The Investment Scientist

Posts Tagged ‘wealth management

Morgan Stanley Smith Barney

Morgan Stanley Smith Barney

I went to a Morgan Stanley financial advisor associate recruitment meeting recently to spy on how they train their new financial advisors.

They have an extremely rigorous 36 month program. New associates are expected to pass series 7 and series 66 license testing in the first 12 months. These licenses enable them to charge both fees and (hidden) commissions. (Comparatively, my series 65 license prohibits me from charging commissions.)

As soon as they get the licenses, they are expected to go into “production.” The firm sets very tough production targets. If they fail the targets, they will be kicked out of the program.

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New Year's investment resolutions

New Year’s investment resolutions

After working as a financial advisor for six years and after reading tons of research, I have developed a good sense about how the average investor loses money. As the New Year approaches, I think it’s good to share my insight so that readers can determine if they are making these mistakes.

Conflict of interest

I cannot emphasize this enough: Wall Street firms don’t work for you. If you have a Merrill Lynch or Morgan Stanley advisor, expect to give away 2.5% of your money every year – about half of it will be in explicit fees, the other half will be in hidden fees. If you invest through insurance products, expect to give up 3.5 percent of your money.

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conscious and unconscious mind

What prompted me to write about financial peace of mind is actually something that happened to me recently that had nothing directly to do with the topic.

My iPhone failed to sync with my desktop calendar; as the result, I missed an important client meeting.

For a whole day and whole night, I had this nagging feeling that I missed something but couldn’t quite be sure what it was. Did I leave my keys in the gym? No.

Then, I woke up in the middle of the night and remembered the appointment that did not show up on my iPhone!  Apparently, some part of my mind was not resting during sleep.

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[Guest post by Tom Warburton] Last week a buddy walked into my office distressed over unemployment, the economic malaise, gold prices, the prospect of inflation, government debt, currency fluctuations, trade imbalance and future prospects for the stock market.  He basically covered the waterfront of issues we see on the front page of financial magazines and issues we hear talked about on CNBC.

When my buddy left my office (somewhat soothed – I believe – in the knowledge that his portfolio was positioned to achieve his financial goals without regard to the speculations of Jim Cramer), I found myself thinking about the many obstacles that humans have overcome and the unlikelihood that ‘conditions will last’.

In the words of John Allen Paulos, Professor of Mathematics at Temple University and versatile author with books on a wide range of philosophical topics:

“Uncertainty Is The Only Certainty There Is, And Knowing How To Live With Insecurity Is The Only Security”

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Inflation is the silent killer of wealth. It does not have the “bark” of a full-blown financial crisis, but it certainly has the “bite.” Just imagine if the inflation rate is 4% over the next 10 years; within a decade you would lose nearly 40% of your wealth if you didn’t do anything about it.

Inflation over the next decade is highly probably because of two simple macro realities:

  1. America – from the federal government to the states down to individual households – is heavily in debt. The easiest way to get out of debt is to print money. There is a tremendous political incentive to do so.
  2. China, which has been the low-price setter for the past two decades, has seen labor costs galloping at a 20% to 30% annual clip lately (thanks to the one-child policy). Before long, that will translate into higher prices at your local Walmart.

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Avoid conflicts of interest.” – David Swensen, Yale Endowment CIO.

Jose is the head of a ultra high-net-worth family. He has a number of accounts with Merrill Lynch (ML), the storied brokerage firm that paid their senior executives $4 billion in bonuses last year. Three of his accounts lost a great deal of money, not due to the market crash but to conflicts of interest.

Double dealing in Treasury

Jose has a Treasury account where his ML wealth manager[picture of double dealing, enable image to view] purchases Treasury bills, notes and bonds for him. Last year was a great year for Treasury securities – the market turmoil caused investors to flock to them, driving prices up more than 10%. Jose’s account, however, lost 3%. How could this happen? Conflicts of interest. ML is a primary dealer in the Treasury market. They buy Treasury securities and resell them to their customers at a markup. It looks like the markup is so high it takes away all the customer profit.

Churning stocks

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On the after-effect of government bailoutwarren buffet

This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.” Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation. Moreover, major industries have become dependent on Federal assistance, and they will be followed by cities and states bearing mind-boggling requests. Weaning these entities from the public teat will be a political challenge. They won’t leave willingly.

On government bailout

Whatever the downsides may be, strong and immediate action by government was essential last year if the financial system was to avoid a total breakdown. Had that occurred, the consequences for every area of our economy would have been cataclysmic. Like it or not, the inhabitants of Wall Street, Main Street and the various Side Streets of America were all in the same boat.

On his own mistake

… But there’s another less pleasant reality: During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt. I will tell you more about these later. Furthermore, I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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