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Charity Navigator — The Smart Way to Give

  • May 25, 2017/
  • Posted By : admin/
  • 0 comments /
  • Under : Charitable Donations, Scams & Schemes, Seeking Prudent Advice

charity-navigatorGiving to our community to help make this world a better place is very important, but how do you know if you’re contributing to a reputable organization that will make the best use of your donation?

Charity Navigator (charitynavitagor.org) features a rating system of 1 to 4 stars for dozens of charitable organizations.  This non-profit provides key guidance on where it’s best to give and how these charities utilize the money that you give them.

A four-star charity has the following characteristics:

  • it excels at its financial health
  • spends most of its money on its charitable programs (not administration or fundraising)
  • completes an annual financial audit
  • guarantees donors it won’t sell their names to outside parties (i.e., it protects its donors privacy and respects their time)

The best way to donate is to give directly to the charity through their website.

The worst is donating to “cold calls” from a telemarketing firm.  The middleman typically keeps 80% to 90% of your contribution and shamefully little actually reaches those in need.  Also, avoid appeals delivered via social media because you don’t know who is behind them.

Sources:
Charity Navigator
NPR


Not Googling a New Financial Advisor, Seriously?

  • May 19, 2017/
  • Posted By : admin/
  • 0 comments /
  • Under : Scams & Schemes, Seeking Prudent Advice

It’s hard to believe, but there are people who sign on with a new financial advisor without bothering to do even the bare minimum due diligence.  Consider the sad story of fraudster Janamjot Singh Sodhi who ran a Ponzi scheme promising high rates of return in a relatively short period of time.

Sodhi solicited and received funds from investors starting in 2005 and through the fall of 2011 despite the fact that

  1. The New York Stock Exchange permanently debarred him in January 2006, and
  2. The California Department of Corporation ordered Sodhi to cease and desist from dispensing investment advice in California.

Potential investors and soon-to-be victims could have easily learned about these serious redflags had they bothered to simply google “Janamjot Singh Sodhi”.  Sodhi did not use an alias so the information and fraud was in plain sight.

“Forget about hiring an attorney or paying for a background check. If you just typed his name into Google you could find out that before he solicited you he was barred by the NYSE and threatened by the state of California. … People spend more time buying a used car for $2,000 than giving $10,000 or $1 million to someone they never met or checked out to invest.”  This from Bill Singer, a lawyer who specializes in investor fraud.

Sodhi was sentenced to four years and nine months in jail and required to pay back the $2.4 million he stole from investors.

Source: CNBC


Putting Clients Second (!?!)

  • February 9, 2017/
  • Posted By : admin/
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  • Under : Best Practices, Fiduciary, Scams & Schemes, Seeking Prudent Advice

fiduciaryAlthough the following makes reference to politicians and political decisions, it’s not meant to be political.  The intent is to inform you and to help protect you and your family’s best interest.

Today the founder and former chief executive of Vanguard, John C. Bogle, penned an article in the New York Times.  It starts off:

 THE Trump administration recently announced that it intends to review, and presumably overturn, the Obama-era fiduciary duty rule that is scheduled to take effect in April. The administration’s case was articulated by Gary Cohn, the new director of the National Economic Council.

Mr. Cohn, most recently the president of Goldman Sachs, called it “a bad rule” and likened it to “putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.” Comparing healthy and unhealthy food to healthy and unhealthy investments is an interesting analogy.

The now-endangered fiduciary rule is based on a simple — and seemingly unarguable — principle: that in giving advice to clients with retirement funds, stockbrokers, registered investment advisers and insurance agents must act in the best interests of their clients. Honestly, it seems counterproductive to go to war against such a fundamental principle. It simply doesn’t seem like a good business practice for Wall Street to tell its client-investors, “We put your interests second, after our firm’s, but it’s close.”

To learn more, see Mr. Bogle’s article and The Freedom To be Fleeced — How Donald Trump Made Financial Hustles Great Again

It’s easy to get lost in the details and let our minds glaze over, but what you should know is very simple:

  • An advisor that is a fiduciary has a legal obligation to put your best interests first, always.
  • Most people think that all or most advisors are fiduciaries (WRONG!).
  • Most purveyors of financial products and services are NOT fiduciaries.  They comply with a much lower “suitability standard.”
  • To assure you and your family are getting the most trustworthy care, always ask your advisor or financial salesperson the following:
    “Are you a fiduciary?  Are you always acting in a fiduciary capacity when working with me?”

When we formed our advisory practice many years ago we purposefully chose to be a fiduciary because it’s the right thing to do. Incredibly that ethos is counter-cultural in financial services. It’s bemusing to watch the delicate public-relations dance and contortions that many big institutions are making around or in avoidance of doing the right thing.


Ponzi Schemes? Look No Further Than Your Backyard!

  • January 5, 2017/
  • Posted By : admin/
  • 0 comments /
  • Under : Scams & Schemes

A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation. The scheme is named after Charles Ponzi, who became notorious for using the technique in 1920 (see photo).

People often don’t realize Ponzi schemes happen everywhere and all the time. Take for instance Bruce Kramer and his company Barki, LLC based in Mint Hill, North Carolina. This small town is just outside of Charlotte, NC and not far from the headquarters of our firm, NorthStar Capital Advisors. The Charlotte Observer broke the story on May 29, 2009:

In January, with the economy tanking and Bernard Madoff’s $65 billion scam unraveling, Bruce Kramer met a nervous investor for lunch at Hawthorne’s pizzeria in Mint Hill.

The investor, a Charlotte consultant who had invested several hundred thousand dollars with Kramer’s foreign currency exchange firm in Cabarrus County, wondered if the money was safe. Kramer reassured him it was, recalled the investor, who asked not to be identified to protect his family.

Kramer then thanked him for lunch and drove off in a new $90,000 Maserati.

A month later, Kramer shot and killed himself. Court documents allege he swindled $40 million from 80 clients and spent much of it on luxury cars, a racehorse, art and extravagant parties.

The U.S. District Court ultimately issued a default judgment against the late Bruce Kramer and his company ordering more than $40 million in fines and restitution.

How to spot a Ponzi Scheme

According to the SEC, many Ponzi schemes share common characteristics. Look for these warning signs:

  • High returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any “guaranteed” investment opportunity.
  • Overly consistent returns. Investments tend to go up and down over time. Be skeptical about an investment that regularly generates positive returns regardless of overall market conditions.
  • Unregistered investments. Ponzi schemes typically involve investments that are not registered with the SEC or with state regulators. Registration is important because it provides investors with access to information about the company’s management, products, services, and finances.
  • Unlicensed sellers. Federal and state securities laws require investment professionals and firms to be licensed or registered. Most Ponzi schemes involve unlicensed individuals or unregistered firms.
  • Secretive, complex strategies. Avoid investments if you don’t understand them or can’t get complete information about them.
  • Issues with paperwork. Account statement errors may be a sign that funds are not being invested as promised.
  • Difficulty receiving payments. Be suspicious if you don’t receive a payment or have difficulty cashing out. Ponzi scheme promoters sometimes try to prevent participants from cashing out by offering even higher returns for staying put.

Two Deadly Assumptions

  • July 14, 2016/
  • Posted By : admin/
  • 0 comments /
  • Under : Scams & Schemes

false-assumptionWe live in a world that is replete with financial scams. Here are two classic and deadly assumptions that can rapidly separate you from your money.

Deadly Assumption #1 — The guy belongs to my church / temple / country club / ethnic group, of course he’ll look out for me. 

Maybe he will, but is affinity a good enough reason to trust a financial advisor? Quarterback Mark Sanchez found out the hard way that this sort of thinking can easily lead one into the arms of a predator…

From ThinkAdvisor:

Former New York Jets quarterback Mark Sanchez and other professional athletes said they were cheated out of millions of dollars in a Ponzi-like scheme orchestrated by an investment advisor who appealed to their Christian faith.

Sanchez and Major League Baseball pitchers Jake Peavy and Roy Oswalt were defrauded out of about $30 million, according to a recently unsealed U.S. Securities and Exchange Commission lawsuit in Dallas federal court. The athletes all used the same broker, Ash Narayan, formerly of RGT Capital Management. The advisor gained their trust through religion and their interest in charitable works, the SEC said.

Deadly Assumption #2 — This advisor works for a big, prestigious firm and the product is very sophisticated, I deserve this special access. 

Structured products are a minefield for the wirehouse wealth management client because the firms’ “producers” are highly incentivized to sell them. Anything being pushed on the brokerage sales force by the home office is, by definition, perilous for the client. Because if it were so good, then no commission would be necessary – the product would be found by savvy investors and there would be no need for extra compensation. But structured products are unnecessary for most investors, although profitable for the firms that create them, hence the degree to which they’re sold to people.

As proof of this, you almost never hear of a fiduciary advisor recommending this stuff. It’s not even in the lexicon for a client-centric practice or an unconflicted advisor.

Source: TRB

 


Hedge Funds — Exceptional Complexity, Exceptional Underperformance

  • May 5, 2016/
  • Posted By : admin/
  • 0 comments /
  • Under : Fees, Performance, Scams & Schemes, Seeking Prudent Advice

hedge-vs-sp500

The chart above compares hedge fund returns to the S&P 500 Stock Index (blue) and the Barclays/Lehman Aggregate Bond Index (red) since 2011.  Various popular hedge fund strategies are portrayed by the four colorful lines that occupy the zero-to-negative return space!  In both an absolute and a relative sense, this is stunning underperformance.  Moreover, those hedge fund returns are before fees, so the investor return is even worse. Hedge funds traditionally charge a management fee that’s 2% of assets, plus 20% on any profits.

Despite this dismal five-year run, complex and expensive hedge funds are more popular than ever.  In the Internet era, interesting, persuasive, and money-losing commentary is just a click away!

At last Saturday’s annual meeting of Berkshire Hathaway, legendary investor Warren Buffett unloaded: “There’s been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities.”  Buffet added that hedge funds operate with “a compensation scheme that is unbelievable to me.”

Our brains are naturally attracted to “shiny objects” and our intuition suggests success requires a complex solution.  Nonetheless, empirical data such as the chart above demonstrate that wealth can be achieved through simple investments combined with simple discipline.


Misconduct! 10 Worst & 10 Best Behaving Advisory Firms

  • March 4, 2016/
  • Posted By : admin/
  • 0 comments /
  • Under : Best Practices, Scams & Schemes, Seeking Prudent Advice

New research shows the level of financial advisor misconduct is alarmingly high.  “It’s everywhere, not just small firms. It is pervasive,” said Dr. Amit Seru, a finance professor at the University of Chicago’s Booth School of Business and a co-author  of “The Market for Financial Adviser Misconduct” (Egan, Matvos, and Seru 2016).

These researchers data mined the FINRA database to aggregate and measure the misconduct data for all U.S. firms with at least 1,000 advisors.  The industry-wide average was 7% of all advisors have records of misconduct.

Oppenheimer ranked #1 in the “bad behavior” list. Nearly 20% of the advisors at Oppenheimer & Co. have been disciplined for misconduct that varies from placing clients in unsuitable investments to trading client accounts without permission.  This rate is ~25 times higher than the “best behaving” firm, Morgan Stanley.

The following excerpt from Table 6 of this landmark study lists the 10 firms with the highest rate of “bad behavior”:

highest-misconduct-adivsory-firmsOn the flip side, here is the list of the “best behaving” firms from the study:

lowest-misconduct-adivsory-firmsHere are some other key findings from this research:

  • Roughly 7% of advisors have misconduct records
  • Prior offenders are 5 times as likely to engage in new misconduct as the average financial adivsor
  • Approximately 50% of financial advisors lose their job after misconduct
  • 44% of those advisors are re-employed in finance within a year (!)
  • Misconduct is concentrated in firms with retail customers and in counties with low education, elderly populations, and high incomes
  • Some firms “specialize” in misconduct and cater to unsophisticated consumers

Run, don’t walk, to the FINRA search page to immediately review your advisor’s regulatory disclosures!

Sources:
The Market for Financial Adviser Misconduct (Egan, Matvos & Seru, 2016)
Bloomberg


Don’t Mix Your Politics and Your Investments

  • February 11, 2016/
  • Posted By : admin/
  • 0 comments /
  • Under : Behavior, Best Practices, Scams & Schemes

money-in-politicsSalespeople and product-sales organizations are very astute at selling during political stress.  They usually find a hook to sell their products…products that in most cases are not really in your best interest.

As Mike Piper points out in the Oblivious Investor, fear is a powerful sales tool.  Salespeople exploit a person’s political views to instill fear and ultimately sell undesirable financial products. Those products are not only intrinsically bad, they come with a huge cost.

The pitch goes something like this,

  1. [Political event X] just happened or is likely to happen.
  2. As a result, the economy will take a nosedive.
  3. You should buy my product to protect yourself.

This strategy is popular because it appeals to people of vastly different political views.  To lure in investors with left-leaning views, the pitch evokes a narrative that the markets are rigged by the financial elite.  To draw in the right end of the spectrum, the pitch emphasizes over taxation, over regulation, or excess government spending.

The technique is also popular because it can be used to sell just about anything…

  • The economy is going to hell, and that’s why you should buy gold.
  • The economy is going to hell, and that’s why you should buy my market-timing newsletter.
  • The economy is going to hell, and that’s why you should buy this annuity.
  • The economy is going to hell, and that’s why you should invest in my hedge fund.

If the fact that someone is trying to play you with a sales pitch designed to sell any product to two contradictory sets of beliefs isn’t enough to drive you away, consider this.  For the recommended product to be right for YOU the following conditions have to be met:

  1. The salesperson’s political prediction must be right
  2. The salesperson’s economic prediction must be right
  3. The salesperson’s product must indeed be a good solution to the proposed scenario

Good luck getting all that to be true!

Source: OI


Stock Market’s Down — SO WHAT?

  • January 14, 2016/
  • Posted By : admin/
  • 0 comments /
  • Under : Behavior, Scams & Schemes

SO-WHAT

This great little piece in the New York Times provides 6 points to consider when the stock market is down:

You Are Not the Stock Market
Chances are, your portfolio is a diverse mix of investments. While stocks may be falling, you probably also have some bonds and cash. Perhaps there are some real estate mutual funds, too. Then there’s your home equity if you own a home, not to mention the value of your future earnings. These things probably won’t all fall simultaneously.

You May Have Done Quite Well in Stocks
If you were in stocks from 2009 to 2015, or in the 1990s or consistently since the early 1980s, you are most likely a big winner. It’s generally a bad idea to look at your investment statements too often, but take a quick peek at your long-term performance. That outsize gain you see is one reason you were in stocks in the first place.

Your Goals Probably Have Not Changed
At some time in the past, when you were not scared, you made a decision to construct your portfolio a certain way. You knew that stocks involved risk and that the returns they have traditionally delivered, above and beyond what cash and bonds do, was the reward for your persistence.

Most Investors Have Plenty of Time to Recover
Too many 70-year-olds sold all of their stocks in 2009 and are healthy enough to live to 100. They would be going on a lot more vacations now and be worrying less about long-term care if they had held firm.

Some People Cannot Handle the Stress of Stock Investing
Maybe you are one of them. But try to give this more time, and consider the alternatives. There are few investments that can deliver the kinds of returns that stocks can without their own accompanying anxiety. An alternative is to save a lot more in safer investments like cash or certain bonds. Most people don’t have enough income to do that easily, so settling for lower returns will mean a combination of working longer and living modestly. For some people, that is a fine trade-off.

Dear New Investors: This Is Just What Markets Do
There is absolutely nothing abnormal about what is going on here. Most of us have to save somewhere, and history suggests that stocks are the most accessible route to getting the returns you will need to retire someday. It would take decades of systemic economic erosion to prove otherwise, and a few days of market declines do not suggest that anything like that is upon us.

Read more at the NYT and stay cool!

Source: NYT


The Ultimate Alternative Investment Strategy?

  • October 8, 2015/
  • Posted By : admin/
  • 0 comments /
  • Under : Scams & Schemes

unicornsThe Onion:

“Taking into account the average American’s present level of savings as well as prevailing market conditions, there simply is no sounder choice individuals can make than venturing into a hidden glen or cavern, luring an enchanted creature from its dwelling, and then apprehending it and using its offered wishes to build a solid financial plan for the future,” said researcher Alison Knox, who explained that whether the wishes were acquired by sparing the life of a talking golden fish, rubbing an ancient Arabian lamp, or intoning the name of a woodland troll backwards to make him one’s captive, Americans would be wise to set aside one of their wishes for an ample 529 college savings plan for their children and use another wish on a well-funded retirement account.

Nation’s Financial Advisors Recommend Capturing Magical Creature That Grants Wishes (The Onion)


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