The WSJ featured an article titled “Taking Control,” which gives some advice as to how investors can better protect themselves against schemes and scandals.

I just want to hone in on one part that deals with potential conflicts of interest:

Financial advisers essentially fall under one of two of regulatory structures, one often considered stricter than the other. Under current law, “brokers”—who often are called financial advisers or wealth managers—don’t consider themselves to be “fiduciaries,” who are required by federal law to act in the best interest of their client. Brokers can put the interest of a mutual-fund firm ahead of yours, although they are required under law to follow a “suitability” standard, meaning they can’t recommend a product that is inappropriate for an investor.

On the other hand, “registered investment advisers” have to follow a fiduciary standard.
…

A big difference among advisers is how they are paid, and some have financial incentives to recommend one strategy or product over another. There is nothing necessarily wrong with commission-paid advisers, and many investors may well prefer to work with such professionals if it means they don’t have to pay a sales load. Still, it is important to know if an adviser has a financial incentive to recommend what he or she is recommending.

[Emphasis added]

While earning a sales commission is an honorable way to make a living in many industries, it has been more of failure than a success when it comes to the investment arena. The history books are filled with stories about scrupulous brokers and brokerage houses that used the commission structure for their benefit and not the client’s.

In the financial service industry, abuse tends to be greatest when larges sales commissions are at stake and many victims are clueless as to either what they are buying or getting involved with.

I believe that RIAs (Registered Investment Advisors), who work on a fee only basis (assets under management), will offer you the best opportunity to receive an unbiased opinion since money does not change hands whether you follow the advice or not.

If you think I am biased, you are absolutely correct. I am a fee based RIA, and I have represented this opinion for over 20 years.

Reader Richard had some interesting thoughts on what he considers market manipulation and asks whether it might affect trend tracking in general:

I really value your work and daily comments; so what I am about to say is not meant as a negative reflection on you or your tracking signals.

Again, I so value your work and your comments that if I didn’t I wouldn’t even bother to write what I have here.

First, I have to say that you can’t be sure of any manipulation via “painting the tape.” Just because large orders come in at the close does not mean anything at all. Case in point is what happened this week.

If you had watched certain ETFs (long and inverse ones) you might have also noticed millions of dollars of orders coming in right at the closing price. To you, the casual observer, you might have interpreted this as something different than it actually was. It had nothing to do with market manipulation; it simply was me setting up hedged position at MOO (market on close) to be sure that my intended ratios of long to short were what I wanted them to be.

There are a lot of trading strategies that utilize market-on-opening and market-on-close orders to fulfill an investment objective. To draw any other conclusion without any additional facts is simply guesswork.

Second, if someone really would want to manipulate markets, keep in mind that he is stuck with a position which he eventually has to unwind again. Yes, I am sure there have been manipulation attempts especially in thinly traded futures markets, which is why I always stress the need of investing only in high-volume products.

Third, what matters in the end is the closing price no matter how you arrive at it. Stringing together closing prices will form a trend that can be measured and is the only thing when it comes to investing that is real to me. I have more trust in those than company reports with their misleading footnotes and questionable interpretations.

When all is said and done and analyzed to the hilt, we end up with a final price for the day. If it turns out that this price was incorrect because of misleading facts, then it will correct itself the next day or the next week. I see no reason that this has changed over the past 25 years to make me reevaluate the basis of trend tracking.

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

Increased unemployment figures today did not derail the gains made earlier in the week.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has now crossed its trend line (red) to the upside by +0.80%% keeping this week’s buy signal intact.



The international index has now broken above its long-term trend line by +9.47%. A Buy signal was triggered effective May 11, 2009. We are holding our positions subject to a trailing stop loss.

It could have been a lot worse yesterday but, as we’ve seen quite often lately, a last hour buying spree limited the risk of a nasty slide.

Despite Fed Chairman Bernanke’s rhetoric that the recession will end this year, the markets seemed to ignore his words of encouragement.

The main focus this week will remain on Friday’s employment numbers. The expectation is that “only” 500,000 jobs were lost. If the real number comes in close to that, it would be interpreted that things might be “less bad” as in the recent past, which could provide fuel for another rally.

If the number comes in considerably higher than expectations, all bets are off.

As of yesterday, our Trend Tracking Indexes (TTIs) are showing the following positions:

Domestic TTI: +1.02%
International TTI: +8.84%
Hedge TTI: +1.54%

We continue implementing our plans as posted previously.

Given this week’s run-up, the markets held up well today and pushed our domestic Trend Tracking Index (TTI) clearly above its long-term trend line by +1.30%.

This is where the rubber meets the road, which means that a Buy Signal for broadly diversified domestic equity funds/ETFs has been generated. For tracking purposes, the effective date will be tomorrow, June 3, 2009.

We will now increase our domestic exposure via hedged and outright long positions. If you follow along, I suggest an initial allocation of 33% of portfolio value to this arena.

Our exit point at this moment will not be the crossing of the trend line to the downside, since that could happen quickly, but it will be based on each individual holding’s 7% trailing stop loss.

Again, following a Buy signal immediately is not as crucial as executing a sell signal promptly. If you’d rather wait a few days until Friday’s employment numbers have been digested, that is fine. If the rally continues, you merely lose a few points on the upside, while missing a sell signal could have very negative effects on your portfolio.

The old adage “it’s easier to live with lost opportunity than with lost money” still holds true today.

Today’s market activity pushed the major indexes higher and with it our Trend Tracking Indexes (TTI). The domestic TTI has now crossed its long-term trend line by +0.97%.

I will wait another day to see if this was just a one day pop followed by a drop on Tuesday before declaring this a new Buy signal. The domestic TTI only crossed above the line last Friday, and I usually like to see either a 1% move above or 3 trading days in bullish territory before establishing outright long positions.

However, I will move ahead with setting up further hedges regardless of the outcome. Nevertheless, this is crunch time for me, and my posts will be short and succinct for a few days.