Crowdfunding is Here

Starting May 16, 2016, companies can use crowdfunding to offer and sell securities to the investing public. However, when you think of selling securities, don't confuse the publicly traded stock of, say, FB or SBUX, with the equity purchased through crowdfunding. As the SEC warns in their Investor Bulletin on the topic:
Illiquidity.  You will be limited in your ability to resell your investment for the first year and may need to hold your investment for an indefinite period of time.  Unlike investing in companies listed on a stock exchange where you can quickly and easily trade securities on a market, you may have to locate an interested buyer when you do seek to resell your crowdfunded investment. 

In other words, selling these securities would make trying to sell your home seem easy by comparison. On the other hand, buying these securities is about to become extremely easy. As the SEC explains, "Anyone can invest in a crowdfunding securities offering. Because of the risks involved with this type of investing, however, you are limited in how much you can invest during any 12-month period in these transactions.  The limitation on how much you can invest depends on your net worth and annual income." Basically, for lower-income and net-worth investors, a few thousand dollars per year can be invested in an early-stage company using crowdfunding. For higher-income and net-worth investors, up to about 10% of the lesser of their income or net worth can be invested--not to exceed $100,000 per year.
Frankly, I'm a little surprised at how liberal these restrictions are. Then again, the SEC is all about full disclosure, and crowdfunding investors will have to sign various acknowledgements before investing and will only be investing through entities registered with the SEC and FINRA. These intermediaries--broker-dealers, mostly--must provide all kinds of education to such investors, because this is about as high-risk as investing can get. As the SEC states, "Before you can make a crowdfunding investment, the broker-dealer or funding portal operating the crowdfunding platform you are using must ensure that you review educational materials about this type of investing.  In addition, you will have to positively affirm that you understand that you can lose all of your investment and that you can bear such a loss. You will also have to demonstrate that you understand the risks of crowdfunded investing."

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This is not the GMAT

I used to think certain customers were being paranoid when they asked if the computer will adapt to their answers at the testing center. Now that I've examined the structure of the GMAT exam, it all makes perfect sense. On the GMAT your answer to the first multiple-choice question determines the difficulty of the next question presented to you. If you miss the question, you get an easier question. Get that one right, and the difficulty level will rise, allowing you to score more points. The Series 65, on the other hand, generates 140 questions randomly when you fire up your test--no adaptations to what you're doing whatsoever on this exam. And, each question counts the same on the Series 65.

The GMAT also has a writing section scored by composition instructors and business professors, who use a "holistic" approach to score large batches of essays, as I did when teaching at Alabama State University back in the day. Good news, people--there are no essay questions on the Series 65 exam!

The GMAT teaches actual learning abilities/skills, while the Series 65 focuses on vocabulary, regulatory concerns, and basic features of securities investing. Therefore, the GMAT actually does put out "old test questions," while the Series 65 never does.

One advantage you get on the Series 65 exam vs. the GMAT is that you can mark questions for review and then change your answers on the Series 65.

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What's Up with this Fiduciary Standard for Brokers Thing?

You have probably heard some of the uproar surrounding a proposed rule that would define fiduciary standards for both broker-dealers and advisers uniformly. Currently, advisers are held to a higher fiduciary standard under the Investment Advisers Act of 1940 than broker-dealers, who are held to a mere "suitability" standard under the Securities Exchange Act of 1934. While advisers have to put the client's interests first, broker-dealers merely have to sell products that are suitable--and often the most lucrative to sell, as well.
The Department of Labor enforces ERISA, and four years ago they proposed a rule that would define anyone helping people save through a retirement account as a fiduciary. Although that rule was scrapped, they have just sent another one to the Office of Management and Budget, who has up to 90 days to review it before releasing it to the public. Dodd Frank required the SEC to do a study on a uniform definition of fiduciary standards, which they released back in 2011. Turns out, while the Department of Labor and the White House would love to force agents and broker-dealers to operate under the same standards that fiduciaries do under the Advisers Act, the SEC is not on the same page. The 5 commissioners still are not convinced there is any need for rulemaking here, and one of the Republican commissioners, Daniel Gallagher, fired back at the White House for leaking a memo recently designed to gain support for the DOL rule proposals making stockbrokers fiduciaries, just like their cousins in the advisory side of the business.
Some have stated that the brokerage industry's lobbying group SIFMA opposes any changes to fiduciary standards. Actually, they support a standard--as long as it's fair and does not hold brokers to the same fiduciary standards required of investment advisers.
How do I feel about the whole thing? That it's totally unnecessary. That investors have to pay for advice somehow, and that I myself save untold thousands using a broker-dealer (whom I never talk to) as opposed to giving up, say, 1%, of my account value for someone to take over and start driving with discretion. In other words--investors need different options. Many individuals in a 401(k) account would benefit from talking to a financial planner. Others might need a portfolio manager. And still others--like myself--know what they want to buy and just enter their orders online through a broker-dealer who gives NO ADVICE whatsoever and simply executes trades with accuracy and competence while maintaining custody of assets. Why not give investors as much choice as possible? Because this White House and its Cabinet are often unable to trust the intelligence of the typical American, who if left to his or her own devices would be doomed. Of course, I have a conflict of interest here--if a rule goes out requiring all Series 6 and 7 reps to also get their Series 65 or 66, this would be a major financial benefit to Pass the Test and ExamZone. But, still, the whole thing seems like more effort than it's worth to me.

Just Get it Over With Already!

Many people fear public speaking. So, it's not surprising when they get up before a group and rush through their talk in order to remove the anxiety as quickly as possible. As a kid the only thing that truly scared me was something most people take for granted--getting a haircut. I'm not sure why, but I would procrastinate the inevitable date with the barber as long as possible, until finally I would get up the nerve to deal with the anxiety. As soon as the little paper collar went around my neck, I would grip the armrests tightly and hold on for dear life. Just get it over with, please. As I got older, I must have tried over a dozen hair stylists. Even though I cared about my appearance, I just wanted the haircut to be over with. Not surprisingly, I ended up with some of the worst haircuts imaginable. Senior year, somebody's older sister gave me short bangs with long hair in the back, but I told myself I didn't care--it had saved me the dreaded trip to the barber or hair styling salon, so it was fine.
Nonsense. All I was doing was ignoring the big picture. The big picture was that I had hair, that this hair would have to be cut every so many weeks, and that I would, therefore, have to learn to deal with haircuts. Similarly, you have a painful stimulus to deal with called the Series 65 or Series 66 exam. Unfortunately, these tests are designed to make you perform at the testing center, eliminating wrong answers and thinking creatively, even when your palms are sweating and your tongue is thick with fear. I know, I know. You don't wanna, same way I didn't wanna get my haircut. And, the same way I would let Johnny Jedder's older sister ruin my hair at age 18, you are probably rushing through the practice questions with only one focus in mind--getting it over with.
Sorry. Until you are ready to sit down in the chair and work through practice questions for as long as 1 minute or more each, you will be spinning your wheels, just trying to make the pain go away.
I'm going to write about test-taking strategies up ahead, but the first step is to learn to accept the anxiety and learn to work through the questions in spite of it. Because unless you are already a CFP or PFS, dear friend, you can't just make it all go away the way I did:

The nuclear option

Purchasing Power

CPI measures the overall level of pricing for the goods and services that consumers buy over the month. Typically, the October number is compared both to September and the previous year's October. CPI can be positive or negative. If the CPI is running at 2% annually, investors are losing that much purchasing power. If, however, the CPI is negative, investors are gaining purchasing power.
So, if you got a question like the following, how would you answer it?

Aunt Alice keeps her extra cash in a coffee can hidden in a secret compartment of her basement. Last year, the CPI was -1%. Therefore, which of the following is accurate?
A. Aunt Alice's real rate of return was -1%
B. Aunt Alice's real rate of return was 0
C. Aunt Alice's real rate of return was +1%
D. Aunt Alice's real rate of return was -2%

EXPLANATION: although putting money in a coffee can is not an investment, Aunt Alice got lucky last year when prices fell by 1% overall. Therefore, she is 1% above the level of pricing. The answer is . . . C.

What the Series 65 or Series 66 Question Didn't Say

Lately, some of my tutoring clients have been using our textbook, Pass the 65, or Pass the 66, to write their own practice questions. Some of the questions that are coming out are outstanding, too. Like this one:

An investor interested in purchasing 100 shares of stock in Amazon should place a

A.      Sell Stop

B.      Buy Stop

C.      Market Order

D.     Buy Stop Limit

EXPLANATION: obviously, you can eliminate any answer with the word "sell" in it, but notice how the question seems to be missing key details. That will really do a number on a test taker, trust me. Don't panic. Whatever information was not provided is just as important as what was provided. What in the question justifies either a "buy stop" or a "buy stop limit" answer? I see nothing about wanting to buy only if the stock trades up at a certain price. All I see is that an investor wants to buy 100 shares of stock. So, if you want to get your order filled, you place a market order--Answer C. Right? At first, a question like this can seem too hard--just hang with it. Consider what the question said, and what it didn't. Need Help With Your Test?

Series 65 and Series 66 questions with TWO right answers?

Sometimes I hear tutoring clients state in frustration that "test questions often have a good answer and then a better answer." What is actually the case is that test questions have an answer that SORTA works and an answer that ACTUALLY works. Let's take a look at what you'll encounter at the exam center:
To determine how gross margins may have affected net margins, an investor using fundamental analysis techniques would examine the corporation's 
A) balance sheet 
B) income statement 
C) 8K 
D) 1041

DISCUSSION: We can rule out "1041," a tax form used by trusts and estates. We can rule out "balance sheet," too, as that is a static snapshot showing financial strength in terms of assets and liabilities. The results of operations over the quarter or the year are found on the income statement. Yes, but the income statement is also contained in an 8K! Therefore, there are 2 RIGHT ANSWERS!!!
Maybe not. Even if we cling to "8K" as an answer, what is our answer based on--the fact that we would open up the 8K for only one reason--to look at the income statement.
Upon further review, we see that the two answers are not equal. 8K kinda/sorta works, while income statement closes the deal, without question.
A good question will force you to think a while--which is okay, since you are entering a thinking person's profession. Good luck out there, people!

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