Mutual Fund Prospectus, SAI, Shareholder Reports

To REALLY understand mutual funds--and investment vehicles in general--download a mutual fund prospectus, and an SAI, and a shareholder report. If you want the scaled-down, bare-bones disclosure document, download the prospectus or the even slimmer summary prospectus. You'll find the risks and objectives and policies of the fund, the fees and expenses, the taxation issues, etc. But if you want to see precisely what's in the portfolio, download the statement of additional information or SAI. For example, when I look at the prospectus for the American Balanced Fund, I see that: "The fund invests in a broad range of securities, including common stocks and investment-grade bonds (rated Baa3 or better or BBB- or better by Nationally Recognized Statistical Rating Organizations designated by the fund’s investment adviser or unrated but determined to be of equivalent quality). The fund also invests in securities issued and guaranteed by the U.S. government and by federal agencies and instrumentalities. In addition, the fund may invest a portion of its   assets in common stocks, most of which have a history of paying dividends, bonds and other securities of issuers domiciled outside the United States." Okay, that's a good general statement that could attract or repel from an investment in this conservative mutual fund. But if I'm willing to download the statement of additional information/SAI, I can get more detail on the portfolio. For example, I see that within the 69.73% of the portfolio devoted to common stock, there are some 45,386,600 shares of Wells Fargo worth at the time $1.25 billion. The portfolio holds 16 stocks in the "financials" sector, which represents both 10.8% of the fund's industry allocation and approximately $5.3 billion of market value.  By the way, I notice that this mutual fund holds large positions in at least four other companies that issue and/or manage mutual funds. Hey--why not--it's a great business? So, the SAI gives a much more detailed look at the mutual fund portfolio than the prospectus or summary prospectus.  If I want to know that and also how much money the fund pays in expenses to all the various service providers, I need to download the shareholder report--either semi-annual or annual. In this report, I discover that the following parties were paid the following amounts:
  Investment advisory services   121,350,000
  Distribution services  182,738,000
  Transfer agent services  42,807,000
  Administrative services   30,064,000
  Reports to shareholders  2,393,000
  Registration statement and prospectus  762,000
  Trustees’ compensation  458,000
  Auditing and legal   133,000
  Custodian   278,000
  Other   2,214,000
TOTAL EXPENSES $383,197,000

So, the fund's income statement shows that the portfolio earned $1,306,571,000 in dividends and interest, and after deducting $383,197,000 for expenses, the net investment income was $923,374,000. Notice that the adviser earned about $121 million managing the portfolio; the distributor earned about $182 million marketing the shares and providing other services. Heck, just generating the semi-annual and annual reports themselves cost about $2.4 million a year! In any case, I find this stuff interesting. It's painful to dig in at first, but the rewards are pretty high. I mean, if you understand mutual funds to this level, how hard are the test questions really going to be?

RIMM, Research In Motion, BlackBerry

I've been tutoring series 65/66 exam candidates a LOT lately, and one area most seem to struggle with is fundamental analysis. Not sure why so many people are intimidated by the income statement, balance sheet, or statement of cash flows. If you're a business owner, pull up Quickbooks and print your financial statments--how did you do last quarter or last year in terms of sales and profits? That's your income statement. What's your current financial condition in terms of assets and liabilities? That's your balance sheet. If you took a lot of depreciation expenses on your income statement, you might want to see how much cash you generated on the statement of cash flows; or, you can just take your net income after tax on the income statement and add back the depreciation you took on equipment, real estate or other fixed asset.
What's any of this got to do with RIMM/Research In Motion/BlackBerry? Take a look at this scary snippet from a recent headline on the company: "Following quarter after quarter of slashed financial outlooks and missed targets, the company made the ominous choice to discontinue making future predictions about its BlackBerry sales or profit." Huh? What IS a share of common stock? As your exam might say, it's merely a claim on any earnings/profits/dividends the company might have. Well, at RIM right now, there's none of that going on. Last year they made a profit of $934 million; this year they LOST $125 million. So, a share of RIMM right now is a share of a profit that comes in just south of ZERO. Will the company turn around? Here's another snippet: The new CEO said the next several quarters will be difficult ones as the company transitions to a new, bet-the-house platform called BlackBerry 10. That is still on track to become available at the end of the year -- far later than RIM initally planned." Oh, great--so it all comes down to this new platform, and that platform is already suffering release delays. Even if the thing does work out, there will almost certainly be negative news items pushing this stock down indefinitely. Then again, maybe you're a value investor, and you see hidden assets on the balance sheet. Maybe you just feel that sales will improve again, that this "loss" is really due to a one-time event, and as the news drags the stock price down, you load up your shopping cart and just wait for the inevitable turnaround that inconveniently hasn't taken place yet.
Or, you care NOTHING about the COMPANY called Research In Motion because you use technical analysis. Regardless of what the company does, you just trade the stock RIMM based on its price patterns, volume levels, 200-day moving average, what have you. Whatever the case, try to use the financial news to help clarify what you're studying. If you go into the testing center with no real-world understanding whatsoever .. . well, try not to do that. The passing score on the Series 65 exam is 72%; the passing score on the Series 66 exam is 75%. Overstudy?
How?

How do I set up my own RIA?

Most people taking the Series 65 exam are going to work for an investment adviser, but some are actually setting up their own RIA/registered investment advisory firm. Either way, first understand that passing the Series 65 exam is just a pre-requisite. If you pass the Series 65, you can then apply for a license from your state. IARs (investment adviser reps) register with a Form U4; investment advisers register via Form ADV. Criminal and regulatory disclosure is provided on both forms, and this is where it all goes wrong for a handful of people, as you might have seen from other blog posts. For example, some people pass the exam with flying colors but then have to answer "yes" they were convicted of a felony, or convicted of a misdemeanor involving money or dishonesty. For some, this is a game-over.
Of course, most of you have no criminal or regulatory issues, so you can go ahead and take the Series 65 exam all on your own, knowing that the test is really the only issue. Use a U10, pay your money, buy your materials and study, then schedule your exam and pass it.
That would be Step 1.
If setting up your own RIA, you should also be focusing on all of that, and many people choose to use compliance consultants to do so. RIA Registrar includes our materials in their package to folks setting up RIAs. Google them if interested. Our exam materials, btw, are at www.passthe65.com

Series 65 or Series 66 Tutoring?

Looking for a little help passing the Series 65 or Series 66 exam?

We have a solid track record of helping people pass their exams, recently and over the previous 7 years.

We use GoToMeeting to provide you with an individualized study platform in which you can move at your own pace and get the help YOU need.

For more information, click the title of this post.

Occupying Wall Street

So once again folks want to add more regulations on the cartoon-like villain named "Wall Street." These folks obviously have never waded through, say, the Securities Exchange Act of 1934 and the rules "promulgated thereunder," or the dense, barely readable FINRA/NASD manual. If they had, they might see how futile it seems to add MORE regulations to an already highly regulated industry. The SEC, FINRA, and the state regulators have plenty of tools at their disposal. They can go after violators in administrative actions or civil court, maybe even refer cases to criminal prosecutors. And, believe it or not, the compliance officers at broker-dealers and investment advisers are pretty good at catching mischief internally.
Making fat bonuses and accepting bailout money--neither one is a crime. If Uncle Sam is handing out cash, take it, I say. These financial firms provide a huge benefit to the economy by raising capital for government entities and corporations and are behind every single 401K and IRA account in America. Rather than bash Wall Street, educate yourself on this fascinating part of our amazing economic machine.

Updates

A few things have changed due to Dodd Frank. Some items could be testable. You can get a free update at www.passthe65.com/updates or www.passthe66.com/updates. The main changes have to do with the ADV Part 2, which will be in narrative vs. check-box format, and will have a supplement on the IARs overseeing/involved with a client's account. Also, AUM is now $100m for SEC (federal covered) eligibility.

Trouble with FINRA

If you click the title of this post, first of all, remember to hit the back arrow; otherwise, you're gone. Secondly, know that this is all public information. The New Jersey Bureau of Securities--what the test calls the Administrator--operates in a very public fashion. If you get in trouble, they publish your name, address, and registration number. And they tell the world what you did and why that was, like, not allowed. For example, the respondent whom we find first on the list, under "Aaron, Shawn E." got in trouble with FINRA (formerly NASD) for, apparently, threatening and intimidating an issuer of common stock, telling them they'd better listen up, or he could drive down the market price of their stock based on his large holdings. Well, like a lot of guys, he overstated the size of his holdings, but that's not what got him in trouble with NASD. It was the whole threatening/extortion thing that really ticked them off. Notice how NASD (now FINRA) suspended him for two years--meaning he might be able to get back in after requalifying by exam and probably finding a firm willing to do heightened supervision for a while, assuming anyone wants to hire him. Also notice that NASD/FINRA notify the state Administrator when somebody gets in trouble with them. And, that the state has a whole separate hearing to determine if the license should be--in this case--revoked.