Sunday, November 22, 2009

Net Asset Value

All of the following would cause NAV for an open-end fund to increase except

A. stocks in the portfolio increase in value

B. stocks in the portfolio pay a dividend

C. investors buy new shares in unexpectedly large quantities

D. bonds in the portfolio make interest payments

EXPLANATION: if you owned stocks and bonds in a brokerage account, the account value would rise whenever the value of the stocks and bonds went up, or whenever they put money into your account via dividend and interest payments. If you multiplied the size of your portfolio by a bazillion and cut it up into shares, the same thing would happen to the mutual owners of your mutual fund. So "A", "B", and "D", all do make the NAV rise. Choice C has nothing to do with NAV--supply and demand does not apply here. At 4 PM or so each day the fund is revalued based on what we just mentioned--THEN, they let buyers in based on that NAV, and they pay sellers out the NAV. But it's all proportional and all done at the same price.


Wednesday, November 18, 2009

Broker Check

Up to now there has been a big difference in the way that state securities regulators and FINRA publish violations of agents, principals, and broker-dealers. While the state securities regulators tend to keep the notices of revocation up indefinitely, FINRA (formerly NASD) has allowed the violations to disappear after two years. That way if an agent were barred by NASD (now FINRA) for cutting bad checks and misappropriating client funds, the public would only know about it for 2 years after he got himself kicked out of the business. The state securities Administrator would usually issue an order of revocation, and that would stay up on the website indefinitely. Apparently, FINRA doesn't think that's good enough, and they're probably right in thinking that more investors will go to the "broker check" site at than their state regulators' site, especially with all the FINRA TV and radio commercials out there encouraging them to do exactly that.
In any case, starting in a few days, any agents or principals who get in trouble with FINRA will have the violation sitting in broker check indefinitely. That way, if they try to switch to, say, the insurance business, customers will be able to look them up at broker check and see that maybe they aren't the sort of people investors should trust with a $1.5 million annuity purchase.
Go ahead and check out the actual press release at the link below. And, more important, stay out of trouble once you get your securities license.

Monday, November 16, 2009

Get the Series 66 Done in 2009

Many people taking the Series 7 will also have to take the Series 66 exam. Usually, the tests are taken in that order, but you might want to consider getting the Series 66 exam done in 2009, even if you have to put the Series 7 on the back burner to make it happen.


The Series 66 exam is changing. The old 80/20 split between regulatory concerns and investing concerns is changing to 50/50. The test is adding questions on derivatives (options, futures, forwards), hedge funds, statistics (mean, median, mode), annuities, insurance, retirement plans, Efficient Market Theory, and a handful of other exciting topics.

Will the test be easier or harder starting in January?
Nobody knows, but nobody has ever seen these tests get any easier. The regulators feel that they protect investors by flunking a certain percentage of test takers, and we will never convince them otherwise.

To help you get the Series 66 off your plate before all the changes occur, I have created a 50% off coupon code to be used on any purchase at The coupon code is: 66now. Be sure to hit the APPLY button to get the discount.

Friday, November 13, 2009

Municipal Securities and the So-Called "Real World"

It always amazes me to hear Series 7 classroom instructors tell students that the Series 7 "has nothing to do with the real world."

Nothing could be further from the truth. As you'll see from the link below, the Series 7 material that you're studying about municipal securities is unfolding right across the street from my office. Across the street sits an old brick industrial building that was almost converted into lofts, condos, and townhomes except that the real estate market--as you may have heard--sort of went south before they could sell any of the units. I watched a few work crews install hundreds of windows and sandblast the original wooden beams, but this project never even got off the ground after that. The developers borrowed $15 million with nothing to show for it, and the lenders have sued to foreclose on the property.

A very familiar story playing out across America, isn't it?

What does this have to do with municipal securities? As you'll see from the article at the link below, the local park district now wants to purchase that huge former industrial campus with our tax dollars and use it for office space and recreational facilities. They'll have to borrow a ton of cash to buy the property now in foreclosure, and they'll do so only if we taxpayers vote "yes" in February to let them issue these municipal bonds backed by an increase in our property taxes. If the majority determines that tax payers should pay a few hundred bucks more a year in property taxes in order to expand the park system, the bonds will be issued. If the majority votes "no," the issue will die temporarily, until the politicians can think of another plan. It's kind of shocking to see how the village played their hand on this one. The village dragged out the development of the "Roos building" painfully by requiring all kinds of variances and rejecting round after round of architectural changes . . . by the time the developers got the village council to approve the project, the real estate market had completely turned south and--oopsie--no interested buyers at this time.
Now that the building is in foreclosure, that same local government steps in to buy it at a discount. Then again, this is basically Chicago here. I mean, you can see the Sears Tower by stepping outside and looking to your right. But it seems like some pretty strong-armed tactics for a village government to take just the same.
In any case, if you'd like to see how the same Series 7 material you're studying is unfolding right outside my office window, click on the link below:

Thursday, November 12, 2009

Public Offering Price (POP)

A customer buying a new municipal bond from a syndicate member pays the:
A. ask price, plus a commission
B. public offering price, plus a commission
C. public offering price, plus a reasonable markup
D. public offering price

What the above question is pointing out is that a primary offering of securities has one price called the "public offering price," or "POP." Built into that POP is the compensation to the underwriters and selling agents. This is true whether we're talking about municipal securities, corporate securities, mutual funds, or variable annuities. When securities are traded among investors in the secondary market, broker-dealers step in between and either make commissions or markups-markdowns. But when they act as underwriters on the primary market, their compensation is built into the POP.


Friday, November 6, 2009

Insider Trading

It's Friday morning and, as usual, I'm at the FINRA website looking up recent disciplinary actions. Today I find a well-known broker-dealer being fined for insufficient anti-money laundering policies. $600,000 is the fine, but I also know how much it costs to shoot advertisements involving helicopters, let alone running those ads in prime time, so I think their pocketbook will survive.
On the other hand, the individual referenced in the link I'll post below is done. Game over. Forced early retirement. As you'll see, when a broker-dealer is called in for investment banking work, they end up knowing information no one else has, information that can move the price of the company's stock up or down with near certainty. So, investment bankers are fiduciaries who have to keep the information confidential. Don't spread the news, and--for crying out loud--don't try to buy shares of the company's stock so you can dump it when the news becomes public. Tempting, sure. But it's a criminal violation. It leaves you open to all kinds of civil suits. And--as you'll see--it tends to end a registered representative's career permanently.

See what I'm talking about here:

Tuesday, November 3, 2009

Kicking the Series 7's Behind

I'm going to let one of our happy Series 7 customers write this blog post. In case you're thinking that passing the Series 7 is "impossible," see what my man Danny has to say below:

I just passed the Series 7 yesterday (Nov 2nd) and I wanted to thank you for your assistance. I've been sitting in on your free Friday webinars and they have been extremely helpful. Perhaps they were the key to me getting a 93% on the test!Your willingness to share your expertise and personal passion for this material is very uplifting, during a period of time when we (the test takers) are stressing out. You bring a level of reality to the material and your practical examples based on your real life experiences is very helpful. Keep it up, I'm off to the 66 now and will continue on the calls, I do enjoy them.

Danny Williams

The Series 7 Exam

Let's talk about the Series 7 exam itself. First, the basic facts:

  • 250 questions (plus 10 experimental)
  • 6 hours with a required "half-time" break
  • a calculator is provided--bring your photo ID only
  • you must be sponsored by a broker-dealer to take the test
  • to get a securities salesperson (agent) license from your state, you must also take the 63 or the 66 exam in virtually all states

Now let's dispel a few urban legends regarding the Series 7

  • there is no limit to the number of times you can take the test
  • however: you must wait 30 days to re-test after the first failed attempt, 30 days to re-test after the second failed attempt, then 6 months after every failed attempt going forward
  • the test does not adapt to anything you're doing on the computer
  • no one has the "actual Series 7 questions"

How do people perform on this exam?

  • on any given day, ~ 66% of those taking the test pass it
  • any company claiming to have a "90% pass rate or higher" is pulling a number out of thin air. how could anyone consistently beat the national average by 25+ points, especially when all other vendors have access to each others' materials? there are no secrets in the test prep industry
  • the average score is about 73% on the test
  • no one has results broken down by "first attempt," "second attempt," etc.

For more information on the Series 7 exam itself, go to YouTube and type in "Series 7 exam" or "What is a Series 7?" and click on our video clip.