Removing All Mystery From Modern Wealth Management Performance

Stock brokerage was a middle class career path in America after World War II, thanks to brokerages that hired military veterans to staff branch offices across the country. The sector morphed into financial advisory and became a playground for the spoiled kids of rich families. It happened gradually, then suddenly, much like the way spendthrift households go bankrupt.

Legions of stock brokers built their books of business with long hours of cold-calling complete strangers. Federal legislation behind the National Do Not Call Registry removed millions of potential wealth management prospects from the financial sector's reach. The USA PATRIOT ACT further required financial institutions to thoroughly know their potential customers, in the expectation that familiarity kept terrorists out of finance. Brokerages in the early 2000s knew these legal changes would quickly make mass cold-calling an obsolete way to attract new business. They needed some new juice.

Demographics answered the brokerages' growth dilemma. Some market researchers figured out in the 1990s that wealthy people increasingly preferred doing business with other people who were just like them. Being rich was the surest sign of trustworthiness. Everybody was getting rich in the 1990s from the dot-com bubble, so it all seemed so easy without any work ethic or basic financial competence.

Leading brokerages hired consulting firms after the 2001 dot-com crash to redesign their new broker employment pipelines, compensation plans, and even their branding and cultures. The result was a collection of top-tier brokerage firms that defined success as walking in the door with enough money to instantly produce high six-figure revenue. Most firms would put this figure at a minimum $10M book of business. The only people who could pull this off were the trust fund kids born into serious wealth. Mom and dad hand over the family fortune to Junior, who takes a wealth management job to fulfill some stipulation in their multigenerational trust fund. Meanwhile, the brokerage's branch manager acts in loco parentis to ensure Junior sticks around during market hours. It all makes being rich look so easy, and that's enough to fool newly rich clients.

It's easy to become a top-performing wealth manager today. Just walk in the door with your family's $10M and do absolutely nothing. Anyone else hired in a wealth management branch who walks in with less money will be fired in a few months, because their expected production after half a year will curve up by the amount of revenue they would have made if they had walked in with $10M. In other words, wealth management firms employ the hard-working poor to generate qualified leads that their rich peers will collect after they are fired.

I have no empirical research to support my observations above. Chalk it all up to what I have personally witnessed since earning my MBA. Investors have every right to know what their hired financial professionals do with client money. In almost all cases, the hired pros do somewhere between nothing and less than nothing.

The Haiku of Finance for 11/30/15

Adviser practice
Register, insure, audit
No such biz for me

A Former Financial Adviser's Unchosen Route To Independence

I created Alfidi Capital to be a research-only platform, which is fine by the SEC so long as I do not maintain fiduciary relationships, sell securities for third parties, provide personal advice or recommendations, or do other things that fall under regulatory guidelines. I considered going that traditional route at inception, and I quickly realized that doing brokerage or capital markets transactions were part of the things I did not like about working for other people. My thinking has not changed since 2008 and neither has my business model. I might as well lay out some of the thinking I did before turning away from the more common path to independence.

I first checked the regulatory requirements for a registered investment adviser (RIA). The SEC's basic guidelines for investment advisers point to its IAPD site for filling out its Form ADV. I reviewed that form and realized that it does not apply to me as long as I am not providing financial advice, selling financial securities, or maintaining custody of assets other than my own.

I reviewed the institutional platforms of several leading self-service brokerages. The platforms come bundled with custodian and clearing services, plus some optional things like independent research subscriptions. I would not be surprised to find social media services bundled with some platforms now, along with media archival systems that meet SEC compliance standards. I realized I did not need to spend money for such a platform if the only money I ever manage will be my own.

I checked FINRA's rules for the registration and qualification of advisory firms. There's a lot of things there to know for someone who doesn't handle compliance as a full-time job. I would have had to meet all of the compliance requirements like client correspondence recordkeeping, transaction auditing, keeping copies of advertising material, writing a compliance manual, using business cards with the state insurance registration number on back, etc. There are lots of independent SarBox consultants who charge big fees for this activity. I will always be too cheap to pay for anyone else's services. I did not want the operating expenses of regulatory compliance or an "RIA in a box" solution.

I needed an alternative to the overhead of an owned RIA platform. I briefly researched an arrangement where potential clients could custody their assets in a conventional account with a discount broker, but grant an adviser limited power of attorney to execute transactions and extract a management fee. That's the approach of at least one RIA in San Francisco. When I spoke to the local one I thought was a good model, I realized there was just no way to escape the potential problems of dealing with clients and regulators.

The administrative things that my former wealth management employer used to pay for like insurance, licensing, continuing education, etc. would have become my own expenses. I thought about finding CE requirements through a local chapter of the Financial Planning Association. The FPA is probably full of plenty of independent practitioners, and I had wondered if some older adviser would hand over a book of business prior to retirement. The window for such opportunities is rapidly closing now that discount brokerages are deploying robo-advisors with automated portfolio rebalancing. I would have wasted time buying into a dying business model.

All of my homework revealed that an adviser model would never work for me. Publishing general circulation research is consistent with SEC analyst rules and reflects my intellectual gifts. I have said before that Alfidi Capital does not perform financial brokerage and advisory services for others. There is no way this firm or I will ever conduct securities transactions and business with the investing public. I stand by my decision.

The Financial Adviser's Standard Deception

I used to be a financial adviser a decade ago. I had no success at a wealth management firm from 2005-2006. I told dozens of prospects exactly what I would do and made good on my word. No one cared. I learned why after interacting with some of the humans who did succeed. Financial advisers and their sales managers have a large bag of tricks they deploy against clients.

One corporate trainer I encountered early in my financial career built his entire training script around pushing people's emotional buttons. Humans make decisions around greed and fear. Emotional impulses trigger rash, irresponsible decisions and lots of financial advisers count on that to make money. Cajoling a client into discussing their hopes and dreams reveals a host of emotional buttons the adviser will push. Like in sales jobs anywhere, a cynical understanding of human weakness pays off. The difference in financial sales is that pushing a short-term emotional button can harm a client's long-term financial worth if they're pushed into an expensive or unsuitable product.

Insincere commitment is another standard financial adviser trait. The best actors can portray sincerity. Sociopaths are also convincing when they say something knowingly false. Financial sales jobs attract large numbers of actors and sociopaths because they can be persuasive all day without troubling their souls. Detecting fake sincerity is difficult. Poker players and law enforcement officers are among the few professions who develop skills in reading people. Maybe fraud investigators for insurance companies can figure out liars. It takes time and practice to read someone's body language and facial expressions for the "tells" of insincerity.

I had no bag of tricks as a financial adviser. I relied upon my intellect and integrity, and I told my bosses that's exactly what I thought was most valuable about myself. My bosses laughed at me. They bragged that painting a dreamy picture in a client's imagination was more important than giving them what they said they wanted. In a bizarre way, their insights into human nature had some merit. Most humans prefer self-deception and will paradoxically respect those who deceive them. I refused to deceive my contacts and that's one big reason why they refused to entrust me with their wealth. The human race will need a strong evolutionary leap to validate my business approach.

Nota bene: I am not a financial adviser, and I have not been one since I left UBS in December 2006. Alfidi Capital is not a financial advisory firm or brokerage of any kind. Readers will only find the truth here, not advice or deception.

Career Wanderlust On Wall Street Faces Obsolescence

Wall Street's top performers usually move around a lot. They jump from one firm to another every few years if the gaining firm finds their high-powered connections or book of accounts desirable enough to warrant a signing bonus. The upside to such wanderlust is a fatter paycheck for a small number of people. The downside is a mercenary culture that rewards greed over loyalty. The future may be different.

A specter of automation haunts Wall Street. Robo-traders can do everything human brokers can do at much lower coast. The AIs fronting automated portfolio rebalancing systems can't jump to rival firms and don't need bonuses. Their programmers and domain experts can jump firms, but there are far fewer of them than today's hordes of financial advisers and investment bankers. The hordes will be gone in a few years and Wall Street firms will be more efficient in their absence.

I used to work at a wealth management firm that tried to pretend its career revolving door did not exist. The "You and BS" people bragged about poaching top earners who brought clients from other firms, but stuck loser labels on their own defectors. Every firm thinks that way, even the once-mighty Merrill Lynch whose "Mother Merrill" culture encouraged people to stick around. I meant what I said when I told prospects I was loyal to my firm. They must have though I was naive not to have a mercenary mindset. That may be why they never wanted to invest with me. Many people really do reward disloyalty, as if it were a sign of maturity.

The most disloyal people end up with the biggest bonuses after years of cheating their teammates. Perhaps that's my bias showing, or just a broad truism. Bonus pay to reward wanderlust may not directly reflect the competence or integrity of a prized hire. If the pay is based on the hire's proven trailing revenue then it has everything to do with the winning firm's revenue. The future of AI relationships means all of a firm's human best practices will be permanently recorded in computer code. No ethically challenged humans need apply. Money formerly earmarked for bonuses will return to clients as saved transaction costs or to shareholders as dividends.

Wanderlust has a point if it diverts performers away from trouble. Sometimes the only way out of a bad job situation is to say goodbye and never look back. That worked for me once I realized that no investment firm or client would ever care enough to pay me for my work. It still works for a little while longer, until AIs copy all of the human skills they need.

The Haiku of Finance for 04/14/15

Conflicted advice

Client duty still comes first

Bring on robo-plans

DOL Fiduciary Rule Brings Tougher Times for Financial Advisers

The US Department of Labor's EBSA proposed a new fiduciary standard today for financial advisers giving advice on retirement plans.  Read the proposed rule on EBSA's site for the large amount of background material.  Prohibitions of conflicting interests will be tougher.  Disclosure will be more thorough.  The bottom line for advisers is a higher standard of care for the clients paying their fees.  Many advisers will not prove themselves up to the task despite the exemptions available.

Most wirehouse advisers push retirement plans populated with actively managed mutual funds.  These funds are more expensive than passive index funds and tend to underperform their benchmarks.  These same funds pay 12b-1 fees to advisers and their branch offices.  Fiduciaries have built-in conflicts tied to the financial products with the largest market share in retirement planning.  The SEC has recently placed 12b-1 fees under close scrutiny.  Any regulatory change that discourages 12b-1 fees will reduce product selection in retirement planning.  Less profitable products and tighter fiduciary standards will deter many advisers from offering retirement advice.

Clients seeking retirement solutions in this changing landscape have reason for optimism.  Robo-advisers are coming.  The AIs at automated brokerages work non-stop for zero pay.  Automated advisers can accommodate dirt-cheap, plain vanilla index funds in tax-advantaged retirement plans.  They also have negligible potential for fiduciary conflicts because they are programmed to do precisely what the client wants.  Coding DOL rule changes into an AI is much cheaper than retraining human advisers and funding a human compliance function.

Human beings always seek the path of least resistance.  Advisers are only human and plenty of them will get out of the retirement planning lane if reduced fees and more regulation make it unattractive.  Clients still need advice and they will not have the patience for human relationship managers who must explain conflicts before deciding what role they may play in a transaction.  Fiduciary rule changes are one more force pushing humans out of finance.  Automated advisory programs will fill the gap.

The Haiku of Finance for 03/25/15

Robo-adviser
Automate investing choice
Pre-chosen finance

The Haiku of Finance for 01/24/15

Automate advice
Cut out brokers from clients
Obsolete selling

Automation Will Destroy Financial Advisers

Way back in the day, financial advisers were hard-working sales people who matched investors with products they needed.  The profession morphed into a refuge for trust fund babies who needed a real job on their resumes to meet their multi-generational trust's inheritance requirements.  The brokerage infrastructure grew into a multi-headed hydra, mixing an investment bank's cute ideas into proprietary products.  The age of Big Data and artificial intelligence (AI) is about to turn this whole enchilada inside out.

The virtual financial adviser is an interim step toward full automation.  A new generation of financial salespeople are managing relationships via Skype and Google Hangout, all without ever meeting their clients in person.  Tech-savvy investors want a personal touch but don't have time to trek to meetings.  The brokerages with the most tech-savvy compliance architectures have approved social media channels for marketing.  The firms' other IT challenge is grafting on archiving systems that allow firms to record client contacts in social media.

Human advisers working remotely are a bridge to the wave of full automation about to break over anyone in finance who manages client relationships.  A full stable of fully digital wealth management firms deploy AI interfaces that cut out human advisers completely.  Machine learning teaches cloud-based AI algorithms how to behave when a human client asks financial questions.  Fully automating client relations cuts out the layers of back office people who processed client orders and designed financial products.

The end of overhead in wealth management means a drastically lower headcount.  Employee compensation is the single greatest expense in the finance sector.  Eliminating the lazy idiots kicking back and counting their bonuses will save money for clients.  Part of the cost avoidance will undoubtedly leave more earnings on the table for the shareholders of automated brokerage firms.  The SEC should breathe a sigh of relief at the dramatic reduction in broker misconduct complaints.  Fewer human operators of any system mean fewer human-caused errors.

The creative destruction that the cloud / AI / Big Data paradigm brings to finance will change Wall Street for the better.  Branch managers won't have to act in loco parentis for trust fund baby brokers because neither will be needed anymore.  Client decisions aggregated into Big Data packages will arbitrage away the investment products that cost too much and deliver too little alpha.  I suspect index funds and ETFs will be the biggest product winners because they are simple to build, cheap to operate, and easy to distribute to AIs from wholesale channels.

I wish tech had been this mature when I was a financial adviser from 2005-2006.  I could have blasted out emails, scored social media followers, and closed accounts electronically.  Tech has finally caught up to the needs of sophisticated clients.

Nota bene:  Alfidi Capital is not a registered investment adviser (RIA).  Anthony J. Alfidi is not a financial adviser.

Americans Lulled To Sleep By Pumped Markets

I have noted for some time that Americans are oblivious to the main force driving their portfolios to the moon.  That would be central bank quantitative easing, all around the world.  One BIS report from 2013 said it all.  I'm not linking to it this time.  Go find it yourself.  Earn that knowledge with some work.

Americans typically don't save their paychecks and invest for retirement.  The poor don't have much income to save, although staying off booze and cigarettes would help.  The middle class has been instructed to believe in Social Security's mythical solvency.  That leaves the bottom four quintiles at the mercy of the top quintile.  The serf population will be quite large and desperate after the next crack-up.  I expect to have my pick of the litter as itinerant labor after I become their overlord.  This is where I would insert a sinister laugh track if I cared enough.

I do not listen to the nonsensical chatter spewing from financial advising media.  I did when I was a financial adviser from 2005-2006 and much of it made little sense to me.  I was terminated as a financial adviser because people don't want to hear the truth.  The retail salespeople attached to investment banks are riding the pump scheme for all it's worth.  I don't expect them to wake up.  The few financial advisers with sense enough to pursue independent paths can't compete with central banks determined to pump asset classes to the moon.  That's why I'm not a financial adviser.  No one wants my advice and I don't give any.

Lemmings can enjoy the wealth effect of pumped markets while it lasts.  Taking out HELOCs ended badly for many home "investors" after 2006.  Everyone has forgotten how that ended.  People are going to learn the hard way all over again.  America went to sleep after the financial crisis of 2008.  I'm not trying to wake the country up.  Other investors' pain will be my gain.  

Silicon Valley Billionaire Wastes Fortune On Life Insurance

Some Silicon Valley titan just dropped serious coin on the world's most expensive life insurance policy.  This unnamed billionaire is probably very intelligent in her or his business career.  That talent didn't prevent this very stupid decision.  There are cheaper ways to incentivize one's heirs while leaving them the bulk of a hard-earned fortune.

This person could have pulled a George Lucas and dumped the bulk of their assets into a charitable foundation after selling off whatever enterprise they owned.  They also could have set up separate charitable remainder trusts for each beneficiary among their next of kin and recorded major tax deductions.  Charitable gifts work pretty much the same way for publicly traded securities, restricted shares, and entire private enterprises.  The only things that would be difficult to gift might be "future assets" like deferred compensation from options or bonuses subject to earnouts.  If this person's financial advisory team proposed a range of options for the client's consideration then they fulfilled their fiduciary duties.  

Insurance products are among the most expensive things investment advisers can sell.  All this nameless big shot accomplished was the transfer of risk from their portfolio to a collection of insurance companies.  If one of those insurance companies ends up insolvent in the next financial crisis, like AIG was in the last one, that policy could be toast.  Life insurance has a role to play in creating an estate that will provide income in the absence of a head of household.  This billionaire doesn't have that problem.  Their life insurance policy didn't need to be this big.  Someone just wasted a lot of money for more peace of mind.  

Financial Sarcasm Roundup for 02/10/14

It's time once again for sarcasm but I think I'll leave out the LOLcats.  Putting those images together is a lot of work and it may not be worth my time if it prevents me from writing more articles.  I may revisit the concept in the future.

Here comes another empty threat of a US Treasury default.  We've all heard this alarmism before.  A default isn't going to happen as long as the US can roll its short term debt to pay interest, and it can do so as long as the Fed is buying Treasuries.  The only threat to this dysfunctional status quo is a spike in real interest rates that crashes the assets on the Fed's balance sheet.  Lawmakers' decreased willingness to risk brinksmanship reveal the precariousness of this untenable situation.

The PBOC is telling us to get used to volatility in the yuan money market interest rate.  Really?  Gee, ya don't say.  My last few sarcasm roundups have dealt with the likelihood that the PBOC is losing control of China's own yield curve.  The first possible WMP default deadline came and went without incident, but future problems are unavoidable.  This is a preview of what will happen in the US when our own central bank is unable to contain interest rates.

Wages are not moving up, and neither is hiring.  The macroeconomic reason is simple but largely unreported.   Real unemployment is much higher than the official BLS figure.  This slack labor market is known to hiring managers who receive thousands of resumes for a handful of job vacancies.   High-income earners are doing just fine while health care mandates are about to hollow out middle class employment.  Everyone below the top 1% should prepare to get a lot poorer.

The SEC is cracking down on financial advisers who make bold claims in social media.  I'm not an adviser, so any claims I make at Alfidi Capital about my tremendous genius or charisma fall outside the SEC's jurisdiction.  I do not guarantee or promise anything at all, although I try my very best to ridicule stupidity.  I do not sell any products or do anything for clients.  Advisers who claim they can guarantee any investment result deserve scrutiny, and a lot of advisers don't deserve to be in business at all.

If you miss the LOLcats, I don't ever want to hear about it.  

IRA Rollovers and 401(k) Problems

FINRA is warning financial advisers in Regulatory Notice 13-45 that they need to remember their fiduciary duties when discussing IRA rollovers with clients.  I have no such fiduciary duties with anyone so I can discuss this subject from all angles.  The regulatory notice reminds advisers that products in a 401(k) may be more appropriate for a client's goals and risk tolerance than products available in an IRA.  I'm reminded of target date funds that automatically adjust portfolios as clients age, and those funds may not be available outside of a 401(k).  Positioning clients to accept comparable arrangements with products in IRAs may harm their best interests if management fees and transaction costs would increase.

FINRA's regulatory workarounds preserve the independence of retirement plan sponsors who offer diverse options within 401(k)s.  The remaining problems for 401(k) investors go beyond the choice of whether to rollover assets into other retirement accounts.  I can think of quite a few problems off the top of my head, based on years of studying finance.

A 401(k) contains a lot of actively managed products.  Actively managed funds carry more fees and tend to underperform passively managed products (i.e., indexed funds).  Even target date funds contain actively managed funds, layering another set of fees on top of the active managers' fees.  This Yale study by Ian Ayres and Quinn Curtis shows how active management and plan fees hurt 401(k) investors.

Multiple 401(k) options confuse investors.  Plan sponsors do not all perform thorough educational roles for their plan participants.  The best education is probably oriented toward construction of simple plans to avoid overwhelming low-information investors with poor choices.  It is unfortunate to see plan sponsors mimic brokerages by stuffing flavor-of-the-year mutual funds into 401(k) choices but that's what they are allowed to do to entice interest from their participating employees.

Investors borrow from 401(k) accounts.  Allowing investors to borrow from their own retirement accounts is IMHO one of the dumbest loopholes in American tax law.  Those loans must be repaid with interest to ensure the investor catches up to where their retirement account balance should be if they had never taken out a loan.  Oh BTW, the interest on a 401(k) loan is NOT entitled to the same tax deductibility as a home mortgage loan, so it's a pretty stupid way to fund a home purchase for people who don't qualify for a mortgage.

I would much prefer that the US scrap its entire tax-advantaged retirement system and start over from scratch.  The replacement regime should be very simple.  It should NOT at all resemble Theresa Ghilarducci's Guaranteed Retirement Account plan.  I've criticized that idea before because it's just another way of funding persistent federal budget deficits.  Investors forced to accept such a plan will eventually be prohibited from investing in anything other than government bonds.  Those bonds will eventually pay below-market interest rates and will lose purchasing power after inflation.

My preferred solution would resemble Australia's superannuation accounts system.  A simple system would be the best system.  Investors would be able to put as much of their income as they like into one tax-advantaged account with exactly one product:  a target date fund.  The fund would be structured like the federal government's Thrift Savings Plan and contain only index funds to minimize fees.  Limiting the number of fund components to a handful would still allow for allocations to equities, fixed income, and hard assets (and I'll include real estate and infrastructure among hard assets).  Investors would be prohibited from taking out loans from their superannuation account.  My plan has exactly zero chance of ever being enacted in America because it's too easy to understand.  The national political climate favors complicated solutions that are amenable to financial sector lobbying.  The plan would also completely replace Social Security because it could not be used as an entitlement program or as an accounting gimmick to mask deficit spending.  That definitely isn't going to fly in Washington, DC.  We'll just have to watch our government's entitlement programs collapse during hyperinflation before we see real reform.

I was a financial adviser years ago, and I was very circumspect when I discussed the characteristics of an IRA rollover with prospective clients.  I outlined the advantages, disadvantages, and consequences for their particular situations.  That's precisely why no one wanted to entrust an IRA rollover to my care.  Sharing my knowledge and concern really turned people off.  Human beings won't listen to detailed descriptions of consequences.  They prefer the excitement of wish fulfillment and will trust liars who promise the moon.  Financial advisers who "succeed" in obtaining business from investors doing rollovers are likely to ignore details and lie about consequences; they are human and they pitch to humans.  They tend to use action words like "must, should, ought" to manipulate a prospect into thinking there is only one choice.  This is why I have contempt for most financial advisers and most individual investors.  I find manipulation to be disgusting and I believe FINRA would agree with me.

Nota bene:  Nothing I wrote here constitutes investment advice.  I need to state that clearly in case a bunch of idiots claim I give financial or investment advice.  I do no such thing.  I don't give advice because I don't give a hoot what other people do with their money.  

Advisors Add Little Value With Higher Fees or Smaller Clients

My loyal readers know that I used to be a financial advisor.  No one wanted to pay for my advice or trust me with their assets.  I have often wondered why some investors pay "professionals" who abuse their trust and underperform benchmarks.  Some investors are just stupid, and their trusted advisors are just crooks.

The financial advisory profession is increasingly throwing away smaller investors.  Advisors make little money from smaller accounts and believe they seldom grow into larger accounts.  I saw this attitude a lot in the office where I worked.  Top-producing brokers considered non-millionaire clients to be worthless and several layers of management discouraged new advisors from pursuing such prospects.  I would have loved to have had a bunch of six-figure net worth clients just to prove that someone considered me trustworthy.  "Trust" in finance means a verifiable track record of work, no matter how unfavorable the result of said work.  Smaller investors just won't timely service or good advice from full-service firms anymore because their advisors want them to go away.

It's no prettier at the institutional end of the advisory spectrum.  A Maryland study of state pension funds shows that plan sponsors are overpaying and getting poor performance.  The higher the fees they pay, the worse their returns.  These clients are not amateur investors with $100K in assets that advisors don't want.  No ma'am.  These are retirement plan sponsors with tens of million of dollars in assets to manage.  They've been screening advisors for years using very detailed investment strategies.  They still get ripped off by professional advisors who can't outperform benchmarks.

The shop talk around the offices of institutional investment managers is much the same as it is in the retail wealth management world.  I worked for a large institution that specialized in managing retirement plan money.  The team leads in the client relationship management division were just as arrogant and clueless as top-performing wealth managers.

None of the pros are looking out for investors.  It doesn't matter whether they say they are.  Some clients are stupid and some fiduciaries are crooks.  The rest of both groups may just not know enough or care enough to do the right thing.  That's why it doesn't bother me that none of them want anything to do with me.

The Haiku of Finance for 02/11/13

Dummies cannot read
My blog says, "no advice here"
Quit asking for it

Financial Sarcasm Roundup for 10/01/12

September flew by with no market crash, no default from Greece (or Spain, or Italy), no eurozone breakup, and no U.S. hyperinflation.  I'm disappointed.  I'll have to find more things to get sarcastic about.

The head of the SF Fed defends QE3 in his own words.  I get the argument for a natural unemployment rate of 6% but it needs to be defined as primarily for those in transition from one job to another.  I don't get the claim that real unemployment is only 8.1%.  The Fed folks are glad U-6 isn't published anymore because they know it would embarrass them with a high double-digit unemployment rate.  This guy also trots out the deliberate underestimation of inflation at under 2%.  *Sigh.*  He needs to do more of his own grocery shopping so he can see the price of canned tuna is over $1.00 a can.  I remember when it was $0.45 per can a decade ago when I was in graduate school.  Nowhere in the speech does he specify just how monetary stimulus will reduce unemployment.  That sleight-of-hand trick won't fool markets for much longer.

Bank of America is paying off the last of the irate shareholders who didn't like getting saddled with Merrill Lynch's problems.  The $2.4B bill will cause a $1.6B charge against earnings, and BAC had net income of just over $2.4B last quarter.  That leaves very little cushion for any other bad news coming out of this bank.  Maybe I should take out a loan from BofA just for kicks in case they can't survive.  Nah, I'm not that mean and BofA isn't in that much trouble (yet).  Full disclosure:  No position in BAC.

China's exports are rapidly collapsing.  A less intense contraction is still a contraction.  I'm glad I sold the last of my China position to herald the end of the China bull story.  Note that this survey of purchasing managers by a private bank is more pessimistic than the Chinese government's official survey of purchasing managers.  China can no longer avoid getting caught lying about its economy.  The plan to turn China into a nation of middle-class consumers hasn't come fast enough and probably never will given that country's demographics.  Staying away from Chinese investments is probably the patriotic American thing to do anyway, given Beijing's increasingly bellicose attitude towards its neighbors.  I expect nothing but trouble from that country for the next couple of decades.

The Financial Planning Association is in denial about the chances it can reach middle class investors.  I remember the rounds of interviews I went through as an aspiring financial adviser in 2005 with branch managers who were convinced that 401(k) rollovers into IRAs would be the industry's growth story.  Fast forward to today, with the average retiree having less than $30K in assets.  Great job, FPA.  Keep wasting time touting the middle class's nonexistent wealth so you can send people like me on wild goose chases.  That's how rich people (and their financial advisers) amuse themselves.  

People Lie About Wanting Financial Advice From Ex-Military

I don't enjoy being angry.  I read something today that made me boiling mad.  Some survey claims that Americans value military veterans as financial advisers, and that this estimation increases with a respondent's affluence.  I need to state for the record that nothing could be further from the truth.

I spent over a year as a financial advisor at a major wealth management firm.  I worked harder than I ever have in my life to acquire clients.  Every prospect I encountered - with two exceptions - completely ignored my military experience as a selling point for my abilities.  The two exceptions were unique; one had very little liquid net worth to invest and the other was a phony who had zero net worth.  All of the other prospects regarded my military background as something to disregard.

People with serious money to invest want it managed by someone who's achieved a comparable level of success.  I find it telling that the Edward Jones survey above mentioned households with incomes of $100K or so.  I hate to break this to the 1300 ex-military advisors they employ, but their careers will be short if they focus on acquiring people at that income level.  Wealth management firms are increasingly discarding advisors who pursue clients with net worth under $1M.  Making $100K/year isn't going to get anyone to millionaire status in an America beset by price inflation, equity overvaluation, creeping hyperinflation, and a rapacious elite bent on regulatory capture and financial repression.

I employed all of my military-acquired skills to establish trust, build rapport, demonstrate an extreme work ethic, prove my integrity, and persevere in the face of adversity.  All of those traits turned off people with serious money.  All of those attributes got me terminated.  Most veterans hired as financial advisors don't realize that they're just filling an affirmative action quota and will be gone in a year.  That's why brokerages can afford to brag that some percent of their sales force is comprised of veterans.  They know that annual turnover for lack of production enables them to keep hiring and firing unsuspecting veterans over and over again.  Americans who say they want military veterans as financial advisors probably don't make enough money to afford an advisor in the first place.  Too many people just don't know what they're talking about.  

Morgan Stanley Salivates Over Smith Barney

Another brand name brokerage may be headed for complete absorption by a long-time rival, in this case Smith Barney.  Morgan Stanley is reportedly hungry to devour the chunk of Smith Barney it doesn't already own.  That would be the final unraveling of the house that Citi built during the late 1990s in its bid to become the first true global financial supermarket.  Its acquisitions of Smith Barney and the Travelers insurance group proved to be so unwise that it has unwound much of what it bought since then just to raise enough capital to survive.

I recall doing a case study of Citi in 2002 for my MBA class in M+A.  I was the lone voice in the class arguing that Citi's mergers would prove to be a strategic disaster and I was able to sway my teammates to agree with me.  Another team gave a competing presentation arguing Citi's mergers would work out great, relying exclusively on DCF projections and other quantitative estimates without any qualitative assessments of strategic fit.  Ah, memories.  It goes to show that academic rote only gets you so far.  Truly insightful analysis often requires an intuitive leap.

Citigroup would be wise to sell its stake now before the renewed recession hits retail investors' portfolios and Smith Barney's revenue.  Oh, BTW, none of these firms ever seriously wanted to hire me so I wouldn't be terribly bothered if they all suffer.

Full disclosure:  No positions in MS or C at this time.

Market Waking Up To Debt Dealmakers' Lack Of Insight

Financial markets have exhibited a ho-hum attitude towards the lack of movement in Washington's budget negotiations . . . until now.  Wall Street is getting nervous about the possibility that lack of a firm deal will send interest rates soaring and equities tumbling.  Europe is also getting nervous about Washington's games, with the IMF scolding the lone hyperpower as if it were a collapsed emerging market in need of intervention.

Our leaders are playing with fire and the increasingly likely consequences of their games will be a stock market crash.  If a ratings downgrade forces the U.S. to raise its effective bond yields, countries that normally have to borrow on AA or worse credit will quickly find themselves crowded out of the global bond market.  That is a recipe for an immediate credit crunch in some of the markets that have been very good to U.S. multinational firms' earnings this year. 

This sad episode will not end well for the U.S. even with an agreement to raise the federal borrowing limit.  The only community that is completely oblivious to the coming debacle is - no surprise - the mass of financial advisors whose unguarded optimism about the U.S. economy will probably put many of their clients in the poorhouse. 

Full disclosure:  Long FXI and GDX with covered calls.  No positions in individual U.S. equities at this time.