Structured products are on the regulators' radar, as I mentioned in a previous post:
http://labradorinvestments.blogspot.com/2011/06/finra-boss-discusses-structured.html
Most individual investors (people like you, your family and your friends, as opposed to institutional investors such as banks, trust companies, hedge funds and investment advisors) do not understand these complex products. FINRA (the Financial Industry Regulatory Authority), a regulator that was formerly called the NASD (National Association of Securities Dealers), has prepared an excellent, readable and understandable summary of a product called Structured Notes With Principal Protection.
http://www.finra.org/Investors/ProtectYourself/InvestorAlerts/Bonds/P123713?utm_source=MM&utm_medium=email&utm_campaign=Investor_News_060911_FINAL
I urge anyone who might be approached by a broker touting these products to read this summary.
Thursday, June 9, 2011
Thursday, June 2, 2011
Big Banks on Moody's Radar for Possible Downgrade
In what appears to be a dyspeptic moment, Moody's, a nationally-recognized bond rating organization, has put several of the biggest U. S.-based banks on its radar for a possible downgrade of their credit ratings. The reason: Moody's is skeptical that the U. S. government will bail out these banks should they get into financial trouble again in the future.
Bank of America, Citigroup, Wells Fargo, J.P. Morgan Chase & Co., Bank of New York, Goldman Sachs Group, Morgan Stanley and State Street Corp. are all affected.
http://online.wsj.com/article/SB10001424052702304563104576361353111885360.html?mod=djemTAR_h
Moody's action may increase borrowing costs of these banks, which would have a ripple effect throughout the economy as the banks scale back their lending or increase interest rates and fees that they charge to customers. This action by Moody's may or may not have a meaningful impact on the U. S. and global economies going forward. But it surely does not help sustain any economic recovery that now is under way.
Bank of America, Citigroup, Wells Fargo, J.P. Morgan Chase & Co., Bank of New York, Goldman Sachs Group, Morgan Stanley and State Street Corp. are all affected.
http://online.wsj.com/article/SB10001424052702304563104576361353111885360.html?mod=djemTAR_h
Moody's action may increase borrowing costs of these banks, which would have a ripple effect throughout the economy as the banks scale back their lending or increase interest rates and fees that they charge to customers. This action by Moody's may or may not have a meaningful impact on the U. S. and global economies going forward. But it surely does not help sustain any economic recovery that now is under way.
Wednesday, June 1, 2011
CFA Credential is Very Popular in Asia
As many of my clients and friends know, I am a Chartered Financial Analyst. This designation was first awarded in 1963, and the purpose of the exam was to elevate the ethics of the investment advisory profession and to show that the CFA has demonstrated mastery over a wide range of subjects with a fair degree of depth. Subjects generally include Ethics, Quantitative Methods (i.e. statistics), Economics, Financial Statement Analysis (including an understanding of accounting at the Advanced Accounting level), Fixed Income Securities (i.e. bonds, or debt securities) -- analysis and valuation of these securities, Equities (i.e. common stocks) -- analysis and valuation of these securities, Portfolio Management (i.e. managing investments for individuals and institutions) including development if Investment Policy Statements (IPS) and purchasing investments to meet the requirements of the IPS, and Alternative Investments (Real Estate, Mutual Funds, Derivative Products, etc.)
This article discusses the fact that growth in the number of CFA candidates has surged in Asian markets but is rather flat in the US.
http://www.fins.com/Finance/Articles/SB130686424931820513/Asian-CFA-Registrations-Surge?Type=0
This article discusses the fact that growth in the number of CFA candidates has surged in Asian markets but is rather flat in the US.
http://www.fins.com/Finance/Articles/SB130686424931820513/Asian-CFA-Registrations-Surge?Type=0
FINRA Boss Discusses Structured Products
If you deal with a broker (or, less likely, an investment advisor) who is discussing whether or not a so-called "Structured Product" is suitable for your portfolio, the following article is for you. This article deals with the need for hightened scrutiny of brokers who suggest the purchase of structured products for client portfolios to assure that these products are suitable for clients.
What are structured products? These are complicated and artificial products (not securities) that do not directly relate to specific companies. To me, they are like the plastic cheese that is sold in some grocery dairy cases. They do not represent the "real" thing that you are trying to purchase and consume. They are also fraught with risk, and are very profitable to the brokerage firm that is hawking the structured product.
Many times, structured products are so-called "derivative" instruments, meaning that their price is "derived from" some other asset (such as commodities) or security. Structured products can use leverage, meaning that the investment returns are amplified by using debt to purchase additional exposure to the investment that is supposed to influence the price and investment returns of the structured product. For example, if you put $1 into an investment in a structured product that uses leverage, the manager of the structured product may borrow money from a bank to increase your exposure to whatever the structured product's performance is intended to shadow.
I believe in keeping things simple: invest in securities that you understand and that bear a direct relationship to the company or government that you are wanting to invest in. Common stocks are pretty simple: they represent an ownership interest in a publicly-traded company. Owners of common stocks are part owners of the business and share in the profits and dividend distributions of the company. Debt (or bonds) are investments in which the issuer (a government, agency or corporation) promises to pay to the investor periodic interest payments as well as the original principal value of the investment at maturity, if not before (in the case of callable bonds). There are some complicated bond contracts (or "indentures"), but generally speaking, if you buy a plain vanilla bond, you know what you are getting. Cash equivalents are securities that mature in year or less. They are commonly found in money market mutual funds and are also available for sale at brokerage houses.
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20110524/FREE/110529972
If a broker recommends a "product", especially a "structured product", I recommend running away as fast as your feet can carry you. They are typically inappropriate for an individual investor. The brokerage firm, and your broker, are likely to be paid a nice commission for selling the product to you. So think twice if your broker recommends "products" to you.
What are structured products? These are complicated and artificial products (not securities) that do not directly relate to specific companies. To me, they are like the plastic cheese that is sold in some grocery dairy cases. They do not represent the "real" thing that you are trying to purchase and consume. They are also fraught with risk, and are very profitable to the brokerage firm that is hawking the structured product.
Many times, structured products are so-called "derivative" instruments, meaning that their price is "derived from" some other asset (such as commodities) or security. Structured products can use leverage, meaning that the investment returns are amplified by using debt to purchase additional exposure to the investment that is supposed to influence the price and investment returns of the structured product. For example, if you put $1 into an investment in a structured product that uses leverage, the manager of the structured product may borrow money from a bank to increase your exposure to whatever the structured product's performance is intended to shadow.
I believe in keeping things simple: invest in securities that you understand and that bear a direct relationship to the company or government that you are wanting to invest in. Common stocks are pretty simple: they represent an ownership interest in a publicly-traded company. Owners of common stocks are part owners of the business and share in the profits and dividend distributions of the company. Debt (or bonds) are investments in which the issuer (a government, agency or corporation) promises to pay to the investor periodic interest payments as well as the original principal value of the investment at maturity, if not before (in the case of callable bonds). There are some complicated bond contracts (or "indentures"), but generally speaking, if you buy a plain vanilla bond, you know what you are getting. Cash equivalents are securities that mature in year or less. They are commonly found in money market mutual funds and are also available for sale at brokerage houses.
http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20110524/FREE/110529972
If a broker recommends a "product", especially a "structured product", I recommend running away as fast as your feet can carry you. They are typically inappropriate for an individual investor. The brokerage firm, and your broker, are likely to be paid a nice commission for selling the product to you. So think twice if your broker recommends "products" to you.
Tuesday, May 24, 2011
Gold Is Not An Investment
This article, published in the New York Times, calls gold a speculation, not an investment.
What is a Fiduciary? Why You Should Care.
As an investment advisor registered under the Investment Adviser act of 1934, I am required to put my clients' interests first. This is known as a fiduciary standard. Brokers are not held to the same standard, unless they happen to hold the CFA (Chartered Financial Analyst) designation. (The CFA Institute's Code of Conduct and Standards of Professional Conduct require CFA charterholders to act as a fiduciary by putting their clients' interests first.) The CFA Institute's Code and Standards may be found at the following link:
This short article reviews the confusion, even among investment advisors and brokers, about what it means to be a fiduciary.
Another good article on this subject may be found here:
What does "putting your client's interests first" mean?
- A fiduciary puts himself into the other person's shoes. He/she makes investment decisions as if he were the client, taking into account the client's investment objectives, including risk tolerance and need for income, among other factors.
- A fiduciary places trades in their clients' accounts before they place a trade for the same common stock or other investment in their own accounts.
- Similarly, a fiduciary will sell a common stock or other asset out of client accounts before he places the sell order in his own account.
- A fiduciary does not sell common stock or other investments out of their own account to clients, as brokers often do. Brokerage firms often earn significant undisclosed profits by trading as principal (buying or selling stocks or bonds for the brokerage firm's own account) with their customers.
- Investment advisors do not sell clients mutual funds or other so-called "proprietary products" -- their own brand of mutual funds or investment vehicles. Some brokers will sell their own brand of mutual fund or other investment vehicle that pays a higher commission rather than mutual funds run by a rival firm that pay lower commissions.
- Investment advisors who do not take commissions (and instead charge fees based on a percentage of assets, a flat rate or an hourly rate) do not have an incentive to buy and sell stock to produce commissions. In other words, they do not have an incentive to "churn" the client's account.
- Investment advisors are under a continuing duty to assure that the investments in client accounts, taken together as an entire portfolio, are appropriate for the client. As time passes, the client's investment objectives may change, and if that is the case, adjustments to investment holdings may be appropriate. Brokers are only held to a "suitability" standard, in which they are only responsible for assuring that the investment is appropriate for the client on the day that the investment was purchased.
Thursday, May 19, 2011
Top 10 Thriving Industries
This Wall Street Journal blog post in the Real Time Economics blog lists the top 10 thriving industries. Interestingly, they fall into two major categories: Technology (Information Technology and Biotechnology) and government supported/sponsored/influenced industries.
The top 10 are:
Voice Over Internet Protocol Providers (VoiP)
Wind Power
E-Commerce & Online Auctions
Environmental Consulting
Biotechnology
Video Games
Solar Power
Third-Party Administrators & Insurance Claims Adjusters
Correctional Facilities
Internet Publishing & Broadcasting
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