Wall Street Potholes: Insights from Top Money Managers on Avoiding Dangerous Products

Praise for WALL STREET POTHOLES

"Every day, millions of retail investors are neglected, led astray or blatantly deceived about the investments that are recommended to them. In Simon Lack′s new book, Wall Street Potholes, investors are taught to fight back and win the battle for their retirement. Given the conflicts and regulatory gaps in today′s environment, consumers of financial services need to be armed to the teeth with knowledge in order to make good decisions. This book is a powerful step in the right direction."
Joshua M. Brown, CEO of Ritholtz Wealth Management, author of Backstage Wall Street and The Reformed Broker blog

"Wall Street Potholes is required reading for all individual investors. Simon Lack shares insights derived from many years of experience as a successful risk manager and investor. Contributors Brolley, Burke, Centrella, and Pasi add their unique perspectives with a shared commitment to simplify what is often an over–engineered process. This book provides guidance that is equally beneficial to both the seasoned investor as well as those new to the field."
David Puth, CEO, CLS Bank International

"A book written by Wall Street insiders that reveals how unsuspecting individual investors are often steered towards high–fee investment products that deliver poor results. Everyone who relies on others for financial advice should read this book so they can ask the tough questions that will help them achieve better investment results at less cost."
Scott Jones, Retired head of global equities, Jefferies & Co.

"Simon Lack′s book hits the mark. What investors need more than anything in today′s investment world is a way to stay away from rogue products and rogue investment professionals. As an investor′s rights attorney for the past two decades, I know that avoiding the wrong product and the wrong professional is far more important than finding ways to outperform the market. Simon Lack′s book is strikingly focused on this important issue. I hope that every retail investor out there buys this book before they make any significant investment. Regulators would do well to read it as well and realize what is really happening under their watch."
Chris T. Vernon, Founding partner of Vernon Litigation Group, a law firm that represents investors nationwide

"As a RIA serving the middle class investor, our firm sees the abuses that are covered in detail in Wall Street Potholes. An excellent resource for the astute investor to avoid the self–serving, low quality, high commission investment products that rob your wealth."
Andrew D.W. Hill, CFA, President and Co–founder, Andrew Hill Investment Advisors, Inc.

"Simon Lack has taken the bull∗∗∗t by the horns and wrestled it to the ground! In creating the definitive guide to explaining and avoiding poorly designed financial products, Simon clears the air of the smoke and mirrors the manufacturers of these products hide behind. Easy to read and understand, this book should be required reading for every investor."
Larry Milder, Managing Director, Head of Intermediary Distribution, Catalyst Funds

Preface xi

Acknowledgments xiii

CHAPTER 1 Non–traded REITs: A Security That Shouldn t Exist 1

Poor Advice 1

Why Not Get a Listing? 5

Disingenuous Advice 9

Whose Side Is Your Financial Advisor On? 12

Where Are the Regulators? 15

Overall Returns Are Poor 17

The Importance of Benchmarking 19

Puts and Calls 20

Financial Advisors Need to Do Better 21

CHAPTER 2 Why Investors Pay Too Much for Yield 25

The Mysteries of Closed–End Funds 25

Investors Can Overpay to Simplify Their Taxes 29

The HFT Tax 32

When Managers Run a Company for Themselves 34

The Ham Sandwich Test 37

If the Prospectus Says You ll Be Ripped Off, It Must Be Legal 38

Timing Is Everything 41

CHAPTER 3 Why Structured Notes Are Rarely the Best Choice 47

Kevin Brolley

Caveat Emptor! 47

Structured Note Basics 49

Why Buy Structured Notes? 52

The Heart of the Matter: The Arguments Against 55

CHAPTER 4 Update to The Hedge Fund Mirage 69

Hedge Funds Remain a Great Business 69

Industry Reaction to the Dismal Truth 72

Why Hedge Funds Are Still Growing 74

Some Accounting Rules Are Dumb 77

Politics Drives Asset Flows 80

Too Much Capital 82

For Once, the Retail Investor Wasn t Duped 86

CHAPTER 5 Why Is Wall Street So Inefficient? 91

Why Is Finance So Expensive? 91

Trading Doesn t Build a Secure Retirement 94

Invest Time before Money 97

Sex and Investing 98

Complexity Sells 103

The Hidden Costs of Municipal Bonds 106

Some Bankers Just Don t Think 109

CHAPTER 6 The Un–Portfolio and Better Portfolio Management Techniques 115

Bob Centrella, CFA

Background 118

Un–Portfolios and Diversification 120

Fees and the Black–Box Models 123

Other Examples of Un–Portfolios 125

Exchange–Traded Funds 127

Mutual Funds and Fees 128

Load Funds 130

Fiduciary Duty 131

Portfolio Management Basics 133

Summary and Conclusion 137

Bonus Section 138

CHAPTER 7 Annuities 145

Dave Pasi

Introduction 145

What Is an Annuity? 147

What Are the Different Types of Annuities? 148

Variable Annuities 151

Associated Risks 152

Other Risks Are Lack of Flexibility 153

Variable Annuity Riders 154

Illiquidity, or the Lack of Being Able to Get to Your Money 157

Evaluation of Returns: Investment Options inside of Variable Annuities 158

Fee and Charges 159

Options If You Already Own an Annuity 162

When Should You Consider Using an Annuity? 163

Recent Developments with Annuities 164

Savings Bonds: Little–Known Good Deal 166

CHAPTER 8 Is the Most Important Professional in Your Life Even a Professional? 171
John Burke

My Start as a Broker 172

Pressure to Generate Business 174

Why You Don t Invest with Borrowed Money 176

Has the Industry Made Any Progress? 178

Is Financial Advisory a Profession? 181

Why You Want a Fiduciary 183

More Things to Consider When You Choose Your Advisor 189

A Better Way to Measure Results 191

CHAPTER 9 Putting Investors First 197

The Future of Finance 197

Understand Who Your Advisor Works For 200

Really Understand the Fees 204

Try Asking These Questions 207

What Else Can Be Done? 210

The Role of CFA Institute 212

Bigger Isn t Always Better 215

About the Contributors 219

About the Author 223

Bibliography 225

Index 229

SIMON LACK, CFA, is the founder of SL Advisors, LLC. Previously, he spent 23 years with JPMorgan. Much of Simon Lack′s career with JPMorgan was in North American Fixed Income Derivatives and Forward FX Trading, a business that he ran successfully through several bank mergers, ultimately overseeing 50 professionals and $300 million in annual revenues. He is the author of the bestselling book The Hedge Fund Mirage: The Illusion of Big Money and Why It′s Too Good to Be True.