You should care because it was just three years ago when the U.S. financial system was teetering on the verge of collapse, and to avoid total disaster the taxpayers stepped up and bailed out the “too-big-to-fail” banks. And then those banks told us they had made changes to the way they invested their own capital and a similar problem would not happen again.

But it did.

These are the same banks that have been ardently blocking all attempts by government regulators to make the system safer for taxpayers.

It is quite a ridiculous situation. They want to be allowed to make mountains of profits for themselves while putting the rest of us at risk. Ina Drew, the now-departed JPMorgan veteran who headed the office that was supposed to manage risk, made $14 million last year.  To earn that kind of money, you need to be a risk taker much more than a risk manager.

No matter what the bank CEOs say, no matter what their high-paid lobbyists say, the fact is that unless solid safeguards become law, we will always be a day away from another “unexpected” financial bomb.

How can I say that with certainty? Because bankers are human. Greed, incompetence and poor judgment will always make their way into the banking system.

Don’t forget that Jamie Dimon, head honcho at JPMorgan Chase, was considered the white knight of the industry. He had a team of the best and the brightest.  Yet even for them some combination of greed, incompetence and poor judgment caused their “hedge against risk” to blow up.

The big banks are still too big to fail. Unless we have strong regulations in place, it is and will remain an “I always win” situation for the bankers, and the opposite for us taxpayers.

As I’ve said in the past, I tend to get a little queasy when too many of the “big money” pros are happy about the future. In the past, too much agreement has led to stock market trouble, in part because more of the money that had been safely on the sidelines – the “fuel” for future rallies – goes into the market. As that gets used up, there is less and less to propel stocks higher. Remember, stocks rise only when more people want to buy than sell.

However, we will not invest our clients’ funds based on what the pros do. All these so-called indicators are highly unreliable. Stocks and bonds, and the mutual funds that buy stocks and bonds, will primarily react to the day’s headlines, and news headlines, by definition, will always be unpredictable.

Smith slammed Goldman for its “toxic” culture, one which put the firm first, clients second.  He wrote that one of the ways to move up the ladder at the firm is to “get your clients – some of whom are sophisticated, and some of whom aren’t – to trade whatever will bring the biggest profit to Goldman.”

Ouch.

The financial media became flooded with reactions. Some of the entrenched forces, naturally, derided Smith. Others fully supported his stance.

In an article in Investment News, a for-the-trade news source, one veteran of Prudential Securities said, “During my last 30 days (at Prudential) I received 25 emails from my branch manager on why every one of my clients needed to have [some] new proprietary mutual fund.” Proprietary mutual funds are funds that a brokerage firm or other financial institution sells and also manages. In this case, those proprietary funds would likely be best for Prudential, and not necessarily best for the clients.

That same former broker added, “Everything was about the YTB on the product – the yield to the broker – not the yield to the client.”

That culture is the opposite of what we foster at our firm. We put the client first. This is the reason you want to be with an SEC Registered Investment Advisor. You want your money at a place where there is more loyalty to the client than to the firm.

RIAs such as Weber Asset Management are held to the “fiduciary” standard. We must put the interest of our clients first. The folks at Goldman and most other large brokerage firms are held to the “suitability” standard, which simply means the investment should be appropriate (i.e., suitable) for the investor. That lower standard allows for conflict of interest, in that the broker might put you into something that pays him a higher fee instead of something equally suitable, but less expensive.

Why would anyone, once they know the difference, entrust their nest egg to anyone other than a true fiduciary?

1. market movement
2. advisor investment selection
3. client behavior

None of us can do anything about the movements of stock and bond markets; they will do what they will do.  And of course, as advisors we control which stock and bond mutual funds go into our clients’ portfolios. But it’s the third leg of the stool, Client Behavior, which is the most precarious and unpredictable. Despite all my efforts, clients will do what they do, and that’s not always a good thing.

Recently a client who has been with us for many years expressed dissatisfaction with the returns on one of his two accounts. He is a successful physician and an experienced investor, so he knows quite a bit about the world of money. Yet I was flummoxed by what he was saying to me.

He had been in an aggressive portfolio but in 2009, near the very bottom of the bear market, he requested that we change it to a more conservative model.  My suggestion that we ride through the bear market fell on deaf ears.  And as happens so often, he ended up getting the worst of both worlds – he locked in his losses and didn’t get to fully participate when the market rallied strongly after we made the change he wanted.

Yet when I pointed out what happened, he put the blame on us, seemingly unable or unwilling to see that it was his behavior which caused his returns to lag. I always urge clients to stick with their plan through the inevitable and unavoidable rough seas of mutual fund investing. Most clients follow that advice, but not all.

As our long-term clients know, we stress the importance of looking beyond market fluctuations. Those waves never cease. But if you try to guess when to get out, and then when to get back in, you must be right twice. That’s not easy to do, and it almost guarantees subpar performance.

We are proud of our long-term track record for “Advisor investment selection.”  To get the most benefit from our strategies, we strongly suggest you change your risk level only if your financial situation changes.

Stocks, by at least one historical yardstick, appear cheap. Specifically, the stocks that comprise the Standard & Poor’s 500 Index are trading at 13.7 times profits; that is a terrific number when compared to the historical average of 16.4 (from 1954 to the present). Importantly, stocks have remained below that average for more than a year. According to an article at Bloomberg.com, you would have to go back to the Nixon administration to find a time when valuations were this low for such an extended period.

What’s causing this unusual situation? It appears that after the stock market turmoil of the past few years, millions of investors are gun shy. As the article says, “Battered by the 14 percent decline in the S&P 500 since 2000, the worst financial crisis since the Great Depression and the so-called flash crash 21 months ago, investors are staying away from stocks, even after record profits, 10 quarters of U.S. economic growth and promises by the Federal Reserve to keep interest rates near zero through 2014.”

From my perspective as an Investment Advisor, I also see far too much fear about the short term, without an appreciation for the long term prospects.

This period of stocks selling at what might be called “sale” prices won’t last forever. A low valuation certainly does not guarantee instant profits, but speaking for myself, I surely would rather buy when everyone else is selling. Or, at least, scared to buy.

My optimism stems from a fascinating chart I came across in a financial industry publication (Nick Murray’s Interactive, Jan. 2010). Based on statistics compiled by Intrinsic Research, the chart looks at the stocks that make up the S&P 500 – but with all financial stocks removed. (Those would be banks, insurance companies and REITs.)

The chart shows three lines over a ten year period: revenue-per-share, earnings-per-share, and stock prices. In general, revenue-per-share and earnings-per-share are key drivers of stock prices.

As of Dec. 8, 2011, for those stocks as a group, revenue-per-share and earnings-per-share were soaring to all-time highs. But their stock prices were still languishing well-below their high points. That is a strong positive for stocks.

And not shown on that particular chart is that profit margins are at 20-year highs and corporate debt levels stand at multi-decade lows. Those are two additional strongly positive indicators for future gains in stocks and stock mutual funds.

No prediction for stocks is ever more than an educated guess, and a myriad of things could screw things up. But I want you to go into the New Year sharing the cautiously optimistic feeling I have, i.e., that the case for higher stock prices in the coming year appears strong.

And more importantly, can it happen to your brokerage account?

The $1.2 billion figure is the amount that somehow went missing from MF Global, the once little-known firm helmed by former senator, former NJ governor, former Goldman Sachs chief, Jon Corzine. He says he is as shocked as everyone else at this immensely disturbing turn of events.

Regardless of who knew what when, thousands of MF Global investors are walking on eggshells right now as they await the results of various investigations. If nothing turns up, many of those innocent investors may suffer substantial losses.

The whole episode is immensely troubling – and puzzling. All client accounts at brokerage firms are supposed to be segregated from everything else the firm does. There are supposed to be strict controls to make sure that the wall is never breached; the idea is that while your account will fluctuate with the markets, the money itself should be untouchable. Or so I assumed until I read this article in the NY Times. It turns out that in rare cases it is possible for that wall to be breached.

But getting back to the title question – how safe are your brokerage accounts, and specifically, how safe are your investments in Fidelity mutual funds?  As president of a firm that interacts with Fidelity Investments daily, I am sometimes frustrated by their layers of legal requirements. In the long run, however, those procedural hurdles are in the best interests of you, our clients. To put it bluntly – I believe what happened with MF Global could never happen at Fidelity Investments. MF Global was a completely different animal; they focused on high risk trading, while Fidelity does not.  Nor, by the way, do the other major firms such as Schwab or Vanguard.

Most importantly, even if every safeguard at Fidelity failed and client money somehow vanished, your account is insured against fraud, up to $500,000, by the Securities and Investor Protection Corporation. And beyond the half-million dollar SIPC limit, Fidelity has insurance on your account with Lloyd’s of London for an additional $1.9 million per account. (MF Global investors have the same SIPC protection on cash and securities, but not on futures contracts.)

You can read about how Fidelity protects your assets here, on the Fidelity web site.

Yes, the markets will gyrate, and so will the value of your account. But I am convinced that your account at Fidelity is held safely behind a rock-solid wall.

“Any set of mechanical rules cannot take account of the diversity of derivatives and the multiplicity of ways they may be used by portfolio managers,” BlackRock managing directors Joanne Medero and Ira Shapiro said in a Nov. 4 letter to the SEC. “Used appropriately, derivatives can be effective tools in seeking to achieve returns and control risks in funds.”

Here’s a case where we back the SEC and think the industry leaders are wrong.

Mutual funds should be what they originally were – baskets of stocks or bonds watched over by professionals. Period. There is no clear need to muddy the waters with other instruments like derivatives.

Maybe I’m old fashioned. When I started delving deeply into the world of mutual funds in the 1970’s, mutual funds were uncomplicated affairs. Each fund had a clearly described mandate, and they ought to stay that way.

Derivatives have the potential to cause unexpected turbulence. As SEC Chairman Mary Schapiro says, “A relatively small investment in a derivative instrument can expose a fund to a potentially substantial gain or loss––or outsized exposure to an individual counterparty.”

The fund companies (and so far, it doesn’t appear that Fidelity mutual funds are part of this movement) say they need derivatives to help them control risk. To which I say, “No.”  If I want a fund that is fully invested in the stock market, don’t play games. And if I want to control risk for myself or my clients, I can easily do it by either investing in a bond fund or a money market fund. In other words, the funds should do what they are paid to do.

The same concepts, of course, would apply to funds whose objective is lower risk – they can “control risks” without resorting to derivatives. Let’s never forget that the financial crisis of 2008 clearly taught us all that derivatives are not nearly as simple as their inventors wanted us to believe.

And finally, I couldn’t believe it when I read this…

“Provided ETFs offer sufficient transparency, their investment in derivatives should not raise any additional concerns,” said Phillip S. Gillespie, executive vice president and general counsel of Boston-based State Street’s investment-management arm.

Derivatives “should not raise any additional concerns”?! Haven’t we heard that line before? Amazingly to me, they still want us to believe it.

So when it comes to traditional no-load mutual funds “needing” derivatives – I just don’t buy it.

Matthew Hutcheson is, or perhaps I should say – was – a man I respected greatly.  He has been a highly visible leader in the fight to protect employees from retirement plan rip-offs. While I personally tried hard over a number of years to bring publicity to the problems of hidden fees in 401(k) plans (I even had a meeting in the offices of then-Attorney-General of New York, Elliot Spitzer, about the problem), Matthew managed to appear before Congress, telling them in clear and ringing terms that the system was rife with problems. His White Paper on the subject became our go-to resource for understanding some of the more arcane wrinkles in the complicated world of corporate retirement plans.

Now he is suspected of serious wrong-doing, including breaching his fiduciary responsibilities – the very cause he championed. I fully recognize that the allegations made in the article are not convictions. However the story, sadly, does seem to strongly delineate a pattern of fiduciary sloppiness – at best.

My heart goes out to the people who are now fighting to get their hands on their retirement money. 

What could, or should, the employers have done differently?

First and foremost, we have always urged employers to place corporate retirement money with nationally-known mutual fund custodians such as Fidelity, Schwab or Vanguard or at least with a major insurance company (although I am not a fan of their generally higher fee structures). That simple step, instead of placing the money with Hutcheson’s proprietary firm, almost certainly would have precluded the problems now faced by these innocent workers.

If the charges against Matthew Hutcheson prove true, it will be an astonishing fall from grace for a man who, more than almost anyone else in America, should have known better.

Which leads me to a discussion of “relative” vs. “absolute” performance. Some years the markets go up, some years they go down. The important question that needs to be asked is how did you (or your advisor) do in comparison to an appropriate benchmark?

If the S&P 500 Index goes down 10% but your stock accounts go down only 8%, you can reasonably say you did 20% better than the market. Conversely, if the S&P gained 26.5% (as it did in 2009) but your account gained 37.4% (as our Diversified Growth portfolio did that year, after all fees) then you can say you did better than the market. (Past performance does not guarantee future results. This example is not indicative of Weber Asset Management’s long term performance and is used for illustrative purposes only.)

Sometimes you will hear about “absolute” performance. This way of looking at investments is concerned only with the raw numbers, up or down, i.e. “What did I end up with?”

Some advisors say they care only about absolute performance and indeed, their arguments are compelling. After all, if the market stumbles badly, the fact that you lost less might be small comfort.

The problems come in the execution of that quest. To achieve good long-term absolute returns you or your advisor must be willing, in our view, to sacrifice good long-term performance. “No pain, no gain” works for both body building and investments. In other words, to say “I don’t want to risk losing money,” means “I won’t move out on the risk spectrum.” Almost always, over many years, investors who stay conservative reap less than those who accept a higher level of risk. That’s why stocks and stock mutual funds, over the long term, have returned more than bonds and bond mutual funds.

Here at Weber Asset Management we continue to advocate for superior relative returns based on each investor’s appropriate risk level.