Finances

Finances

   Imagine yourself a star tennis player, as in making the quarterfinals at Wimbledon.  Now picture meeting someone with a brain tumor, someone who doctors told he had only six months left to live.  Two wildly separate people, both of whom went on to become quite successful in their fields, the world of finance; one worked for decades in the height of Wall Street (Goldman Sachs, Lehman and Credit Suisse) and the other was (and still is) recognized by Barron's as one of the top 100 financial advisors in the U.S.  And both were disgusted by what they saw happening.

   First off (again), this is not my field and as with all matters financial, one should always take one's finances seriously since this is your money and your retirement and your life savings (and of course, this is a blog so while I try to be accurate, be aware that when it comes to money, you should view this as only opening a door for further investigation on your part).  Okay, that part being out of the way, what these two saw happening to your money disgusted them.  Some of it was outright cheating, yes, but much of what they saw was simply people and companies taking advantage of other people's money...your money.

   Much of it was a simple lack of understanding or comprehension on the part of the "investors," which of course is...you.  Companies that they worked for, that you work for, told them to start putting money away into an IRA or a 401(k), to basically just pick a field and start building your retirement.  What happened from that point, well, that was up to you (and for the most part, it was wrong).  So, amidst all the confusion, the advice was to then get a financial advisor or go with a mutual fund or a hedge fund or penny stocks ot whatever (and for the most part, this was also wrong).  At the end of the day, the average investor basically shrugged his or her shoulders and just left the money alone, trusting the markets to do whatever they did (which, yes, was also for the most part wrong)...or, they decided to actively play the market, just like the big boys on Wall Street (and, since even the oldest computer transactions can make over 1,000 trades per second, this was --you guessed it-- also wrong). 

   Now maybe you fit into one of those groups and you have done extremely well, and if that's the case, both congratulations and you can stop reading here.  But for Daniel C. Goldie and Gordon S. Murray, they felt both surprised and relieved to find one another, for now they could tell the public a simple explanation of how it all worked, everything from investing in the markets to hiring a professional...and most importantly, the fees.  What caught my eye about all this fuss was an article in Fortune about one of the authors, Dan Goldie:  Dan Goldie’s professional tennis career lasted only 5 1/2 years.  In that time he won four titles (two in singles and two in doubles), peaked at 27th on the singles ranking, and earned a total of $683,000—or less than one one-thousandth of the money he manages today through his Palo Alto financial services firm...Three months after retiring (from tennis) with a 122–117 record, he launched his financial advisory firm. He began with no clients and a minimum buy-in of $50,000. Today his firm manages $700 million in assets for about 250 clients—and the buy-in is $1 million.  

   But the pair went on to write a simple book (and I mean a simple 70-page "guide") titled, The Investment Answer.  Gordon Murray did pass away due to his tumor (two months before the book reached shelves and went on to become a best seller):  The book’s central theme is the folly of trying to beat the market.  But after Murray’s death, that theme became secondary to the story of a Wall Street insider who found religion about keeping investments simple and honest—thanks to a former tennis ace.  Goldie says the book’s ideal reader “isn’t interested in numbers or money, but really needs to know this information.”  

   As one example, let's take hedge funds.  You keep reading about their record profits, at least for those who run them (remember this headline from The Washington Post a few weeks ago: The top 25 hedge fund managers earn more than all kindergarten teachers in U.S. combined).  Turns out, according to the book, 60% of hedge funds don't last even three years, and plus, they don't have to report their returns, especially if they lose money or fold entirely since they are removed from the statistical database.  "The chance that a hedge fund that performed above average in one year will repeat in the following year in about 50%."  And those fees?  Well, a hedge fund will take on average 1.5% of your assets (win or lose) and if you do make a profit, 20% of that profit.  So let's say you put $100,000 into a hedge fund (and that would be a very low figure for most hedge fund investments are in the tens or hundreds of millions; one of the largest investors, Calpers --the California Public Employee Retirement System-- pulled all of its money out of hedge funds last September due to continued losses) and you made $20,000.  You would then emerge with a $14,500 profit after fees...not bad you think;  but suppose you were a big firm (like Calpers) and you lost money...your fees would still have to be paid to the managers.  In the case of Calpers, their fee last year was $135 million. 

   This is much the same for financial advisors who consider your assets to be all your assets, from your savings and checking to your investments...and take a percentage of those assets as a fee, win or lose.  Says the author, Goldie: Retail brokers are commissioned agents compensated by their firm or a third party for selling you investment products.  Traditionally known as stock brokers, today they call themselves Financial Advisors and Financial Consultants....Retail brokers typically offer two different types of accounts--a "classic" brokerage account and an investment advisory account.  With a brokerage account your broker will act as an agent for his firm.  In this capacity, your broker's first duty is to his firm, not to you, even though you are his customer.  With this type of account, your broker is not held to the legal standards of the Investment Advisers Act of 1940, which requires that anyone who offers both investment advice and charges an asset-based or flat fee to register as an investment advisor.  According to the law, advisors must disclose any conflicts of interest and put their clients' interests first.  You do not get this protection with a brokerage account.

   But here's some of Goldie's important advice:  Don't believe those glitzy ads that you see in the Wall Street Journal or on TV about how they work just for you.  To complicate things even more, not all brokers work for Wall Street firms, although they still face the same conflicts and incentives.  Some brokers may call themselves independent because technically they are not employees of a Wall Street firm.  Instead, they are independent contractors of a brokerage house that might even be based in your home town.  There are some 5,000 such firms around the country with thousands of branch offices.  To clear things up, simply ask in they are a registered representative-- this is the technical term used by all brokers.  If so, they are not truly independent (emphasis in bold is mine).

   The book came out in 2009 and many things have changed (although much has remained the same).  It is still a complicated and confusing mess, as evidenced by all the legal wrangling trying to reign in Wall Street (which so far, has been unsuccessful).  But what both authors have tried to do is present a simple version of what you're up against.  Certainly, you can make money in the market and build and save for your retirement (and they do cover commodities such as precious metals and petroleum);  but one should bear in mind that predicting the market is just that, a prediction.  And as their charts show, many fund managers fail to accurately do so...and it's your money their gambling.  This book is merely a guide to help you understand the game you're entering (and indeed, at times it does seem like a well-paying game for those managing your money).  As the authors say, "do not focus on what you cannot control...this is not a free lunch...going forward, when you see the investment predictions on the cover of the latest financial periodical, watch the talking heads make their forecasts on TV, and listen to your friends and neighbors boast about their latest great investment scheme, you will understand that they are speculating instead of investing.  Now you know a better way."

   Those lucky enough to have money to invest or put away for retirement, and those struggling to do so, keep in mind that this is indeed your money and you're handing it over to someone or some company that may or may not put it to good use (despite good business intentions).  At the very least, go in prepared and understanding of the risks and fees.  This book is a good place to begin...