WALMART SELLS FOOD. They sell car tires. Board games too. You can stop at any Walmart in the world and buy the same plethora of consumer goods. One roof, dozens of product areas, thousands of individual items. This "cross-vertical" strategy has many perks to consumers like us. But it's not without flaws. From brand dilution to in-store clutter, down to a lack of item expertise when you ask questions of employees - there are issues with "selling everything to everyone." The financial world is no different. Many national household names in financial services are "one name, many businesses." Retail banking, wealth management, investment research, custodial services, market making, investment banking, private market access. The list goes on. There is value in these institutions for consumers like us. Just as there is value to buying my snow tires and my peanut butter in the same Walmart store. But there's a core tension we must be aware of when financial services are a one-stop shop. The same connective tissue that creates value for customers also introduces deep conflicts of interest. Ready to Launch Let's examine SpaceX's recent initial public offering. Morgan Stanley served as a joint investment bank (with Goldman Sachs) and sole stabilization agent for the IPO. Morgan Stanley managed early trading, retail distribution, and - yes - earned massive underwriting fees (to the tune of ~$100M). As a consequence of Morgan Stanley's involvement, clients of Morgan Stanley and their subsidiary, eTrade, received special access to the IPO. For example, long-time Tesla shareholders who held TSLA in a Morgan Stanley or E*TRADE account for at least 10 years qualified for a supplemental allocation of SpaceX on top of standard offerings. Nice perk! In other scenarios, such cross-pollination might lead to lower-cost loans. It can lead to access to unique private investments. You can ask a question of your big bank and get a world-class expert to provide their niche answer. There's an upside here. Stuck on the Launch pad? But the same fuel that can propel you into the atmosphere can also blow up in your face. Deeper connections and internal conflicts are the same exact mechanism, just pointed in opposite directions. Let's step back to the late 1990s, when WorldCom was a darling of Wall Street. But much of WorldCom's meteoric rise was a result of perverse incentives at a large bank. Telecom analyst Jack Grubman of Salomon Smith Barney (owned by Citigroup) issued glowing ratings on WorldCom and other telecom stocks throughout the 90s. Those ratings flowed down to Salomon brokers on Main Street, who pushed WorldCom stock on everyday investors like you and me. SSB/Citigroup also acted as WorldCom's investment banker, earning huge fees as WorldCom acquired more and more small telecom firms. The same bank also provided wealth management services to WorldCom's CEO, Bernie Ebbers, frequently showering him with discounted shares of new IPOs. Give WorldCom a great review. Sell its stock to Main Street, pushing the price higher. Lend WorldCom more money to acquire smaller companies. Earn huge fees. Give the CEO backdoor access. Give them more great reviews. Sell more stock to Main Street...etc. The word you're looking for is: perverse. The rest is history. WorldCom collapsed amid $11 billion in accounting fraud. Grubman resigned, was banned from the securities industry, and paid fines. Ebbers was dragged in front of Congress and separately sentenced to 25 years in prison. Many individual investors were left holding the bag. The episode became a symbol of Wall Street's research/banking conflicts. Model Rockets, Too But the same conflicts happen on a smaller scale, too. Enter the "Smith" family. This is a true story. The Smiths have about $2.5M invested with a wealth management advisor at Bank A. I won't call out Bank A, but you know them. Their CEO is a borderline household name. You own them in any/all USA index fund. The Smiths' taxable account has about $200,000 in fixed-income assets (yielding around 4% interest). Also, the Smiths bought a small vacation home last year, splitting costs with family members. Their share was about $200,000. "How," the Smiths asked their advisor, "should we best pay for our share of the home? Where should we pull the $200,000 from?" Their Bank A advisor suggested they use a pledged asset line of credit. They are using their investments as collateral to borrow the $200,000 at an 8% interest rate. They still own the $200,000 in fixed income that earns 4%, while also borrowing $200,000 at 8%. They have locked in a negative arbitrage of $8000 per year. Bank A is still collecting their AUM fee on the $200,000 of invested assets - another $2000 per year. Did the Smiths receive advice in their best interest? Did their advisor/banker benefit from the path he steered them down? Did Bank A's diverse services work in the Smiths' favor? I doubt the Smiths' banker / advisor is a bad actor. But his incentives are conflicted. As the late, great Charlie Munger would remind us: Show me the incentives, I'll show you the outcome. It's Double-Edged The same size and clout that provides early access to the SpaceX IPO also leads to WorldCom's fraud and the bad advice given to the Smiths. The mega-financial firms are a double-edged sword. You don't get the good without risking the bad. Caveat emptor.   Jesse Cramer writes “The Best Interest” blog and creates the podcast, “Personal Finance for Long Term Investors.” After a decade as an aerospace engineer, Jesse switched careers and now helps families plan their retirements at an independent fiduciary firm. Jesse, his wife, and two daughters live outside Rochester, NY. His previous article was Happy Conclusion.

BY NOW, YOU'VE probably heard the story of the 25-year-old wunderkind Leopold Aschenbrenner. After graduating as valedictorian from Columbia University at age 19, he worked for FTX, the crypto trading firm, then found his way to OpenAI, where he worked as a researcher for about a year, until mid-2024. In the months after he left OpenAI, Aschenbrenner wrote a 165-page paper titled “Situational Awareness,” in which he detailed his views on the future of artificial intelligence. The paper was full of dramatic pronouncements—“the exponential is in full swing now,” he wrote—and ended up being shared widely online. Capitalizing on that attention, Aschenbrenner established a hedge fund to make bets on the AI economy. He named the fund Situational Awareness, and at first, things went remarkably well. In its first two years, it grew to $45 billion in assets as he correctly identified some of the biggest beneficiaries of the AI build-out, including memory chip maker SK Hynix, fuel cell producer Bloom Energy and AI infrastructure provider CoreWeave. The fund also shorted traditional software company stocks, betting that AI would pressure their business models. And Aschenbrenner invested in some private companies, including Anthropic, the developer of Claude. For a while, these bets worked out extraordinarily well. In its first two years, the fund reportedly gained 1,000%. The rest of Wall Street began to follow him closely. In a June profile, The Wall Street Journal wrote that his fund’s regulatory filings “are studied like scripture.” But earlier this summer, both of the trends Aschenbrenner had been betting on reversed at the same time. Fears that AI infrastructure spending was becoming unsustainable led many of these stocks to fall 30% or more. And the traditional software stocks that Situational Awareness had been betting against—companies like Adobe and Salesforce.com—began to rebound, with some rising 20% or more.  Those reversals alone would have been a problem, but it turned out that Situational Awareness had also been borrowing on margin to increase the size of its bets. According to estimates, it was leveraged up to 400%. That led lenders to begin closing in. It got even worse from there, when the fund’s high profile began to work against it. As it attempted to sell positions to reduce its debt, it got trapped. Because of the size of the orders it was placing, and their concentration among AI stocks, other traders were able to guess that Situational Awareness was the seller. That spooked investors, leading others to sell, thus compounding a downward spiral. In a letter to investors, Aschenbrenner compared it to a bank run. Over the course of the next few weeks, as the fund’s assets dropped from $45 billion to just $10 billion, Aschenbrenner found himself with few options. At the end of July, he announced that the fund had sold virtually its entire portfolio of publicly-traded stocks to the investment firm Citadel. Because the positions were so large and thus difficult to sell on the open market, Situational Awareness was forced to sell them at what was reportedly a significant discount. This story might not necessarily seem relevant for individual investors. But there are, I think, several conclusions to draw from this episode. First, and perhaps most important, it’s a reminder that risk management should always come first. After so many years of market gains, it would be easy to become complacent. But it’s precisely when the market is doing so well that investors should be diligent in considering rebalancing. This story also reminds us of the importance of diversification. To be sure, Situational Awareness made mistakes, but it also got one very important thing right: It was diversified. Though it had to conduct a fire sale of its publicly-traded holdings, it still holds a multi-billion-dollar stake in Anthropic. Without that, it might have faced total liquidation. The lesson: We should never go too far out on a limb with any investment idea. British economist John Maynard Keynes was famous for his observation that, “markets can remain irrational longer than you can remain solvent.” In other words, for an investment to be successful, it needs to be correct and correct over the right timeframe. In an ironic twist, in the few weeks since Situational Awareness offloaded its holdings at a discount, many have rebounded. If it had been able to hang on a little longer, the fund might have been able to avoid the situation it was forced into. The lesson: Liquidity is important. This is one of the many reasons I recommend that individual investors avoid private funds—because an asset really only has value if you can sell it when you want to, or need to. The Situational Awareness story also teaches us something about the narratives that surround the stock market. Because of the number of variables involved, it’s all too easy for market observers to paint virtually any picture they wish. And since no one has a crystal ball, no one can say that anyone else is necessarily wrong at any given time. Concerns about “circular” deals in the AI ecosystem have ebbed and flowed over the past few years, as have worries about the impact of AI on traditional software companies. The lesson: We should be careful to never worry too much about the news of the day because it’s often just that—today’s news, only to be replaced by a potentially different narrative tomorrow. There’s an easy comparison between the events at Situational Awareness and the failure in the 1990s of the hedge fund Long-Term Capital Management (LTCM). Both got off to a fast start, both involved leverage and both were run by extraordinarily impressive individuals. At LTCM, two of the founders had Nobel Prizes. But ultimately, IQ doesn’t guarantee success. Nothing does. And that, I think, is another key lesson for investors to draw. In managing our personal investments, we should always look for ways to maintain a balanced, center-lane approach.   Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam's Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.

MANY OF US HAVE little more than a weak, reused password standing between our financial assets and a remote attacker—one armed with powerful tools and a database of passwords from security breaches. This is a losing battle. It’s the most likely way for weak computer security to put our finances at risk. Think this can’t happen to you? I’ll bet you have at least one password taken in a big security breach. A quick way to find out is entering your email address at Troy Hunt’s HaveIBeenPwned site. My address turns up in almost a dozen big cyberattacks. We are notoriously bad at creating strong passwords and remembering them. When you decide to create stronger, unique passwords for each site, you quickly discover that managing dozens of randomly generated, site-specific passwords by hand is a headache. Don’t fret. Password managers like LastPass, Dashlane and 1Password make short work of it. A password manager puts all your passwords in an encrypted vault, leaving you with just one password to remember. You want to make this password really strong and unforgettable. The password manager then fills in the right password for mobile apps and websites whenever you use them. What can you expect from a good manager?

• Up-to-date access to your password vault on all devices, regardless of the device’s operating system.
• Updates to your vault as you create new accounts or update existing passwords.
• A random password generator that creates really strong, unique passwords. Those passwords will meet each site’s requirements for length and allowed characters.
• A security challenge which guides you through the work of replacing existing poor passwords—those which are known to be compromised, weak or easily guessed, or which you’ve used more than once.
• Emergency access to your vault by someone you choose, as well as password sharing with, say, family members for your Amazon Prime or Netflix account.
• Two-factor authentication for extra vault security.

Some of these are only available in paid versions of the service. Despite knowing better, I procrastinated in evaluating password managers. That changed the day I tried to picture life for my spouse after I leave this vale of tears. I visualized the chores I handle: Banking, bill paying and investment management all involve online accounts. That brought my password problem into focus. A list of passwords in a binder, next to our wills, isn’t secure and it’s a pain to keep up. After experimenting with a free trial, I bought a family subscription. Moving my password vault from low-ranked to the top 1% took a couple of weekends. Each weekend, I’d spend an hour or two changing passwords, guided by the security challenge and with help from the password generator. Do this on your home PC or Mac, not an office computer. I started with high-value accounts: email, cellular carrier, and then banks and brokerages. Why email? Most web sites let you reset a password by emailing a link to the address on file. If hackers have access to your inbox, they’ll use it to access every online account. The cellular account is also important if you’ve enabled two-factor authentication that triggers text messages with secure codes. What if someone hacks into your password manager’s vault? If you pick a great vault password, the odds of this are low. But when you have all your eggs in one basket, you want to ensure that basket stays safe. That’s what led me to the YubiKey 5 series hardware keys. When you use a YubiKey with a password manager, the manager encrypts your vault twice, once with your vault password and again with a secret it gets from the YubiKey. For convenience, I’m using two models of YubiKey. I use YubiKey 5 Nano with my PC and Mac. Meanwhile, YubiKey 5 NFC stays on my keyring for use with my phone. The latter should work with an iPhone 7 or newer, as well as an Android phone with NFC (near field communication). David Powell has written software or led engineering teams for 35 years. He enjoys work, vegan fine dining, cycling and travel with his spouse. His previous article was Playing Defense. [xyz-ihs snippet="Donate"]