Financial Professionsals. Do They Serve Any Purpose?

I recently read a column by a financial journalist whom I respect.  Not all such writers deserve respect. 

The discussion was about how difficult times have become for those who are saving for retirement and that many may not have a net worth that's sufficient to get them comfortably though their 'golden' years.

For that column, our writer interviewed several people who earned the title of financial advisor or financial planner.  Readers were told that advisors are currently worried that too many people aren't thinking clearly, and are not focused on making their next eggs last through retirement.  It's not so easy to think clearly when your life savings may have been cut in half.

One such planner, who works for a large firm said that she (the advisor) decided that she "could not let people continue to spend money as usual" because today's conditions were too extraordinary. Why would anyone take advice from her now, after being hung out to dry?

From the interviews, the journalist said that "most advisors 'can't allow' people to hope the stock market eventually will fix everything."  They certainly allowed that before – why would anyone follow their advice to abandon stocks now?  Isn't it too late?

What I find most disturbing about this column is that these financial professionals were supposed to protect their clients from losing such large portions of their nest eggs.  Their job was to help clients prepare for the future and that includes an understanding of the risks associated with investing.  As far as I'm concerned, they do not do enough.  Telling people to diversify, allocate assets, own some gold, buy and hold etc. worked just fine when the markets were soaring.  In fact, the advisors didn't have to do anything during those bullish times.  Oh yes, they did have one thing to do: charge fees.

But when the markets headed south, when good advice was needed, when investors needed protection, I ask: where were the advisors?  What did they do besides charge more fees?  I don't have evidence to prove anything improper was occurring.   In my opinion, it's just a case of the almost blind leading the blind.  But I intend to do some research on professional planners and advisors to see what I can uncover.

There ought be be a requirement that advisors learn, understand, and instruct their clients on how to reduce risk and protect themselves from a catastrophe by adopting hedging strategies.

The best way to do that is to use options to protect the value of a portfolio.  Does the education of planners include any study of derivatives, including options?  I'd like to know.

I recognize that too many individual investors don't have the time or willingness to learn how options work.  That's the job of those who are in charge of protecting their investments.    But do advisors understand how options work?

It's not my favorite approach, but put options could have been purchased as an insurance policy.  That insurance is costly and perhaps collar strategies could have been used.  Either would have prevented a disaster.

The point is that these advisors failed their clients, and now some of them are expressing the thoughts quoted above.  The advisor has the gall to state that she would NOT ALLOW people to spend.  Allow?  As if it's her decision.  As if she is coming to the rescue.  It's far too late for that. 

Now?  Why not earlier?  I know why.  They are being defensive.  Feeling badly that they hurt their clients, too many advisors are probably trying to earn additional fees by providing the same old, traditional advice now.  But to me, it appears as if they are issuing commands:  Thou shalt not spend.  Thou shalt save more money.

And this is my favorite:  After years of telling clients that buy and hold was the best strategy and that it was right not to panic during the markets decline of more than 50% – now – now these people are not ALLOWING clients to depend on the stock market.  What nonsense. Don't panic when the DJIA falls to 13,000 or 10,000 or 9,000.  Now, at sub-7000, now is when clients are advised to no longer hope the market can eventually fix everything.  I'm not saying that such hope will be rewarded, but it's certainly a bit late to be offering that advice.

I don't know that much about financial advisors and planners, including where they get their education and why they are allowed to peddle their advice, but I intend to look into this topic further.  If any of you hire planners or have information you believe is useful, please post a comment or send email to blog (at) mdwoptions (dot) com.

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17 Responses to Financial Professionsals. Do They Serve Any Purpose?

  1. GMG 03/04/2009 at 8:37 AM #

    In my opinion there has been a lack of responsibility on both sides of the advisor/advisee relationship, and it’s been building steadily since the end of the dotcom wipeout. I don’t think most advisors receive the type of training to understand or utilize options, in fact I think their education is geared almost exclusively to asset allocation in a rising market environment, as you said. And their investment vehicles are restricted to common stock, mutual funds, or bonds. That shows pretty clearly over the past year and in your example.
    On the other hand, clients should share the blame as they felt entitled to something that is never a given. Americans seem to think that it’s their God given right to make 8-10% a year, or feel like the advisor got paid so their investments should automatically make money.
    Unfortunately, the average person may come out of this mess with the impression that if their broker got it wrong then the game must be far too hard for any ordinary citizens to play by themselves…instead of realizing that their broker was reading from a flawed script the whole time and is really not any smarter than the client.

  2. Income Trader 03/04/2009 at 10:12 AM #

    Hi Mark,
    This is an issue I have been very interested in for some time. The reason being that I am a former 20+ year industry professional. I have worked for some of the bigger players on the street as a financial advisor, Branch Office manager, Registered Options Principal etc. I have held the series 7, 9/10, 24, 63, 65 among several others.
    Today I am retired from the industry (for several years now) and I make a living by trading conservative options strategies such as Iron Condors.
    I agree 100% with your post. There is an unbelievable lack of understanding pf options amongst all levels and all participants within financial institutions. It ranges from brokers, supervisors, compliance officers, branch office managers and legal depts.
    The regulatory requirements for brokers, managers etc is antiquated and insufficient. For that reason many professionals do not understand today’s options markets and therefore do not feel confident enough to offer it to their clients. Because managers do not understand them, they discourage brokers from using options. Compliance managers don’t understand them and frown on their use further discouraging brokers from offering them to clients. It amazes me that even today, most brokers when asked about options will tell you “forget options because they are very risky”.
    Traditional brokerage firms feel the perceived risks associated with options trading is not worth the litigation risks.
    I think only when the regulatory educational requirements relating to options is revamped for rookies and “seasoned” brokers, managers compliance officers etc, will we we see any meaningful change.
    Meanwhile its the clients who continue to be underserved and who are taking extraordinary risks in their portfolios by NOT using options as hedging vehicles (insurance).

  3. Mark Wolfinger 03/04/2009 at 10:21 AM #

    Thanks. Very helpful. So true – it’s always the client who is left behind when those on whom they rely are not fully qualified (despite a license that says they are qualified) to offer help.
    Can you tell me what education is required to earn the title of financial planner or advisor?
    Is this a college major? Or something one gets after school?

  4. Income Trader 03/04/2009 at 10:39 AM #

    Mark,
    there is no educational requirement…none. As long as the individual passes the regulatory exam, series 7 to practice as a financial advisor, and pass a preliminary background check, they are are then “qualified” to be a financial advisor. It is absolutely scary!
    Fee based “planners” who wish to be designated as CFP certified financial planners” do have additional educational requirements such as a minimum bachelors degree and certain amount of industry experience but they are by far the minority.

  5. Mark Wolfinger 03/04/2009 at 10:41 AM #

    Scary indeed. Thanks.

  6. Mark Wolfinger 03/04/2009 at 2:21 PM #

    Agree that investors felt entitled to profits. I read one letter, published by a columnist, by an ignorant investor who thought all stock market accounts should be insured.
    She loved her profits during the bullish years but demanded protection when the market dropped. And she wanted that insurance for free, but did not suggest who should pay for it.
    My point is NOT that advisors should ‘make money’ for their clients. Nor should they be expected to time the markets. But, by failing to help the public understand that insurance was available (by using options) they did nothing useful. Most people can choose their own mutual funds. Planners may help with asset allocation, but there’s more to maintaining the value of a nest egg than that.
    Advisors must receive better training. But the truth is, that any advisor who offers suggestions off the beaten path might find him/herself subject to a lawsuit if the suggestions lose money. It’s just easier for people who charge fees for service to provide ordinary service and eliminate personal risk of being sued – even when it hurts the client. How sad.

  7. GMG 03/04/2009 at 2:46 PM #

    Sure, sue your broker for making “bad” investments after the fact…and while you’re at the lawyers office, throw in a lawsuit against the lender that “tricked” you into mortgage payments you could never hope to afford. Sad is the only word for it.
    I’m sorry but if someone isn’t willing to put in the bare minimum of time to learn about the potential risks and rewards of their investments (including home mortgage, credit cards, etc) and to really OWN the potential risks the same way they would expect to OWN the rewards, then they should be barred from the court room. After working at a mortgage lender several years ago it became obvious that the cases of genuine fraud and trickery on the lender’s part were relatively rare. Far more common were the cases of what I called “lender-assisted financial suicide”. It’s surpisingly easy to trick someone who’s asking you to hurry up and trick them so they can move into their new McMansion.
    Just my frustrated 0.02

  8. Mark Wolfinger 03/04/2009 at 2:50 PM #

    Isn’t that the American way? Nothing is ever your own fault – there’s always someone to sue.
    No one ‘learns’ about credit cards, until it’s too late. The card companies bombard youngsters with applications and there is no effort to make people financially literate. That’s a huge pet peeve of mine. Grads are sent into the world with no idea of how to cope with any financial situation.

  9. Russ Abbott 03/04/2009 at 10:51 PM #

    Hi Mark,
    This is somewhat off topic for this post, but you suggested that I ask my question as a comment.
    I notice (how could I not) that you tend to trade RUT. As I understand it IWM follows the same index. But it also seems to have higher premiums. First of all, how can that be? Why doesn’t someone arbitrage the premiums? And secondly, why do you trade RUT instead of IWM since you typically sell premium?
    Also, I gather that RUT is an index and IWM is an ETF. Is there a listing of index options?
    Thanks.
    — Russ
    P.S. In a post that I got on my RSS reader but that you apparently deleted from your blog you said you would explain your approch to dealing with spreads that were going bad. I hope you still decide to do that.

  10. Mark Wolfinger 03/05/2009 at 7:39 AM #

    Thanks Russ,
    IWM does attempt to mimic the performance of the Russell 2000 Index (RUT). I never checked to see if the premiums are higher and that’s something I must do. But, unless I find a tradeable premium difference, I prefer using RUT options. Why?
    I like European style, cash-settled, options. For one thing, they expire sooner – Friday’s opening, rather than the close and cash-settled is easier to handle (nothing to do) than buying/selling shares of the ETF.
    As to ‘how can that be’ – good question. I don’t see how it’s possible. The markets would have to be pretty liquid, and not too wide, for arbs to find a difference large enough to trade. Keep in mind that the correlation between RUT and IWM is not 100%, although that is the goal.and that adds risk for arbitrageurs.
    Index options: http://www.cboe.com/Products/Cash-SettledIndexOptions.aspx
    Regarding that post. It was only ‘live’ for a few minutes when I changed my mind and decided not to post it now. This morning I posted on that topic – in a different format – and will do so again.

  11. Mark Wolfinger 03/05/2009 at 9:52 AM #

    OK. I looked at IWM vs RUT.
    When you say the premiums are higher, I thought you meant significantly higher. It’s a very small amount. And although that small amount is certainly worth collecting, remember that I trade spreads and that I would be forced to pay more for the options I buy. The spread has no advantage.
    Add that to the fact that one has to trade 10x as many IWM options to gain the same dollar premium, and the advantage goes away.
    If you suggest BUY RUT and SELL IWM, margin requirements would be enormous.
    No edge here.

  12. ex_wirehouse 03/10/2009 at 5:57 AM #

    Mark Great article. As a 13 year veteran of a major wire house, I can tell you that the all advisors/planners are little more than asset gatherers/fee generators. Requirements are minimal at best(can you say fog a mirror). Options knowledge? The average advisor knows more about the March madness office brackets than how to actually make money for clients, much less employ even the simplest option strategy. This is by design. The goal is assets. Clients, as long as they dont sue you, are of very little concern, so long as they stay put and pay reccuring fees.

  13. Mark Wolfinger 03/10/2009 at 10:02 AM #

    Thanks for an inside peek at the industry.
    Ain’t it a shame? And yet the unsuspecting public runs to these guys/gals.
    How do we get the people who believe they are doing a good thing to suggest that clients/readers/customers/friends seek a ‘good’ financial advisor to stop offering that advice?

  14. ex_wirehouse 03/10/2009 at 10:19 AM #

    One good thing about the current financial implosion of Wall St. is that the curtain is being pulled back in a small way on the scandals and inherent problems with these firms. FWIW I feel the bus model of gathering assets and blindly hurling them at the market for fat re occouring fees, is dead. However the average household spends more time planning the annual Disney trip, than preparing for decades of retirement.

  15. Mark Wolfinger 03/10/2009 at 10:44 AM #

    There’s no doubt that the public is financially illiterate. Retirement planning is just considered to be too difficult. And people always think they can start years later. But that time never arrives.
    Large fees have been a source of income. I truly hope it ends.
    Do you have an RSS feed? I tried to subscribe.

  16. BrianB 03/11/2009 at 8:19 PM #

    My mom retired 10 yrs ago, with a very nice amount of 401k + IRA + lump sum pension. She found an advisor recommended by someone at her church. He is associated with Raymond James. You’re right, he is nothing more than a fee collector. I found out this week that he had roughly 40% of her account with one fund manager, Brandes, who is STILL invested in C, BAC, WFC, F, and other positions that have lost 95% of their original investment.
    His answer? They are good values now. How can this not be incompetence at best and negligence at worst? 2 weeks ago, she tried to contact him and was told the entire office was gone for the week at a training event and could not be reached.

  17. Mark Wolfinger 03/11/2009 at 8:36 PM #

    Brian,
    I’m very sorry to hear your tale of woe. It’s one thing to be unlucky and lose money when investing in the stock market. But to have someone incompetently advise your mom to buy and continue to hold those stocks as they disappeared from the face of the earth, is shameful.
    I’d ask this salesman, in front of his office manager if possible, why he continued to hold. ‘They are good values now’? What kind of an answer is that.
    Let me tell you that I hate lawsuits. I think too many people refuse to take responsibility for their own bad decisions. But, I would make an exception in this case. This is the account of a retired person. This RJ broker demonstrated the height of irresponsibility. I’m sorry that I am not qualified to be an expert witness, but I’m not. I’d speak to a securities lawyer if I were you.
    And to be unreachable with no one to take his calls? This is no way to run a business. By the way, I’m not a Raymond James fan at all – they do not allow clients to use options.
    Best of luck and thanks for sharing.