The Best Questions

In the waning days of 2008 I was asked what may be the best question I received all year. My family and I were attending a party given by friends. In a quiet moment, a friend who is also a client of mine asked, “You guys didn’t get any of that bailout money, did you?” The question was part genuine interest and part ribbing. That’s ok, what are friends for? But it made me realize that the onslaught of news about complex and unfamiliar dealings, mechanisms and institutions, reports laced with cryptic acronyms and strange jargon, had probably left many people confused about what is going on and just how it affects them. Let me both answer the question and tell you why that answer gives me confidence in 2009.

Did Allegheny Financial Group receive any bailout (TARP) money?

No. Keep in mind, the objective of TARP, the Troubled Asset Relief Program, was to help strengthen the financial system by supporting lending institutions (primarily banks) that were threatened by the possibility of massive defaults on home loans. And TARP funds have gone to banks across the nation, mostly in the form of equity investments rather than the originally intended purchase of troubled assets.

Allegheny Financial Group is neither a commercial nor investment bank; indeed, Allegheny doesn’t make mortgage loans or have any borrowers at risk of default. The second group of intended recipients of TARP money was insurance companies (AIG, most prominently) and bond insurers. Allegheny is neither an insurance company nor a bond insurer. Need I add that we don’t build automobiles, either—since GM and Ford are now slated to get TARP funds. But the common thread among the intended recipients was that they were all publicly traded companies whose stocks are traded on the open market.

Allegheny Financial Group is a privately held firm. It comprises a Registered Investment Adviser and its broker/dealer affiliate, Allegheny Investments. A Registered Investment Advisor is an SEC-regulated firm in the business of providing financial advisory services for a fee. A broker/dealer is a firm in the business of buying and selling financial securities for itself and others that is regulated by the Financial Institutions National Regulatory Authority (FINRA).

In other words, we are a professional service firm in the business of providing guidance and advice on financial planning questions and investment advice to households, business owners, and institutions. And we are regulated by government and independent agencies.

Since we are a privately held company, we do not have pressure coming from some far off corporate HQ or thousands of shareholders intent on quarterly earnings predictions. We do not answer to analysts—neither those still employed nor those who used to be employed by companies that have now gone out of business or been sold because of mismanagement (Lehman Brothers, Merrill Lynch, Bear Stearns and others).

Unlike those Wall Street firms, we do not have proprietary products. As you know, many financial service companies have their own mutual funds, annuities, insurance and other investments that they want to sell to you. These products have proven far more profitable for these companies than dispensing advice. But when push comes to shove between your best interest as client and the sale of a high-commission product, you may not be the winner. Does that surprise you?

We don’t have proprietary research that we sell to others, either. Though we do extensive research on investments, and it is the core of our objectivity, its sole purpose is to identify and monitor the best investments for you, our clients. The greatest benefit of our structure and standing is that we are independent advisors. Not only are we free of the turmoil now roiling the Wall Street firms, we are independent of the motives and incentives driving their advice. Rather than wondering what’s next for our careers and our company, we spend our time and energy analyzing the current crisis, assessing its implications for the future, and understanding the effect on your financial objectives and your family’s well-being.

I am not saying we are perfect, nor that we got everything right. But I have a renewed sense of why a privately held, independent financial planning firm is in the strongest position in the industry, and my pride has never been greater.

The Madoff Question

Here’s a related question (related in the way that two shipwrecks or two hurricanes are related) that has popped up about the now infamous Bernie Madoff. The question is, “Who is this Madoff guy, and am I in danger of being swindled by my advisor?”

As you no doubt have read or heard, Bernard Madoff ran a huge investment fund with a reputation for exclusivity. But it turned out to be a Ponzi scheme in which investors’ returns came from the money contributed by new investors. Madoff is not the first, and I am afraid to say, he will not be the last bearer of the Ponzi banner. I won’t speculate why seemingly successful and intelligent people gave millions of dollars to Madoff or his feeder firms with no real knowledge of what they had invested in nor how Madoff could provide returns never before possible. But here are two keys to not becoming a victim—protections that the Madoff debacle throws into focus.

Disclosure

Most of you reading this letter are investors in mutual funds or managed money of some sort that is regulated under the Investment Act of 1940. These securities must disclose their holdings, operational information, expenses, and the names of the largest shareholders. Also, they are overseen by a Board of Directors. Finally, in the case of mutual funds, their net asset value is updated and publicly available every day. The point is, disclosure is your friend—and a basic component of protection.

Third-Party Custodian

Even if your advisor is the person you would trust your children and grandchildren with, your assets should be held by a third-party custodian, and confirmations, statements, and tax information (such as IRS Form 1099 for dividends and interest) should come from this custodian. This custodian could be a mutual fund company, a brokerage firm (we use National Financial), an insurance company, or a trust company. But a report created solely by your advisor should not be your only source of account information. Third-party reports are an important part of your protection.

I believe that the good people in the financial-advisory profession still far outnumber the bad; the smart outnumber the dim. (You probably feel the same way about the industry you are in.) But in our business basic questions—like “Is your company getting bailout money?” and “How do I know if I’m being swindled by my advisor?”—are what make good, smart and prosperous clients. Happy New Year.