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Only If The Price is Right

Posted by Larry Doyle on July 15, 2013 11:16 AM |

Regulators and the general media have a way of vilifying people and products in a manner that strikes me as overly simplistic.

All too often, I see situations in which those charged with protecting the public interest take a belated “ready, shoot, aim” approach and promote that as upholding their mandate.

Well, years after the crisis that took down our global economy, we remain mired in a sea of captured regulators and compliant media.

I maintain that to a large extent, investors — and consumers as well — remain largely on their own in terms of meaningful investor education and protection. 


This said, I will give more credit to those involved in investor protection at the state level.

I broach this topic today given a recent story written at Investment News, which hits upon a number of interesting points.    

The sweep investigation of 15 brokerage firms initiated last week by Massachusetts is a clear message to the advice industry that regulators are hot on the lookout for risky alternative investments being sold to investors, especially senior citizens.

Regulators are concerned that seniors, desperately looking for higher returns than they can earn from traditional bank products, may not fully understand these investments, some of which can tie up investors’ money for years.

Right here, we learn that liquidity is likely being mispriced.

“Alternatives are one of [state regulators’] biggest focuses right now because there’s been such an explosion in them,” said A. Heath Abshure, president of the North American Securities Administrators Association Inc. and Arkansas’ securities commissioner.

“Right now, what we have are senior citizens who rely on a certain level of yield to pay day-to-day living expenses,” he said. “They’re scared of the stock market, [but] they’re saying “Come hell or high water, I need 7%,’ and the only thing that purports to give them that are these alternative investments.”

Massachusetts subpoenaed the firms, demanding information on sales in the past year of nontraditional products such as oil and gas partnerships, private placements, structured products, hedge funds and tenant-in-common offerings to state residents 65 or older.

“These products are gaining some popularity, I think, because people are frustrated by low returns on their investments, and they’re reluctant to return to the equity markets,” said William Galvin, Massachusetts’ secretary of the commonwealth. “They’re especially attractive for older people.”

These points touch upon whether the products being sold are suitable and even more importantly are appropriate under a fiduciary standard for older people.

The targeted firms are Bank of America Merrill Lynch, Charles Schwab & Co. Inc.,Commonwealth Financial Network, Fidelity Brokerage Services LLC, ING Financial Partners Inc.,Investors Capital Corp., LPL Financial LLC, Meyers Associates LP, MML Investor Services LLC, Morgan Stanley, Signator Investors Inc., TD Ameritrade Inc., UBS Securities LLC, Wells Fargo Advisors and WFG Investments Inc.

The complexity of some nontraditional investments is a big issue for regulators, said Terry Lister, chief regulatory officer with Waddell & Reed Financial Inc., which recently went through two senior-related sweeps initiated by state regulators.

A new wrinkle for regulators is finding out how well advisers themselves understand the complicated products that they are selling, he said.

“The regulators take the position that advisers don’t understand these products, so how can they explain them to a senior?” Mr. Lister said.

Nothing new here.

Those selling the products operate under the pressure applied by management to generate revenue. Customer needs and protection run a distant second to this overarching pursuit. All too often, “yield to salesman” — that is, the commission or payout — is more important than the “yield and/or return to the investor.

There are many lousy deals that come down the pike everyday. There are also plenty of excellent deals.

This story and situation remind me of what I often heard while working on Wall Street, that is, the products and deals are not necessarily bad in and of themselves, it is just the prices at which they are being sold. Those prices do not properly reflect the levels of risk and uncertainty.

Navigate accordingly.

Larry Doyle

For those reading this via a syndicated outlet or receiving it via e-mail or another delivery, please visit my blog and comment on this piece of ‘sense on cents.

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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.


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