Sometimes it helps to reduce complex outcomes to more easily grasped symbols.

Which is how we ended up with the latest shorthand…letters of the alphabet used as symbols to describe the shape of eventual economic recovery.

The rules are simple enough.  A downward sloping trajectory refers to a contraction in economic output…ditto…in reverse…for the upward sloping sign.

1.  The classic symbol for a recovery is the letter “V”.

This is distinguished by the vertiginous drop in production, which then touches bottom and reverses course on a dime, and skyrockets right back to where it was before the recession hit.

This is found in short, mild recessions that quickly evaporate.  No such luck this time.

2.  If anything, we are more likely to have a “U” shaped recovery.

This is where it takes time to build a base at the bottom before clawing our way back to prosperity…a feature of lingering recessions.

3. Unless, that is…we end up with the dreaded “L”

If we continue to print money with abandon and total lack of restraint, while propping up Zombie banks and dinosaur industrials, we could end up like Japan in their lost two decades beginning in 1989.

This gives rise to the dreaded “L” shaped recovery.  A steep drop, followed by a long leveling off at the bottom.  We went through this in the thirties.  History could repeat itself.

4. Then there are the “M” and “W”shapes.

Things get complicated when you have back to back expansions and recoveries, as we did in the decade 1999-2009.  The tech stock bubble of 2000 became the tech stock debacle of 2000-2002.  Followed by a five year bull market, and then the savage 2007-2009 bear market after the debt and real estate bubble burst.

It would look like an “M” if you had recovery, decline, recovery, decline.

Or a “W” if you started with decline, and ended in ultimate recovery.

This volatility unnerves investors, shaking their confidence in the future.

5. My prediction?  Not exactly a letter, but the symbol for Square Root: √

A deep decline, followed by a partial rapid recovery, leading into a prolonged period of stasis, as we suffer from the debauchery of indiscriminate deficit spending.

Stagflation.  That seventies show.  Again.

Not all of television is a vast wasteland.

Winston Churchill once famously described the Balkans as an area that produced more history than they could consume locally.  World War I being a case in point.

Which basically sums up my impression of the magnitude and pace of change that began with the Bear Stearns bailout in March of 2008.

Other than the global depression of the thirties, I cannot think of a time when the economic landscape has been so convulsed by the forces of change…and the sheer volume and  velocity of government intervention.

I absorb as much as I can from print media and online sources, but find myself fatigued and overwhelmed at the effort.

Like trying to get a drink from a fire-hose.

So I’ve gotten into the habit of having Larry Kudlow explain it all to me on his CNBC cable business show, The Kudlow Report, broadcast 7-8 PM Eastern.

Be careful not to tune in during the prior hour, or you will be exposed to Jim Cramer, and risk being in range the next time he tosses a chair in your direction.

Fox has a new business cable channel, but its a distant second in my book.  I’ve never been able to warm up to Bloomberg’s cable business channel.  Too tame and bloodless for my taste.

Kudlow is a veteran, both of Washington and Wall Street…

…and he has assembled perhaps the best team of television journalists to help sift and sort the major emerging business and financial  themes of the day.

What surprised me at first was the range and depth of technical discussion, involving the intricacies of how the Federal Reserve functions, along with the other regulatory apparatus of the federal government.

Of course, with a business pedigree, his tilt is towards economic freedom and less intervention, but he is careful to give the opposing viewpoint equal time during panel discussions.

Steve Moore from the Wall Street Journal is paired against Robert Reich, former Clinton labor secretary, to make the gladiatorial combat more equitable.

Senators from both sides of the aisle fight for air time on his show, and his guests run the gamut from idealistic libertarians to unvarnished socialists.

My endorsement of the show is not wholly unqualified.

Sometimes the discussion degenerates into shouting matches, and it’s a sad spectacle to see such academically and financially-pedigreed panelists reduced to such tawdry mudslinging and wrestle-mania braggadocio.

Maybe that just proves how much out of step I am with modern society.

I can remember when libraries expected patrons to be quiet. When movie audiences were hushed during the feature.

And only Marine drill sergeants could casually sprinkle profanity into everyday conversation.

Now that we’ve solved the dilemma of funding universal health care, let’s move on to remedy another gaping hole in the tax collecting bucket.

The real estate lobby has enshrined residential real estate as the most sacred and untouchable of all exemptions and deductions.

Some actually make sense to me.  Of course, real estate taxes should be deductible, otherwise it would represent an intolerable burden of uneven taxation.

And the current $8,000 tax credit for first time buyers is the only example of bailout spending I have seen that is targeted to achieve the biggest bang for the buck, and is matched to sync up with the trough of the recession.

But then come the truly excessive giveaways.

Most egregious of all, is the deduction for home mortgage interest.  Which is truly welfare for the rich.

Let’s do the math:

The average single family home price nationally has fallen to approximately $160,000.  Assuming high leverage (a new FHA loan, for example), plan on a new mortgage of $150,000, at 5.5%.  That would be $8,250 in interest the first year, a number that steadily decreases as the mortgage amortizes, and principal payments steadily increase.

Yet the standard deduction for a married couple filing jointly is $11,400 in 2009.  So the interest deduction is wasted…even a renting couple can claim the full $11,400.

It’s a different story for the jumbo loan on the McMansion.

They could easily rack up $30,000 or more in deductible interest, a subsidy born in large measure by the moderate income families who could not benefit from deductions in excess of the standard deduction.

Which is why we are grossly over-housed as a nation.  Housing is, after all, a consumption expenditure, that does nothing to increase savings or productivity.

The error is compounded, when we allow up to $1 million in acquisition indebtedness to qualify for the interest deduction on not just the primary home, but also the second, vacation home.

They say we have the governance we deserve in a democracy, which is pretty depressing as philosophies go.

I suppose that means we have the tax code we deserve in a flawed democracy, cravenly beholden to powerful special interest groups and lobbies.

We are both addicted to and addled by our love affair with consumption.

Eating too much food, consuming too much energy, driving extravagantly wasteful urban assault vehicles, and living in housing several orders of magnitude larger than what would be prudent.

And being goaded and prodded by tax incentives to facilitate such overconsumption.

To assuage our guilt.

Why not?  It’s deductible…right?

Health care will become a universal entitlement sometime this year.

The only question now…is how to pay for it.

My proposal is hardly original.  It was, in fact, a cornerstone of the McCain campaign last year.

And that would be to tax health care benefits paid to employees by their employers.

Since fairness is the dominant theme in this era of “eat the rich” rampant populism, the question arises…how is it fair that such a large chunk of employee compensation escapes the clutches of the tax collector?

This..in an era when the Feds are trying to figure out how to tax personal use phone calls on company provided phones…and your local grocery store will soon be tasked to put a tax on high calorie sodas and snack foods.

Of course, it is a relic of World War II wage and price controls, allowing a de-facto wage increase to sneak in under the radar in the guise of a non wage benefit.

Not only would taxing health care benefits help pay for much, if not most of the cost of bringing coverage to the uninsured, it would also rationalize health care spending going forward.

First, because employees will be flummoxed when they learn that their employer has been footing nearly $1,000 per month for an employee with spousal and minor children coverage.  All employees see, or even comprehend, is their monthly contribution, as well as the deductibles and copays.

It might then dawn on many such workers that they would be better off with a stripped down, catastrophic coverage plan (very high deductible) costing maybe a third of what the gold-plated plan offered, and then transferring the savings to higher wage income.

Which leads to another blinding moment of insight.

It will then become clear that what we carelessly call health insurance is in fact an amalgam of insurance with prepaid health care.

Nothing will cut the Gordian knot of health care reform unless we can involve consumers in the bargaining and negotiating involved to rein in our runaway spending.

We do not ask our employers to pay our auto or homeowners insurance…and have learned through trial and error, by increasing deductibles or reducing the scope of coverage, how to control such expenditures.

I am convinced that much of the stonewalling by the insurance carriers opposed to reform is their desire to continue the rickety machinery of third party payment, so as to obscure the true cost of their services.

Of course, the government will fail the test if it also continues the third party payment model, as it currently does with Medicare, where it blindly pays for services without regard to successful outcomes.

We will know we have succeeded in health care reform, when all medical service providers aggressively price and market their services in a competitive marketplace, as is now the case with Lasik eye surgery and cosmetic surgery…submarkets that compete for discretionary consumer spending…and which are not distorted by the third party payment diversion.

Don’t hold your breath while waiting for such logic to prevail.

This is a continuation of yesterday’s post, which is a reprint of an article its entirety from the June 16, 2009  issue of Smart Money.

(Copyright: Smart Money Magazine)

 6. “Once I’ve done the plan, I’m outta here…”

Financial planners like to give you the sense that they’ll be with you every step of the way through important financial decisions. But in reality, many clients find that a once-attentive planner becomes increasingly elusive as time wears on. When Kratz worked for a financial advisory firm several years ago, he says he adopted more than 1,000 clients who had been discarded by colleagues, usually because they no longer produced adequate income to keep their planners interested. “Typically, the first year was an intense relationship, but clients complained that they stopped hearing from the adviser after that,” he says. The reason? The commissions had dried up - a lot of products, especially insurance products, are based on one year of commissions before they drop off, says Kratz.

To avoid a shutout, ask prospective financial planners at the interview stage how often you should expect to be in touch. A good reply, says Coupeville, Wash., Certified Financial Planner Kathleen Cotton, is about four times in the first three months to hammer out a plan, then at least once or twice a year after that.

7. “…especially if you’re not so well-to-do.”

The past decade has seen a big push among planners to target high-net-worth clients, and many planners today have a minimum asset requirement—typically $100,000. Considering that, according to the 2004 Census by the U.S. Census Bureau, American households have a median net worth of about $44,000, that leaves a lot of folks out in the cold.

Luckily, middle-class clients do have some alternatives. The Garrett Planning Network (www.garrettplanningnetwork .com) is a ring of 260 planners across the nation who work primarily with the $100,000-and-under income set, charging hourly fees for periodic advice. Similarly, John Sestina has his own network of 20 planners scattered around the U.S.; he says they can even handle some clients entirely over the phone (www.sestina.com). “There’s a large influx of middle-class retirees that have assets that need to be put somewhere, so more and more companies are trying to tap into this market,” says Percy E. Bolton, committee member of the Certified Financial Planner Board of Standards and founder of Pasadena, Calif.–based Percy E. Bolton Associates. “There are two waves of change today—the planners that are going after the super-rich and those that are going after the middle- and upper-middle-class clients.”

8. “Confused? That’s the point.”

Many clients meet with planners only to leave with more questions than answers. “It’s like going to the doctor—you think you understand when you’re there, but then you walk out and think, What was it they said?” says Madeline Moore, a Portland, Ore.–based financial planner. Unfortunately, this confusion is often used to manipulate you.

Sherry Fabricant and her husband, of Plano, Tex., started investing $120,000 with a financial planner at an area brokerage firm at the end of 1997. The planner told them that withdrawal of funds before a five-year period would incur a sliding fee (5 percent of assets in the first year, 4 in the second, and so on). However, not only did the planner put them in high-fee funds without their understanding but he didn’t explain that with any additional investment transaction, the five-year restriction would begin anew. “Recently, we made a huge sell and a huge purchase,” says Fabricant, “and it wasn’t explained that our five years would then start over.”

How can you protect yourself? Ask plenty of questions and write down the responses, and if you don’t get straight answers, move on. “Remember, they work for you,” says Sestina. “So if you never understand what they’re saying, fire them.”

9. “In fact, I don’t even understand your plan.”

There’s a plethora of computer software today designed to help financial planners with clients’ asset allocation, cash flow, retirement planning, and so on. These tools make for quick results, but they can also cause problems—especially when planners don’t understand how the software works.

When Scott Dauenhauer worked at one major brokerage firm, he and his colleagues churned out boilerplate documents that, he says, all looked alike and usually had glaring mistakes— everything from a wrong age (which can render the entire plan wrong) to a misunderstanding of the client’s goals. The danger was that most of his fellow advisers had little training in planning, “so you have a document that’s probably wrong and an adviser who can’t tell you why,” Dauenhauer says.

Cotton suggests that you quiz your planner about any computer-generated plan to make sure he really understands it. You could ask, say, whether the software assumes a flat rate of return on investments or how it deals with taxation issues. You can also test your CFP’s plan against the free service at Financeware.com, which analyzes plans using real stock market returns—and is therefore more realistic than the flat rate used by most planners’ programs.

10. “Good luck busting me for malpractice.”

Since the financial-planning industry is so loosely organized, it’s not surprising that there are no firm regulations regarding consumer grievances. The CFP Board enforces a code of ethics, “but given the limitations of a voluntary certification program, it’s kind of after-the-fact enforcement,” says Roper. So what can you do if you get cheated? If your planner, like most, holds a securities license, you go to FINRA, the Financial Industry Regulatory Authority. But be prepared to wait. Although the majority of arbitration cases are settled in around six months, if your case goes to a hearing, it could take up to 16 months to get a decision.

Even then, there’s no guarantee you’ll get a favorable outcome: In 2007, only 37 percent of investors who had a hearing recovered any money. Also, since arbitration can cost between $15,000 and $50,000, it makes sense only if you’ve lost more than $30,000. If you’re out less than that, start by writing a formal letter of complaint to the supervising manager, then write one to FINRA, the Securities and Exchange Commission, or your state securities regulator. You’re unlikely to get any money back, says Eccleston, but the adviser might face disciplinary action. Even better: Protect yourself in advance by checking out a prospective financial planner’s record. The SEC lists client complaints and regulatory violations on its website (www.adviserinfo.sec.gov), where you can also get details on both SEC- and state-registered planners.

Don’t give me any credit for this one. I have reprinted this article its entirety from the June 16, 2009  issue of Smart Money (though we’ve added all the links). It is a devastating insight and exposé of the dirty little secrets in the world of financial planning.

Talk about biting the hand that feeds you!

(Copyright: SmartMoney Magazine)

1. “I got this gig on a whim.”

There’s a huge market of consumers out there desperately seeking financial guidance—especially in the wake of the 2008 market crash. And a wealth of advisers are eager to serve them. In the early 1990s, only about 25,000 people called themselves financial planners, according to Boston-based research firm Dalbar, but by 2006 that number had climbed to around 650,000. Part of the reason for the boom is that anyone can present themselves as a financial planner—one of several generic titles for someone who provides advice to clients about how best to handle their money. (As opposed to money managers, for example, who actually manage your accounts.) And since there’s no required training or experience necessary, why not hang out a shingle and tap into the profit?

But it can get even trickier than terminology—many of those seeking to provide you with financial advice are actually trying to sell you something. Bank-employed pitchmen are often called “personal financial consultants,” for example, while insurance salesmen may present themselves as “financial advisers.” Indeed, “The bulk of people who market themselves as financial advisers are salespeople,” says the Consumer Federation of America’s director of investor protection, Barbara Roper.

How can you be sure you’re hiring a qualified pro? You can start by narrowing the field to one of the 56,000 Certified Financial Planner licensees out there (visit www.cfp.net). In contrast to run-of-the- mill planners and advisers, CFPs do have to meet specific requirements: Their license means three years’ minimum experience and passing a comprehensive 10-hour exam. Next, grill candidates on how much real planning they’ve done. Wind Lake, Wis.–based CFP Jim Cantrell says he’s met advisers who claim to have 10 years’ experience, “then you find out that they became a planner only a year ago and spent eight years as a bank manager.”

2. “I’m a jack-of-all-trades and master of none.”

James Eccleston, a Chicago-based securities lawyer, recalls a client of his who met with disaster when a financial planner failed to advise him about the tax ramifications of exercising stock options. Instead, the planner convinced the client to buy a second home, Eccleston says, using the stock as collateral for the mortgage, “and the coffin was sealed, because this was a 100-percent position in Cisco.” When Cisco stock tanked during the tech-bubble fallout, the client’s portfolio plunged, from $1.7 million to about $5,400. He was forced to liquidate all his shares and take a $100,000 second mortgage on his primary home to meet margin calls—then got whacked with a $400,000 tax bill.

A good financial planner should work alongside outside professionals— accountants, lawyers, insurance brokers— to offer you the best service. However, at some firms, like the one Eccleston’s client used, the planner tries to do everything himself. Beware. “If they’re claiming that they have the expertise to do it all, I would seriously question that,” Roper says. Like tax planning, estate planning poses great risks, says Eccleston, since flaws might not show up until the client retires or dies. His advice: Doublecheck anything your financial planner says about taxes or estate planning with a lawyer or CPA.

3. “I have ghostwriters draw up your plan.”

So you met with a planner, outlined your goals, and left feeling that your financial future was in good hands. It might come as a disappointment, then, to learn that this wonderful planner won’t be finishing the job. Outsourcing financial plans to a secondary firm or freelancer is a growing trend, especially among big firms, enabling planners to spend more of their time wooing new clients. “It’s the current corruption in financial planning,” says John E. Sestina, cofounder of the National Association of Personal Financial Advisors. But when a plan is done by outsiders, Sestina says, the information gets stale; there is less intimacy and more room for error. “You can’t act on issues as soon as they crop up,” he says.

And don’t assume the planner will offer up this detail without prompting, says Sherry Rhoades, a Plano, Tex., certified financial planner who says she doesn’t outsource. “[There’s] no need for the client to know.”

4. “I’m a high-pressure shill in disguise.”

The majority of financial planners work on commission, which doesn’t mean they’re bad people but can make for some bad financial planning. When Laguna Hills, Calif.–based Certified Financial Planner Scott Dauenhauer worked at a few big-name brokerage firms during the ’90s, he says he was constantly being pushed into selling the firm’s proprietary—and often poorly performing—mutual funds, variable annuities, or wrap accounts. “We got pressured to sell them because the payout was higher,” says Dauenhauer. “But there was no talk of whether it was right for the client.”

To avoid such conflicts of interest, shop for a planner through the National Association of Personal Financial Advisors (www.napfa.org), a strictly feeonly group (no charge-backs, kickbacks, trails, or other hidden commissions) with more than 1,700 members. NAPFA planners have to sign an oath stating that they’ll never receive commissions and promising to put their clients’ best interests first. Along with having three years’ experience, they must take 60 hours of continuing education every two years and submit sample plans for review by other NAPFA members.

5. “Am I ‘fee-only’ or ‘fee-based’? Um, let’s not split hairs.”

As the public’s suspicion of commission-driven planners has grown, so has the market for “fee-only” planning—in which financial planners charge for the advice they provide but don’t get any commission on the products they sell. The popularity of the approach has inspired some financial planners “to clothe themselves in the ‘fee’ word,” says New York–based CPA and former NAPFA Chairman Gary Schatsky. Indeed, more than 40 percent of certified financial planners now call themselves “fee-based,” which means that they charge you an upfront fee and collect commissions on products they recommend, according to the Certified Financial Planner Board of Standards.

According to the most recent statistics from the CFP Board, fee-based revenue for registered representatives had climbed to roughly 33 percent of total revenue in 2004, versus 10 percent of total revenue in 1996—and the trend is still going strong. To be sure that your “fee-only” or “feebased” planner is true to his claims, ask for a written breakdown of fees, especially those associated with each investment product, suggests Virginia-based CFP Randall Kratz. “If someone doesn’t have what he makes in writing, I wouldn’t work with him,” he says.

(Tune in tomorrow for the rest!)

You may have read recently about the brewing scandal involving state pension fund managers pocketing money from asset managers bidding to manage public funds.

As always, where money and politics intersect, this is going to get very ugly.

And it may be just the tip of the iceberg.

I’ve long advocated for the discount brokerage firms, and have had accounts with Schwab, Fidelity, TD Ameritrade, E-Trade and Scottrade.

But you need to pay close attention when these firms trot out their “select” list of “independent” investment advisers for those clients who seek such assistance.

Fidelity (nicknamed “Fido” on the street) recently announced that they will begin charging financial advisers when the firm refers high net worth clients to them.

Fido had been a principled holdout…up to now.  Schwab and TD Ameritrade already have their hand in the till, profiting from their referrals.

Where self interest is involved, ethics and conflict of interest are the first casualties.

You can expect a steady outpouring of rationalization and self justification for this move…but don’t even for a minute fall for it.

The culture on Wall Street is that the customer is above all else, a revenue stream to be diverted and bled dry and parsed out, like any other packaged investment, on terms that best suit the packagers and promoters.

It is even possible that a client might be referred to a high quality adviser, but then, that is entirely beside the point.

Both the sponsoring broker and participating adviser are parties to this compromised bargain, and any subsequent recommendation is forever tainted by the price tag buried deep inside the ultimate management fee.

Since this is yet another cost of doing business, it will ultimately be paid by the client.

There is no excuse or justification for such payola.

For one simple reason.  Whenever there are kickbacks, rebates, or any other form of under the table, opaque and undisclosed compensation…the motivation is not to act as a fiduciary with the client’s best interests in mind.

It is simply to move the merchandise, after marking up the price.

If you are ever in the market for an independent adviser, you must ask this question…and get an answer in writing.

What compensation have you received, or will you pay, from any and all sources other than your client’s fee income…including but not limited to:

• Cash payments, deferred compensation, or payment in securities
• Subsidized office/staff expense
• Reimbursed advertising expenses
• Below market rate information technology and/or trade execution

This will make them squirm.  Because pay-to-play is so deeply and covertly embedded in the investment/retirement complex.

Just about everyone now knows what a CFP (Certified Financial Planner) is…and does.

Yet you may not know about NAPFA…the National Association of Personal Financial Advisers.

Within the CFP ranks are advisers who earn money from commissions — selling financial products and services, and those who earn fee income in their service to clients….with some drawing from both sources.

In any event, they are obligated to disclose any and all income sources to their clients.

I always thought of NAPFA as the Greenpeace of the advisory corps, as they disavowed any income other than fee income from clients…placing them on a supposedly higher ethical plane than those whose judgment might be tempered by injudicious sources of compensation.

So it was with both surprise and sadness that I learned that the SEC has charged James Putman, and an employee of his firm, Wealth Management, LLC in Appleton, Wisconsin– a NAPFA member– with taking nearly $1.25 million in kickbacks related to certain investments they made for clients.

Incredibly, Putman had earlier served as past president of the 2,000 plus member organization….which had long served as a watchdog and scold to the more freewheeling corps of financial advisers.

It gets worse.

The SEC has recently charged Matthew Weitzman, an Armonk N.Y. investment adviser (and NAPFA) member with stealing $6 million in client funds for personal use.

The victims include both terminally ill and mentally-impaired clients.

Another NAPFA member, Julie Jarvis, from Columbus, Ohio,  was charged by the SEC with stealing money from elderly clients and using it to buy property in the Caribbean.

NAPFA had long boasted that they had raised the bar higher, to burnish their own credentials.  It’s members are required to log in twice as many hours of continuing education, and sign a fiduciary oath.   No doubt they are in damage control mode now, and no organization should be held responsible for an errant member.

I soon learned that ethics was an extremely malleable concept in the CFP fraternity.

I remember clearly the required ethics class where the instructor related the story of how he disclosed to his client that his commission on a recent variable annuity purchase was well in excess of $50,000.

In the funhouse mirror world of the SEC, full disclosure trumps any number of sins of omission or commission.

Just so long as you disclose the compensation, you are free to plunder without restraint or remorse.

And you are under no obligation to inform the client that there are high quality variable annuities with lower costs…and absolutely no commissions.

If this watered down mea culpa disclosure is offered as a benign case lesson in financial ethics, you begin to comprehend the magnitude of the ethical gap as the profession stands today.

The elderly especially, and the financially unsophisticated are always and forever at risk.

Because they are too trusting and credulous.