Friday, April 18, 2014
As an investor, I look for consumer discretionary companies that do one thing really well (Krispy Kreme, Starbucks, McDonald's) or financial companies that make money from many different lines of business (TD Ameritrade, Wells Fargo). My investment in TD Ameritrade (AMTD) has been outstanding--up around 90% in about a year--and, fortunately, it happened right after I decided to take much larger stakes in a few companies' stocks as opposed to spreading a little bit of money among several dozen. I mean, if you're not comfortable investing $10,000 into a stock, why "play around" with $400? If it drops, it drops the same % for everybody, and if you happen to hit a double or triple, where are you on a $400 investment compared to an investment of $10,000? Reading the WSJ online article announcing Morgan Stanley's recent surge in income and profits, I noticed that broker-dealers can make money in many different ways. They can underwrite securities. They can open an affiliated wealth management firm. They can trade securities for big profits. And, of course, they earn commissions whenever their customers want to trade, which is often. All along the way, they earn bazillions on unused customer cash, which is largely why I bought so many shares of TD Ameritrade when interest rates were low--as rates rise, AMTD will make more money. Unless they don't. In any case, here are some highlights from the WSJ Online article: Morgan Stanley's net income rose to $1.51 billion from $962 million. On a per-share basis, which reflects the payment of preferred dividends, the firm earned 74 cents, or 68 cents excluding accounting adjustments. Analysts polled by Thomson Reuters had expected adjusted earnings of 59 cents a share. Revenue rose 10% to $8.93 billion. Excluding accounting-related adjustments tied to the firm's own debt prices, revenue increased 4% to $8.8 billion, exceeding analysts' average estimate of $8.52 billion. Not too bad, huh?
Thursday, April 10, 2014
Series 7 exam candidates scour the web for Series 7 exam sample questions. Let's take a look at the kind of question you might see on your Series 7 exam: Which of the following statements accurately explains an investor's "marginal tax rate"? A. It is the rate applied to qualified dividends and long-term capital gains B. It is the rate of tax paid on the last dollar of income earned C. It is the rate applied to all of the investor's ordinary income for the year D. It is the average rate of taxes paid, calculated by dividing taxes paid by taxable income EXPLANATION: as always, take whatever you are given in the question and use it to eliminate answer choices. Choice A is trying to confuse you--investors might pay 15% or 20% (or even 0%) on qualified dividends and long-term capital gains, but they don't pay their marginal rate. A is eliminated. B looks good, but let's make sure. Choice C doesn't have it right, either--if somebody makes enough money to be pushed into the 33% bracket, that rate only applies to some of his income. C is eliminated. And, Choice D is defining the investor's effective tax rate. Choice B is the answer. An investor who tops out in the 33% bracket also pays 10, 15, 25, and 28% on various swaths of his income. He pays 33% on the "last dollar of income earned."
Wednesday, April 9, 2014
Can your employing broker-dealer prevent you from bringing your customers with you to your new employing member firm when you leave for a better opportunity? Yes. Can your employing broker-dealer stop your customers from transferring their account to your your new employing member firm? Absolutely not. See the difference? As FINRA explains perfectly in a Notice to Members, "As a condition of employment, certain members require their registered representatives to sign employment contracts in which each registered representative agrees that when he or she leaves the firm, he or she will not take, copy, or share with others any firm records. In addition, the registered representative may agree that, for a certain period of time following his or her departure from the firm, he or she will not solicit the firm's customers for business. Nonetheless, when a registered representative leaves his or her firm for a position at a different firm, clients serviced by the registered representative may decide to continue their relationship with the registered representative by transferring their accounts to the registered representative's new firm." The specific rule that prohibits interference with a customer's decision to transfer the account in such cases is FINRA 2140. Since you wouldn't otherwise be able to sleep tonight, I'll go ahead and reproduce that rule for you here: No member or person associated with a member shall interfere with a customer's request to transfer his or her account in connection with the change in employment of the customer's registered representative where the account is not subject to any lien for monies owed by the customer or other bona fide claim. Prohibited interference includes, but is not limited to, seeking a judicial order or decree that would bar or restrict the submission, delivery or acceptance of a written request from a customer to transfer his or her account." So, if you leave your firm for greener pastures, please do not violate your employment contract by poaching customers or--probably worse--walking out with their account information on a little thumb drive. But, if your customers decide to move their account when you make your move, your firm cannot play hardball with them and try to interfere with an ACAT transfer.