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Wednesday, August 20, 2008
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I could only be a little aghast at the title and content of the recent story "Smart Money."

On the one hand, one can almost only laud any financial literacy in this nation of 'sheep' as the financial industry commonly refers to its prospects, and foolish consumer spenders. However on the other hand perhaps some common sense and well-learned lessons might have been provided to your readers.

Much passes for "Smart Money" in this country, and some of what was presented was borderline "Dumb Money" at least for someone in the mix.       

At the last minute, I'm not sure if the title of the article is to suggest that it is 'smart money' for employers to provide more financial education to financial employees so that they can sell more financial products, or it's 'smart money' for employers to provide financial education to employees as a retention benefit and/or reduce the risk of being sued for lack of such education in a down market. The article goes both ways and more.

Before elaborating I should mention that I am a formerly licensed financial professional with a most modest four years' exposure in the markets from January 1999 through the end of 2002 in equities, mutual funds, options, technical analysis of the same, and life planning through insurance products as well. I left industry because it is mostly intellectually, morally and ethically bankrupt.

You suggest that formerly employers could be held liable for bad financial advice, and that in the current market, they could be held liable for not providing financial advice.

'Smart money' would really suggest that employees should not be getting financial advice from their employers at all. My God, with all the conflicts of interest in financial services alone, the last place one should be getting financial advice is from one's employer, directly, indirectly, through a 401(k) administrator or outsourced vendor.

"Independence" is absolutely essential to getting good financial advice. Have we forgotten Enron and WorldCom so fast? This simply reeks of financial-services firms trying to get a bigger foothold on group assets. Does anyone NOT see that?

That the nature of the 'smart money' advice being offered is the courage to stay in buy/hold investments during periods of volatility or long-term contraction as the case may be is insane, and totally uneducated and unsophisticated.

Dollar/cost averaging in downward trending equities or a bear market can simply be a way to lose your shirt. How good is that advice if the equity is Enron, WorldCom, or any other of the late bombs, or more recently Fannie or Freddie, or mortgage-backed securities, or other slick proprietary financial products offered by Citi or Morgan Stanley?

'Buy and Hold' is for the sheep! Can you say, "Baa-a-a-a-a."

None other than our current Treasury Secretary Hank Paulsen, former Chairman and CEO of Goldman Sachs was on the front cover of Forbes or Fortune magazine (or some other major financial magazine) back in 1999-2000 with a heading "Volatility is our Friend."

Volatility is where money is made, whether the movement is up or down, but it's way beyond the abilities of most sheep to manage. Senior financial professionals laugh at dollar/cost averaging as a strategy.

Since this is an HR publication, what would you think about a linked story on the HR practices of major financial firms and the nature of their recruiting, and the kind of people they attract and retain for about a year if the candidate is lucky in order to provide "smart money" advice to the sheep?

This would probably not go well with some of your advertisers. Very few financial firms have structures in place to keep new hires beyond a year or so. It is much more cost effective to hire new folks, sell them and their friends and family the company's proprietary products, and cycle them out in less than a year for 'lack of performance.'

This is the business model in financial services. There are also virtually no people involved in financial services today who were in financial services in the bust, and therefore very little institutional memory as it were, at least at the retail level ... the level of providing 'smart money' advice to the sheep.

What does it say when a vast majority of the American population bought real estate on the highs, and who are now upside down or in foreclosure, with the assistance of the least regulated of financial professionals -- mortgage brokers.

Did any financial adviser that you know raise a cautionary finger and ever point to the IMF study of real-estate booms in about a dozen countries over 20 years or so and mention to any client that that data showed 40 percent went BUST and that the market might be overbought? Current events have set a new global benchmark.

Toward a financial literacy, every adult in America should have to read "Devil Take the Hindmost: A History of Financial Speculation" and a few other titles like, "When Genius Failed, the Rise and Fall of Long Term Capital Management."

LTCM failed eight or nine years ago with the best quants [individuals versed in quantitative analysis] in the business, largely because they had no concept of risk and the risk of leverage. Does that sound familiar?

The current global market meltdown occurred because of underregulation of the U.S. financial markets and insane leverage, hence the current descriptions of the market adjusting to the new realities as the 'credit crunch' and 'de-leveraging.'

What this means is that companies are unloading the blank paper they held as collateral and are returning to the hard assets they wish they had all along, had they not been sheep themselves.

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[One company] ... went belly up in the U.K. months ago because it was 32-times leveraged! I have worked with financial and technical analysis software that allowed one in factor in the effects of margin (leverage), at any rate, 5, 6, 7, 8, 10, 12 percent.

The use of margin at those rates is high risk, and easily demonstrated to sheep. They will run from it like it was a wolf on their tail. Here we have evidence of one of the world's leading financial firms leveraged at 3,200 percent and selling their wares on the street to 'smart' investors!

The fact is most Americans are so far behind in their savings that they need to be putting away five to 10 times their annual income today for the rest of their lives to have anything approaching a retirement. Globalization and the world economy are not going to allow American workers to do that, certainly not without massive government intervention.

Mountain America's financial education plans for its employees had the added benefit of increasing the "confidence of the employees to discuss these topics with credit union customers and 'steer' them to appropriate proprietary retirement-related savings and investment products? ... and helped increase the total savings of credit union customers by over 500 million" ! No comment here? You're kidding! Whose 'smart money' was this, and to whose benefit?

Retirement income calculators are free on the Internet. No need to book a vendor on that one.

Lastly, I can think of two financial firms that largely escaped the ravages of the bust, and the current real-estate-based debacle, they are noted for their independence, and wisely their headquarters are not in Manhattan. Your article didn't mention either and I have no ties to either.  

A few essential strategies for successful financial planning:  

* Get independent advice, from multiple sources.

* Diversify.

* Do not buy company stock, even if the company is contributing a portion. If you do, it shouldn't be more than 10% of your assets. They are already paying you your salary and benefits, one should not be returning the money to them. That is just poor risk management.

* One's primary retirement plan administrator or vendor is not 'independent.'

* Only take financial advice from people that you would like to be like--financially.

* Wise financial planning will consist of a mix of both life planning (insurance) and other financial vehicles (real estate, equities, funds, other financial products, and businesses that you own).

In any case, that's my two cent's worth.  

Bryan St.Laurent

Palmetto, Fla.

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