Investools hit with SEC inquiry

Most people regularly see Investools commercials on television parading a string of allegedly successful investors across the tube singing praises of how they made globs of money from the program. These commercials seem to magically appear on every cable channel right before the company sponsors one of its sessions at a local hotel.

In a regulatory filing, the company said it was cooperating with an "informal inquiry" by the Securities and Exchange Commission. The regulators are looking at "representations by certain presenters in certain portions of their presentations at some of the company's seminars," the filing said.

The announcement of the SEC inquiry was made at the same time as an earnings miss. Shares of Investools (SWIM) fell sharply to below $9 on the news as numerous analysts downgraded the stock.

Investools combined with the brokerage ThinkorSwim in February 2007. The company was not profitable for the 10 years prior this integration (except in 1999). Since the combination the company has been profitable during 2007. In the new model, the company educates people at its seminars and then funnels them over to the online brokerage to set up new accounts. Certainly this is an improvement in business model.

You also have to give credit to Investools for its marketing muscle. The company’s logo and advertising is pervasive on the web, in print, and on the airwaves.

The concern of most detractors is if there is anything beneficial behind the hype. Many of the resources pushed as the “Investools method” can easily be found for free on the web. A number of websites including MSN Money, Yahoo, and HingeFire provide outstanding fundamental and technical analytical software for free that enables investors to successfully put the market edge in their corner.

According to David Phillips at 10Q Detective the problems with Investools includes using independent contractors who aren't licensed advisors, being an unaccredited educational institution, and providing coaches with less than 10 years investing experience. He also sites cite numerous accounting red flags in a 10Q Detective blog post in December. According to 10Q Detective, Investools is a Seminar Selling company, with no magic under the hood.

A recent summary states that it is Too Late to Cry “Wolf” at Investools. Only time will tell the end result of the SEC inquiry. Investools may need to reform its seminar tactics, which will break the revenue model of the company. Certainly the stock price is not likely to climb significantly until the situation is resolved.

I regularly urge investors to read and learn about investing on their own. There is a lot of high-priced snake oil promoted in the financial industry. No magic system with green and red arrows is going to suddenly make an investor rich, only hard work and a deep personal understanding of how the market operates will enable you to excel.

Most investors are best off focusing on the long term using low-cost mutual funds & ETFs; only active investors with profound grasp about the dynamics of the market beat the indexes over the long term. These active investors did not obtain their edge by attending high-cost seminars.