Tuesday, April 29, 2008

Darwin Meets Investment Advice!


The more articles you see on how “advice” is sold, the more you want to run for the hills! I think Jonathon Chevareau has been trying to get to the meat of the matter with his recent articles on how different advisors charge fees, but sheeeeesh, should it be this tough?

Perhaps we need to take a trip back to a simpler time when trading stocks was the purview of the elite (i.e. you and I were not invited into the game)

Step 1: Back before Darwin, Brokers sold stocks to wealthy people who paid big commissions for the right to own companies…..you and I bought GICs and looked at the rich with awe and envy!

Step 2: That was good into about the early 1980’s. Then we demanded the right to play in the market; but being simple people we were not likely to understand the complexity of buying one stock! So the smart people set up little baskets of stock we could buy (mutual funds….even sounds a little socialist) at a modest fee. Since we were indeed quite simple, they decided not to bother us with the cost of owning these…they would use hidden fees and trailer fees we wouldn’t have to see for fear it might confuse us!

Step 3: As we paid these high fees without complaint the dollars rolled in and brokers split into two groups, the old guard serving the rich and Mutual Fund Salespeople to milk….er service the rest of us!

Step 4: Then along came a tough challenge for the industry, “discount brokers”! That allowed the mutual fund crowd to get their feet wet in stocks without paying the old guard their full stipend! It also caused fee leakage from MF’s into the DB’s (discount brokerages).

Step 5: Ever on the lookout for ways to make those fees, the smart guys started to stoke up the marketing machines and overwhelm the new investors with new products that they could buy. Soon discount brokers were the home of the money machines known as “day traders”! The average guy/gal thought it they read enough on the internet, watched enough ROB TV, and read the huge ads in the newsprint (think RRSP time); we could do it faster, better, and more frequently than the old guard brokers! Of course our dreams were quickly dashed when the “tech wreck” showed most of us we really were not that good at finding winners!

3b. (love my new math) So we had to back track and return to the MF guys, tails between our investing haunches, and buy more funds. However, we were a more educated bunch now. We knew the cost of a trade and we did not like the MERs on those funds any more!

6. (we are making progress again) Now the field began to divide up depending on our aptitude, level of over confidence/ability,and willingness to do our homework. A few who did not lose their shirts stayed on in the DB channel, those who lost total confidence went to GIC’s, some went back to the traditional broker but now the trade prices had to come down and even “buy &hold” became popular! Through it all, the rich stayed rich (big surprise) but with common folk now in stocks, more of the rich went to Portfolio Managers (fancy schmansy and an entry level deposit requirement to keep us out). Of course many, poorer but wiser, remained with the funds even though the heady days of fantastic gains seems to have gone away!

7. (we’re getting to the end) The deal breaker, earth shaker, and transformational change that occurred next actually began with but a whimper. Out of the U.S. came Index Funds”! They were cheaper than MF’s, they typically outperformed most other funds, and you did not need to pay an advisor! The marketing machine of the “buy side” kicked into high gear and the battle continues to this day! Brokers created new complex products that you had to have; index linked notes, structured products, hedge funds….i don’t know what they do but all the “smart money” is buying them! Heck, they even have this phenominal deal where they keep your money like seven years then guarantee they will give it all back!!!!!!

Finally: Love or hate MF’s or Equities or Bonds or Income trusts….the fact is investors today have more choice than ever! The real issue is the smoke screen of competing products, different fee structures, different types of advisors (fee-based,fee-only,commission sales and trailer based) and a marketing machine that changes the landscape daily with new commission schemes disguised as new products.

Now: What are we to do? Well, do what you understand! Regardless of what channel you decide to invest in WATCH YOUR FEES, ask questions, do not buy what you do not understand! Do not look for the friendliest advisor, look for the cheapest advisor and then monitor your account to make sure it is going up at least as much as the relevant benchmark indexes!

The Future: Planning advice will be bought separately from the securities selection advice! Overall strategy and planning decisions come from one advisor and decisions on what to buy or sell come from another totally separate source. One will not be allowed to impact the other, and like any good balanced approach, each keeps the other honest!

…..at least that’s how I see it all evolving! soismike

Saturday, April 26, 2008



I congratulate the CTV for having the guts to light a fire under the brokerage business and expose the total disregard that can exist for your money! But, alas, don’t wait for anything to change anytime soon! Too many people are making too much money pretending to be working for you!
Lets track down how all these evil deeds might be able to take place even in the biggest nanny state (province technically) in the nation, Ontario! It is as simple as following the money that leaves the customer account and figuring out where it ends up!

Ø Your broker wakes up in the morning and says “should I spend hours researching the stock universe for a truly undervalued stock for my loyal customers……or should I pick up the brokerages list of “action stocks” I should be pushing….er recommending”. Assuming I go with the list I can always claim I only recommended the stock after diligent research including logging onto my company website and reading the list! This effort is rewarded by soliciting a sale and earning a few hundred bucks for myself and the mother corporation!

Ø For those following at home, try to picture about 10,000 brokers sharing the same morning exercise and multiply by about $200. per….hmmmm quick math gives me about $2 million and its not even coffee time yet!

Ø Now the math gets tougher because we need to balance debits and credits….I learnt that during my week as a teller! That means client accounts must go down by $2 million as well. So when you get up in the morning and have your coffee, you have already helped the economy grow….and by economy we do mean the brokerages/banks in this example!

Ø Now the bad part for your broker is that they need to split the commission with the parent corporation so your broker has only actually made $100. from your account this morning…although you of course have lost an additional $100 to feed the bank/brokerage.

Ø Of course the neat part for the broker is its only the morning and they have about 200 other pigeons…..er I mean customers…they can repeat their efforts with in the afternoon.

Ø Now comes the tricky part….the trades are reviewed for ‘suitability” to, you know, protect your interests from some stupid trade that might not be necessary. Now who provide this quality control check in the brokerage world? It would be the branch manager. The branch manager is an experienced broker who has learned all the tricks and can spot a poor trade with his/her eyes closed. For doing this diligent job the branch manager receives compensation. Now think back again to the $100. that the brokerage/bank has made. Would you be surprised to hear that the manager was in on the skim and might make an income based upon how much revenue is generated by the broker? This override on revenue generated should be just the incentive to keep the manager from actually opening those eyes we discussed!

Ø Thankfully the companies all have hard working and honest compliance folks who truly do keep a diligent eye on what trades are taking place. Now the skeptic might ask who are they looking to protect….customers or brokers? You see, if too much money is skimmed (think of Vegas) then the authorities (security regulators) might actually look real close at what is going on. Rule #1 is do not kill the goose!

Ø Now you the customer might eventually get upset and begin to see what is happening. Your complaint goes to the branch manager, who then evaluates your complaint with great concern. The focus is clear: might this complaint be big enough to harm the “goose”? Fortunately, the little guys known as clients are rarely of a size to do any significant harm to the goose. So your complaint is actually a request to the broker to potentially lower his/her income in return for which they will get an angry broker and lots of paper work.

Ø Now we are back to multiplication…..if the goose is exposed to too many complaints it may actually actually get sick. The branch manager (goose keeper) will, if push comes to shove, choose the goose over the individual broker! That’s because the system only works if the customers remain ignorant of the skim. If a dozen small complaints roll up to a regulator there is once more a potential risk to the goose.

Ø Hold on though! The industry has a secret weapon up their sleeve. The regulator is funded by the brokerage/bank. Indeed the full circle is now complete. Your money funds the broker, the branch manager, the compliance team, and the regulator! The only person not profiting would appear to be…..you!

I know this has been a long exercise, but remember, it’s only 10am. This industry still has the bulk of the day ahead of them! At a collective $2mm a pop, we should be thankful that the stock exchange does not share the 8-8 philosophy of the green bank!

Disclaimer: I really do want to point out that not all 10,000 brokers in the above scenario are churning accounts. The fun part of the game is you don’t know which ones are churning and which ones are working hard for their clients! A BIG clue can be found in your monthly statement! The better brokers are moving to a flat percentage fee where high trading is less of a concern for clients. If you make more than 10 trades a year maybe you should be talking with your broker……if they are back from Tuscany!
I think I am beginning to see why they are called brokers…….when they are done, we are broker! soismike

Tuesday, April 22, 2008

Its time to get "active" about being "passive"!

OK, so a money manager tells you that he can beat the benchmarks on a regular basis. You check the facts and low and behold.....not true! Most fund managers cannot beat the index with any more predictability than I can predict the flip of a coin; well actually they are not nearly that good! I can probably predict the coin 50% of the time while recent stats suggest about 85% of fund managers did not make the benchmark over the last 3 years .

When a manager buys and sells securities in an attempt to beat the benchmark, that is called active management. If the same manager bought the index fund and held onto the index for the year, then we would say they did not try to beat the benchmark and are a "passive" manager.
Now, as guys/gals we know that "passive" is not generally a positive trait in people....we think of passive as being, well, wimpy! We want to be considered "active" which certainly sounds healthy and positive and a much better verb than passive.
To those who love "active"management it is as simple as the lottery philosophy; you can't win if your not in the game! Passive will never beat the benchmark! It will just outperform active funds about, oh say, 85% of the time! And did I mention it costs a lot less to own the passive index?
So for some time the debate has raged about "passive vs active"! But, of course life is not that simple! Money managers. realizing the inherent value in diversified low cost indexes, started to use them in an "active" fashion. Now the "passive" product is being actively managed to beat the indexes that they track! Huh? Well, actually, it does make sense if you can forecast which indexes are going to go up or down the most, and switch out of the dropping index and into the rising index! Of course, if you can't then it is a bunch of active trading that fails to beat the benchmark just like the active stockpicking did.
So how do we label our money managers?

1- active/active manager> actively manages stocks which are an active security
2- active/passive managers> actively manages indexes which are a passive security
3- passive/passive> buys and holds index funds with periodic rebalancing
4- buy and hold> buys stocks which are active securities but is passive in managing them

So there are a lot of ways to manage money and you need to know which your advisor is focused upon! I therefore highly recommend you get "active" about how your money is managed, don't be 'passive" about the results, and when it comes to fees, actively pursuing passive products will generally reduce your fees!
....time for a rest, I've had an active day!

Friday, April 18, 2008

Portfolio Complexity: The toxic cake!

Wow, do you ever wonder how an industry with so many smart people can get itself into such a huge mess? Having met Purdy Crawford, I know he is extremely bright and experienced and a great choice to sort out the ABCP issues in Canada. So is it not amazing when he takes months working with a hand picked selection of bright minds, and then acknowledges they have no idea what the ABCP is worth today! I guess that qualifies as complex!

Asset Backed Commercial Paper is one of the best examples of smart people outwitting themselves. It all starts with simple assets like a mortgage, but a straight mortgage can only generate so much profit for the smart folks. So from the mortgage comes mortgage backed securities, then comes a complex bundling process that is like baking a cake. When the recipe is right, the individual ingredients cannot be easily distinguished but the finished product looks and smells great! Unfortunately, as with baking, a little of the toxic stuff can be mixed into the investment bundle and perhaps not be fatal. Maybe we use a few ingredients that are past there "best before dates", who will know or care, right. Well, in a great kitchen the chef would notice and of course in the investing world the rating agencies would know. Quick comment: trust your chef before your rating agency, the chef is not paid by the flour mill!

Not surprisingly, it would appear that there is a limit to how much of the ingredients can be toxic before the cake is poisonous. And to bring this long analogy to an end; the cakes have all been baked, nobody knows how much of the ingredients are toxic, and there are very few investors lined up to sample the outcome! The smart guys in the kitchen can't tell the good cakes from the bad and it would appear the bakeries sold enough cake to feed the world!

So what have we learned: The old adage still holds true....you can't have your cake and eat it too!

As for complexity in your portfolio....beware the advisor selling baked goods! Check the ingredients before you scoop up the icing! For a more rational and clear understanding of portfolio complexity, check out the 3rd issue of the Second Opinion Newsletter .


Simplifying Your Investment Portfolio Ken Hawkins
“Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away”Antoine de Saint-Exupery
IntroductionA well diversified and uncomplicated portfolio is almost always better than one that is overly diversified and too complex. This is especially true for individual investors with limited time, analytical tools and expertise. Despite this, many investors find themselves with portfolios that are too complicated to understand, hard to manage, and difficult to make changes with confidence. This is especially true for investors that hold too many mutual funds and invest in too many complex structured products


Thursday, April 17, 2008

Great advice on managing your mistakes!

Ken Hawkins falls into the category of great people who's advice I respect! I think the attached comments from a recent Investopedia article by Ken are a great reminder to all investors....you can't just wish away your mistakes! Ken gives a great breakdown of what we do wrong, why we do it, and how to stop yourself from doing it!
The Art Of Cutting Your Losses by Ken Hawkins (Contact Author Biography)

One of the most enduring sayings on Wall Street is "cut your losses short and let your winners run". Sage advice, but many investors still appear to do the opposite, selling stocks after a small gain only to watch them head higher, or holding a stock with a small loss, only to see it worsen.

No one will deliberately buy a stock they believe will go down in price and be worth less than what you paid for it. However, buying stocks that drop in value is inherent to the nature of investing. The objective, therefore, is not to avoid losses, but to minimize the losses. Realizing a capital loss before it gets out of hand separates successful investors from the rest. In this article we'll help you stand out from the crowd and show you how to identify when you should make your move.
(click the link below for more....)


by Ken Hawkins (Contact Author Biography)Ken Hawkins is a financial writer and vice president of Second Opinion Investor Services http://www.secondopinions.ca/, an investment consulting firm that provides unbiased and independent investment advice. His experience spans the investment world of the private client investor as well as the world of the institutional investor representing pension funds, asset management companies, mutual funds and investment counselors.

Wednesday, April 16, 2008

Who needs another blog?

I guess that is a question that every blogger asks when they begin the process of cluttering the Internet with their thoughts. As a grey beard I never really felt this Internet thing would catch on....but apparently I was wrong. I now find myself searching the net regularly for information or advice on everything from cooking to gardening to my pathetic golf game.
So why the "UnbiasedPortfolio"?
Working in the wealth management field I have found myself on many sites about investing and financial planning. What is interesting is how often I disagree with the information I read, even though it is presented as an incontrovertible fact! In fact, it quickly became apparent that I must have a weird perspective on things because I disagree with a whole lot of what is said by "experts"! What I soon noticed was that my level of disagreement was often directly connected to whether I was reading information from the "sales" side of the business. Years spent with a large financial company has perhaps jaundiced my view of "free advice" and commission sales people who "put the client first"! Suffice to say the first lesson I learned was when somebody is putting me first, the first thing I need to do is grab my wallet and hang on tight!

So a couple of things for the world to consider:
- no your not wealthier than you think you are!
- no banking is not this comfortable and there is no green arm chair to sit in!
- changes made last week won't put your child through university!
- when a bank "puts you first" they charge a hefty monthly fee to the millions of other people they are also putting first!
- if your partner is holding up a sign to the banker there is a good chance half your assets just left your account!
- news flash....you are unlikely to pay 2.5% MER on Mutual Funds and still retire to France or Italy!
Sorry if many are disappointed by these crushing realities!....but thats my Unbiased opinion!