Wall Street Potholes

Recognize Wall Street tactics for what they are, and make smarter decisions with your money

Wall Street Potholes shares insights into the money management industry, revealing the shady practices that benefit the salesman far more than the client. Bestselling author Simon Lack brings together a team of experienced money managers to give you straight-from-the-source intel, and teach you how to recognize bad advice and when it's better to just walk away. Investors are rightly suspicious that many products are sold more because of the fees they generate than their appropriateness to the client's situation, and that's only the beginning. This book lays it all bare so you can walk into your next deal with your eyes wide open. You'll learn just how big the profit margin is on different products, and why Wall Street intentionally makes things as complicated as possible. You'll learn expert tactics for combatting these practices, so you can avoid buying overpriced products and confidently discriminate against advisors who put their own interests first.

For all the volumes of investment advice on the market, dissatisfaction with the financial services industry has never been higher. This book describes the reason for that disconnect, and tells you how to see through the smoke and mirrors to make the best decisions for your money.

• Discover the profit margin built into some popular products
• Learn the reason behind bundling and why Wall Street fears comparison shopping
• Consider the importance of benchmarking, and why so many firms avoid it
• Become better informed so you can easily recognize poor investment advice

If asking questions of your financial advisor only nets more confusion, if you want to have more control over your money, you need a firm grasp of how these firms manipulate your trust. Wall Street Potholes tells you what you need to know to become a smarter investor.

Preface xi

Acknowledgments xiii

CHAPTER 1 Non-traded REITs: A Security That Shouldn’t Exist 1

Poor Advice 1

Why Not Get a Listing? 5

Disingenuous Advice 9

Whose Side Is Your Financial Advisor On? 12

Where Are the Regulators? 15

Overall Returns Are Poor 17

The Importance of Benchmarking 19

Puts and Calls 20

Financial Advisors Need to Do Better 21

CHAPTER 2 Why Investors Pay Too Much for Yield 25

The Mysteries of Closed-End Funds 25

Investors Can Overpay to Simplify Their Taxes 29

The HFT Tax 32

When Managers Run a Company for Themselves 34

The Ham Sandwich Test 37

If the Prospectus Says You’ll Be Ripped Off,

It Must Be Legal 38

Timing Is Everything 41

CHAPTER 3 Why Structured Notes Are Rarely the Best Choice 47
Kevin Brolley

Caveat Emptor! 47

Structured Note Basics 49

Why Buy Structured Notes? 52

The Heart of the Matter: The Arguments Against 55

CHAPTER 4 Update to The Hedge Fund Mirage 69

Hedge Funds Remain a Great Business 69

Industry Reaction to the Dismal Truth 72

Why Hedge Funds Are Still Growing 74

Some Accounting Rules Are Dumb 77

Politics Drives Asset Flows 80

Too Much Capital 82

For Once, the Retail Investor Wasn’t Duped 86

CHAPTER 5 Why Is Wall Street So Inefficient? 91

Why Is Finance So Expensive? 91

Trading Doesn’t Build a Secure Retirement 94

Invest Time before Money 97

Sex and Investing 98

Complexity Sells 103

The Hidden Costs of Municipal Bonds 106

Some Bankers Just Don’t Think 109

CHAPTER 6 The Un-Portfolio and Better Portfolio Management Techniques 115
Bob Centrella, CFA

Background 118

Un-Portfolios and Diversification 120

Fees and the Black-Box Models 123

Other Examples of Un-Portfolios 125

Exchange-Traded Funds 127

Mutual Funds and Fees 128

Load Funds 130

Fiduciary Duty 131

Portfolio Management Basics 133

Summary and Conclusion 137

Bonus Section 138

CHAPTER 7 Annuities 145
Dave Pasi

Introduction 145

What Is an Annuity? 147

What Are the Different Types of Annuities? 148

Variable Annuities 151

Associated Risks 152

Other Risks Are Lack of Flexibility 153

Variable Annuity Riders 154

Illiquidity, or the Lack of Being Able to Get to Your Money 157

Evaluation of Returns: Investment Options inside of Variable Annuities 158

Fee and Charges 159

Options If You Already Own an Annuity 162

When Should You Consider Using an Annuity? 163

Recent Developments with Annuities 164

Savings Bonds: Little-Known Good Deal 166

CHAPTER 8 Is the Most Important Professional in Your Life Even a Professional? 171
John Burke

My Start as a Broker 172

Pressure to Generate Business 174

Why You Don’t Invest with Borrowed Money 176

Has the Industry Made Any Progress? 178

Is Financial Advisory a Profession? 181

Why You Want a Fiduciary 183

More Things to Consider When You Choose Your Advisor 189

A Better Way to Measure Results 191

CHAPTER 9 Putting Investors First 197

The Future of Finance 197

Understand Who Your Advisor Works For 200

Really Understand the Fees 204

Try Asking These Questions 207

What Else Can Be Done? 210

The Role of CFA Institute 212

Bigger Isn’t Always Better 215

About the Contributors 219

About the Author 223

Bibliography 225

Index 229

SIMON LACK, CFA, is the founder of SL Advisors, LLC. Previously, he spent 23 years with JPMorgan. Much of Simon Lack's career with JPMorgan was in North American Fixed Income Derivatives and Forward FX Trading, a business that he ran successfully through several bank mergers, ultimately overseeing 50 professionals and $300 million in annual revenues. He is the author of the bestselling book The Hedge Fund Mirage:The Illusion of Big Money and Why It's Too Good to Be True.

Most of us buy financial products and services with the knowledge of an amateur, and we are often vulnerable to an unscrupulous advisor. While the financial services industry is full of good people, there are too many "me-first" advisors who offer less than a fair deal for their clients.

In Wall Street Potholes, Simon Lack—bestselling author and investment guru—shares insights into the money management industry to reveal the all-too-often shady practices that benefit the salesman far more than the client. The author draws on his own experience as well as contributions of four experienced money managers to give you straight-from-the-hip intelligence about investing. Together they reveal how to recognize bad advice and when it's better to just walk away from an unprincipled advisor.

Wall Street Potholes includes a discussion about the potential risks of investing in non-traded Real Estate Investment Trust (REIT) ventures that provide substantial guaranteed fees to the broker while often generating disappointing returns for the investor. Discover just how big the profit margin is on different products, and why Wall Street intentionally makes things as complicated as possible to keep investors in the dark. The author lays out the proven tactics for combatting these practices and helps investors avoid buying overpriced products. Armed with the strategies outlined in Wall Street Potholes, investors can avoid financial advisors who deceitfully put their own interests first.

Make the best decisions for your money with an understanding of the real reasons behind the exercise of bundling and why Wall Street fears consumers that comparison shop. With this important resource as a guide, learn better portfolio management techniques and the significance of benchmarking and why so many financial firms avoid this necessary practice.

Wall Street Potholes is filled with illustrative examples, vital information, and time-tested strategies that will give you more control over your money and your financial future.

WALL STREET POTHOLES

Most of us buy financial products and services with the knowledge of an amateur, and we are often vulnerable to an unscrupulous advisor. While the financial services industry is full of good people, there are too many "me-first" advisors who offer less than a fair deal for their clients.

In Wall Street Potholes, Simon Lack—bestselling author and investment guru—shares insights into the money management industry toreveal the all-too-often shady practices that benefit the salesman far more than the client. The author draws on his own experience as well as contributions of four experienced money managers to give you straight-from-the-hip intelligence about investing. Together they reveal how to recognize bad advice and when it's better to just walk away from anunprincipled advisor.

Wall Street Potholes includes a discussion about the potential risks of investing in non-traded Real Estate Investment Trust (REIT) ventures that provide substantial guaranteed fees to the broker while often generating disappointing returns for the investor. Discover just how big the profit margin is on different products, and why Wall Street intentionally makes things as complicated as possible to keep investors in the dark. The author lays out the proven tactics for combatting these practices and helps investors avoid buying overpriced products. Armed with the strategies outlined in Wall Street Potholes, investors can avoid financial advisors who deceitfully put their own interests first.

Make the best decisions for your money with an understanding of the real reasons behind the exercise of bundling and why Wall Street fears consumers that comparison shop. With this important resource as a guide, learn better portfolio management techniques and the significance of benchmarking and why so many financial firms avoid this necessary practice.

Wall Street Potholes is filled with illustrative examples, vital information, and time-tested strategies that will give you more control over your money and your financial future.