Saturday’s Wall Street Journal carried a column by Jason Zweig, Brokers Win, Investors Lose Key Reform which lamented the loss of a provision in a bill now "oozing" through the Senate that would have made stockbrokers, insurance agents, and certain other financial salesmen into fiduciaries.
On the remote chance that the term fiduciary does not ring any bells, let me explain. Investment advisors and managers, including, for example, mutual fund companies, are fiduciaries. They are required to put their clients’ interests first, which basically means watching over client money as they would their own. Of course, there are limits to this, nobody would expect a mutual fund company to lower fees out of fiduciary responsibility, but by and large this works and consumers get what they expect from the relationship.
At the opposite end of the trust spectrum are ordinary salesmen and the ordinary profit-maximizing companies for which they work. Of course, the great majority of people and firms we do business with fall into this category. We know this and think nothing of it. When the waiter suggests dessert, nobody indignantly objects he is not putting the interests of the diners ahead of that of his employer. Ditto for the salesgirl at the mall who says you look great in those pants. Again, this system works and consumers get what they expect.
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March is just around the corner, which means we are entering the heart of tax season. Time to gather those 1099s, fire up the old TurboTax, and wonder how we can possibly pay Uncle Sam less money next time.
So ’tis the season to think about, and write about, schemes and tricks to minimize your tax bill. For example, the AP ran an item the other day discussing the rather unlikely maneuver of teenagers opening Roth IRAs.
It’s an idea with some intuitive appeal. As readers of this blog know, Roths are attractive if you believe that the tax rate paid today is likely to be lower than what will be paid when the money is withdrawn from the IRA. A teenager with a tiny income, and thus a low marginal tax rate, certainly qualifies.
And there is the tremendous emotional appeal of "the magic of compounding" that miracle of mathematics that will drastically increase the IRA balance during the very long journey to retirement. Even with only 5% annual return, after 50 years $1 would grow to $11.46. Imagine how grateful your child will be when they retire and realize the foresight you had in making them save way back in 2010.
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Yesterday former Merrill broker and municipal bond investor Suze Orman, CFP, sent out word to her legions of followers that they should "be extra careful in how you invest at this point in time." The Oracle of Berkeley continued:
A pullback from here shouldn’t be surprising given the fast and steep rise. Meanwhile there’s the evolving concern that Greece’s debt problems could spread to other countries given the inter-connectedness of all our economies. Add it all up and there’s more to worry about than cheer.
I am writing down the date she wrote this "2-8-10" and that day’s S&P close "1056.74" on a post-it I am placing on the wall here at BMA World Headquarters. I would encourage my legion of followers to do the same, so that together we can bask in the wisdom and foresight of the Great Suze.
Orman goes so far as to recommend that investors act on her vision through dollar cost averaging. That’s more than a little asinine, but before discussing it, let me dwell a bit on her reasons for worry. It’s not every day that Suze shares her market timing insights. (In fact, I think this may be the first time ever.)
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Headlines for newspaper items and blog posts are troublesome things. They have always sold papers, particularly tabloids, but the advent of the web and search engines have made their importance, and the temptations to play games with them, even greater. The coin of this realm is the click, and if you 
want to get surfers to read your stuff you better have a catchy title, preferably including some popular search terms.
Earlier this month The Washington Post blamed an increase in typos (e.g. soldiers wearing "shiny black boats" on their feet) on copy editors being distracted by new duties. "Separate online headlines must be written in a way that attracts attention on the Web."
I bring this up because the other week Jason Zweig’s Intelligent Investor column in The Wall Street Journal was headlined "Why Many Investors Keep Fooling Themselves." (Mysteriously, the metatitle, the thing that appears at the top of the browser window, hedged: "Why Some Investors May Be Fooling Themselves.")
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Almost three years ago I discovered peer to peer lending, in the form of the then widely hyped Prosper.com. For a week or two I was enthusiastic on it as an investment, until I crunched enough numbers to decide it was not so 
exciting after all. In the meantime, I had put $1000 in ten $100 loan slices.
Loans on Prosper are three years in duration, so next week this little experiment will finally wind down. Assuming that I get the last $15.46 that is owed me, I will have received a grand total of $1029.50 over three years. A zero percent return is pretty lousy, but at least I have the solace that quite a few other things that I could have invested in in January 2007 would have done a lot worse.
But, as it turns out, breaking even makes me an above average lender on Prosper. According to the delightfully data laden Eric’s Credit Community, which tracks and analyses Prosper loan data, the average lender on the site has an ROI of –2.29%. Again, it could have been worse.
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On the remote chance that the term fiduciary does not ring any bells, let me explain. Investment advisors and managers, including, for example, mutual fund companies, are fiduciaries. They are required to put their clients’ interests first, which basically means watching over client money as they would their own. Of course, there are limits to this, nobody would expect a mutual fund company to lower fees out of fiduciary responsibility, but by and large this works and consumers get what they expect from the relationship.
Government, Investing, Media | Frank Curmudgeon | 
March 1, 2010 12:59 pm | 
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