Did you see what happened this week on Wall Street? It was quite a story! Last Wednesday, an executive director at Goldman Sachs resigned through an op-ed article in the NY Times. It was really something, the guy just unloaded about the toxic work environment where doing right by clients was not even a topic at sales meetings. The focus was on ripping clients off in a variety of ways including by persuading them to invest in products left on the books that the company was trying to dump. He even shared that he had seen no less than five different managing directors refer to their own clients as “muppets” in emails.
It’s shocking and yet somehow it’s also not a surprise, right? How else would the financial services industry make so much while regular investors lost so much? Because you know, it's not just Goldman Sachs. It's the majority of the financial services industry—not just Wall Street even—but right here on Main Street in pretty much every city and town.
As fascinating as the op-ed piece was, and the follow up articles in the NY Times and most other major news outlets too, the comments posted under the articles by regular people were just as intriguing. One person after another from inside the industry weighed in in agreement with this guy on the Time's website. There was one guy who worked for another major bank commenting that when he questioned the push to sell bad investments at his firm he was told in no uncertain terms to stop questioning as these were "profit centers". Another comment was from someone who worked for JP Morgan Chase in 2008 who spent a whole year trying to tell managers about all the abuses going on with respect to disclosures about mortgages and home equity loans. He said that they couldn't have cared less. He ended up writing a letter to the CEO and all that got him was a call from personnel that was essentially, "What do we have to do to shut you up?"
So there's the sad truth. Your interests, the interests of regular investors putting away a portion of their paycheck each month, seldom come first. This is an industry that has lost its way. For them, making money is everything. Financial advisors are trained as sales reps, not in investing.
Of course that’s the other half—the more devastating half—of this problem. It’s an industry focused on sales, not on investing. Most of the professionals in the industry do not know how to invest successfully; not only your money, but their own money too.
I wrote an article about this last year where I reported on a Harvard study that was coined the Study of the Decade and tracked trillions of investment dollars only to conclude that advisors do not provide superior asset allocation, they add to bad investor behavior by buying high, then selling low out of fear, and the biggest conclusion was that on average they not only underperform the market indexes, but dramatically underperform the results of people that invest on their own. These regular people were reported to make more than twice as much money as the advisors, on average! Did you have any idea it was that bad? You can lean more in my article.
The industry isn't going to change. Why should they? They make a ton of money; avoid getting overly regulated, or punished. They just keep successfully spinning their spin getting people to trust them with their money and are still in control of massive amounts of consumer money.
So what can you do? How do you win when it comes to investing your money?
I strongly advocate that everyone can and should manage their own investments. Part of the financial services industry’s success comes from spinning a myth that investing and money management is complicated. They intimidate people with overly complicated products and financial-speak. But the truth is that investing is very straightforward. I’ve written extensively about exactly how to go about it in my book, Money Smart, and on http://moneysmartonline.com/advice/invest-successfully.
If you read up on that and still don’t want to venture into making your own investment decisions, there are good people out there who can help you, though they are rare and hard to find. The important thing is to be absolutely sure you have one of these rare people. The only sure way to know is to ask for a five to ten year report on their investing track record. Be sure it is not just a well-chosen selection of a time period when the market was growing. Look at their entire record compared to the success of the markets they were in vesting in for the same time period. You should expect that an investor who really knows how to do it will beat the market most of the time and will avoid major losses.
If you can’t find someone with a written, five to ten year or more record of success, the Harvard study is very instructive. Do it yourself and, for most people, invest in the stock market with index funds. They’re easy to understand; they have no commission, are very low cost and outperform 95% of all managed mutual funds over the average 10 year period. For more information on index funds read my article, How to Invest In the Stock Market—Index Funds.
While I don’t manage people’s money for them any longer, I’m proud to share my track record. I’ve given that up but do still provide some limited financial coaching when people ask. My focus is always on getting people set up and confident enough to manage their own finances, however.
It’s common sense, really. It's your money and no one will care about it as much as you. Certainly not the Goldman Sachs of the world. With some basic information and just a little time, you can be more successful than anyone else in managing your money.
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