Recent news articles by BusinessWeek
and other major media outlets highlighting egregious nationwide sales contests coming out of Stanford Financial and Stanford Group Company (related to the infamous CD scandal) illustrate why such practices can potentially lead to trouble. For example, it is now known that brokers in at least one Florida office could qualify to receive as much as $100,000 to be applied toward the purchase of a new BMW 745 sedan if their sales of the Stanford Caribbean bank CDs put them in the top sales tier. You’ve got to be kidding, right? That’s been the reaction of investors who had no knowledge of the contests. That — and a few expletives.
While securities regulators may frown on such practices, Stanford’s sales practices were perfectly legal due to a lack of fiduciary standards.
So, exactly what is a fiduciary standard anyway?
A fiduciary standard is a construct that requires any and all financial decisions made relating to the interest of the client be made with the client’s best interest in mind first and foremost (i.e. not to be made with the motivation of, say, a BMW). Many financial firms operate under a standard of a fiduciary.
Are abusive sales practices normal for the brokerage industry? Of course not. Just as in any business, while there are those who may push the limits toward self-interest, most financial professionals and their firms do their best to do right by their customers and clients.
So learn the score. If any adviser is pushing any certain investment product hard, ask questions — lots of questions. Make sure that you understand and know exactly why that particular recommendation is right for you. Ask your adviser if he or she is a fiduciary. If the answer is yes, talk about it and hold him to it. Whomever you are working with, now more than ever, make sure that you are working with someone you trust. If you have any questions or concerns regarding your adviser’s background or record, check him out either at sec.gov or finra.org.
Learn from the experience of others. Given the financial shenanigans and scandals that have erupted over the last several months, the last thing you need is to get slammed out of left field by an adviser or an investment product that turns out to be a bad apple. There is no educational value in the second kick of a mule. In this case, an ounce of prevention is so worth the pound of cure.
In April 2008 I wrote a column titled “Inflation — We Don’t See No Stinking Inflation
,” arguing that even though there was a widespread concern that inflation was getting ready to rear its ugly head (oil was then embarking on its upward trajectory toward $145 per barrel), the concerns were unwarranted. Recent releases of both the consumer and producer price indexes (down, year-over-year) have shown that line of thinking to have been correct.
Once again there is an understandable fear that inflation will soon again be a problem. After all, the Feds have created and thrown some $1 trillion dollars at the problems created by the financial crises of the last 18 months. Sooner or later that’s got to be inflationary, right? Well maybe later — but I suspect it will be much later.
A funny thing has happened to our financial markets in recent weeks. It seems that the “bond market” is a bit worried by all of the financial games being played in Washington. And the bond market matters.
We no longer control our future or our destiny. The bond market (that is, the creditors of the entire world who buy our debt which allows the games of Washington to continue) controls our destiny, and it could care less about opinion polls, focus groups or political ideology. How is this control manifested? Through rising long-term interest rates, over which the Fed and Washington have no control. If the bond market vigilantes sense that the financial policies coming out of Washington are unsustainable, irresponsible and inflationary, they will simply hold back on the purchase of new debt, which will force long-term rates to rise.
That in fact is happening. Just three months age rates on 30-year government bonds stood at 3.59 percent. Today they have climbed to 4.68 percent — in spite of the Fed’s best efforts to keep those rates down. Such a climb is the last thing a weak economy needs. As I said, we’ve lost control of our finances.
By embarking on a spending spree that might embarrass even the most ardent Keynesian ideologues, and financing that spree with borrowed money, we’ve lost the privilege of setting the rules. Selling your soul to the devil has a cost.
Don’t fear the return of inflation anytime soon. Indeed, hope that the ever-so-slight green shoots of recovery being spoken of so hopefully do not soon turn to brown wilting weeds.
Bo Billeaud has been president and chief investment officer of a Lafayette-based money management firm for the past 18 years. Contact him at