Broker Investment Account Statements: misleading By Design

This is the first in a series of articles that could encourage the “regulators” to change their direction and focus. Quick as they are to punish product salespersons, and focus on costs instead of quality and income, most of their efforts prove counter-productive and more expensive for investors. It almost(?) seems that they work for the “Master’s of the Universe” and against the average investor/shareholder.

In my experience, I’ve determined that most regulators are blind followers of “da law”, with little functional knowledge of investing. They write their quota of traffic tickets, punch the clock, and repeat the time of action with the next victim.

Let’s give these terriers better guidance, and turn their generally rude behavior on the real malfeasants in the institutional hierarchy. We need clearer statement information, better products, and fairer pricing. The financial industry “Police Force” (SEC, DOL, FINRA, etc) is ignoring all three.

We’ll be looking at several additional issues, including the following:

  • Requiring Clients to pay Fixed Fees Instead of Variable Expenses
  • Allowing expensive Pricing for On Line Trading In complete Service Firms
  • Tacking Service Fees, and SEC Fees, On Top of Everything Else
  • Hijacking 401ks Within Institutions in spite of of Low Income Only Product Choices
  • Holding Interest Rates Down as Part of a “Long Con”

“Compliance” related employment is one of the fastest growing specialized fields in America. We are expected to believe that the regulatory oversight protects us, and makes us safe. But, in reality, it does simply increase costs, interfere with progress, and make life miserable for financial sets practitioners.

It paralyzes independent thought, reduces productivity in every area it touches, and institutionalizes ridiculous redundancies, while turning nit-picking obstructionism into an art form.

And we are paying dearly for the regulatory overload

The DOL is attacking costs within 401k and IRA investment programs while they ignore the high risk products and anemic income production inside.

The SEC requires small advisory businesses to comply with rules designed for huge organizations while ignoring both the misleading statement information provided by institutional Wall Street, and the trillions in excessive “service” fees that rub our nostrils raw.

Compliance officers levy fines on their own employees for minor clerical errors, just to avoid a confrontation with or whipping by FINRA’s “cat-o’-nine-tails”. As a consequence, they make it virtually impossible for their dependent advisors to bring better and fairer products to the market place, or to do timely new product marketing.

While small firm compliance directors huddle in fear, regulatory agencies poll institutional Wall Street firms for their sage advice. Who do you think benefits from that collaboration?


Wall Street Prepared Account Statements

Most specialized investors would agree that ASSET ALLOCATION (growth purpose vs. income purpose), various DIVERSIFICATION guidelines (position size, sector participation, etc.), basic security QUALITY (risk level), and realized INCOME production are important areas of portfolio development that all investors should be helped to understand.

Wall Street prepared statements ignore all but one of these… the realized income.

As a private portfolio manager, the first thing on my “regulators-could-fix-this” list is the account allocation “pie chart” that my clients see on their monthly account statements.

  • According to my personal National Financial sets (NFS is the custodian subsidiary of Fidelity Investments) statements, my investment portfolios (at age 71) are 97% invested in equities, which most normal people would think method the stock market.
  • I know that only about 15% of my total portfolio is in growth purpose securities, while the rest is invested for tax free and taxable (in the IRAs) income, and that the actual shared stocks are Investment Grade Value Stocks (please Google IGVSI if you think I’m talking about what Wall Street calls “value stocks”).

The account statements show nothing about the “purpose” of my securities, the sectors they belong to, or their “basic” risk level? Nothing specifies or summarizes my actual portfolio diversification numbers by either individual security, or by class of security (income vs. equity).

According to NFS (the paid custodian of my total investment portfolio) I am almost 100% invested in equities… as are most of my clients. In reality, after this 9+ year rally, my portfolios contain fewer individual shared stocks than in either the pre-crash summer of 1999 or in June of 2007.


Several years ago, I received a call from an irate client: “What have you done to my Municipal Bond Portfolio”, he blustered, “my statement says you’ve got me 100% in the stock market!”

What I had done was take smaller than expected profits on his strange lot individual bond holdings and replace them with a diversified portfolio of Tax Free Closed End Funds (CEFs) paying about twice as much interest, in monthly increments. Not one shared stock in the lot.

  • Why “smaller than expected”? Because Wall Street firms put shamefully unrealistic bond market values on customer account statements. Go ahead, ask your broker to get you a live “bid” on your individual bond holdings. Why has this been tolerated for so long?

Yes, CEFs do “trade like equities”, but should the statement’s “ACCOUNT ALLOCATION” pie chart tell the unsophisticated investor (or an unscrupulous product salesperson), that the account is fully invested in the stock market?

Not by any stretch of the regulatory imagination should portfolios containing hundreds of municipal bonds, corporate bonds, preferred stock, senior loans, and convertible securities, etc. for already one eye blink be considered in the same financial risk category as any shared stock.


Should a Blackrock Municipal Income Trust or a Pimco Muni Income Fund be represented to the investor in the exact same category as a penny stock? The regulations seem to allow it.

  • Couldn’t Mutual Funds show the Morningstar “risk” assessment? Shouldn’t stock signs be accompanied by the S & P quality rankings? Wouldn’t it be nice to know the % of portfolio for each security or fund?
  • The information is freely obtainable, and a whole lot easier to understand than the two and a half pages of boiler plate footnotes and legalese at the bottom of account statements. Smile if you’ve never read already half of the fine print.

As an different to individual income securities, CEF professionally managed income portfolios are traded for regular commissions instead of “manipulatable”, and invisible, mark-ups. Individual bond portfolios are dangerously illiquid and impossible to price precisely on statements. Where’s the required consumer protection warning label about these financial cigarettes!

CEFs eliminate both unrealistic pricing AND illiquidity… but the financial institutions don’t want you to know that they exist.

  • And (conspiracy theory again), are the individual “strange lot ” locaiongs an attempt to diversify or simply a set-up for a “double-dip mark-up” tax swap a year or two later.
  • Perhaps unwittingly, some financial advisors use shorter “duration” bonds to soften the “on paper” market value impact of rising interest rates, while the regulators nod their (empty) heads in approval.
  • Don’t they understand that market value change rarely has any impact on the income produced by fixed income securities.

CEFs provide moment income portfolio diversification AND an opportunity to take advantage of changing interest rates, in either direction. Comprenez? But most institutions seem to insist that their salespeople focus in other places.


At a conference a few years ago, I had an opportunity to present my “misleading statement observation” to a National Financial sets (NFS) representative. Long story short, NFS had no interest in changing its statement presentation.

An equity is an equity is an equity (who cares what message is received by the customer)… unless, of course, the boss wants the statements to rule that consumer in a particular direction.

  • Interesting or, perhaps upsetting, NFS has recently set up a new statement sub-category called “Exchange Traded Products” where they now list the endless varieties of ETFs… not “investments”, not “securities”, not “sector speculations”.
  • Funny, but these market timing gaming devices are (drum roll please) traded like equities! AND aren’t CEFs Exchange Traded Products, but with a much safer recipe?

If you own open end equity and income Mutual Funds, stock options, futures contracts, etc., I’m guessing that their “account allocation” is equally as inappropriate as it is for the income CEFs.


The solution isn’t too difficult; all the information is out there. S &P publishes shared stock quality rankings and Morningstar publishes apples-to-apples comparisons of income (and equity) CEFs. Mutual Funds are risk analyzed in addition.

  • Financial Institutions are not required to disclose portfolio content that “we the investors” need in order to understand what their employees have sold us. Is it the regulators or the institutions that are culpable.
  • Why is it that employees of financial institutions are being deemed “fiduciaries” when the company itself is not? How much “lobbying” did that take?

Let’s make them (the institutions) preface the pie charts (yes, there should be more than one) with layman’s language expectation paragraphs and simple explanations of the elements in at the minimum three new and required account allocation “pies”.

  • The Risk Assessment Pie is a summary of individual security portfolio risk assessment arrows and S & P “basic rankings” inside the portfolio. The * should state that the less financially risky income purpose securities are more likely to be price impacted by rising interest rate expectations, BUT, that market value generally has little or no impact on the income produced.
  • The Sector Diversification Pie is a sector by sector breakdown of the individual securities AND products inside the portfolio. My personal portfolio, for example, would show 90% national municipal bonds, 4% NY bonds, 4% NJ bonds, and 2% PA bonds. It could be further separated by: quality, duration, and risk.
  • The Asset Allocation by Purpose Pie is a growth vs. income purpose, asset allocation assessment. The purpose pie chart for my IRA portfolios would show: 70% income generation, 30% growth of capital… my objective is to generate more than enough income to pay the RMD, 1/12 monthly.

There is also a lot of work to be done in the “Current Holdings” section. Every security description should be required to include the S & P Ranking, or Morningstar Risk Arrow/examination, a sector categorization, and the % of the total portfolio cost basis that the security represents.

This is not new information… standard portfolio management software can do most of it, for example:

  • Honeywell, Int’l, HON, S & P Ranking = A, Sector = Aerospace & Defense… and (1.5% of total portfolio cost basis) next to the cost basis. The estimated provide, and cost per proportion are already provided.
  • Pimco Income Strategy Fund CEF, PFL, No S & P Rating, Morningstar examination = X Stars, Taxable Bond Income… 2.75% of portfolio cost basis.

Conspiracy Theorists, rev up your imaginations!

Why is none of this important information included in our account statements? and “why oh why”…

  • are there no CEFs in 401k product menus
  • has your Wall Street firm broker never once suggested that you add an income CEF to your portfolio,
  • not already once, ever, have you heard about the scores of income CEFs that have been paying yields well above what you have been receiving… since the early 1990’s
  • is a Vanguard Retirement Fund yielding less than 2%, invested 30% in equities, and 15% in non US debt, one of the most popular (over $10 Billion) in the 401k space… when so much better yielding “stuff” is obtainable.

Let’s get this information out there, and force the regulators to do something about this, and a growing number of other issues, that they have ordinarily (if not negligently) ignored.

Hmmm, should I sue my brokerage firm or the regulators for not telling me about much better yields and potentially dangerous portfolio content or conditions?

Leave a Reply