Today's plundering is not done with violence, theft and slaughter, but through subtle deceptions. Through the use of titles such as "wealth managers" and "financial consultants," together with clever marketing designed to induce a relationship of trust and confidence, today's brokers and insurance agents receive the trust of their fellow Americans. Yet few of these brokers and insurance agents, in my experience, practice as expert, objective, trusted advisors in the manner that their clients justly expect and deserve.
The result? An extraction of rents from the portfolios of our fellow Americans. This must end. And the way to end is is simple - subject everyone who provides financial and investment advice to a non-waivable fiduciary standard of conduct.
What is a fiduciary? It's simple. When a person acts as YOUR fiduciary:
1) The fiduciary represents you, the client, and act as your expert, trusted representative. They avoid conflicts of interest wherever possible. For any conflicts of interest which are unavoidable, these are managed by the fiduciary in order that you are not harmed.
2) The fiduciary acts with the care of an expert, undertaking due diligence prior to undertaking any recommendations, and ensuring that any fees and expenses you pay are reasonable. Because, as academic research has confirmed, over and over - higher fees and costs associated with investment products lead to lower returns.
3) The fiduciary is candid with you, even telling you things (like: "you need to save more) that you may not desire to hear. The fiduciary lets the truth be known, in all of its stark realities.
I update and revise this piece, and I tone down the rhetoric ... a little. But the message remains the same - if Wall Street's huge diversion of the returns of the capital markets, away from the providers of capital and into its pockets - continues, then not only is the financial security of our fellow citizens at risk, but also the economic future of America itself.
OBJECTIVE, EXPERT PORTFOLIO REVIEWS REVEAL WALL STREET'S SACKING OF THE PORTFOLIOS OF INDIVIDUAL AMERICANS
Time and time again I review the portfolios of my fellow Americans who come to me for a second opinion. Most of these hard-working, dedicated savers have invested with broker-dealer firms and their registered representatives ("stockbrokers").
As I review the investment portfolios, I nearly always find expensive products. Some are sold for up-front sales loads (commissions) of 5% to 12% (or even much higher). Other investment products possess extraordinarily high annual total fees and costs.
Most of the investment products - sold to unsuspecting customers by the "financial advisors" and "wealth managers" and "financial consultants" of these brokerage and insurance companies - never survive due diligence by an expert, trusted advisor. These products simply don't fulfill the hype which Wall Street accords them.
The person who has found their way to me for a second opinion has no idea of the many different ways the investment products are providing compensation to the brokerage firm. He or she "trusted" their broker. They often felt that their broker wasn't even getting paid, and acting gratuitously. Never do those seeking a second opinion realize how much in fees and costs they were paying.
The multiple (and often simultaneous) extraction of fees results from sales commissions, 12b-1 fees, investment advisory fees (for dual registrants), payment for order flow, payment for shelf space, payment of soft dollars, and other nefarious arrangements. Wall Street does a good job of disguising many of these payments, and hiding others in the fine print of hundred-page disclosure documents.
Nearly always I find that the client is paying total fees and costs greater than 2% a year, often more than 3% a year, and sometimes even greater than 4% a year.
And here's the rub. More expensive products = less returns for the investor. The academic research on this point is clear.
Even worse, seldom are these portfolios allocated into carefully selected asset classes. Our friends and neighbors are sold often illiquid investments in asset classes that have poor long-term expected returns. No expertise is applied. Because, far too often, the "broker" or "insurance agent" has received training on "how to sell," and not the education we would expect of an investment expert.
Additionally, nearly always the investments themselves and/or the overall investment portfolio is structured so poorly that high income taxes are paid each year, unnecessarily. The "tax drag" on individual's investment portfolios further diminishes the future growth of the portfolio.
Want some real-world examples? See the results of two of my portfolio reviews here and here (in Section 1.A.).
If a well-diversified portfolio can earn an investor a gross amount averaging 8% a year, but that investor loses 2%-4% a year to high fees and costs, and also loses another 1% to 2% a year due to avoidable tax inefficiencies, the client will only earn 2% to 5% a year. For many, that's barely keeping up with inflation. So much for that person's future financial security.
WALL STREET'S SACKING OF THE AMERICAN ECONOMY
Wall Street's diversion of the returns of individual portfolios does not just affect the portfolios of individual Americans. This enormous intermediation also drags down the U.S. economy.
Over and over again Congress hears from Wall Street firms that they provide the "grease" and the "fuel" of the modern economy, and hence nothing must interfere with them. Yet even Adam Smith recognized the need for prudent regulation, via professional standards of conduct.
Without prudent regulation, Wall Street has become not a pleasant oil for our U.S. economic engine, but rather a dirty sludge that slows down economic growth and endangers the future of the United States itself.
Steve Denning, writing for Forbes, summarized the findings of a 2015 report by the International Monetary Fund, stating: "The excessive financialization of the U.S. economy reduces GDP growth by 2% every year, according to a new study by International Monetary Fund. That’s a massive drag on the economy–some $320 billion per year. Wall Street has thus become, not just a moral problem with rampant illegality and outlandish compensation of executives and traders: Wall Street is a macro-economic problem of the first order."
In essence, as the returns of the capital markets are diverted away from individual Americans - the owners of capital - to Wall Street, the accumulation of capital falls. This results in less accumulated capital for investment purposes - an effect that compounds over time with severe negative consequences for the long-term health of the U.S. economy. The cost of capital to corporations increases. Innovation, without capital, equates to missed opportunities for economic growth.
Much of the growth of the financial sector over the past 40 years has been more in the form of economic rent extraction — basically something for nothing — than the return to greater economic value. These economic rents are found in the high fees and costs of the investment products pushed by Wall Street and the insurance companies.
Here's more, from recent academic research into this issue:
- "The shifting of non-financial firms’ investment towards financial instruments and away from production decreased total value added in the non-finance economy. This negative effect on total production is visited on labour and the state as lower total income. The hypothesis that financialization of the non-finance sector reduces overall economic growth is supported by these analyses ...." http://ser.oxfordjournals.org/content/early/2015/05/13/ser.mwv009.full.pdf?keytype=ref&ijkey=fIz9gDjv4ZzTEu7
- "The financial sector’s share of GDP increased from 15% in 1960 to approximately 23% in 2001, surpassing manufacturing in the early 1990s. The proportion of corporate profits in the financial industry increased from 20% in 1980 to 30% in early 1990s and to roughly 40% by 2000 (Krippner 2005). In the years leading up to the recent financial crisis, bank profits were found to have reached an historic high (Tregenna 2009). This soaring profitability was reflected in employee earnings. Kaplan and Rauh (2010) report that the top five hedge fund managers in 2004 earned more than all of the CEOs in the S&P500 companies combined ... Research has shown that the rise of finance heightens income inequality because the increased payback from financial investment is not reinvested in the firms for productive activities, causing stagnation of real wages and increased indebtedness of wage-earners (van der Zwan 2014). This trend essentially turned America from a nation of savers to a nation of borrowers, as personal savings declined and consumer debt replaced stagnant or declining income (Carruthers & Ariovich 2010, Hacker 2006) ...." http://webuser.bus.umich.edu/gfdavis/Papers/Davis_Kim_financialization_revised.pdf
- "Everyone knows that something is wrong with the American economy. It has been a full decade since the annual growth rate reached 3 percent, and it has not exceeded 2.5 percent since the end of the 2007-2009 Great Recession. Meanwhile, individuals at the very top of the income scale have appropriated almost all the gains from growth, leaving stagnant or declining wages for everyone else. These trends have sapped the great American middle class of its dynamism and its optimism. The overall problem can be summed up in five big economic trends: (1) Rising inequality; (2) A shrinking middle class; (3) An increasing wedge between productivity and compensation; (4) Less business investment; and (5) Excessive financialization of the U.S. economy. Income inequality has increased steadily since the 1970s, accelerating rapidly in the 1980s. This increase in inequality coincides with deregulation of financial services in the 1980s and 1990s and an increase in U.S. non-financial firms pursuing financial investment strategies ... In addition to turning the role of the equity markets upside down, financialization depresses entrepreneurship. Paul Kedrosky and Dane Stangler of the Kauffman Foundation find that as financialization increases, startups per capita decrease, in part because the growth in the financial sector has distorted the allocation of talent. They estimate that if the sector were to shrink as a share of GDP back to the levels of the 1980s, new business formation would increase by two to three percentage points. We have substantial circumstantial evidence to show that these trends have had negative consequences at the macro level: “the influence of finance sector size on economic growth turns negative when financial services become too large a share of an economy and that high levels of financial activity crowd out investment and R&D in the non-finance sector.” http://www.brookings.edu/~/media/research/files/papers/2015/06/30-american-economy-growth-strategy-galston-kamarck/cepmglastonkarmarck4.pdf
- "Financialization refers to both the rising political and economic power of financial service firms and the growing importance of financial, rather than production, strategies in the rest of the economy. In the US case at least, financialization also accompanied a shift from values associated with employment and production to a normative elevation of financial investment. In the US the financialization dimension of neoliberalism has increased national and global systemic risk, increased income inequality between sectors of the economy, capital and labor and among classes of workers, and at the same time has led to decreased employment and a less productive economy." http://www.fdv.uni-lj.si/docs/default-source/tip/3-15_tomaskovic-devey.pdf?sfvrsn=2
- "There is little doubt that the size and reach of financial activities, markets, motives and institutions has grown enormously in the last thirty years, relative to other aspects of the economy. There is a great deal of historical and empirical evidence that, at least to a some extent, this growth has contributed to economic instability, an increase in inequality, and in some cases, to a decline in productive investment and employment relative to what might have occurred otherwise." http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_351-400/WP394.pdf
THE FIDUCIARY STANDARD - THE WAY TO END WALL STREET'S SACKING OF BOTH INDIVIDUAL AMERICANS AND THE AMERICAN ECONOMY
Fortunately, there is a way to end Wall Street's huge extraction of rents. There is a way to end the huge size of the financial services sector and its negative impact on the U.S. economy.
It's called the fiduciary standard. Simply require all persons who provide investment advice to our fellow Americans to be experts, act with candor and honesty, and act in the best interests of their clients.
It's the same standard we expect in another relationship where there exists a vast disparity in information asymmetry, together with the possible use of superior knowledge and skill by the much more knowledgeable party to take advantage of the other party: the attorney-client relationship.
Attorneys deal with both personal and business legal matters of clients that, in turn, affect those clients' futures, including their future economic security.
Financial and investment advice also significantly impacts the financial security, hopes and dreams of our friends and neighbors. Good investment and financial advice can greatly assist those goals.
But excessive rent-taking, and poor advice, as nearly always delivered by many of the Wall Street brokerage firms, destroys those hopes and dreams.
It does not have to be that way. The fiduciary standard can be applied. All Americans deserve expert fiduciary financial investment advice for reasonable, professional-level compensation. They don't deserve to be victimized by conflict-ridden sales practices and the perverse incentives that drive the sale of high-cost, inappropriate investment products.
And there exist plenty of advisors who operate, already, under a non-waivable fiduciary standard. Many of these are fee-only advisors, who don't accept commissions, 12b-1 fees, or other material third-party compensation. In this way, these advisor's interests are thoroughly aligned with the interests of their clients. Where can you find them?
- www.NAPFA.org (National Association of Personal Financial Advisors)
- www.GarrettPlanningNetwork.com (Garrett Planning Network)
- www.ACPlanners.org (Alliance of Comprehensive Planners)
- www.XYPlanningNetwork.com (XY Planning Network)
If you are a consumer, take time for a second opinion on your investment portfolio. Search for an advisor at the web sites, above. A few hours of your time could well determine whether your own future financial security is secure.
STAND UP AND BE HEARD - HERE'S HOW.
But few will hear the message, above. Wall Street's high extraction of fees and costs fuels its own marketing machine.
It is time for YOU to stand up to Wall Street. Today, not tomorrow.
September 2015 is a crucial month for the fiduciary standard, which has been proposed by the U.S. Department of Labor to apply to the retirement accounts of individual Americans. Wall Street and the insurance companies are fighting back - pouring tens of millions of dollars into advertising campaigns, and at policy makers, with false claims.
But it is possible for you - the voter - to fight back.
It's time for investment advisers, financial advisors, and the American consumer to stand up and inform our policy makers - "THE SACKING OF AMERICA BY WALL STREET CAN NO LONGER BE TOLERATED."
I urge you to use this simple online tool to contact both of your U.S. Senators, and your U.S. Representative. TODAY. Because next week, or next month, may be too late.
Spread the word - to your own colleagues, friends, family, business associates, and more. Let's join together and fight against Wall Street's rape of America, and support the U.S. Department of Labor's rule to eliminate conflicts of interest and impose fiduciary standards.
So that a reformed Wall Street will work for us in the future, not against us as it does currently.
Stop Wall Street's sacking of America. Make yourself heard today. For yourself. For your family members. For your friends and neighbors. And to ensure a healthier America and a more robust economic future for us all.