The Lure Of Leverage
Like any other products, investments are subject to the immutable law of supply and demand-even leveraged ETFs, optioned fund baskets and their fee-laden brethren. The appeal of these hybrids is contingent upon a credulous audience buying into the cloudy premise of enhanced performance and/or diversification. That's why they are marketed as "leveraged" and not "optioned" products. They would likely be much less popular if marketed to investors as what they are, day trading options, and less popular still when offered to retirees.

Their continued success, indeed their very existence, relies on investor demand fed by the improbable dream of making a killing. Those whose portfolios were eviscerated in the 2008 bloodbath seem particularly susceptible to the promise of recouping their losses through double- or triple-leveraged voodoo. If investors understood the cryptic strategies and bloated fees underpinning these products, their sales would soon diminish.

But who will educate investors to the dangers of these speculative packaged products? Certainly not the Wall Street product manufacturers, their marketing allies in the major wirehouses or the advertising-dependent mass media. The regulatory bodies could provide some clarification and protection for investors against the precarious practices of speculative products, but they are evidently too busy wrestling with the subtleties of those "onerous" 12b-1 fees.

Advisor Duty
Leveraged and inverse ETFs represent just a tiny fraction of the larger derivatives market and its host of packaged, optioned and leveraged products. The responsibility for protecting investors against the dangers of these speculative time bombs lies mainly with advisors, since the building blocks of the speculation cult are individuals. Changing the culture of speculation among registered representatives and their clients removes the fuel for further economic combustion by these products.

This entails overcoming the marketing sophistication and advertising budgets of Wall Street product manufacturers. While that may seem daunting, I believe it is a battle worth fighting. I also believe that en masse, advisors have the clout to challenge the SEC and get results.

The roughly 100,000 top brokers and financial advisors that represent the core of financial management in the U.S. have enormous power as a group. Advisors are the core income engines for the entire industry. They have the bully pulpit with their clients, an influential position that can wield enormous power. Advisors have the opportunity to apply their values to help guide their clients away from speculation and back to fundamental investing.

Back to Basics
That means satisfactory portfolio performance with sufficient downside protection can be achieved for most investors with a diversified asset allocation, an appropriate mix of stocks, bonds, cash equivalents and non-leveraged ETFs.

This strategy may lack the excitement of triple-leveraged fund baskets or the thrill of being on the right side of a derivative trade, but it can give clients the safety net they seek, contribute to the productive use of investment capital and hopefully save investors from the inherent perils of speculative derivatives.

I do not suggest that this will be an easily won victory. At the very heart of the challenge is convincing individual investors to ignore the forcefully persuasive marketing messages they are subjected to daily. Getting some clients to resist the urge to plunge into the Wall Street casino and take a flyer on a triple-leveraged roulette bet may be difficult, but as advisors, we have an obligation to do our best to change this mind-set.

Some advisors may contend that entrusting investment management to the array of derivative products frees them up to spend more time building their practice. But the perception of our advice as relevant is imperiled when we rely on side-bet products with black box strategies, leveraged risk and veiled fees. And even if we were free to spend more time on our practice, our client relationships would inevitably be strained if the loyalty shifted from advisor to product.