FOOLISH (eBook)

How Investors Get Worked Up and Worked Over by the System

Gil Baumgarten (Autor)

eBook Download: EPUB

2021 | 1. Auflage
256 Seiten
Lioncrest Publishing (Verlag)
978-1-5445-1998-2 (ISBN)

Infos

Wall Street brokerage firms won't be happy about this book. That's because brokerage firms have built their businesses on profiting in the shadows, and they surely don't want the lights to come on. After 25 years on Wall Street and another 10 years as a fee-only fiduciary RIA, Gil Baumgarten knows all the brokerage tactics that make your portfolio inefficient and put you at a disadvantage. He also understands the common, self-destructive tendencies that make every investor vulnerable to brokerage firm schemes. FOOLI$H pulls no punches. This book is your inside look at the complicated brokerage ecosystem and the realities of investor behavior. You'll discover the staggering differences between brokerage and advisory systems and walk away with actionable advice to help you stay on guard. Most importantly, you'll take an introspective look at your investing style and learn how to walk away from the FOOLI$H routes investors so often take.

Textauszug

Chapter One

1. The House Always Wins

“Lesson number one: Don’t underestimate the other guy’s greed.”

—Scarface (1983)

I haven’t spent much time in casinos, but I know one thing for sure: the house always wins. Casinos are designed to influence human psychology and lower defenses. The lights, the colors, the free drinks, the glamour and allure of success—it all gets people to act in certain ways so that the house always wins. So it is with Wall Street. Wall Street always wins.

Even though Wall Street is a real place, “Wall Street” also refers to the entire financial services industry in the United States. So let me clarify: when I say “the house” I’m referring to the major brokerage firms, such as Merrill Lynch, UBS, Morgan Stanley, and so forth. They’re bent on winning, utilizing an ecosystem designed to take advantage of investor impulses, anxieties, and predispositions. Exploiting the emotions accompanying the unknowns and what-ifs, brokerage firms present themselves as the accommodating guides to the complex financial terrain. It just so happens they’ve designed much of that complexity themselves. The fancy suits, the exciting products, the pitches about excess returns—it all gets investors riled up to play “the game.” The problem is that the game comes at great cost to the average individual investor, and it often fails to deliver the promised results.

If you have money to invest, you probably know what I’m talking about. Being successful sounds the alarm for commissionable opportunity, as people calling themselves “advisors” stand ready to give you their best pitch on why you should participate in their money-making brilliance.

Many of these advisors (who are technically brokers if they work for a brokerage firm) claim they can unlock the power of Wall Street on your behalf, which is fair, considering how often investors do poorly when they embark on their own. But the system is designed to benefit those firms more than it is to benefit you, the individual investor. Since these firms have interests that compete with those of their clients’, they often don’t counsel you on the best paths given your goals. Instead, they counsel on the best paths given their goals.

Don’t worry. I’m not about to call out the suits on Wall Street for being a bunch of crooks. They’re not. If we’re calling anything crooked here, it would be the system, not the brokers. Every business has bad apples, but the vast majority of people in the financial business are moral and ethical. The problem is, although they are free to act morally and ethically, they’re given bumpers for their lanes. Those bumpers force the balls to hit the pins one way or another, meaning every transaction must be profitable for the brokerage firm. Period.

It hasn’t always been this way. In college, while studying economics, I vividly remember my impression of Wall Street as genteel, with country clubs and mint juleps. It seemed brokers knew their clients, their families, and their dreams and aspirations for their legacies. It sounded to me like a great place to earn a serious living and help people. That’s why I joined.

I just didn’t know that being behind Wall Street’s closed doors would expose a new side of the business just a few short years after college.

What’s in It for Me?

People tend to demonize and caricature Wall Street. I won’t do that. After all, I worked for some of these brokerage firms. However, what I experienced as a broker was a firm culture that was entirely focused on what was best for itself. All that does is inspire greed, stimulate fear, and lead to frustration for both brokers and clients.

Allow me to explain.

The relationship between a brokerage firm and broker can be an easy one, as long as the broker is willing to put the firm’s interest first. Brokerage firms incentivize their brokers to engage in activity profitable for the firm by making it profitable for the broker as well. For instance, is the broker considering selling a mutual fund to a client? They’ll be sure to choose one that includes a 12b-1 fee (a hidden kickback) to ensure it’s profitable for themselves. Are they pitching a client a hot stock? That’ll bring in a trading commission which is split between the firm and the broker. Regardless of the transaction, the firm’s message to the broker is the same: “Do what’s profitable for us, and it will be profitable for you.”

In broker vernacular, they must constantly be thinking of one question: What’s the YTB (yield to broker) on this?

Here’s my question: Did anyone stop to think about whether a path is optimal for the client?

From 35 years of experience, I can assure you the answer is far from satisfactory. Maybe the client was considered for a moment, but when the gears are built to propel in one direction (the brokerage firm’s best interest), any contaminant just gums up the works. In the current system, there is no mechanism to ensure client benefit, only external regulations to ensure an investment is not “wrong” for the client (i.e., in outright opposition to the client’s goals). Because of the mentality of brokerage firms and their sticky relationship with brokers, you ought to be skeptical of each idea they present to you.

Yes, businesses should aim to succeed. Every business should not only be thinking about your needs and how they can meet them but also about how they can play the right tune to get you to click “Buy It Now!” For most products or services, there’s no harm in that strategy. We’re all familiar with paying a markup on a product or service, and we purchase accordingly. But in most industries, there is either transparency or a multitude of options, so consumers get to decide if the price is right from a more informed position. Not so in the financial services industry, where complex cost structures and hidden fees shroud the client’s understanding.

Further, although no business should provide a service without a compensation model, consumers ought to know exactly what they’re paying for. If another company offers a similar service but gives the client better odds of ending up with more money in their pockets, instead of the pockets of the house, so to speak, consumers should know about that, too.

It’s much more complicated in the financial services world because you’re not buying just one product or subscribing to a monthly service, nor are you taking a quick weekend trip to Las Vegas where you know you’re going to spend money on “playing the stakes.” With financial advisors, you’re purchasing access to professional relationships. They even toss around the term advocacy, telling you that they are your friend who’s looking out for you. So, many trusting investors go in without knowing what they’re getting themselves into, without knowing what the markups will be or where they will be coming from. Frankly, it’s a bit of a convoluted mess.

In the middle of all this, there’s you, the client, the individual investor. You have needs; the brokers have knowledge and access to solutions. One thing is for sure: you know that they know the markets better than you do, and you know they said they’d look out for you. All you can do is hope they hold up their end of the bargain.

The win-lose proposition of a casino is not identical to the Wall Street scenario, where it is possible for you and the service provider to both win simultaneously. Actually, the odds of winning are quite high for those who invest correctly. But the ecosystem at traditional brokerage firms siphons off profits for the firm, detracting from the investor’s odds of success, and the firm wins regardless because the house always wins.

Welcome to the Slaughterhouse

I remember being on a road trip with my family when I was around 12 years old. We were all getting hungry, but we were in the middle of nowhere. Eventually, we came across this stand-alone taqueria, and my brother and I begged my mom to pull over. We walked in, and it felt like an oasis. It smelled amazing. I ran to the bathroom, and on my way out, I saw these cardboard boxes in the hallway that said, “Ground Beef. U.S. Canner.” I walked back out to the table, wondering what that meant. When my mom explained that canner beef is the cheap stuff, one notch above dog food, I wondered what happened to my appetite. You’ll never see a restaurant promote the fact that they use canned meat. That’s because some things in life simply shouldn’t be for sale.

Let’s take a look at the case of Facebook “mishandling” users’ personal information in 2018. The world’s most dominant social media platform cut sharing deals with technology companies and other large businesses looking to purchase access to user data. The Federal Trade Commission (FTC) went up in arms, and Facebook had to endure a record-setting fine to settle the matter. As you know, the FTC is an agency whose primary concern is to protect consumers, to advocate against fraud, deception, and unfair business practices. The moment a consumer’s privacy is on the line, the FTC is...

Produkt-Details

• Erscheint lt. Verlag: 4.5.2021
• Sprache: englisch
• Themenwelt: Wirtschaft ► Betriebswirtschaft / Management ► Finanzierung
• ISBN-10: 1-5445-1998-2 / 1544519982
• ISBN-13: 978-1-5445-1998-2 / 9781544519982