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In December, 2002, ten of the most prominent brokerage firms in the country agreed to a massive settlement. The charges involved well-documented claims that analyst reports issued by these firms were deceptive. The firms sold out their retail clients to curry favor with their underwriting clients.
Among the settling firms were Citigroup (NYSE: C), UBS (NYSE: UBS), JP Morgan Chase & Co. (NYSE: JPM), and Morgan Stanley (NYSE: MS).
Their conduct was so bad that former Attorney General Spitzer agonized over whether to indict them for criminal conduct.
The industry unleashed a massive PR campaign. It convinced you that it saw the error of its ways. They had "reformed." You could trust them again with your hard earned assets.
And you did. Money flowed back in the coffers of these firms and others.
That was the first time.
Recently, settlements were announced in the auction-rate securities debacle with each of these firms and with Wachovia (NYSE: WB). It is likely that more cases will be brought.
The charges were that these firms misrepresented the safety and liquidity of these securities. When they realized that the market was collapsing, some brokerage firm executives sold their personal positions, but deceived retail investors into believing that the markets were just fine. They did this to satisfy their underwriting clients and to keep the underwriting fees flowing.
You believed them again and bought billions of dollars of these securities, thinking that they were "as liquid as cash." Sound familiar?
That was the second time.
Even if the culture of greed that pervades Wall Street, and caused them to sell you out twice, did not exist, you would still be better off not using them.
The securities industry has successfully kept a lid on an exhaustive study that demonstrated that investors who buy stock and bond mutual funds directly from fund families, without using any broker or advisor, significantly outperformed those who used these "investment professionals."
Finally, did I mention that at least one study (that I co-authored) casts serious doubt on the fairness of the mandatory arbitration system imposed on investors by the securities industry? This means that, if you are victimized by your broker, you are unlikely to get justice from the arbitration panel appointed by the industry you are suing.
As our president so eloquently stated:
There's an old saying in Tennessee -- I know it's in Texas, probably in Tennessee -- that says, fool me once, shame on -- shame on you. Fool me -- you can't get fooled again.
I can only speculate what he would have to say about being fooled three times!
Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and the NY Times bestseller, The Smartest 401(k) Book You'll Ever Read (Perigee Books 2008). Visit his website at Smartestinvestmentbook.com.
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Reader Comments (Page 1 of 1)
8-17-2008 @ 12:01PM
John said...
Finally, you got it right, Solin. The brokerage industry is just a group of mafia families/companies trying to gouge the "investing" public. Unfortunately, the US government has given them the concession for acting as the middlemen in ALL investment transactions. There are ways to get around the crooks, but not to trade actively. If anything, the full-service side of the industry must die. Years from now, with more experience, most "investors ought to be able to do without them.
Wouldn't it be nice if the pathetic Presidential candidates we have would address this issue and stop creating straw men in healthcare and the military? Eliminating this mafia-style lock on the markets would usher in a new age of American hegemony in world finance.
9-03-2008 @ 8:25AM
Steve Selengut said...
Not as severe as John, but I see similar problems...
Why 401(k) Retirement Plans Really Don't Work
The good news about the Internet is the information we can get our cursors on instantly; the bad news is the information we can get our heads around instantly, but without any way of gauging accuracy, relevance, or completeness. This is particularly evident in the financial-investment-retirement world, where thousands of websites tell us how to do things and why, and why things work the way they do and how. Few gurus explain why and how certain concepts and plans of action just may not work the way they are supposed to.
You don't need to read very far before the fingernail-screeching 401(k) chalkboard becomes deafening. For example, do they provide: 1) free money from employers, 2) lower taxable income, 3) retirement without any worries about money, or are they, 4) one of the most popular retirement plans.
The inadequacies I'm talking about may seem nit-picky at first blush, but the misconceptions and invalid expectations they nurture in inexperienced investors are mind blowing. Employers are providing a valuable benefit in the form of a defined contribution savings plan, a self-directed investment program that has little in common with defined benefit retirement and pension plans. It's not free money at all. It's a clever, goal-directed, business expense that is both touchy-feely visible to you and far less expensive for your boss. It's a good deal, but not a retirement plan.
Although it is true that you do not pay taxes on your contributions during your earning years, you will undoubtedly pay through both nostrils when you retire. If your karma is off, you may find yourself trying to retire at a time when the stock market is not in a party mood and your shrinking mutual funds just don't seem as secure as you thought they were a few months earlier. Typically, the 65-year-old retiree can expect four or five major mutual fund shrinkages during retirement.
Similarly, more fortunate retirees (those who get the "gelt" during a rally) generally fail to lock in a guaranteed stream of income, and find themselves in the same cyclical conundrum as their less market-timely brethren. The money worries continue well after retirement; the taxes become much larger than anyone ever anticipates; the misconception that the 401(k) is a retirement plan continues. In fact, a recent president once proposed to change the only true retirement program that most of us belong to into a similar non-retirement program.
No, this isn't just semantics. The differences between retirement programs and savings programs are very real, extremely fundamental, and politically incomprehensible to legislators--- so long as it's not their money.
Retirement programs are income machines designed to support people, not to make them feel wealthy, investment savvy, or temporarily tax-free. Pension plans produce fixed amounts of monthly income that don't change appreciably when dot-coms, real estate, CDOs, or index funds (they're next) self-destruct. You just can't buy dinner or medications with currency futures, gold bars, or appreciated acreage.
The investments contained in a pension plan are designed to produce income, and are managed by trustees who are experienced in constructing safe, conservative, diversified programs that are just as boring as they can possibly be. Most pension plan benefits are calculated as a percentage of the amount earned while employed. The Social Security retirement/welfare plan is a tontinesque Ponzi scheme based on the government's ability to continually abuse taxpayers. There are no investments at all, and no trustees... just IOUs.
Defined benefit pension programs are rapidly becoming extinct--- corporate America can no longer afford them, along with 50% of total Social Security contributions, employee health care, and CEOs who collect $50 million per year from their unwary shareholders. But those that have survived (notably, labor union plans, retirement annuity contracts, and the Congressional Pension System) produce monthly income checks without any problems whatsoever. And here we thought our congressional leaders were incompetent--- not when it comes to their own benefit package + COLAs.
Still, the 401(k) plan deserves to be every bit as popular as it has become. It, and the vast array of complicated IRAs, could help save Social Security, improve the economy, and create jobs--- all those good things that neither of the presidential candidates have a chance of achieving. Just two simple strokes of an Oval Office ballpoint get it done: 1) Eliminate all taxes of any kind, at any jurisdictional level, on any form of investment and/or retirement income. 2) Replace the failing Social Security system with a private pension system, funded by taxpayers only and managed by the existing insurance industry infrastructure.
How do we make the 401(k) plan provide more retirement security? That's not so difficult either. Simply dictate that all plans require participants to invest at least 60% of their assets in individual (plain vanilla) income securities that can be withdrawn "in kind" at retirement.
Until that happens, we just have to educate people better and make the appropriate distinctions between an as-speculative-as-you-care-to-make-it savings and investment plan and a pretty-much-guaranteed retirement or pension plan. Existing 401(k) participants should contribute enough to get the matching contribution, and start a personal tax-free income account with whatever disposable income is left.
Now about that Congressional Pension Plan--- we've only our apathetic selves to blame.
Steve Selengut
http://www.sancoservices.com
http://www.kiawahgolfinvestmentseminars.com/
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"