RIAs are held to a fiduciary standard; brokers are held to a suitability standard.  Briefly, a fiduciary advisor is required to act with undivided loyalty to the client, including disclosure of compensation methods and conflicts of interest.  On the other hand, the broker’s suitability standard requires only that the broker’s recommendations are suitable for the client’s situation.

Those two definitions are on opposite sides of quite a chasm, don’t you think?  I think that the consumer of financial services deserves to receive advice from an advisor who has their best interests at heart.  (Full disclosure: in case you hadn’t already guessed, I’m a fiduciary advisor.)

This is not to say that a broker is not capable of having undivided loyalty to the client – I’m sure many do, even though they’re not required to.  What is disturbing is the fact that the broker industry has been strongly opposing the fiduciary standard – with the argument that it will be costly to implement and will leave certain lower-end consumers without an affordable choice.

Wait a second… does that mean that in order to serve these lower-end consumers, the professional has to provide recommendations that are not in the best interest of the consumer?  What other compromises are there?

I’ll repeat myself:  I think that the consumer of financial services deserves to receive advice from an advisor who has their best interests at heart.  I realize that the whole concept (this study by the SEC, that is) is only so much legalistic mumbo-jumbo for most folks.  And honestly, since the big money is on the side of the brokers and insurance companies, I don’t expect for a true fiduciary standard to be applied to all advisors after the SEC’s study.

But this is a law that you can write for your own world.  If you agree that the F word rocks – that is, a fiduciary standard makes sense to you – then you can take charge and require that all advisors that you work with are held to a fiduciary standard. This way, no matter what the SEC does, you’re covered.

Generally speaking, the broker is paid to do one thing: sell financial products.  If you’re in the market for a financial product and you know what you want to purchase, by all means, go to a broker and buy it.  But if you’re looking for advice in your best interests, look for a fiduciary.  That’s what they’re paid to provide.  And when you do, I’m betting you’ll be glad you did – the F word rocks!

Photo by Justin.Beck
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