How sophisticated are your clients, really?

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Anonymous's picture
Anonymous

Do you think they understand CDOs, or would if they bought them? Do you understand CDOs, even now? http://blog.registeredrep.com/reformation/2010/06/11/suitability-how-sophisticated-are-your-clients-really/I'd love to hear what you think about  this topic...

Cowboy93's picture
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Joined: 2005-05-10

Clients--no way.Me: barely.  I think too many of us take what our firm tells us at face value.  I believe many people in the food chain at Merrill (for example) truly believed the stuff they told people even though it was completely bogus or exaggerated.

Milyunair's picture
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Joined: 2009-09-25

Clients are smart enough to know that they are paying for the consequences of what they don't understand, and that people like Barney Frank want to hold high positions of regulatory authority, but don't want to get into the details of their jobs.

navet's picture
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Joined: 2010-02-25

Barney Frank??? WTF???? This is a question about client sophistication. I might give a rat's a-s about your political views if the other side of the aisle hadn't caused or at least negligently allowed our problems to occur in the firat place. Why don't you just go and get your rocks off on a political blog?

gethardgetraw's picture
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Joined: 2009-10-22

From the article:" Should someone with $1 million in net worth have a responsibility to understand complex investment products?"-  Yes. You've got to draw the line somewhere. The client must take responsibility after they've received the proper disclosures, the opportunity to read each prospectus, and the opportunity to ask questions on anything they don't understand.  Do the majority understand complex investment products? No. And they don't want to. Why? My reasoning is that most HNW clients are HNW because they allocate the majority of their time doing what made them HNW in the first place. Doctors and lawyers are two good examples. They do not have the time nor the energy to understand the stock market. That's why we are compensated for what we do. In contrast,  you could ask how much stockbrokers know about H1N1 or how to successfully represent yourself in court during a divorce. We know nothing about either of these topics, which is why our doctors and lawyers are paid so well for what they do.

Milyunair's picture
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Joined: 2009-09-25

Navet, girls just wanna have fun. http://community.fpanet.org/cs/forums/t/5398.aspxIt must be annoying for you to be confronted with the relationship between CDOs, our clients, regulation, understanding and sophistication. I will probably be annoyed when you figure everything out and start whining about how the government is eating your lunch. We should all be concerned about protecting our clients from ignorance. The regulatory nightmare and market failures wrought by political economic policy, ensuing government bailouts, and then more regulations is what we should really fear. How smart is it view markets from your bubble? By the way, if clients were holding a diversified portfolio of stocks and bonds through the crisis, how badly hurt were they by CDOs? If you're doing technical analysis or market timing, how much value do you add for your clients in your reading of capital markets that are distorted by political economic policy and bailouts?The first action of progressive economics is to define the forum - what is in bounds or out of bounds for discussion. You like to pretend that you work or believe in free capital markets and you don't want anyone to challenge your ignorance or motives about the connection between economics and social policy. There should be a requirement that someone who holds himself out as a financial advisor have a basic level of financial education. In the case of Barney Frank, in the article, he freely admits that he took his appointment to a position of authority because he was mainly interested in getting housing for poor people - and understands little about finance or economics. What you don't know, or attribute to other people as just being an agenda, may come back to hurt you. You might as well just go out and smoke a bong and space out. For anyone who is interested, you can see that some readers of the FPA article were offended by the kid gloves treatment of Mr. Frank. My take on it was, the man exposed himself. ( No joke intended.) If ever there was a case for moving everything to cash and never buying another security, it would be Frank's admission that he was unqualified for his job. How sophisticated is the average financial advisor, really?From the JFP article:  " How did you wind up with a committeeassignment in the financial servicesarena—why does this industry sectorinterest you?I joined the committee in 1981 when itwas still the Banking and Urban AffairsCommittee because I cared a lot abouthousing. That was my major interest. With the benefit of hindsight, do youhave any regrets about any of yourvotes or actions in Congress with regard to thefinancial meltdown?We should have been quicker to do someregulations.  Do you believe that the current regulatoryregime for the delivery of financialplanning services is adequate?This is not one of the things we have yetfocused on. It will be something we lookat.   What is your general assessment ofthe way Americans receive financialadvice, and the quality of that advice?I’m not competent to judge that. Do you have any parting messageyou’d like to convey to financial plannersabout what you’re up to?I’d like to repeat what I said before—thatwe regard appropriate regulation as promarket.And it’s similar to what TheodoreRoosevelt and Woodrow Wilson did, andFranklin Roosevelt did. During periods ofgreat innovation, you need thoughtful regulationthat keeps up with it.

Sportsfreakbob's picture
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Joined: 2008-08-24

MillyCongrats - you have become the most annoying guy on this forum.

B24's picture
B24
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Joined: 2008-07-08

gethardgetraw wrote:From the article:" Should someone with $1 million in net worth have a responsibility to understand complex investment products?"-  Yes. You've got to draw the line somewhere. The client must take responsibility after they've received the proper disclosures, the opportunity to read each prospectus, and the opportunity to ask questions on anything they don't understand.  Do the majority understand complex investment products? No. And they don't want to. Why? My reasoning is that most HNW clients are HNW because they allocate the majority of their time doing what made them HNW in the first place. Doctors and lawyers are two good examples. They do not have the time nor the energy to understand the stock market. That's why we are compensated for what we do. In contrast,  you could ask how much stockbrokers know about H1N1 or how to successfully represent yourself in court during a divorce. We know nothing about either of these topics, which is why our doctors and lawyers are paid so well for what they do. Yeah, that's horsehlt.  Clients pay us a lot of money so they don't have to know what the freakin risk is of a CDO.  If we as advisors can't see that, then we shouldn't be in this business.  Most advisors don't do NEARLY enough to earn their fees.  That's one thing that bugs me about life at Jones...there is this "belief" (which exists at many firms) that the firm will worry about the investments, and we just go out and prostltute for new clients.  Of course, that's masqueraded as "planning time with clients".  In reality, the firms don't care what we know about investments, they just want us to dedicate as much time as possible to finding more assets.  That's one of the places that captive firms are at odds with the needs of clients.  Advisors MUST have a good understanding of the markets and various investments, EVEN if they never intend to use those investments.

Milyunair's picture
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Joined: 2009-09-25

To the extent that product manufacturers can marginalize the professionalism of "salespeople", BG is right, ain't never gonna happen. Follow the money. The solution is to organize ourselves as professionals, and make sure we get paid for doing what you say. Not to argue about shadows on the cave wall. A rep who is managing ten for fifteen million SHOULD be able to make a decent living, and not be vacuumed up by the guy who is managing seventy or a hundred million.

Gaddock's picture
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Joined: 2007-02-23

I run a pretty complex strategy. I make my clients learn it in baby steps before we really get down to business. By the time they are ready they know more than most brokers do about trading. My true value is keeping them on track in an environment like the last six weeks. When they began to freak I took control and was cold and calculated this allowed us to take advantage of others fear. Most of my accounts are back to they were before the May tank. I don't make any trades I make for my clients as to not introduce emotion. I'm hugely proud of my clients as they are truly my partners.

Bodysurf's picture
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Joined: 2008-08-02

A couple of things are clear.  Not only did clients not fully understand or appreciate the CDO; the firms that trafficked the things didn't either.  Somehow we got to the point that the financial system of the entire free world became dependent on former trailer dwellers in Kentucky and Arizona making their mortgage payments on their new half million dollar homes.The only ones who really understood CDO's are the ones we're reading about now, who figured out ways to bet against them.I was very fortunate.  At the time I was with a major wirehouse, but only had a small handful of clients who were considered accredited, so they weren't in them.  Or the limited partnerships that blew up, or the auction-rate securities that froze up.  But I still had to go to the meetings, and was leafing through one of the offering prospectuses for the CDO's, and had no idea what they were even talking about.  It was the most confusing document I've ever seen in my life.  It's easy to see now, however, why foreclosure proceedings are being retarded by the fact that nobody can even determine who really owns the mortgage on the thing--they get carved up into so many tranches going in so many different directions, with this tranche self-liquidating on such-and-such a date and that one picking up interest after another date--it was impossible. 

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