A couple of days ago, I posted about a reader’s question regarding SMAs (Separately Managed Accounts).

You may recall that the reader also said that “Last time I had a SMA with that broker they made it so difficult to close it. I am now afraid of opening another one with them.”

Huh?

Unfortunately, this is nothing I haven’t heard before and it happens from time to time. There seems to be some confusion within some investment firms as to who owns the money that is under their trust. They treat the customer with utmost disrespect and use some intimidation by either making it difficult to close an account or delay transferring it to another custodian.

From my experience of having transferred assets over the past 20 years, firms with this uncooperative attitude are in a minority, however, they still exist. One of my clients had a recent experience with Genworth Insurance that, as he described, made it almost impossible to withdraw money from his account.

The final transfer of assets to my custodian took a long time in addition to my client having to call, sign and notarize documents (special seal was required). They finally found him worthy of receiving his own money and finalized the transfer.

If this has happened to you, don’t accept that type of harassment. It’s your money and you are in charge! Call them up, read them the riot act and threaten to contact the regulatory authorities. This industry is tightly regulated and no one wants to be another pot of gold in the hands of the Attorney General.

Today’s heading “Why Business People Speak Like Idiots” is actually the title of one of my favorite books written by authors Fugere, Hardaway and Warshawsky.

It’s a fabulous effort of unearthing the stupidity and ignorance that goes on in meetings, during Power Point presentations and general communications in corporate America. Bloated jargon and monotonous memos contribute to the official language of business: Epidemic bull.

I can promise you that reading this book will change you forever in that you will look at every meeting or deadly dull presentation in a different light. Here is one calorie of empty business communication you might have heard at your workplace:

“This is just the kind of synergistic, customer-centric, upsell-driven, churn-reducing, outside the box, customizable, strategically tactical, best-of-breed, seamlessly integrated, multi-channel thought leadership that will help our clients track true north. Let’s fly this up the flagpole and see where the pushback is.”

The author’s cite many examples of ignorant executives simply stringing together a bunch of big words to make small points or no points at all. Some have figured out that when they don’t have a strategy, just play the word game. Here’s an excerpt by a CEO of a Fortune 500 company who sent an internal memo to his employees:

“… Resources will be targeted at the areas of highest potential for our entire business. We will strip complexity from our operations and enhance efficiency. As we become faster, more innovative and more responsive, we will strengthen our relationship with our customers. You will, I am sure, appreciate how integration will enable us to create more growth in North America through a better go-to market strategy that will benefit our customers, employees and system. By simplifying our business structure and focusing on (selected) channels, we will make it easier for our customers to deal with us…”

Sometimes businesses have a hard time delivering a tough message for, say, global workforce reduction of 20%. Then you might find a memo by the CEO like this:

“We are announcing today a series of necessary restructuring steps that are critical to the future of Warner Music Group…All of these steps are based on a careful and thorough analysis of all aspects of WMG’s needs and operations, undertaken in close collaboration with the company’s senior management over the past few months. It is of utmost importance that we make the necessary changes as quickly as possible so that WMG can begin to move ahead with increased strength and confidence as a more competitive, agile and efficient organization.”

The book goes on citing one moronic story after another. The stuff they uncovered is simply hilarious and reading it is very enlightening to say the least. In all fairness to corporate tycoons, there some examples of great communications shown as well, unfortunately, they are in minority.

If you have encountered similar stories, feel free to share them with me.

The brokerage industry is always inventing new products and then touting the incredible benefits to you, the individual investor.

One such product has created some confusion for one of my readers, who wrote as follows:

“I thank you for your postings about how mutual funds will not protect us in bear markets. They will go with their mandate of sticking to their style and losing money.

This is a good insight for me— though it might look obvious to you.

I was recently persuaded by a brokerage firm to open Separately Managed Accounts – for large cap, small cap and international. The brokerage firm touted the advantages of SMAs.

It stuck me that SMAs fall into the same trap as the mutual funds in regards to bear market protection. Am I thinking right or not?

Last time I had a SMA with them, they made it so difficult to close it. I am now afraid of opening another one with them.

You should write a brief note about the perils of SMA. Though it may be obvious to you, it is not obvious to me.

Please do not use my name in case you choose to write an article about it.”

Okay, first things first. If you are afraid of opening another SMA, don’t! As I have always stated, the comfort level of the investor is most important. If there is not match with the intended investment or method, find a different one. After all, whichever you select, it should be for the long term and that will only work if you and your advisor’s philosophies are aligned.

Even though SMAs have been around for a long time, most people are not familiar with them. To get a better understanding, here’s one definition I read:

“When you invest in an SMA, you own individual securities (unlike a mutual fund investor, who owns shares of the entire fund). Though SMAs have set investment styles or strategies, you have the freedom and flexibility to tailor your portfolio to address personal preferences and financial goals. Although portfolio managers may oversee hundreds of separately managed accounts, your account is “separate” and distinct from all others.”

I really did not make this up; this is from a major firm promoting these products. This description tells you exactly what any fee based advisor (depending on his specialty) will do for you as well. There’s nothing new here; it’s the same pig, but with a different lipstick.

Of course, nowhere in the material does it state any real benefits to you as the investor, like what is the strategy during a bear market. How will the portfolio manager adjust? Or is it up to you to tell him you want out?

When a product like this is being touted because of the ‘incredible growth’ it has experienced, you can be sure that there is some benefit for the transaction hungry, commission motivated Wall Street crowd that most likely outweighs the benefits you are receiving. It’s the way the game is played.

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

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

The bears had the upper hand this week and all major indexes ended sharply lower.

Our Trend Tracking Index (TTI) for domestic funds/ETFs is now positioned +2.98% above its long-term trend line (red) as the chart below shows:

The international index has now moved to +6.64% above its own trend line, as you can see below:

For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

Don’t let it be said that Morningstar doesn’t have a sense of humor. A recent article called “10 Surprising ETF Facts” covers an array of ETF facts ranging from amusing to downright shocking.

For example, did you know that 30% of all domestically listed ETFs have been launched in the last 6 months? That’s a scary thought I touched on before, because some kind of track record is needed before you can make an intelligent decision whether an ETF is suitable for current market conditions or not.

Here’s another good one: The average expense ratio of ETFs launched in the last 6 months is 0.67%. The average ratio for ETFs launched before December 2006 is 0.45%.

And you really believe that there is no inflation?

The WSJ had an interesting article called “Bigger Bets and Risks with these ETFs.” It addresses the use of leveraged ETFs to enhance performance or to double your losses.

The story uses the Rydex Dynamic S&P; 500 fund as an example, which tries to duplicate double the daily performance of the S&P; 500 stock index. Interestingly, during the recent market pullback the Rydex S&P; 500 lost 6.3% while the traditional Vanguard 500 Index fund lost only 3.1%.

However, over a longer period of time, there seems to be quite some disconnect from the daily objective. The study says that the Rydex S&P; 500 fund gained an average of 11.2% a year over 5 years, while the Vanguard 500 Index fund gained 9.6% annualized.

Huh?

What that means to me is that you are getting in the neighborhood of twice (or more) the downside risk, but nowhere near twice the upside potential reward.

That’s not a good combination and, as I mentioned before, I personally don’t use leveraged instruments in my advisor practice. I suggest you research carefully what you are getting into, should you consider leveraging your portfolio.