can affirm, which he will not believe.
— Dr. John Gordon, 'The Doctrines of Gall and Spurzheim', 1815
I recently attended a brilliantly marketed event held at a certain hotel. The costly mailer advertised that several Genuine MILLIONAIRE Experts including a certain celebrity would share the “secrets and strategies” to creating wealth. One of their testimonials touted:
“I’ve almost tripled my portfolio in the last 11 months from just under $1M to over $2.7M. Thanks!”
While archetypal of claims made on late night infomercials, financial professionals are well aware that the Investment Advisers Act of 1940 prohibits advisers from making misleading statements or omitting material facts. In particular, "false advertising or mis- representation includes the use of testimonials or endorsements which is prohibited." This bears repeating... THE USE OF TESTIMONIALS OR ENDORSEMENTS IS PROHIBITIED.
My curiosity piqued, and so I decided to investigate this "once in a lifetime" celebrity symposium. Who were these guys, what were they promoting, and how were they able to skate by industry regulations?
The definition of a charlatan is a person practicing quackery or some similar confidence trick in order to obtain money or advantage by false pretenses. Unlike a conman, he does not try to create a personal relationship with his marks, or set up an elaborate hoax using roleplay. Rather, charlatans resort to quackery, pseudoscience, or some knowingly employed bogus means of impressing people in order to swindle victims by selling them worthless nostrums, goods or services that will not deliver on the promises made for them. The word calls forth the image of an old-time medicine show operator, who has long left town by the time the people who bought his snake oil tonic realize that it does not perform as advertised.
Could it be that these guys are the modern day equivalent of financial snake oil operators?
Before conveying what transpired, let me emphasize that the majority of the professionals I know, from insurance agents and financial advisors to professionals in related fields of accounting and estate planning, behave honorably and in the best interests of their clients. Additionally, there are ample regulations in place as well as industry watchdogs and administrative bodies imposing strict guidelines pertaining to its members’ conduct and ethics.
All the same... “Caveat emptor”
Unfortunately this age-old piece of wisdom raises the pragmatic question of how such advice should be put into practice. The answer is twofold: first, educate yourself; second, follow the money.
Most (but not all) financial products are commission-based, that is why the economic foundation and core culture of many brand name commercial banks and brokerage houses rests in their sales force. Yet all because financial products are packaged and sold, it does not automatically make such investments “bad” for the consumer. The question is whether the traditional product-driven, commission-based sales culture that permeates the financial services industry best serves the interests of investors?
As investors have become more educated and less inclined to be “sold” financial products, there has been a transformation in the financial services industry. Have you noticed that there are no more “stockbrokers” or “insurance agents”? Financial product salespeople have evolved into “Vice Presidents,” “Private Bankers,” “Estate Planning Specialists,” Financial Planners,” and all manner of intriguing and captivating titles denoting trustworthiness, wisdom, experience and financial acumen. These titles—they may be well earned and deserved—are meant to boost professional credibility, and to provide consumers with confidence that they are being advised rather than sold, which may or may not be reality.
Fact is that the majority of stock and bond market “advisors” are commission-based “registered representatives,” which is their official regulatory title and indicates that they are agents of their employers (broker-dealers), and are registered and licensed (Series 6 or 7) to receive commissions for the sale of securities (stocks, bonds, etc.). Ludicrously, the Series tests are not at all difficult to pass, and bragging rights often go to those with the lowest passing scores because they are “most likely to succeed”—I am not kidding.
In effect, registered representatives are distribution agents for broker-dealers—it is their job to sell products to the investing public, for which in turn they are paid a percentage of the commission. The percentage a registered representative receives is dependent upon the trailing level of “production” (ie, sales) that he or she generates for the firm. That’s why broker-dealers refer to their agents as “producers” and every representative’s goal is to become a “top producer”. As in any sales culture, compensation is the ultimate benchmark used to measure effectiveness—not the performance of clients’ accounts. A top producer ranking means that he or she is among the biggest generators of sales commissions for the firm and is among the highest compensated agents.
The untarnished truth is that the majority of well-known brokerage firms (also known as wirehouses) push new advisors to sell, sell, sell and only pay lip service to the building of a financial practice with the clients’ best interest in mind.
But I digress… What were these "celebrity" get-rich-quick experts selling? The answer is half truths wrapped in a ‘one size fits all’ motivational pitch designed to push all the right “greed” buttons and get you to buy their snake oil. And the crowd was gobbling it up!
Looking sharp in an expensive business suit and carrying the swagger of a just retired football quarterback, our first presenter was selling a website that provided systematic buy/sell entry/exit points for “only $8,000”. Showing charts with well known and commonly used indicators such as MACD, RSI and stochastics he illustrated on two huge screens presentations of back-fitted trades all perfectly aligned to make money at every twist and turn of the stock. He went on to claim that “these technical tools can help you [us] make a 95% annual return, which over twenty years can turn a $5,000 investment into over $3 billion dollars!! Now, wouldn’t you [us] all like to make a billion dollars?” He extolled to the whoops and applause of a roused audience. So as to nail it home, this charismatic and authoritative speaker was willing to offer us the whole package at a reduced price of just $3,000 including a two day seminar required to make attendees overnight experts on his website system.
I was amazed to watch a large group of the attendees flock to the back tables and happily plunk down $3K knowing that armed with this man’s “secrets” (and their remaining $5k from the $8k “actual cost”) they too will turn into multi-millionaires. Unfortunately they didn’t realize that this so-called “knowledge” about systematic trading is well documented on the business bookshelf at their local Borders Bookstore. And as far as all those charts and indicators on his website, these services can be easily obtained without charge on multiple websites not to mention that most brokerage firms now provide excellent trading portals with an abundance of similar tools.
Of personal interest was the regulatory loophole that allowed this mountebank to use unsubstantiated testimonials—technically he was only selling “investment education” and access to a website. And because he positioned himself as an “educator” and not an advisor, he did not have to be registered. At the same time, while websites providing specific buy/sell investment advice given should be a regulatory cause of concern, my suspicion is that his firm side-step this issue by having their subscribers input their own buy/sell rules based on the two-day seminar each must attend. What was most devious about the slideshow was that the so-called systematic entry/exit points shown were back-fitted and selectively presented. There is not enough room here to go into the development of robust trading systems, but I’ll relay to you what the National Futures Association (NFA) has to say about this:
HYPOTHECTICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOVLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNT FOR IN THE PREPARATION OF HYPOTEHTICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
Next was a Juris Doctor appropriately bespectacled to substantiate his intellectual lawyerly demeanor. Just as polished and motivational as the prior speaker, his pitch began with C-Corps. According to him every single one of us was losing out on all sorts of tax deductions and needed to immediately establish our own C-Corp using his easy-to-use book of forms (for only another few thousand dollars, I might add). What about having legitimate business income? “Well aren’t you all going to make big bucks with that trading system you were just shown,” he taunted, “that’s legitimate business income!” Then without skipping a beat he was off and promoting Charitable Remainder Trusts as if this structure was appropriately suitable for each and every attendee.
Now there is no doubt that such structures in certain situations can be beneficial. But the operative words are “appropriate” and “suitable.” For some J.D. who isn’t even a practicing attorney in the State of California to be flatly suggesting that we ALL could benefit from his one-stop-shopping advice made my stomach crawl.
But wait, there’s more! The third expert was about to speak about the “safest, most lucrative, investment strategy in America”—tax liens. To learn everything I needed to know to set myself up only would cost me only another “measly” $3,000. I had enough... I could go on about tax liens as I was once responsible for winding down a portfolio of tax liens purchased from Kidder Peabody by the investment boutique I worked for, but I think my point is made.
So what is to be learned from all this?
Savvy investors know that good investment results requires the steady and persistent application of knowledge, hard work and prudence. Obtaining outsize returns can only be generated by outsized risk—sophisticated investors understand how to measure risk in relation to the returns their portfolio generates. They also ensure that their portfolio is well diversified across a variety of trading strategies as well as asset classes, and monitor the markets and make tactical adjustments as necessary. In order to do this properly institutional and sophisticated investors delegate portfolio management to money managers who have expertise in specific investment strategies.
I hear a lot of criticism about the financial services industry and us professionals in the business—some is deserved, but more often criticisms reflect a level of confusion about investments in general. Yes, it helps to be familiar with the structure of the financial services industry, the sales culture that it propagates, and how your advisor is being paid. But if your not comfortable with investing on your own, that should not prevent you from seeking help to create a personal financial plan and structure a well diversified investment portfolio.
So whether you invest on your own or work with an advisor(s), the key to successful investing is education, diversification and disciplined approach(es). When using a professional seek out advisors who take the time to communicate the costs, risks and benefits of their investment approach. Reputable advisors encourage the public and their clients to become ever more knowlegable about the investment process and risk-return concepts, as that translates into the ability to advise on sophisticated strategies.
Postscript: What about the celebrity? Who was he? Without naming names, it’s enough to say he was a participant in some reality TV show. Like I said, half-truths…
- Mack Frankfurter, Managing Director
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