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Tuesday, September 1, 2015

Stop Wall Street's Rape of America

Wall Street's treatment of its customers, and of America itself, is "rape." And I don't use the term lightly.


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 is clear. Nearly always, especially over the long term.

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.

Additionally, nearly always the investments themselves and/or the overall investment portfolio is structured so poorly that high income tax are paid each year, unnecessarily.

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 another 1% to 2% a year due to avoidable tax inefficiencies, the client will only earn 2% to 5% a year. That's barely keeping up with inflation. So much for that person's future financial security.


Wall Street's rape is not just of individual Americans. It's also a rape of the U.S. economy.

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.

According to a 2013 report by the U.N.'S International Labor Organization, a United Nations agency,  46 percent of labor’s falling share of the economy is a result of this excessive finalization. In turn this contributes to rising income inequality, which itself is an important reason for inadequate growth.


Fortunately, there is a way to end this rape.

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 and the possibility of use of superior knowledge and skill by the much more knowledgeable party to take advantage of the other party: the attorney-client relationship.

Financial and investment advice 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.


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 RAPE COMMITTED BY WALL STREET OF INDIVIDUAL AMERICANS, AND OF AMERICA ITSELF, 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 the RAPE 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.

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