| By Dan Ferris, editor, Extreme Value |
A relative recently showed me a statement from her IRA account.
The money was in a fixed-income program with a major insurance company's asset-management division. The account had been churned ad nauseam, with a constant stream of buy and sell transactions generating fees. Partly due to the churn, my relative earned less in interest than she paid in fees.
She's getting out of the account. Since she's 72 years old and only wants to preserve her principal, she's going to put the money in a CD at a nearby bank. That way, she'll never again pay more in fees than she's getting in income and dividends.
The money was in a fixed-income program with a major insurance company's asset-management division. The account had been churned ad nauseam, with a constant stream of buy and sell transactions generating fees. Partly due to the churn, my relative earned less in interest than she paid in fees.
She's getting out of the account. Since she's 72 years old and only wants to preserve her principal, she's going to put the money in a CD at a nearby bank. That way, she'll never again pay more in fees than she's getting in income and dividends.
I'm against most regulation of financial markets and products. The rules never work as advertised and generally make the situation worse than before the rule was enacted.
For example, when you try to protect someone from risk, they respond by engaging in riskier behavior. When you expose them to the full brunt of risk, however, they behave the most responsibly. "Protecting" investors actually works against them.
With situations like the one my relative found herself in recently, where she paid more in fees than she earned in dividends, it's no wonder so many people throw up their hands and say, "There ought to be a law against this." But there are plenty of laws against fraud. And churn isn't easy to establish when you've given a financial advisor or broker permission to trade as he sees fit.
There are also plenty of securities laws requiring lengthy disclosures to investors. Trouble is, most investors just glaze over the required disclosures without studying the information carefully.
You can't legislate good investor behavior. You can't legislate the knowledge of what businesses are worth. You can't legislate diligence, judgment, and experience. You can't legislate skill. And you can't legislate investment profits. Investing is an art, not a science. That makes it tougher to regulate.
Think of all the laws already in existence that didn't prevent Bernie Madoff from perpetrating the biggest Ponzi scheme in history – one the SEC was alerted to numerous times over several years without doing anything about it.
Why would anyone conclude we need more laws to prevent such an event from recurring? Madoff was in violation of securities laws for years before his scheme fell apart. A simple audit would have found him out relatively early on. He would have been caught almost a decade earlier – saving investors billions of dollars – had the SEC listened to Harry Markopolos, the forensic accountant who figured out Madoff was a fraud within five minutes of looking at his accounts.
Investing is work. There is absolutely, positively, no way around it. And in the end, you are on your own as an investor.
You see, everyone you encounter in the financial industry is working for himself, not you: your bank, your broker, your newsletter advisor, your mutual fund manager, your 401(k) administrator, everyone. "They're not working for me; they're working for themselves," should be your default position when managing your finances. Even honest people can work against you, simply by rationally pursuing their own interests. You need to pursue your own interests, too. You need to watch out for your own money.
Excessive fees, account churning, and guys like Bernie Madoff are way too common in this world. You can't walk around with blinders on, like most people do. You need to watch out for them.
Most of the time, though, you won't be a victim of outright fraud. You'll be the victim of a short-sighted, greedy financial-service provider who is trying to make a living. The industry thrives on fees. You need to know every step of the way how these people get paid and how much.
When you sit down with your asset manager, question every fee… every transaction. Is he getting you into unnecessary, high-cost products? Question your broker's motives. Does his firm receive banking fees from the companies it recommends to its clients? If you're getting a loan, any type of loan, ask to have every penny of every fee explained to you until you're satisfied.
Question your investment advisory publisher. Does it receive "marketing fees" from the companies it recommends? Question the company you own stock in. Do the board and management forgo paying cash dividends and buying back shares only to fritter away the company's money on excessive perks, self-dealing, and value-destroying acquisitions?
If the answer to any of these questions is "yes," you might be getting screwed. And it's not up to the government to fix it. It's not up to the government to protect your money. It's up to you.
Good investing,
Dan Ferris
For example, when you try to protect someone from risk, they respond by engaging in riskier behavior. When you expose them to the full brunt of risk, however, they behave the most responsibly. "Protecting" investors actually works against them.
With situations like the one my relative found herself in recently, where she paid more in fees than she earned in dividends, it's no wonder so many people throw up their hands and say, "There ought to be a law against this." But there are plenty of laws against fraud. And churn isn't easy to establish when you've given a financial advisor or broker permission to trade as he sees fit.
There are also plenty of securities laws requiring lengthy disclosures to investors. Trouble is, most investors just glaze over the required disclosures without studying the information carefully.
You can't legislate good investor behavior. You can't legislate the knowledge of what businesses are worth. You can't legislate diligence, judgment, and experience. You can't legislate skill. And you can't legislate investment profits. Investing is an art, not a science. That makes it tougher to regulate.
Think of all the laws already in existence that didn't prevent Bernie Madoff from perpetrating the biggest Ponzi scheme in history – one the SEC was alerted to numerous times over several years without doing anything about it.
Why would anyone conclude we need more laws to prevent such an event from recurring? Madoff was in violation of securities laws for years before his scheme fell apart. A simple audit would have found him out relatively early on. He would have been caught almost a decade earlier – saving investors billions of dollars – had the SEC listened to Harry Markopolos, the forensic accountant who figured out Madoff was a fraud within five minutes of looking at his accounts.
Investing is work. There is absolutely, positively, no way around it. And in the end, you are on your own as an investor.
You see, everyone you encounter in the financial industry is working for himself, not you: your bank, your broker, your newsletter advisor, your mutual fund manager, your 401(k) administrator, everyone. "They're not working for me; they're working for themselves," should be your default position when managing your finances. Even honest people can work against you, simply by rationally pursuing their own interests. You need to pursue your own interests, too. You need to watch out for your own money.
Excessive fees, account churning, and guys like Bernie Madoff are way too common in this world. You can't walk around with blinders on, like most people do. You need to watch out for them.
Most of the time, though, you won't be a victim of outright fraud. You'll be the victim of a short-sighted, greedy financial-service provider who is trying to make a living. The industry thrives on fees. You need to know every step of the way how these people get paid and how much.
When you sit down with your asset manager, question every fee… every transaction. Is he getting you into unnecessary, high-cost products? Question your broker's motives. Does his firm receive banking fees from the companies it recommends to its clients? If you're getting a loan, any type of loan, ask to have every penny of every fee explained to you until you're satisfied.
Question your investment advisory publisher. Does it receive "marketing fees" from the companies it recommends? Question the company you own stock in. Do the board and management forgo paying cash dividends and buying back shares only to fritter away the company's money on excessive perks, self-dealing, and value-destroying acquisitions?
If the answer to any of these questions is "yes," you might be getting screwed. And it's not up to the government to fix it. It's not up to the government to protect your money. It's up to you.
Good investing,
Dan Ferris
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