The Brokerage Industry

This is a conversation I had about the brokerage industry:

N: A lot of folks are deeply concerned about income accounts ... they're talking about challenging it's gonna be to do fee-based accounts for people in the income distribution mode ... basically, fee-based accounts are not practical for people living off their assets .

S: That's not good from the client perspective, it seems

N: Right ... the clients ask things like: why am I paying you 10 grand a year ... that I could spend on myself?

S: yeah, big time. think about what percent of your annual income that 1-2 percent represents
N: right! ... and the advisors want to do the right thing, too
S: as they should
N: So what is the right thing? That's what they're trying to figure out
S: yeah, good question.
N: because ... these accounts do take time to service ... In fact, maybe more time than wealth accumulation accounts
S: Fee for service, it seems?
N: ... right, some kind of retainer, maybe ... but the brokerage world is still stuck in the product mode if they can't tie a product around something, they don't focus on it
S: don't the really big accounts actually underwrite those distribution accounts?
N: hmmm, probably. But these distribution accounts aren't necessarily small.
S: yeah, that's bad.
N: And the advisors are caught in between... but, basically they're saying, you can't take a cookie-cutter approach ... it can't be all fees all the time. But advisors tend to focus on what pays them, like anyone else, so if there is no product commission or asset-based fee, they feel less confident charging purely for doing an estate plan, say.
S: here's an interesting question ... seems to me that the goal or outcome of the switch to fees is a drive by the advisor to be as efficient as possible with any account, thereby realizing, in some cases, an extremely high hourly rate when total time spent on account is analyzed on an hourly rate.
N: ahh, right
S: So it begs the question, though, at what hourly rate is the advisor actually getting way more than he should or anyone would agree is fair.
N: right
S: what's a fair rate and profit level.
N: and the SEC is sorta cracking down now on fee-based brokerage accounts ... I think it's the SEC ... because they don't do enough transactions.
S: yeah
N: So they're focusing on transactions, which is so lame
Sean: Back to 1999 ... my frame of reference!
N: but this industry is squarely caught between professionalism and sales ... the CPAs all envy the brokers!
S: It's true. So the question is, what profession has actually worked this out.
N: Because they can spend two minutes (exaggeration) on an account and earn an asset-based fee
S: right
N: 10 grand ... so there's no connection between what they DO, and what they get paid
S: Right. If i bring over a $10 million account and you bring over a $2 million account, I'd bet most advisors are going to run us through the exact same process and time allocations.
S: how is that fair?
N: right! it's like the realtor who spends five minutes, and earns 25K . You can make disporportionately high returns in sales
S: yeah
N: And there's no fiduciary duty ...

Is the War in Iraq Good or Bad?

My new friend John down in Memphis sent me this link from a BBC programme about how politicians (neo-cons) have appropriated 9/11 for their own purposes, essentially that they're capitalizing on our worst fears. John believes 9/11 is a crime not an act of war, and that we're not in grave jeopardy anymore than the IRA was a threat to the British way of life.

Here's my response:

I guess a series of deadly nightclub bombings over a decade seems small compared to simultaneously hijacking four large airplanes, taking out two 117-story towers, killing 3,500 people and destroying a good chunk of the Pentagon. But is that just my ethnocentrism? :-)
I'm a centrist politically. But 9/11 did change something in me forever. I don't trust Muslim terrorists to be moderate in their actions. I don't trust them to stop until they've unleashed nuclear Armageddon.

From the 23rd floor of a building overlooking the Hudson River, my co-worker, Ed Klink watched the second airplane hurtling toward the Trade Center. He heard the horrifying thud from the explosion that rocked lower Manhattan. My Horsesmouth co-workers were evacuated as thick smoke, ash and debris filled their building.

I can't forget 9/11.

If that was just a massive crime scene perpetrated by 19 individuals who are currently dead, what have we got to fear?

That 19 more individuals with the same hatred, hell-bent for Paradise, will set loose an even larger crime scene with nukes or a bio attack.

Does that wipe out the U.S.A.? No. But if our markets can't depend on us thwarting off attack, we've got a big problem, bigger even than losing thousands or millions of people. If the terrorists can put a permanent scare into our economy, they will bankrupt us. And that is what bin Laden wants to do. That is his ultimate hope, and what he claimed he did to the Soviet Union.

So, how do we deal with that? We pull the rug out. We change the equation in the Middle East. Too many young Arab men have no occupation but terrorism. Give them something to shoot for in life -- figuratively. Work over the long-term to improve the living standards in the Middle East and suddenly a one-way ticket to Paradise won't be their best option. Facilitate elections and new leaders. Already with Hussein and Arafat out of the way, there is new hope. Help people start businesses, and honest endeavors. Help them discover the joy of free speech and free markets. Isn't that what really ended communism in Europe?

See, I'm a true capitalist! :-)

Star Wars Education & Independent Judges

So, one of my co-workers sent around this fake article about how U.S. school children lead the world in Star Wars knowledge. I had to admit, it was funny. But of course, it took the obligatory pot shot at Bush's No Child Left Behind program. Obviously the program's working, the article went on to quote Secretary of Education Margaret Spellings. ""When it comes to understanding 'Star Wars,' our children leave the rest of the world behind."

And then Ed, another co-worker told me: "I always chuckle at how we're so dumb, and lag behind kids in other countries, yet we've been kicking the world's butt for 50 years."

Yes, the left has to complain about something, Ed. The irony is that public education is DOMINATED by liberals! Why aren't they doing a better job teaching our kids???? And Hollywood, advertising, and the electronic game industry is dominated by liberals. So if our kids know more about movies and play stations than math, whose fault is it?

It's like this filibuster debate. Democrats talk out of both sides of their mouth. They act like the judiciary is this pristine place, and they wring their hands over the "radical" takeover by Republicans. (Did you see the Moveon.org commercial with insane elephants running rampant, smashing the Supreme Court building, etc.?)

First of all, Republicans won democratic elections. There is no "takeover". Last I checked, we didn't have a military coup. And secondly, are Democrats deluded to thinking the judiciary is CURRENTLY independent? It's been dominated by liberal judges for more than 50 years, thanks to FDR, JFK, LBJ, Carter and Clinton. So, I guess in their minds, the only "independent" judiciary is a liberal one.

Talk about a space fantasy.