Monday, April 08, 2019

"Investment Advisors"

Among my activities as a lawyer is being an arbitrator for FINRA, the entity that regulates financial advisors and brokers.  In fact I'm rated to chair arbitration panels.  There hasn't been much activity of late, which I chalk up to two things: 1) There hasn't been a big downturn in which a bunch of people lost their shirts and want to blame (often with good reason) their financial advisor, and 2) I have blasted both investors and advisors, so counsel doesn't where my biases lie (In truth I have a reality bias, i.e. I go where the facts lead because, as John Adams said in his statement to the jury in his successful defense of the Boston Massacre soldiers, "Facts are stubborn things." [which, btw, has the opposite meaning of Reagan's misquote].).  Which is a long way of saying that, if I issue a warning about someone purporting to be offering financial advice, I know something about the topic, and I'm not acting out of some grudge.

That said, the source of this entry is all the snake-oil salesmen who are purporting to offer financial advice.  I'm going to lay out some warning signs, and I'm going to use one outfit as an example, because it seems to hit the major points.

Agora Financial is a major player in this field.  I've been receiving multiple pieces of spam from them and their assorted affiliates daily for years, so I've been able to watch them over time.  I've done the research so you don't have to (Just another service I provide.).  The principal players are Porter Stansberry and Jim Rickards, with long-time hanger-on James Altucher, and new hanger-on Robert Kiyosaki.

1. The first thing you should ask before you take someone's financial advice is, "Who are these people?"

Stansberry, to put it charitably, a publisher and commentator.  He is a gold bug, which is never a good sign (Gold is a perpetual underachiever as an investment, and anyone who promotes gold-backed currency doesn't understand how money works and is campaigning for a level of deflation that would return us to the 14th Century.).  If he has ever held a financial advisor's or broker's license, he doesn't advertise it, and real financial advisors are obligated to disclose this information.  Another thing he doesn't disclose but would have to if he were legit is that the SEC nailed him about 15 years ago for lying about his advising record in order to promote his stock tip newsletters and also lying about the risks present in the tips (The fact that Karen Martinez and her mob here in the Salt Lake SEC office pulled this off just shows how ham-fisted Stansberry was, because as I have commented before, Martinez led The Gang That Couldn't Shoot Straight.).

Rickards actually has some credentials.  He held several FINRA-regulated licenses (Series 3, 7, 24, 30, and 63) but apparently no longer does.  He has a JD, an LLM in tax, and an MA in international economics.  OK so far.  Then you start seeing things that make you shake your head.  He's another gold bug.  He was general counsel for Long-Term Capital Management, yet another "smartest guys in the room" operation that went disastrously belly-up 20 years ago.  As general counsel he must have been in on everything that mattered, and if he was as prescient as he now claims to be, he would have seen things were going extraordinarily wrong.  But all we know about his role is that he negotiated the government bail-out (i.e. created an exit strategy for the guys who created the problem at taxpayer expense).  He makes noise now about how he has testified before Congress, which he did, 10 years ago.  And it wasn't before one of the financial committees; it was before a subcommittee of the Science and Technology Committee, where he was talking about financial modeling.  I've read the transcript, and it's 14 pages of impressive-sounding blather.  Lately he's been holding himself out as "a high-ranking member of the US Intelligence Community" and "the CIA's Financial Threat and Asymmetric Warfare Advisor".  Let me tell you about folks who claim to be high up in the CIA without actually being in the Company.  They're like those guys who claim to have been Special Ops in Vietnam but it was all secret so they can't tell you about it, but trust them, they earned six Purple Hearts and three Medals of Honor at places like Muk Wah and Sin Loi, it's just that their file is all sealed up in the Pentagon.

James Altucher first blipped on my radar 10 years ago with a bit of total lunacy on Huffington Post claiming the economy had already turned around and to keep it going we needed to ignore several well-founded rules of financial and economic management.  I won't go into details here, but I savaged his position at the time as being perfect if you wanted to replace the economy with a kleptocracy, and it's been his MO ever since.  If I were writing the piece today, I'd start by channeling Luke Skywalker, "Impressive.  Everything you just said is wrong."  He used to say cryptocurrencies were a scam but now heavily promotes them, probably because the winds of hot money shifted (FWIW, I've always considered cryptocurrencies, as presented, a scam.  They aren't currencies, they're securities of a sort, they aren't terribly useful as either investments or wealth storage, and Heaven help these pyramids and the folks inside them when the regulators finally decide to descend on them, but that won't be until all the players have left the building and the only ones left are the marks who bought in because BLOCKCHAIN!).  I'll just leave the rest to someone who has actually dealt with him.

Kiyosaki is a special case.  He has admitted that Rich Dad, Poor Dad is made up, but people keep buying it and keep attending those seminars (Which he never attends.  He just lets his name and smiling face be plastered on them.  For a fee.  BRANDING!).  He bankrupted one of his companies to avoid paying a judgment debt.  The debt was about 1/20 the alleged annual revenue of the company.  With a revenue stream like that, obtaining financing to pay the debt would have been easy, far easier than filing bankruptcy, which means there were only two reasons for filing: Either he just plain wasn't going to pay (no guarantee of that in a Chapter 11 reorganization) or he couldn't get the financing because the revenue stream wasn't as represented.  Neither looks good for a financial advisor.

2. What are they selling?

A financial advisor provides a particular service: Set up an account with an advisor, and the advisor will manage it, the level of management depending on the specifics of your account terms.  And they're obligated to disclose to you how successful they've been.

Agora and companies like it don't sell management services.  They sell tip sheets and seminars ostensibly telling you how to manage your own investments.  And they don't disclose a thing about how successful they have been.  The SEC nailed Stansberry for misrepresenting his track record.  His crystal ball since then hasn't been any better.  Rickards's history is no better.  Altucher?  Go reread the link to Steemit above.  Kiyosaki?  It's all a pitch for "investment courses" that will cost more than any return you can possibly realize.  Run a cost-benefit analysis, and buying what they're selling makes no sense.

3. How are they selling it?

A legitimate advisor wants you to make money and will advise you accordingly.  He or she wants you to make informed decisions about your investments.  If the markets are heading down, the advisor will have you move into hedge positions to protect yourself.

Agora and the like play on fear and bias.  They constantly preach the imminent collapse of the economy.  They've been doing it for years.  They even keep recycling the same pitches, with obvious voiceovers changing the date the collapse is supposed to happen.  And they've been wrong every time (Interestingly, they reject the one thing that could actually bring about the collapse they keep predicting: climate change.).  Fear is a good way to sell snakeoil to marks, but it isn't a good basis for investing.

Neither is bias.  The most noticeable one is political.  These folks are all fans of President Trump, perhaps in part from sincere beliefs, but also in large measure because they are targeting a certain audience.  Nothing inherently wrong with that, unless it colors the advice they're selling.  Which it does.  Currently, they loudly broadcast that Trump is trying to do X, Y, and Z, that these moves are all brilliant, and that they will save everything if Trump is allowed to implement them.  But five years ago they were claiming Obama was trying to do the same things, except that if he did them, they would bring about immediate collapse.  Identical actions tend not to bring about opposite results.  Claiming they do?  I'll let you decide what to call that.

Misrepresenting the "opportunities" you're presenting is not a good advising method either.  Rickards has a doozy where he's holding Trump's budget proposal and says that on a certain page is a plan that will make you scads of money.  I got the document and looked at the page.  It's Trump's proposal for rebuilding national infrastructure (which hasn't happened but desperately needs to because about every aspect of our infrastructure is a wreck).  So if you're a construction contractor, you can bit on government contracts, perform them, and get paid.  That's their "investment" tip.  Another is an "obscure" law that will have the government paying you all sorts of money for your property.  If you look it up, what it says is that if you have a building, and the government decides to lease it, they'll pay you rent.  Another great tip.  A final example I'll give is a mysterious type of trust that will pay you piles of money.  They call it an Eisenhower Trust, undoubtedly just to invoke his name.  What they're really talking about are real estate investment trusts or REITs.  So if you invest in one, you'll get a piece of the return.  More great investment advice that is surely worth its cost.  I would note that REITs were the vehicles that held all the mortgage-backed securities and were the core of the financial crisis in 2008, so a return on your investment might no be such a guarantee.

4. Do they have "affiliates", and are they dodgy?

Legitimate advisors do not have affiliates, other businesses they have advertising and referral arrangements with.  An advisor may know lawyers or CPAs or real estate agents who can help you with certain issues, but the advisor is not in any kind of pay-for-referral relationship with any of them.  There are many good reasons for this, but probably the biggest is that they are illegal.

Agora and the like have piles of affiliates because that allows cross-platform promotion and getting your pitch in front of more people.  And are these affiliates dodgy.  Let facts be placed before a candid world.  One claims campaigning against sexual harassment is a threat to men.  Another claims it has herbal cures for cancer and diabetes.  One argues should be able to carry firearms even if you've been found judicially incompetent.  And another one claims that Mexico is sending all those illegal immigrants across the border in a deliberate plan to undo the Treaty of Guadalupe Hidalgo and take back the southwestern US.  I'm not making any of this up.

If someone wants to be your financial advisor and flunks one of these tests, you probably ought to give them a pass.  If they flunk them all, well....

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