The Lehman and Merrill Woes

With the Fannie/Freddie bailout on the books, Merrill Lynch and Bear Stearns bought up by rivals, and Lehman Brothers’ collapse all but complete, we all start feeling a little stress. But make no mistake, at JWA, we are committed to the long term success of investor portfolios and believe free capital markets will continue to thrive. Yet, men with all their foibles and “feet of clay” make bad decisions – even those at the largest and most fabled institutions in our country. The real question is what this means to you as an individual investor.

Investors are generally led to believe the larger a company is, or the longer they have been around, the safer they are. One could argue that comfort with larger firms is based on an instinctual belief of safety in numbers. Unfortunately, this is not always the case. The performance based compensation practices at Lehman and throughout Wall Street was structured to pay big bonuses when bankers bet right, but only imposed losses on shareholders when they bet wrong. This mentality led to the mortgage-backed securities meltdown. Their size and reputation allowed them the resources to dig an even deeper hole.

Larger firms are not immune to certain risks. When you deposit your money with a financial institution one of two things will happen. They will place it in an account for you to direct (custodian), or they will turn around and loan/invest it for their benefit (bank). Custodians simply hold your investments and make their money on trading/holding fees. Banks on the other hand make their money from lending and investing your money. If they invest in poor opportunities they may fail and you may lose. The problem for investors is the distinction between these entities is becoming increasingly blurred. Most, if not all of the companies mentioned are engaged in banking functions on top of their custodial responsibilities. The results of this marriage are that many investors are now stuck holding investments that are either worth less or worthless.

What makes this situation even worse is that clients of these troubled larger firms went to them seeking objective investment advice. Most, likely did not find it. Independent registered investment advisors (RIA) on the other hand, are structured to provide objectivity. RIA’s offer transparent pricing and do not accept compensation from anyone but their clients (in the form of fees). Additionally, independent firms are required to take on a fiduciary duty to you, the client.

At JWA we use Fidelity, Schwab and TD Ameritrade to hold client accounts. They act as our custodian. (We hold no client funds at JWA Financial Group). These custodians hold client investments and facilitate trading in your account. Additionally, as an independent financial advisory firm, we have no incentive to use in-house products. We do not have any. Our job is to find the best possible strategy for your portfolio at a fair and reasonable price, acting again, in a fiduciary manner. This is not the case at large brokerage houses with an ever-growing number of new products to sell.

It is a shame the average investor has to absorb the restructuring costs of these troubled institutions. It is even more tragic to think how much still remains to be decided among the larger firms. There are millions of investors, and trillions of dollars, that are now trapped with a plethora of unanswered questions. These investors are not sure who they will be calling in a few weeks as many brokers from these famed institutions will undoubtedly jump ship. Staying the course is hard enough with a sound plan and good advisor, much less without one.

If you own individual stock in Bear Stearns, Lehman, or Merrill you will be affected. Some active fund managers can own as much as 5% in one individual stock. Therefore, all mutual funds do not necessarily provide cover. We protect our clients against these individual financial risks by having them own the market through what we call super-diversification in over 12,000 securities. If you are already super-diversified, be thankful, and stay the course. We cannot promise that you will not be affected during this market downturn. However, by spreading your risk so broadly, you will be in a position to reap the rewards more swiftly when the markets inevitably turn positive. Although hard to realize now, the times we are seeing are exactly the times when fortunes are kept, and thus bigger fortunes are made in the future.

If you have any doubts as to whether or not you are properly invested, now may be the time to give us a call. Learning from these events and questioning outdated Wall Street practices is the first step to wealth without worry.

JWA Financial Group 6200 LBJ Freeway, Suite 180 Dallas, TX 75240

972.661.3355 phone 877.JWA. 9300 (877.592.9300) toll-free        www.jwafinancialgroup.com

This article is intended as general information and not as advice to specific individuals.