Road to Independence

Many advisors, including myself, are engaged in an ongoing effort to make sense of current events. We formulate our own beliefs concerning the economy and the financial markets and attempt to position our client’s money accordingly. Frequently, information from one source contradicts information from another source, leaving us to sort through the rabble. For example, one source may provide reasons which support a bull market, while the other argues for the bear. Which will it be and who is correct?

While no one knows for sure, I do believe some analysts are better than others. Part of the process involves processing comments through the filter of biases and conflicts of interest. In other words, does the commentator have a horse in the game? Would they benefit if their views came to fruition? For instance, stock managers are seldom pessimistic and bond managers may be candidates for Prozac. Making sense of it all it the difficult part. My approach involves two steps: listen and observe. I listen to what they say and make a note of it. Then, I watch to see if their predictions come true.

CEOs are typically optimistic. They have to be. They lead by inspiration. From their employees to investors to consumers, CEOs must choose their words carefully. They must “send” the right message. This gives them the best opportunity for corporate success and has the added benefit of job security. When times are challenging (another term for bad) they will find the rainbow and talk about it.

Politicians are interested in one thing and one thing only…..GETTING VOTES. Everything they say must be filtered through this prism. I’m reading an interesting book entitled, “The Ascent of Money,” by Niall Ferguson and published by Penguin Books. In it, he quotes Germany’s Otto von Bismarck who said of socialism, “Whoever embraces this idea will come to power.” This is due to the fact that the poor outnumber the rich. More social programs require more bureaucracy which leads to bigger government and greater power.

Over time, I have developed a short list of people who I respect and follow. In no certain order they are: Bill Gross, Nouriel Roubini, John Hussman, Bob Prechter, and Mohamed El-Erian.

After reading their views, I must merge them with my own and draw conclusions. Then, with the prism of what I believe to be a plausible future, I position client portfolios to capitalize on this. I am not always right and neither are they, but it is better than the alternative of buy and hold, which incidentally only works well in a continually rising market.

Who do you follow and how do you approach asset management? Love to hear from you.

Thanks for reading!

During a recent client review, the performance report indicated that his trailing returns were approximately +22.0% (12 months), -1.20% (three months), and -0.10% (one month). During the same periods, the market returns were +12.0%, -15.0%, and -5.0%, respectively. In short, the client’s portfolio did very well compared to the market. What do you think the client saw? The client saw the two negative numbers and suggested that perhaps the money should be kept in a savings account.

This particular client is a pleasure to work with, but admitted they are unfamiliar with the markets. The moral of this story could read; “Exclude short-term periods,” or, “Make sure the client understands that short-term results are not the focus.”

Sometimes it may not be wise to show them to a client, especially if that particular client assigns undue importance to them.

After all, we live in a society where instant gratification is the norm, fed by television’s sound bites. In the future I will be more cautious about showing short-term results. It’s also important to educate the client on prudent expectations. After some discussion the client understood and now everything is fine.

A New Frontier (At least for me)
Have you ever wanted to host a Webinar, but lacked the knowledge to do so? This was the case with me. However, thanks to Matt with Advisor Portal, I am now equipped to host Webinars. Advisor Portal provides a number of services including Web site design, online document storage, and the aforementioned Webinars.

To conduct a webinar, I simply direct the client to my site, have them log in to their portal, and click the Webinar button. Then, they select the wWbinar link and the rest is academic.

There are a few good reasons to conduct client Webinars. For clients who live farther away the answer is obvious. For other clients, especially the busy, working professional, this saves time. Think about it. Clients can break for lunch, have a sandwich, and attend your presentation in the comfort of their office. This is an efficiency booster. I wouldn’t necessarily use this in lieu of face-to-face meetings, but for some clients, this will prove very beneficial. In addition, you can give presentations to prospective clients as well.

The New Tool
In recent postings, I’ve mentioned the new portfolio management tool from Gravity Investments. While I scale the learning curve each week I am finding it to be one of the most intriguing programs I’ve seen in my 25-year history in the business. I’ll write more on this later.

Is the Bear Growling Again?
With the 10-Year Treasury yielding less than 3.0%, a large drop in consumer sentiment, persistent high unemployment, and a Fed projecting a slow economy for Q3 and Q4, it doesn’t seem as though the financial markets will perform very well in the near term. We’ll talk more about this later.

Thanks for reading!

What’s the difference between a commission-based advisor and a fee-only advisor? One is selling an investment product while the other is providing advice. Say what you will, but when the option of receiving four to five years worth of commissions up front is present, it’s a tremendous temptation.

Several years ago, a friend of mine told me how excited he was about a new client who was looking to invest several hundred thousand dollars. What did the advisor recommend? An annuity. Why? He was brimming over about the prospect of a fat commission check. Assuming an 80% payout, an investment of $300,000, and a 6% commission, his take would have been in the neighborhood of $14,400! That’s a lot of money! That’s also far too common.

Very recently, a new client of mine relayed the story of a bank advisor who sold her elderly father a rather large annuity. She was not happy about it, but by the time she found out, it was too late to change it.

Let’s be clear. An advisor working on commission is not an advisor at all. He is a salesperson. I realize this may ruffle some feathers, but consider this. Would any business owner in their right mind hire a new employee and pay them a year’s worth of wages upfront? Of course not! They would pay them as they earn it, which is the essence of an advisor working on a fee basis.

Why does this type of behavior exist? It’s really very simple. This is a business where you can earn a physician’s wage with only a fraction of the educational commitment. Moreover, if the commissioned salesperson works for a bank or brokerage firm as an employee, the expectation is clear. Sell or be replaced. And who wants to be replaced? So they sell, sell, sell!

I’ve been in more sales meetings over the years than I care to count. In each meeting, the focus was on selling. That’s why they call them sales meetings!

Because of the egregious sales practices of some brokers, Congress is trying to place them under the same fiduciary umbrella as investment advisors. Will this work? My optimism meter runs low. As long as we have structures where the production of revenue is the primary focus, enforcing a fiduciary standard is unrealistic. This is because the interests of the client would have to come first which is diametrically opposite to a commissioned-based world. Even if this new standard were passed, it would be impossible to catch all of the abuses. The suitability standard is much more lenient and allows for this type of behavior.

What we need is client education. Clients need to know the difference between a broker and an investment advisor.

As long as we have large companies spending billions of dollars on fictitious ad campaigns, the public will remain confused.

So I will try and save as many clients as possible. I know many of you will do the same!

Thanks for reading!

This is the time of year when I reflect on and appreciate our country’s independence. I find it humbling to consider the ultimate price that was paid by so many individuals so we can live in freedom. The corollary between our nation’s independence and my becoming an independent advisor is clear. Leaving the comfort and security of a large corporation involves a certain level of risk. However, as an employee of a big box firm, your freedom is somewhat limited.

Moreover, the rules of engagement are structured to fit those who, how shall we say it, are less than ethical. This “lowest common denominator” compliance can be extremely frustrating to the honest advisor. In fact, some of the rules might even be considered, well, ridiculous. This is why compliance is often referred to as the Department of Sales Prevention.

Perhaps you are reading this and considering a change. Perhaps you have been contemplating the independent model, but haven’t quite reached the point where you are willing to pull the trigger. If that is you, I hope this will encourage you to take the leap of faith, trust in your abilities, and join the ranks of the independent. To do this you must have a minimum base of clients, that is, unless you plan to live on beans and weenies. Let’s take a look at some basic numbers.

If you have a current book of business, remember, as an independent, you only need a small portion of your existing clientele to make a go of it. A typical payout at a large brokerage or bank may range from 20% to 50%. As an independent, you should expect to receive 85% to 100%. Using 90% as a guide, and a 1.0% average fee, each million dollars of AUM would generate $9,000 in annual income or $750 per month.

Depending on how much you require in support, independence may be easier than you think. Look at your current book, client by client, and consider which clients might be willing to follow. You may be surprised to find the number is greater than you think. Did your current clients choose to work with you because you work for ‘Company X’ or because of you? Some will prefer the brand name,’ but many will not.

Consider your future, and if becoming an independent advisor is for you, I wish you well. If I can help, please let me know.

Thanks for reading.

One attractive aspect of our business is its dynamic nature. Change is the norm and to remain static is akin to dying on the vine. Therefore, it’s important to stay abreast of new developments. One of the most rapidly changing areas is the field of technology.

To elaborate, I had the pleasure of meeting Joel Bruckenstein during a dinner last February. I recall much of what Joel said, but one of his most profound comments was that we should be willing to pay for technology if it will increase our productivity. In short, if it saves us time—since time is money—we should invest. On the other hand, during the period you are building your business, special attention must be given to expenses. If you increase expenses too rapidly, you face the possibility of operating in the red.

There are basically two ways to “launch” a new venture. One is to pay for it as you go. The other is to use ‘seed’ capital and run a deficit until such time as your income exceeds expenses. Then you repay the debt. I chose the former over the latter. In other words, I wouldn’t accept a new subscription or purchase a new item until I had the either the cash flow or the capital to pay for it. That’s not necessarily the best way, but in many respects it is the safest. In any event, many of the tech tools I used in the beginning stages of my Road to Independence have, or are, being replaced as I learn about better offerings.

One such offering is from Gravity Investments. This is possibly the most exciting new tool I have seen in my 25 years in the industry. Although I have alluded to it in the past, I’d like to dispense with the mystery and discuss it.

What Gravity has done is amazing. It’s simple and elegant, yet profound. Picture it this way. You have a holographic globe with only the lines of latitude and longitude. In the very center of this globe is a dot which represents cash. Every investment you hold extends out from the center, at varying lengths and angles. Each angle represents an investments relationship with another. If all lines led to the same place, you have a non-diversified portfolio. If only one hemisphere has lines extending to it, then you are not well diversified. Gravity has created a three dimensional analysis for a portfolio. Simply amazing!

I’ll write more about this later.

Thanks for reading.

As Gilda Radner once said, “It’s always something.” As an independent RIA, I must concur, especially with the choppy markets of the past decade. Since becoming an independent advisor on April 1, 2007, I’ve witnessed the worst bear market since the Great Depression and the near collapse of the global financial system.  Using my best Ben Stein monotone interpretation, I have to say, “How exciting.”

During the latter 90s, I was working with a large broker/dealer. Ah, the 90’s—those were the days! Every broker, rep, advisor, whichever moniker you prefer, looked like a genius. Didn’t matter what we did, everybody made money, including the client. The markets were so good, in fact, that a rooster could peck at the stock page and pick a portfolio that would rival, and sometime even surpass, that of the most seasoned broker. As long as you had loaded up on large-cap stocks, and specifically, tech-laden funds, things were good. That is, until the bottom dropped out. Let’s take a closer look.

The Dow inherited a starting level of 2,753 from the close of 1989 and finished the decade at 11,497. What an impressive run! On April 17, 1991, sixteen months into the 90s, the Dow topped 3,000. It took a while, but it reached 4,000 in February 1995. Dow 5,000 occurred on November 21, 1995. The 6,000 hurdle was reached on October 14, 1996. Seven thousand was topped on February 13, 1997, and 8,000 on my 15th wedding anniversary— July 16, 1997. Nine months later, April 6, 1998 to be precise, it crossed 9,000. After retrenching to the mid 7,000s, Dow 10,000 was breached on March 29, 1999. It took only two months to hit 11,000, which happened on May 3, 1999. By the time the Dow reached its pinnacle of 11,722 on January 14, 2000, euphoria was widespread. However, tech stocks, like tulips some centuries before, were about to wilt.

Why do I go into all this history? Well, for one, I enjoy it, but the other reason is for perspective’s sake. After its peak on January 14, 2000, the Dow didn’t reach that level again until October 3, 2006…..six years, eight months, and 19 days later! Then, it began its upward climb once again. The all-time high was 14,164, which occurred on October 9, 2007. Last Friday, the Dow closed at 10,211.

 As of the end of May, the 10-year average return was 1.97% for the Dow and -0.82 for the S&P 500. That’s less than the average money market fund, which registered a staggering 2.15%. The Barclays Capital U.S. Aggregate Bond Index returned 6.52% for the same period.

I am on the cusp of a radical change in the way I manage money. I have discovered a new technology which will absolutely transform our industry. I guess you could say I have my own internal tech bubble brewing.

Stay tuned for further details!

George Santayana once said, “Those who cannot remember the past are condemned to repeat it.” I wonder what the Spanish-American philosopher would say if here were alive today? Very recently, the blatant disregard for fiscal prudence reached a pandemic state.

Most of the “developed” world spent the greater part of the last 30 years on a debt spree that would make Imelda Marcos blush (I wonder is Barack Obama is related?). This debt binge was part of the reason the developed world, well, developed. In fact, debt is an integral part of economic life for, without it, growth would be sluggish at best. Individuals, businesses, and government, in the aggregate, typically spend more than they make and this fuels prosperity.

However, the greater the debt and accumulation period, the longer it takes to unwind. And during the unwinding period, the economy will tend to be more lethargic. Excess debt is the chief reason for the recent near collapse and current woes of global financial systems.

That which took 30 years to create will not be corrected in 15 short months. Moreover, here at home, the Fed is out of ammunition. As a result, America is somewhat at the mercy of consumers and businesses and, of course, the rest of the world. Yes, the rest of the world.

Europe? Well, there’s no need to rehash that except to say that according to the IMF, Europe is the world’s largest economy. China has an up-and-coming bubble with inflated real estate prices and a plethora of bad bank loans for starters. It seems that “keeping up with the Joneses” has gone global and debt has been the ticket, which brings me to my point: How do you protect client assets? Where are the opportunities found in such a grim scenario?

I once thought we’d see high inflation as the U.S. monetized its debt. While this may still occur down the road, the greater likelihood in the near term is a prolonged deflationary period. Though risky assets may have intermittent jumps, the trend is likely to be down. Therefore, cash is king, high-quality, shorter-term bonds are sensible, and inverse funds and the VIX are the engine that might just fuel portfolio growth. Stocks, well, I’d be very careful there.

Thanks for reading!

Given the current economic climate and the decline in risky assets, I feel compelled to continue the conversation we began some three weeks ago. If you recall, I voiced my concerns over the excessive debt burden of the European nations, the rise in socialism here at home, and, in short, how this path is unsustainable. I wrote that if the tiny nation of Greece caused such panic in the global financial markets, what would happen if a larger economy, say Spain or Italy, was to falter?

I’ve long held the belief that if socialism ever grew too large, government would be unable to collect enough tax to support it, and the entire house of cards would come crashing down. It’s essential to understand how government competes with the private sector. As government grows it requires a greater amount of revenue to operate. Since there is a finite amount of capital in an economy, the more that government collects, the less there is to buy products and services from the private sector. At this point, economic growth is stifled. Yes, the government can increase the money supply and a multinational company can go global, but slower economic growth may still result.

Oh, and with an increased money supply comes a potential currency devaluation which helps those exporting-multinational companies (Can you say ‘campaign contributions?’).

Today, Europe is fighting the effects of the recent debt crisis and a strong entitlement mentality. Because of its debt woes, Europe is in the process of making severe cuts in government programs, beginning with politicians’ salaries and ending with government programs. According to an astute friend of mine living in Europe, we can expect more unrest like that which we’ve seen in Greece. Clearly, the percentage of the dependent class (in the sense of those receiving government benefits) has reached its tipping point.

How will the financial markets respond? How did they respond with the Greek tragedy? You don’t have to be a market timer, just ask yourself this one simple question, “IF there is more rioting in the streets of one of these troubled nations, would European stocks likely rise, or fall?”

When a storm comes, you close the shutters, buy the appropriate supplies, and hunker down. A few weeks ago, I reduced my client’s exposure to stocks to a range from 6% to 29%. Yes, I may miss one of those ‘50 greatest daily increases,’ but in my view, the trend is down. And whenever the trend is down, there are always placebo increases along the way. Since I cannot time these short-term increases, but believe the market is on a downward trend, I remain a bear.

Which animal are you these days? I’d love to hear!

Thanks for reading.

A few weeks ago I voiced my concern over the prior week’s massive dip in the stock market, the genesis of which we have yet to discover. I commented on the extreme amount of debt in Europe and here at home, and how this was an unsustainable path. This buildup of debt is simply the product of decades of overspending. Overspending, as it is, is simply leveraging future wages. As long as future wages continue to outpace the required debt payment, the “house of cards” can remain standing. However, if wage growth slows, debt defaults increase, and a downward cycle begins. This is precisely what happened as the housing bubble burst. Median home prices had outstripped median income. The ratio of median home prices to median income is normally around 3:1, but due to soaring real estate values, this ratio grew to around 5:1. This, my friends was a “bubble extraordinaire.” Moreover, during this buildup, so much of an individual’s wealth was tied up in their homes through mortgages and second mortgages, that when prices began to fall, homeowners found themselves underwater. Hence, they abandoned their homes, and the problem was exacerbated.

Here’s my point: Booms are always followed by Busts which are always followed by Booms!

I recall in the late 1990s, the trailing 10-, 15- and 20-year returns on the stock market were so much higher than the long term average, that a period of underperformance was inevitable. Perhaps I should say that the rapid economic growth during the ’80s and ’90s was not sustainable.

Let’s take a brief look at another period in American history from 1900-1929. This was a time of incredible boom which brought the production of American oil, the automobile assembly line, an incredible expansion of urban areas through massive road construction, and the mobilization of the American population. The economy grew at a very rapid, but unsustainable pace. This boom was followed by the most difficult economic contraction of the 20^th century, a.k.a., The Great Depression.

Today, it’s been less than 24 months since we saw the near collapse of the entire financial system. Do we really believe everything has worked itself out in such a short time? When I discuss my concern about the stock market, I am not so much trying to “time the market” as I am trying to read the economy with the understanding that a healthy stock market relies on strong economic growth.

Today, with unemployment stuck at around 10%, can the remaining 90% of the workforce provide the necessary level of economic activity to put us back on the path to prosperity, even with a major trading partner (Europe) in such dire straits? I’m not optimistic about that. Therefore, I remain bearish, not because I am trying to time the market, but because I don’t see how we can sustain a healthy economic growth rate while businesses and individuals continue to deleverage.

I would welcome your comments, but please, I am not a market timer. I’m just a cautious fiduciary trying to do the best I can for my clients.

I’d also like to know this: Are you a bull or a bear?

Thanks for reading!

Not that there is any similarity between market declines and earthquakes per se, but the thought did occur to me recently that the vicious market decline of late may only be a tremor. What if the big one was lurking just around the corner? Just like earthquakes, the question concerning an impending market correction, or worse, is not a question of “if,” but “when.” The difficultly lies in predicting when and how severe.

In any event, when last Monday rolled around and the market bounced back sharply, I began to question my bearish assessment. To think I could possibly foretell the direction of the market….well….what was I thinking anyway? For years I’ve held the belief that no one can predict what the markets will do—you know, the Efficient Market Hypothesis and all that?

Today, I still hold this view, but, with the serious debt contagion in Europe, and the rapidly escalating fiscal irresponsibility here at home, I am convinced that a serious market decline is not only plausible, but highly probable.  Besides, the market has already has risen significantly from its March 2009 bottom so a correction would not be that abnormal. Then, when the market took a nose dive at the end of last week, I thought perhaps I’m not that far off base. You see, it wasn’t just the decline in the stock market that worried me, but the aggressiveness with which it fell. Moreover, this intraday decline was the worst ever recorded.

If it’s true that the European socialistic experiment is failing and that there really is a upper limit on the size of government which can be supported by its citizens, then perhaps, just perhaps, history is about to write a new and ominous chapter that will be forever etched in our memories.

As if more evidence were needed, the euro has been falling fast against the dollar and a 1:1 ratio would not be at all unreasonable. Ironic as it may seem that the greenback is actually strengthening, remember currency values are all relative.

I believe at some point this entire house of cards will come crashing down. After all, you can’t build an economy on debt, continue to rescue it with more debt, and expect it to survive. Moreover, you can’t promise the moon and the stars to the citizenry and expect they will be willing to give it all back when times get tough.

Yes, we are on a slippery slope. I only hope that our politicians will learn a lesson from our neighbors in Europe before it’s too late.