Monday, April 30, 2012

Meet the Psychopathic 1%

The Occupy Wall Street movement has focused our attention on brokers’ excessive salaries and bonuses. But an article in CFA Magazine suggests that there is a darker side to Wall Street. Sherree DeCovny writes that one out of every ten Wall Street employees is clinically psychopathic. They are also more willing to take dangerous risks, in part because they don't have great empathy for others and, therefore, don’t worry as much about possible negative consequences. She suggests that the gambling itself, with the chemical rush of serotonin and endorphins, matters more to these traders than the possibility of portfolio gains.

“A financial psychopath can present as a perfect well-rounded job candidate, CEO, manager, co-worker, and team member because their destructive characteristics are practically invisible,” writes DeCovny. Yet, she stresses that for someone with a “latent compulsive gambling problem,” a job trading stocks can trigger pathological responses that result in escalating lies and even embezzlement and fraud. In fact, she says a person with this problem would often feel gratified by an enormous loss, which goes a long way to explaining the criminal actions of recent rogue traders.

In “Greg Smith’s Resignation: Are Wall Street Traders Psychopathic?” Maia Szalavitz explores additional research that suggests that powerful people at the top tend to behave less ethically than others. Researchers found, for example, that people driving fancy cars -- a measure of high economic status -- were most likely to cut off other drivers and to fail to stop for pedestrians at crosswalks. Yet, the same research revealed that unethical behavior wasn’t linked directly to a person’s wealth, but to how much they believed that greed was acceptable. In fact, additional research offered by Szalavitz illustrated that simply being in the physical presence of visible wealth reduces a person’s willingness to share.

So, as we seek meaningful financial reform, maybe it’s time to redecorate those fancy Wall Street lobbies and corner offices which likely serve as a breeding ground for selfish, greedy behavior.

Monday, April 23, 2012

How is a Broker Like a Butcher?

Would you ask your butcher if eating thick, juicy steak is the best thing for your heart? Of course not. You’d expect that his answer might involve a conflict of interest and misinformation. I ask this question because recently I came across a video produced by Hightower Securities that compares brokers to butchers and fiduciaries to dieticians. Think about it. The butcher sells you a choice cut of his most expensive meat that may not be good for your overall health, while a dietician offers honest, unbiased advice on a healthy diet. I think Hightower Securities’ metaphor does a terrific job of illustrating the conflicts built into the brokerage compensation model and why consumers are better suited seeking the advice of a fiduciary. Click here to see the video.

If you’re interested in some facts to support Hightower’s video, I suggest you read Go,Teams! Our Annual Compensation Ranking Examines Team Remuneration Along With the Best Payout Plans. The most interesting material is at the end of the article where you’ll find firms’ actual payout grids.

For example, if a Merrill Lynch broker has made $280,000 in commissionable transactions or brought in asset management dollars that generate this level of total compensation (gross dealer concessions) as of mid-December, he stands to make 35% of the total, or $98,000. However, if that broker generates another $20,000 more in gross production/sales, bringing him up to $300,000, he'll earn 38% on the total amount for the year, plus a potential long-term productivity bonus of 2.5%. Do the math. That $20,000 sale could mean an extra $23,500. So, do you think that broker might call his customers in the latter half of December with a great end-of-the-year investment idea?

You will see a similar pattern at all of the major Wall Street firms as you scan each firm's payout grids. We think the investor is better served by working with an advisor who does not have production/sales goals. An advisor should only be paid by his clients, not the company whose products he pushes. He can only serve one master and it is normally the one who pays him.

To return to the Hightower metaphor, do you think this broker has incentive to offer a juicy steak to someone with high blood pressure and a family history of heart disease?

Monday, April 16, 2012

Buffett: Stocks Beat Bonds

Fortune recently published an article by Warren Buffett where the Oracle of Omaha divides the investment world into these three asset classes:
  • Investments denominated in a given currency, including money-market funds, bonds, mortgages, bank deposits, and other instruments. “Most of these currency-based investments are thought of as safe. In truth they are among the most dangerous of assets. Their beta may be zero, but their risk is huge,” writes Buffett.
  • Assets that will never produce anything, but that the buyer hopes someone will pay then more for in the future. “Tulips, of all things, briefly became a favorite of such buyers in the 17th century,” notes Buffett. “Today, the major asset in this category is gold, currently a huge favorite of investors who fear almost all other assets, especially paper money (of whose value, as noted, they are right to be fearful).”
  • Investments in productive assets like businesses, farms, or real estate. “Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment,” Buffett writes. “Farms, real estate, and many businesses such as Coca-Cola (KO), IBM (IBM), and our own See's Candy meet that double-barreled test. Certain other companies -- think of our regulated utilities, for example -- fail it because inflation places heavy capital requirements on them. To earn more, their owners must invest more. Even so, these investments will remain superior to nonproductive or currency-based assets.”
Buffett says that stocks will be the “runaway winner” over the long-term, however, “currency based” and “sterile assets” will always be the most popular when fear preys upon the market. In fact, in the wake of ongoing volatility, investors have pulled money from U.S. stock mutual funds each of the last five years, including $100 billion in 2011. And at the same time, they poured money into bond funds each of the last six years, including $110 billion last year.

Notably, those saving for retirement or supporting themselves in retirement have a different investment horizon than Buffett’s “forever.” And that’s where we come in -- working with clients to identify their goals and risk tolerance, build an appropriately diversified asset allocation plan, and manage the portfolio based on reason, not emotion.

Monday, April 9, 2012

Investment Team Expands with the Addition of Kenneth Robinson, CFP®

McLean, VA (April 9, 2012) – Bernhardt Wealth Management announced today that Kenneth (Ken) Robinson, CFP® has joined the firm’s investment advisory team as Senior Financial Advisor. In his new position, Ken will be working with clients in all aspects of wealth management, including investment management, retirement planning, tax planning, philanthropic giving, estate planning and other complex financial issues.

“I am pleased to welcome Ken Robinson to the Bernhardt Wealth Management team,” said president and founder Gordon J. Bernhardt CPA, PFS, CFP®, AIF®. “Ken will immediately be contributing his knowledge and extensive experience to positively impact what we are trying to accomplish on behalf of our clients. He has excellent technical skills, works well with clientele and is a respected member of the financial planning industry,” Bernhardt continued.

Robinson joins Bernhardt Wealth Management from The Monitor Group, Inc. where he served as senior planner and previously, director of operations.

“I am truly excited for the opportunity to work with a team of such dedicated and consummate professionals,” said Robinson. “While many firms today are shifting their priorities away from personalized advice and customer service, Bernhardt Wealth Management maintains an unwavering focus on providing great unbiased advice that serves only the best interest of their clients.”

Robinson has more than 15 years of experience in the financial services industry. He graduated with a bachelor's degree in Economics from the Virginia Military Institute and earned his Masters of Science in Finance from Georgia State University. He is a member of the national Financial Planning Association, and serves on the Board of the Financial Planning Association of the National Capital Area (FPANCA) as Pro Bono Director, having previously served as the Director of Public Relations.

Sought out for his insights into financial and practice management matters, Robinson has been quoted in the Washington Post, Investment News, and various industry publications, as well as appearing on CNN Newsource. He is active in pro bono financial planning efforts and is a volunteer for Junior Achievement of the National Capital Area in the financial literacy programs for local schools. He is a former adjunct professor for Virginia Commonwealth University’s CFP® certificate program.

Left-to-Right: Ken Robinson, MS, CFP®, Senior Advisor;
Gordon Bernhardt, CPA, PFS, CFP®, AIF®, President & CEO;
Tim Koehl, AAMS®, CFP®, Senior Advisor


 

 

More Support for a Universal Fiduciary Standard

An early version of the 2010 Dodd-Frank Act would have eliminated the “broker-dealer exception” from the definition of investment advisor under the Advisers Act and required brokers to abide by the common-law fiduciary standard that investment advisors uphold. Unfortunately, that change was put on hold in order to study just how the reform might impact the consumer. Among the suggested consequences of this policy change has been the strange notion that requiring brokers to serve as fiduciaries would somehow limit middle America’s access to advisors by limiting a broker’s ability to sell commission products or offer a range of investments.

In their newly published paper, The Impact of the Broker-Dealer Fiduciary Standard on Financial Advice, professors Michael Finke and Thomas Langdon analyze states that have a uniform fiduciary standard of care versus those that do not to determine what impact the regulation has on the availability and cost of a broker’s services. Interestingly, they find that the number of registered representatives doing business within a state as a percentage of total households does not vary significantly in states with stricter fiduciary standards.

More importantly, when comparing states with strict fiduciary standards and those with no fiduciary standard, they find no statistical differences between those groups of brokers in terms of percentage of lower-income and higher-income clients; the ability to provide a broad range of products, including commission products; the ability to provide tailored advice; and the cost of compliance.

I hope studies like this will motivate regulators to stop dragging their feet and require a uniform fiduciary standard. Only then can we ensure equal access to advisors who will always operate in their clients’ best interests.

Monday, April 2, 2012

Protect Yourself from Identity Theft

Do you know the meaning of “dumpster diving,” “skimming,” or “phishing?” According to the Federal Trade Commission (FTC), these are just a few of the methods thieves use to steal your personal information. Dumpster diving involves rummaging through trash looking for bills or other paper with your personal information on it. Skimming lifts your credit card numbers during processing. And phishing involves emails from thieves who pretend to be financial institutions to get you to reveal your personal information.

The FTC suggests you take the following steps to safeguard your personal information:
  • Shred financial documents and paperwork with personal information before you discard them.
  • Don’t keep Personal Identification Numbers (PINs) near your checkbook or debit card.
  • Don’t carry your Social Security card and limit the number of credit cards in your wallet.
  • Unless you initiated the contact with a business, do not share confidential information such as credit card numbers, Social Security number, your birth date, or your mother’s maiden name.
  • Be wary of e-mails asking you to enter personal information at a linked web site.
  • Don’t use an obvious password like "Password1," your birth date, your mother's maiden name, or the last four digits of your Social Security number.
Amazingly, identity theft often goes undetected for months because the thieves often change your address on an account so that you won’t receive the bills with the fraudulent charges. That’s why it’s wise to check your credit report regularly at one of the three major credit agencies: Equifax, (800) 685-1111; Experian, (888) 397-3742; or TransUnion, (800) 888-4213. And, if you are a victim of identity theft, the quicker you discover the crime and report it to the police and these credit agencies, the better your chances of limiting the financial damage.