Why A Commodity Trader Is More of A Fiduciary Than Your Financial Advisor

A trend following commodity trader advisor (CTA) who runs a separately managed account for a client is more of a fiduciary than a financial advisor under the current rules, as delineated in the NYT yesterday.

Here’s why:

-They run one transparent strategy

-They minimize losses

-They make much more money through Incentive Fees

-They are Long/Short, not Long-Only, so they can make money in all types of markets

A commodity trader’s Disclosure Document is easier to read than a Mutual Fund prospectus and there are not 12b-1 fees either!

In a stark contrast, trend following CTAs add to winners and sell losers – they don’t always come back. Conversely, Financial Advisors & Consultants do the opposite with their quarterly rebalancing act, effectively Robin-Hooding the winners to give to the losers. Counter-intuitive and counter-emotional to a trend follower. Diversification is a good start, but it’s just a start…

You can trend follow with mutual funds and sector funds a la Market Wizard Gil Blake.

The NYT ran article in the paper yesterday called Trusted Adviser or Stock Pusher? Finance Bill May Not Settle It about the brokerage industry.

I’m bearish on the industry, not for any other reason of how Wall St. branch managers dumb-down the advisors to the level of the client. That does not serve the client in any way. The internet is partly to blame as well: as the investors read and had more access to financial information, commissions dropped by 95%, thereby killing the stock trading business for the wirehouses.

Everything became, and still is, a fee-based wrap account – the ultimate neutering of Wall St.

Can you name one person in your life who has made a fortune investing in mutual funds?

Ultimately, I concur with those quoted in the NYT article: trading and risk management advice was never discussed. After passing the Series 7, we were trained how to sell and market the firm’s goods and services. At no time were we taught how to make money.

As if Johnny Cochran himself gave them the mantra a la “if it doesn’t fit, you must acquit,” it was ingrained in us that:

-you have to buy and hold (long only)

-you have to diversify

-you can’t time the market

Worst of all, they can’t really go to cash. It’s not ethical to garner management fees for managing cash. How defensive can they possibly be?

Nowadays you have the advisors repeating this nonsense and they have no understanding of what they’re saying. Training them this way robs them of making a difference and it robs the clients of having a real money manager. It’s not their fault though, it’s on the shoulders of the Wall St. firms that have trained them and their branch managers.

This model breeds complacency. It breeds “sign ’em up. Wrap ’em up, and move on”…the mantra for handling a new account.

-have them sign the new account documents

-wrap them in a fee-based asset management account in a long-only mutual fund or separate account platform

-go after new assets, referrals, or new accounts – move on

By repeating this mantra, you don’t have them focus on making clients money, but on marketing.

By ingraining “diversify, buy and hold, and you can’t time the market,” in their heads, the Wall St. firms have gotten perfectly capable people to surrender their intelligence at the door before they have a single dollar in AUM.

A few ideas towards a solution:

-Pay advisors more money and increase their payout to a minimum of 50%

-Make them work from home to save rent for commercial real estate, but allow them access to a conference room for meetings

-Incent them with bonuses for the most stable account balances – happy clients are sticky

-Cut head count – there are too many advisors at the wirehouses, which are not distinguishable

-Do away with the FINRA Series 7 exam

-Eliminate options trading – 90% of the complaints generate 4% of the revenue – are you crazy?

-Train advisors properly in trading and risk management in fundamental & technical analysis – an abbreviated CMT / CFA combo

-Use mutual funds, if at all, only in retirement accounts with less than $100k in them


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