One Man With Courage

ONCE AGAIN, EQUITY INDICES continued their journey up the wall of worry. By the numbers, for the week ended Friday, September 18, 2009, the Dow Jones Industrial Average closed at 9820, up 215 points, or 2.2%. The Standard & Poor’s 500 closed at 1068, up 26 points, or 2.5%, and the NASDAQ Composite closed at 2132, up 52 points, or 2.5%.

Worry over the relationship between stock prices and underlying business fundamentals continues. With so much variability in how numbers can be reported, it’s often difficult to come to meaningful conclusions. Adherence to a discipline, while continuing to study, back test, try, fail, and adjust, seems to be the best approach to doing well. This applies to arenas outside the financial markets as well.

Mark Hulbert, in a recent column, looked at bond funds versus stock funds during 2009. Mark said that bond newsletters are more bullish now than they have been since early 2001. Over the last six months, bond funds have had net inflows of $214 billion, and equity funds have had net inflows of $10.5 billion, according to TrimTabs Investment Research. This bond inflow is twice as much new money as went into bond funds over the previous four years combined.

This is interesting insight into investor behaviour, as the major equity indices are up about 50% from their March 2009 lows. Keep in mind though, that this 50% increase is roughly 20% of the market highs in October 2007.

Fed Chair Bernanke said his numbers say the recession has ended. It is true that employment is a lagging indicator. Retail sales were up 2.7% in August, the biggest monthly increase in three years. Auto incentives, gas prices, and school shopping are credited with helping to spur sales.

Since the U.S. has put tariffs on Chinese tires, China is preparing to levy tariffs on U.S. chickens. There must be some good one-liners in this story somewhere.

In economic news, the Producer Price Index was up 1.7% in August, and CPI was up 0.4%, both larger than expected. Business inventories were down 0.1% in July, the eleventh consecutive monthly decrease, which means someone will need to start making something soon. Industrial production was up 0.8% in August, the first increase since December 2007. New home construction was up 1.5% in August, which is a move in the right direction.

Boston Consulting Group recently predicted that worldwide wealth wouldn’t return to 2007 levels until 2013. They also found the number of millionaires down 18%. According to David Kelly, chief economist at JP Morgan, the stock market, on average, moves 0.81% daily. During the fourth quarter of 2008, average daily volatility was 3.7%.

Many investors over the last two years have been reassessing how and whether they work with financial advisors. What is unclear to many investors is the business relationship between themselves, the advisor, and the advisor’s employer.
Many financial advisors today work for large brokerage or insurance firms. As an agent for and representative of these firms, their first responsibility is to move the products of the firm for whom they work.

The determining criteria for whether consumers should buy a particular product from an agent or rep is called “suitability”. If, based on the information the rep collects from the consumer, the product is suitable, then the consumer can buy, and the rep can sell, the investment or insurance product. The relationship remains, for the most part, a customer/sales person relationship, and in every case of which I’m aware, these reps cannot serve as fiduciaries.

Consumers’ ability to receive from this rep or agent unbiased financial counsel is completely dependent on the rep. For many reps and agents, the lure of substantial commissions makes it easy to rationalize recommendations that serve them first and consumers second. The good news is that there are solid, independent reps in the marketplace that do serve their clients well.

A much smaller group of advisors serve as fiduciaries. These advisors, and their firms, are regulated by the SEC and individual states, though under a different Act of Congress than registered reps. Those firms and individuals who serve as fiduciaries have sworn to always place the client’s interest ahead of their own, and they accept no commissions on the sale of products. All revenue at these firms comes from clients.

Culturally and structurally, fee-only fiduciary firms look more like other professional service firms, such as law, accounting, and engineering, than they do product sales organizations. We have found that the only way to provide completely unbiased, objective, independent advice and counsel is to be a fee-only firm that serves our clients as fiduciaries.

Quote of the week:

“One man with courage makes a majority.”
President Andrew Jackson