Opinion: Why are my investments in a rut? That’s the way Wall Street wants it.

From your point of view, the returns you achieve are equal to what’s left over after Wall Street takes its cut in the forms of expenses, sales commissions, hidden costs, and more. 

Read: A ‘humbling’ for David Solomon? Economist refers to his investment bank as ‘Goldman Sags’ in cover story.

But from Wall Street’s point of view, the more you keep, the less is left for brokers, traders, sales people, marketing people, advertising agencies, executives, corporate jets, sales incentives, and other “essential” tools of the trade. 

 Yes, the overall stock market
SPX,
+0.25%
had a dismal time of it last year. And that’s not the fault of the investment banks, insurance companies, brokerage houses, financial media, mutual-fund companies, independent advisers and various online gurus and services that collectively make up what I refer to as Wall Street.

This industry doesn’t make the market go up and down.  

However, Wall Street is riddled with conflicts of interest and populated with smiling people who will do virtually anything to attract assets they can manage.

 Beat the market

 Once they get their hands on our money, their greatest desire is to convince us they can help us beat the market and “do better than the other guy.” If they can do that, they’ll likely keep our business and get referrals too. Yet it’s ironic, unfair (and heartbreakingly expensive for millions of investors) that Wall Street doesn’t promote a simple product that virtually guarantees above-average returns: the index fund. 

The index fund as we know it today gives individuals an easy and inexpensive way to own a slice of everything that’s in “the market.” This is very good news for us as investors.

But from Wall Street’s point of view, index funds have a serious problem: They let investors keep too much of their gains.

To keep investors away from index funds, Wall Street promotes recent performance, hotshot managers and expensive, high-risk products that theoretically could produce high returns for investors but are guaranteed to generate hefty short-term sales commissions for advisers—and ample profits for the companies that produce them.

The cost of all this can easily exceed 2% per year. For many investors, that can add up to millions of dollars over a lifetime. 

Recent performance

If your job is to sell investment products and collect assets for your employer to manage, your surest and easiest ticket to success is to focus your sales presentations on recent performance. 

Your customers want you to connect them with winners. And if a particular fund has been outperforming its peers in the most recent decade, calendar year or six-month period (you as a salesperson can choose whatever data seems most impressive), you’ve found what your customers want.

Is it the best choice for them? Well, that’s not really your problem, is it? 

However, if you are the investor, you might want to listen to John Bogle, the founder of Vanguard, who wrote that buying funds based primarily on their past performance, especially only recent performance, “is one of the stupidest things an investor can do.”

Getting smart

 As I said, Wall Street won’t be happy that you’re reading this. In my 2012 book “Get Smart or Get Screwed” I describe how Wall Street’s salespeople are taught to deceive investors while staying barely within the limits of the securities laws. Read your free copy here.

It’s only natural to think this couldn’t apply to your own adviser. After all, successful salespeople, including brokers, are usually courteous, respectful and likable, the sort of people you would want for friends. 

However, the people you deal with do not work in isolation. They are part of a highly organized and sophisticated industry, stuck in a system that works against the client in various ways.

My criticisms are aimed at the system, not the individuals who have found they can make a living inside it. 

In a chapter called “Get screwed through sales pressure,” I discussed one of the primary drivers of the whole business. How much peace of mind would you get from a medical system that paid doctors a commission for every prescription they wrote? Sales pressure can lead to churning accounts through frequent purchases and sales with no apparent purpose other than to generate trades. It also favors high-risk, high-commission products. I talked to a broker whose firm was underwriting a new stock offering that he thought was too risky for his clients.

When he complained about having to sell a quota of the stock, his boss told him that whatever he didn’t sell, he would have to buy for himself.

Conflicts of interest

 In this book, I also described how an insurance company representative once invited me to help create a new investment. When I protested that his proposal would cost so much that it would be a poor choice for investors, he replied: “That won’t be a problem. If you put a big enough commission on something, the salespeople will sell anything.”

I passed on the opportunity.  

All is not lost

 You can avoid most of this, if not all of it. But in order to do that, you have to take charge of your investments. Your best bet is to educate yourself as much as possible, maintain reasonable expectations, and do the right things:

·     Keep your expenses and portfolio turnover low;

·     Diversify massively;

·     Don’t try to beat the market;

·       Pay attention to taxes.

Finally, if you work with an investment adviser, choose one who has a legal fiduciary responsibility to resolve any conflicts in your favor. 

Richard Buck contributed to this article.

Paul Merriman and Richard Buck are the authors of “We’re Talking Millions! 12 Simple Ways to Supercharge Your Retirement”. Get your free copy.