How Much Of YOUR Money Is Going To Those Fat Cat Wall Street Bonuses

Hey, good morning, this is Brian Fricke, are you there BT?
(BT)
Yep, I’m here. . I’m been priming the pump.

(BF)
Sorry, everybody, I’m running a couple of minutes late. Actually, I’m calling from my cell phone in Melbourne. We’re over, ah, seeing some of our Melbourne clients today. But let’s just get right into the subject matter today. How do you know and how can you prevent your money from going to some of those fat-cat Wall Street bonuses that are making the news this morning. On the morning news shows we’re hearing about all those big brokerage firms and investment banking firms being criticized by the government for their year-end bonuses. Some of these bonuses are gonna’ be in the millions of dollars, and I’ve heard even a secretary getting a bonus of over $200,000. So how do you know if it’s happening to you and what can you do, if anything, to prevent it? Well, now-a-days, it’s getting tougher and tougher to know who you can trust. And when it comes to the scandals, the Ponzi schemes like the Bernie Madoff scandal, where even smart sophisticated people found themselves being victimized and taken advantage of; those scams are kinda’ easy to detect and protect yourself from and I’ll explain that in a minute. But today, we think we know, there are millions of people that are being taken to the cleaners so to speak and they don’t even know about it. And we’re gonna’ talk about that as well. Alright, and really what it boils down to, a lot of people have unknowingly hired sales people to give them investment advice. Which is really kinda’ like hiring a used car salesman to give you advice on which car to buy and how much to pay. Just doesn’t make sense. I mean in both cases the result usually is less than ideal for your money, for your financial health. So, I mentioned a minute ago it’s not too hard to avoid the outright scams. People who got taken by Bernie Madoff and others like him, the reason it happened is , ahh, Bernie and his company had control of customers’ money. They acted as their own brokerage firm. Well that doesn’t happen when you use a firm, you know, well, like ours, I don’t mean to sound like a commercial, ahh, but ah, a true independent advisor never has control over of their customers money. The money is on deposit at third party independent clearing firms, brokerage firms, custodian firms. Those are all fancy names for companies like Schwab, Fidelity, TD Ameritrade, Scott Trade, and so forth. And customers get statements directly from those companies so there’s a check and balance in place that tells you where your money is and what’s going on. And those statements come to you either by paper or electronically on a monthly basis.

So, now the trust issue gets a little bit harder when you’re deciding who’s advice to follow. ‘Cause there’s probably, I’m gonna’ guess at least a half a million insurance and annuity sales people who call themselves financial advisors, or financial planners, but once they’ve collected a lot of your personal information, it’s amazing how their recommendations always seems to be similar. Buy a lot of life insurance or annuities from their company. So, if the person is skilled, if the person sitting across from you is skilled at overcoming objections or what’s seen to you as valid questions, and if the recommendations tend to involve products, rather than advice, and you’re never quite sure how this person is getting paid for the time they spend with you, then a word of caution; “ you want to be careful about giving your trust to that type of person.” Unfortunately, most sales people like this are kind of easy to spot. Here’s the difficult part. The people that work for the Wall Street brokerage firms, and these would be all the companies that have made the news, the Merrill Lynch’s, the Morgan Stanley’s, UBS, Goldman Sachs, all those types of firms, can be far more difficult to evaluate. Now, I’m not gonna’, I’m not here to suggest that people working for these firms are unethical and ahh, dishonest. It’s the business model that these firms have. So this isn’t condemning the individuals that work for those firms. It is, however, my opinion anyway of how these firms operate and do business. So all these brokers that work for these firms… you know today, they don’t call themselves a securities sales person or a broker. They call themselves a vice-president of investments or a financial advisor. And by the way, don’t be impressed by titles, you know you think you’ve got somebody that knows what they are doing because they’ve got some kind of a title of vice-president of investments at XYZ brokerage firm. Well, most firms, I would say all firms, the way you get vice president is not by demonstrating above average knowledge competency, it is because you met sales quotas from the company.

So, and now, a lot of these firms say that they charge fees for their service. The problem is the fees are paid not by you to the broker, but they’re collected by brokerage firms and then paid back to the broker as an employee of the firm. So, the real difference between and independent advisor who works for you or a broker who works for the brokerage firm, you know, is there really a difference? Well, yes there is. And the big difference is individuals that work for the big brokerage firms, at the end of the day they’re motivated to recommend products which will be highly profitable to their employer because that’s who’s signing their paycheck. Compared to independent advisors, where clients pay a fee to the advisor and that’s who employs the advisor.

So, how do you find out about these expenses? Well, a while back we analyzed a investment account of somebody who had been working with a broker at one of these big national brokerage firms and we compared costs. And the costs aren’t itemized in a simple-to-read billing summary which there ought be a law against that, but that’s a whole different topic. So when we analyzed all the internal fees and expenses that the brokerage account was being assessed, we found that the customer of this firm was over paying fees and expenses to the tune of almost $7,000 a year. The actual number was $6,648 a year in excess fees and expenses hidden, legally, from their view. And how can this be? Well the brokerage firm isn’t breaking any laws because they, technically, are disclosing the fees and expenses, but they’re disclosed in a manner that makes it darn near impossible for the average person to find them or even decipher them. We’ve all seen the credit card notice, the credit care company disclaimer in that big ole pamphlet that is 15 or 20 pages of super-fine print, well the same analogy hold true with brokerage firms. All their fees and expenses are disclosed technically but it’s in fine print taking up page after page after page of text. So it’s very difficult.

So, anyway, we went through this brokerage account. Found out what they were paying compared to just lower cost options. We assumed the investment mix stayed the same, we assumed investment performance was the same, all we were looking at were fees and expenses. And in this particular situation, they could have saved over $6,648 per year in investment fees and expenses. And these folks, said, “Yeah, they spend less than that on a nice vacation to Europe.” So, basically, they were giving up a trip to Europe every year just to put more money in the pocket of the brokerage firm. So here’s an example of where the money is coming from to pay these fat-cat Wall Street bonuses. So I got curious and applied what we think is a typical Wall Street brokerage firm expense component to how we do business and we estimate that we’re saving our clients collectively almost $2 million a year in fees and expenses compared to if they had been using a brand name Wall Street brokerage firm.

So the bottom line is when it comes to fees and expenses, you have to dig deep you have to look at the small print or get somebody to do it for you to truly know and understand and what your total fees and expenses are with your investment accounts. That’s something that a firm like ours is more than happy to do. I suspect that your typical brokerage firm is not gonna’ be as eager and anxious to disclose all the hidden fees and expenses. So if you know somebody that’s with a big brokerage firm, my advice would be to get them to listen to something like this. And get them to, encourage them, to have their investment accounts analyzed for fees and expenses so they truly know and understand what they’re paying for. And don’t just take the brokerage company’s word for it. If you’re gonna’ do that, then get it in writing. Have the brokerage company sign off on it. Not just the broker but the brokerage corporate official sign off on the statement summary on what all the internal fees and expenses are on your brokerage account.

So that covers what I had for my thoughts today on the Wall Street bonus situation. And see if more people would just be proactive in policing how their money was used and spent. Then, my opinion, we don’t need the government getting involved and commenting on whether they’re gonna’ add some kind of sur-tax or surplus tax for these companies paying out these big bonuses because if the money’s not there, the bonuses can’t be paid. So, if the average investor was made aware of or knew what the true fees and expenses were, I’m here to suggest that maybe the money doesn’t exist to pay out these bonuses and now we don’t need the government meddling in private business private industry. Let the free market system do the job that it’s intended to do. And usually, better than the government getting in, sticking their noses in places where it just doesn’t belong.

OK, so I’m gonna’ have BT come on in just a second. We’ve got time for questions. We’ll be happy to answer questions on this topic or any other financial topic. I’ll caution you if you will, try to keep your question generic so that the question would benefit everybody listening in. If you’ve got a question specific to your individual situation, hold that and call us after the call or send us an email and we’ll be happy to address any individual questions or concerns that you may have. And then the other is a favor. We’ve been getting some positive feedback on these calls. We intend on keeping them going every week. If you have a particular question or topic that you would like to see us cover, go ahead and send us an email or give us a call with your question or your ideas for topics on future calls. We really appreciate your input and feedback on that.

Alright, so thanks everybody for being patient. BT, why don’t we go ahead and let everybody know how they can get their questions answered?

(BT)
Sure thing, in just about a minute I will un-mute all the phone lines and just so that you know out there, if you press *6 on your phone, if there’s a lot of noise behind you, and you can’t, you’re just not in a real quiet place, and you feel like you might interrupt a call, just hit *6 on your phone. It will mute your line and we won’t hear the noise in your background on the call so that folks can have their questions answered. So we’re gonna’ go ahead and un-mute now and let us know if you have a question.

… Anybody…
(Bob Chandler)
Hello, this is Bob Chandler.

(BT)
Hi, Bob, good morning..

(Bob Chandler)
Good and how are you doing? Say I have a question in regard to something you said in the newsletter about the selling off and taking profits when it seems to be advantageous. How does that affect an individual’s portfolio?

(Brian Fricke0
Yeah, I’m not sure I understand the questions totally. How does taking… Ask the question again.

(Bob Chandler)
Selling off some of the assets that you have in your overall portfolios was advantageous, you said. I was just curious how does that affect and individual’s portfolio when you sell off assets. Are they group assets, that are in each portfolio that you manage, or how does that work?

(Brian Fricke)
Oh, Ok so uhmmm, I think this is just referencing a general comment in the newsletter. You know we’ve taken profits in assets. We’ve gotten out of positions for profits. And usually when we do that, that affects everyone because if everyone has an investment in a particular holding, then we’re gonna’ take either the profit in that particular holding, or if it’s time to get out of that holding, we’re gonna’ get out of the holding and that’s gonna’ happen in everyone’s account. For example, last year we had, and still do, we had money in a Latin American fund. Latin America did really well. We’ve got price points and values where we know it’s time to take profits, kinda’ like pruning a bush. Sometimes in order to get the bust to grow even stronger and bigger. You prune back or trim back some of the limbs. So that’s often times what we end up doing with the positions that we hold. We like them, but now the position has just gotten bigger than what we’re comfortable with from an overall risk management perspective. So we’ll take some of the profits off the table and look for other areas to reinvest in.

Next question?
… Nobody has any other questions? Wow!.

(Bob Chandler)
I’ll only ask you one more, this is Bob Chandler again.

(Brian Fricke)
Sure.

(Bob Chandler)
I think we’ve talked about before about paying off the mortgage?

(Brian Fricke)
Yes.

(Bob Chandler)
Are you still sitting behind that philosophy that that’s the best idea?

(Brian Fricke)
Yeah, in general terms, we’re big proponents of owning your home free and clear. At retirement, if not before retirement but certainly anybody that’s retired if at all feasible, we’d like them to own their home free and clear. We can always find people to take a different point of view an usually it’s, “Well, you know, mortgage money today’s cheap. We can get mortgage money at 5, 5 ½ percent and I can keep my money invested and you know last year the market was up 20 or 30 percent and you know, that’s ah, the difference is mine to keep. Once and a while somebody will complain, “you know, well, my taxes are gonna’ go up and, yeah, it’s your itemizing on mortgage interest, you may see a slight increase in your taxes however your cash flow is also improving because you don’t have mortgage payments coming out of your pocket every month”. So usually we find, well usually find, always I find on a net-after-tax cash flow basis, you’re better off than not having a mortgage, you know the home is a tax deduction just doesn’t hold water. Uhm, where does it make sense to give the government a dollar, pardon me, where does it make sense to give a mortgage company a dollar of interest so you can save $.25 on your income tax? So that argument to me just doesn’t hold.

The investment argument, that has merit, but not on a apple to apple comparison. If you’re gonna’ keep a mortgage and have money invested in the market, well the mortgage is guaranteed, you’ve guaranteed to pay the interest back to the bank. The investment in the market is, as we all know, is not guaranteed. So sometimes you come out ahead and sometimes you come, you don’t come out ahead. When it comes to a worry-free retirement, kind of a lifestyle choice as well, we find that, especially in 2008 when the market was not cooperating at all, (and I’m being generous there) I can look back, and we all know, of our clients, we put our clients in two groups, people with mortgages and people without mortgages, I don’t need to tell you who was sleeping better at night. Not that they weren’t worried, but people with no mortgages tend to sleep better at night especially when the economy, the markets, aren’t cooperating and performing as well as we would like.

All right, I think that we may have time for one more question. If anybody has a question, we’d be happy to answer it, so otherwise we’re gonna’ let everybody get on with their day.

(Pat)
This is Pat. Do you hear me?

(Brian Fricke)
Yeah, go right ahead.

(Pat)
Hi. Uhm, my husband, I have a couple of rental properties and even though they’re paid off by the time I pay the taxes and you know everything else, I really make good little money and he’s kinda’ encourage me to just get rid of them and put the money somewhere else. By the time, if we wait until the market to improve, then you know capital gains or whatever may have gone up and it would be a wash.

(Brian Fricke)
Uh, yeah, that could be. I mean the rental properties, are these single family rental properties?

(Pat)
Condos.

(Brian Fricke)
Yeah. My experience, and once upon a time I used to have, I don’t know, 25-30 rental properties. The…, and when I look back, it’s just with single family, whether it’s a house, a condo, a town home, it’s very hard to make the numbers work as an investment. For instance, we can go today and buy a, put our money in a REIT, a Real Estate Investment Trust. We can get a dividend yield, today of 7-9 percent easily. And we don’t have any management headaches or problems, property management problems to deal with

(Pat)
Right.

(Brian Fricke)
And we can sell our, if it’s a publicly traded REIT, we can sell our shares whenever we want. And you don’t have that with rental property, individual rental properties. The a, so, from a tax and a cash flow point of view, it’s very tough for the rental properties to justify themselves. One area that may be has merit is capital appreciation, you know, is the property going to increase in value? And the question I always ask is, “What is the likelihood that your property doubling in value in the next 7 years?”

(Pat)
Hmmmm. Ok,

(Brian Fricke)
And the reason I pick 7 years is if you’re familiar with the rule of 72, if you know the length of time your money’s gonna’ be invested you divide that into 72 and that’s the rate of return. So, 7 years into 72 is 10. So that works out to a 10 percent rate of return. If your money is invested where if you hold the property for 10 years, and it takes 10 years for your property to double in value, then 10 into 72, works out to 7 percent return. So, if, just if your knee-jerk reaction is, “Gee I’m not sure”, or “No way, that’s never gonna’ happen,” in terms of the value of the property doubling in a 7-10 year period, then I think it’s time to get out now while you can and look for better investing opportunities.

(Pat)
Oh ,OK. Well, maybe I’ll look at that.

(Brian Fricke)
Alrighthy.

(BT)
I think we’ve about run out of time for today, Brian.

(Brian Fricke)
Oh, OK. Well thanks everybody for joining on this week’s Coffee Club call. Hope you find the topics useful and informative. Tell your friends we’re glad to do these. They’re fun for us too. And as I’ve mentioned before, if you’ve got a particular question or a topic that you’d like to see us cover on a future call, please just givethe office a call or email the office and we’ll be happy to discuss your question or your topic anonymously of course in upcoming calls. So thanks everybody. Have a wonderful day, and we’ll talk to you next week. By now….

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