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Alexander Efros, MBA, CPA
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Alexander Efros, MBA, CPA, is the President and Founder of Athelon Wealth Management, an Independent Fee-Only Registered Investment Adviser based in Staten Island, New York. Prior to founding the firm, Mr. Efros worked as an auditor in the Investment Management practice at PricewaterhouseCoopers... More
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  • Top 7 Things Your Wall Street Broker Doesn't Want You To Know

    In this article, Alexander Efros, MBA, CPA, President and Founder of Athelon Wealth Management, presents a few things your Wall Street broker doesn’t want you to know.


    1. Brokers can legally put their interests ahead of yours.

    Most brokers operate under what is called the “suitability standard”, which simply means that the securities they recommend must be appropriate for you given your financial profile. However, many of the securities that can be considered “suitable” may be far from the best investment options available at a particular time.

    You may be surprised to learn that brokers working under the suitability standard are not legally obligated to find the best prices or the best investments to help you accomplish your goals. As a result, your broker may offer you securities that provide lower returns and carry more significant risks than other alternatives as this can be more profitable for the broker. The suitability standard can apply to brokers that sell insurance, annuities, stocks, or other investment types.


    2. Brokers can make money whether you succeed in the market or not.

    This is because of the commissions-based compensation model used by many brokerage firms. Let’s say your broker convinces you buy into ABC Corp. at $100 per share. If the price subsequently increases to $120, your broker may call and advise you to buy more of the same security because of the 20% appreciation in price. This transaction would then generate a commission for your broker.

    On the other hand, let’s say the same $100 investment in ABC instead dropped to $80 per share. In this case, the same broker might still tell you to buy more of ABC because it is now less expensive than it was at the time of the initial investment, and therefore it is should be considered a bargain. This transaction would also generate a commission. So as you can see, your broker’s success can have little relation to your own. This represents a misalignment of interests which may cause your broker to benefit at your expense.


    3. Brokers may choose to offer you only those investments which pay the highest commissions.

    To illustrate this point, let’s consider another example. Let’s say Investment A is the best investment for you, but it offers no commissions to your broker. Investment B, on the other hand, is a worse investment which offers a 5% commission. Under the suitability standard, the broker is not obligated to offer you Investment A, and may instead sell you Investment B in order to collect the commission on the transaction. This conflict of interest is permitted under the suitability standard which is currently applicable to many brokerage firms.


    4. The investments your broker sells may be illiquid or highly risky.

    It is often the case that brokers are associated with a particular issuer of securities or a certain investment company. These brokers may be limited to offering only the proprietary products sold by their affiliates, even though other more attractive investment options may be available in the market. They may be also be limited to a particular list of securities and may be paid more to offer one security over another at any particular time.

    The fact is that investors have time and time again been sold products which are illiquid, non-marketable, highly risky, and lacking in transparency and disclosure. This manner of investing can often result in significant downside exposure which often leads to disappointing investment results.


    5. Brokerage commissions may significantly erode your returns over time.

    If your broker charges commissions on a per-trade basis, then you may be paying more to your broker than you might expect. If you are charged a per-trade commission of 2%, then making just 3 trades per year could cause you to pay 6% of your total investment portfolio in commissions annually. This amount can significantly exceed the 1-2% annual management fees typically charged by Registered Investment Advisers.


    6. Brokers may use deceptive titles to give you the wrong impression about their compensation model and/or qualifications.

    The abundance of professional designations used by professionals within the financial services industry (e.g. ‘broker’, ‘financial planner’, ‘financial adviser’, ‘financial consultant’) is often confusing even to the most experienced investors. Nevertheless, having an understanding of the differences between these various titles could have a dramatic effect on your long-term results and overall satisfaction.

    As an example, the term ‘financial adviser’ is one of the most commonly used terms in the business. However, many of the individuals using this title are salespeople working to meet quotas by selling financial products. They may, in some cases, sell non-marketable securities which require long-term commitments, excessive fees, and a high level of risk.

    There are also ‘fee-based advisers’ who earn income both from management fees paid by clients and commissions earned from the sale of certain financial instruments, such as insurance or annuities. This blended compensation model may influence advisers to sell investments which generate high commissions but may not be most advantageous for their clients.


    7. There are investment firms other than broker/dealers that may be better suited to your needs.

    With a broker, you are working with a salesperson who may or may not have your best interests in mind. On the other hand, Registered Investment Advisers (RIAs) are firms which operate under the fiduciary standard, meaning that they are legally obligated to put their clients’ interests first.

    There are also firms known as Fee-Only RIAs, which operate under the same fiduciary standard, but differ in that they only accept compensation directly from their clients in the form of management fees. This helps to ensure that Fee-Only RIAs provide unbiased and objective investment advice without third-party incentives of any kind. For more information regarding a particular RIA’s compensation model, you may consult the firm’s brochure (also called the Form ADV Part II) which is typically available on the firm’s website or upon request.

    What can investors do to ensure that their financial professional has their best interests in mind?

    When choosing an investment adviser, investors should consider whether the professional they are dealing with is acting in a fiduciary capacity. If not, the adviser may be influenced by third-party incentives which can lead to disappointing investment results.

    If choosing to work with a Registered Investment Adviser, investors can consult the brochure (also known as the Form ADV Part 2) to find out more about a particular firm’s compensation model, management, investment style, and any relevant disciplinary disclosures. The Form ADV can provide valuable information which can make it easier to compare different RIAs and choose the one best suited to your needs.

    Furthermore, investors may seek out “Fee-Only” Registered Investment Advisers. Fee-Only firms typically receive no third-party compensation of any kind. As they are compensated only by their clients, these firms are able to provide reliable, objective, and unbiased investment advice.



    Alexander Efros, MBA, CPA
    President / Founder
    Athelon Wealth Management, LLC



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: PLEASE NOTE: This article is for informational purposes only and does not constitute a complete description of our investment services nor does it represent any advice to buy or sell investments or other services. This article is in no way a solicitation or offer to sell securities or investment advisory services, except, where applicable, in states where we are registered or when an exemption or exclusion from such registration exists. Information throughout this article, whether stock quotes, charts, articles, newsletters, or any statement or statements regarding market or other financial information, is obtained from sources which we, and our suppliers, believe reliable but we do not warrant nor guarantee the timeliness or accuracy of this information. Nothing in this article should be interpreted to state or imply past results are an indication of future performance. Neither we nor our information providers shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in transmission thereof to the reader. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION POSTED IN THIS ARTICLE.
    Jan 05 11:17 PM | Link | Comment!
  • High-Frequency Trading – A New Financial Revolution

    In recent years, significant improvements in communication technology have brought market participants closer together and reduced latency to mere nanoseconds. Among other new developments, these advancements have led to the emergence of high-frequency trading (HFT). With HFT, investors use powerful computers to run complex algorithms designed to find profitable investment opportunities within the market. Such algorithms take snapshots of a various technical indicators, trading volumes, and/or other real-time quantitative factors to formulate a strategy with the highest predicted changes for success. Computers then execute trades with little or no human interaction.

    More than anything else, speed has become the most crucial differentiator between winners and losers in HFT. Trading, calculation, and delivery of market information must be performed more quickly and effectively than the competition in order to make a profit. While it takes about 500,000 nanoseconds to click the button on a mouse, a delay of even 5 nanoseconds in receiving market information or placing trades may prevent a high frequency trader from being successful. Accordingly, a share of a particular stock may be sold within just a few seconds or even sooner after it is purchased.

    The search for the best and the fastest has become somewhat of an arms race within the financial services industry. However, the war may actually be fought through financial propaganda. That is, while market participants look for investment opportunities by scanning through thousands of real-time data points, they may also be sending out information intended only to confuse the HFT computers of their competitors. As an example, one investor might generate orders to purchase a security at prices far below those currently available in the market (e.g., offering $5 for a security trading at $50). This investor might then cancel the order and generate another buy order at $6, only to immediately cancel it. This process is performed not to actually purchase any securities, but simply to produce “noise” which the other market participants must filter out before they can generate their own trade ideas. In effect, market participants are cluttering the landscape so that their competitors take longer to process real-time information with the goal of making profits at their expense.

    The speed and high levels of automation associated with HFT may have far-reaching consequences. HFT is widely believed to be a major contributor to the “Flash Crash” of May 6, 2010, when the Dow Jones lost almost 1,000 points (about 9%) within just a few minutes. Although prices quickly rebounded, investors were left wondering how the market could fluctuate so significantly within such a short amount of time. HFT may well have played a large part in causing this sort of volatility, however there are other automated systems and conditions within the markets which may also have contributed to the crash. One cause may have been the use of leverage, which allows traders and institutions to increase their positions and maximize returns through the use of short-term borrowing (such borrowing can also amplify losses). Another cause may have been the use of stop orders which trigger a sale when a stock price falls below a certain predetermined threshold.

    These recent developments in financial markets have attracted the attention of the SEC, which has taken an interest in the matter. It remains to be seen whether the agency will make efforts to regulate or prohibit HFT.

    With all of the new technological developments changing the dynamics of finance, you need to work with a qualified and experienced investment adviser who can assist you in navigating the fast-paced modern financial markets.

    Athelon Wealth Management is an Independent Fee-Only Registered Investment Adviser based in Staten Island, New York. We help our clients reach their financial goals while protecting them from excessive and often unnecessary downside risks. To accomplish this, our process involves creating highly customized portfolios to obtain the desired level of return while effectively managing risk through diversification, ongoing in-depth research, and periodic portfolio rebalancing. In choosing investments for our clients, our methodology emphasizes transparency, liquidity, and value. This helps to ensure that each portfolio is working most efficiently and increases the chances of reaching the financial goals of our clients.

    Give us a call today at (347) 706-1414 for a FREE introductory consultation. You may also visit our website at http://athelonwealth.com for more information.

     

    Alexander Efros, MBA, CPA
    President / Founder
    Athelon Wealth Management, LLC
    Jan 01 7:27 AM | Link | Comment!
  • An Introduction to Mutual Funds – Top 10 Questions Answered

    1. What is a mutual fund?

    A mutual fund is an investment vehicle which allows individuals and businesses to pool their money together and have it invested by professional money managers. Just as you would hire a mechanic to fix your car, or visit a doctor for medical care, many people find that hiring an investment professional makes sense for them.

     

    2. What is the purpose of a mutual fund?

    The purpose is to provide diversification as well as risk management. Generally, the goal for a fund manager is to make as much money as possible for the fund’s investors while also protecting them from losses. A manager can do this by investing across many different companies, countries, security types, credit ratings, and also risk levels. The specific strategy for each fund is outlined in the fund’s prospectus, which also provides other important information relevant for investors. You should always read the prospectus prior to making an investment to ensure that a particular fund is right for you.

     

    3. Are there different kinds of mutual funds?

    Yes, there are actually many different kinds. Mutual funds may provide exposure to certain geographic areas, security types, and/or risk levels. For example, there are income funds, which generally only invest in bonds and other fixed income securities. There are also equity funds which hold primarily shares of public or private companies. Other funds hold a combination of the two and may also utilize derivatives to maximize returns for investors.

     

    4. What determines the performance of a mutual fund?

    The performance of a mutual fund is actually determined by the underlying securities which the fund invests in. If a mutual fund holds a share of stock, for example, then its investors participate in any increase or decrease in the market value of that share, which is the price that may be quoted on a stock exchange for that particular security. Fund investors may also receive any dividends that are paid out by the companies whose shares are held by the fund. With fixed income securities, such as bonds for example, fund investors participate in any increase or decrease in the market price of the instrument, and also receive the interest that is paid out on the bonds or other fixed income instruments held by the fund.

     

    5. What are open-ended investment companies?

    You may hear mutual funds being referred to as open-ended investment companies. The term “open-ended” means that the number of shares that can be issued by the fund is unlimited. So instead of buying shares from other investors (as you might do when you purchase a share of stock), you buy and from the mutual fund company itself. Because of this, mutual funds are said to be more “liquid” than other pooled investment vehicles such as hedge funds or private equity investments. Unlike these other investments, which may require you to lock in your money for several months or even years, mutual funds generally allow you to buy or sell your shares within a day.

     

    6. What happens when I purchase a share in a mutual fund?

    Each mutual fund share you own allows you to participate in the gains or losses incurred by that fund. So let’s say a mutual fund has one investor who puts in $1 million. Then a new investor puts in another $1 million. The fund would then grow to a total of $2 million, with each investor participating in half of the gains and losses incurred by the fund.

     

    7. What kinds of investors do mutual funds typically have?

    Investors in a funds can be individuals, public or private companies, retirement plans, or even other funds.

     

    8. What are the advantages to mutual funds?

    The primary advantage of mutual funds is diversification. This means that your money is invested in many different securities and asset types. The purpose of this is to decrease the risk that a loss on any particular investment would be seriously detrimental to the overall portfolio. A fund can hold dozens or even hundreds of securities, which means that each holding might represent only 1 or 2 percent of the entire value of the fund.

    Another advantage to mutual funds is that they provide professional management. Investing in securities involves a tremendous amount of analysis and research, which is time-consuming and can be very expensive. When you invest in a mutual fund, you are able to hire a fund manager with significant investment management experience and a proven track record to manage your portfolio.

    A third advantage is that fund investors can also benefit from economies of scale, because the fund may receive discounted rates from brokerage firms and other service providers.

    Yet another advantage to mutual funds is that they may use derivatives for purposes of speculation and hedging. This is done to maximize returns in some cases and to prevent simply losses in others. Funds may employ a wide variety of derivatives to execute their strategy, many of which are often provided only to reputable investment companies and may be unavailable to individual investors. As a result, someone looking to protect their portfolio may not have access to all the tools that a mutual fund might employ on their behalf. The use of derivatives may also be a disadvantage in some cases, however, as volatile market conditions or improper handling of derivative instruments can negatively affect a fund’s performance.

     

    9. What are the downsides to investing in mutual funds?

    These advantages do come at a cost. Mutual funds charge fees for their services which are taken out before distributions are made to investors. The fees are charged as a percentage of assets under management, and may range up to 1%, 1.5% or higher in some cases. Passively managed funds generally charge lower fees. The fee schedule for any mutual fund can be found in its prospectus.

    One thing investors should watch out for when choosing a mutual fund is sales charges (also referred to as “loads”) that are assessed either when you invest in or pull your money out of a fund. These charges can range up to 5.75% in some cases. When you are charged a front-end load, this means that a sales fee is deducted before fund shares are purchased. So, for example, if you invest $100 with a $5 front-end load, only $95 will actually be put into the market. This is an important consideration for investors, because that $5 takes away not only from the returns you earn in the first year of your investment, but also in future years as you lose the potential compounded returns that the $5 might have provided.

     

    10. Can I lose money if I invest in a mutual fund?

    Even though mutual funds provide diversification and rely on advanced research and analysis, there are unfortunately no guarantees against loss. Today’s markets tend to move quickly, and even the most well-known and experienced mutual funds managers may underperform at times, which can result in losses for investors. This means that investors should continually monitor the funds which they are invested in and work closely with a financial professional to ensure that there remain on track to achieve their investment goals.


     

    Jan 01 7:27 AM | Link | Comment!
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