Category Archives: Bad Products & Services

Like everything else there are good investment products and there are bad investment products. For example, some mutual funds are rated five stars and some have no stars. Some products are investor-friendly and some make a lot of money for companies and advisors. Your key for growing your assets is to know the critical differences before you invest in them.

Trust in U.S. Financial System Drops to a New Low!

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The Chicago Booth/Kellogg School Financial Trust Index’s most recent quarterly report showed only 21% of Americans trust the financial system in the U.S. This is the lowest point since the financial crisis started in 2007. And, this study was conducted before the Libor scandal and JPMorgan’s latest acknowledgement of billion dollar trading losses. The combined impact of these two events will reduce this trust percentage even more.

According to Luigi Zingales, a professor at the University of Chicago’s Booth School of Business and co-author of the index, “This suggests that the national banks may be ‘too big to trust”. I could not agree more. The major banks are out of control. Continue reading →

Variable Annuities: All Downside, No Upside

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I’ve heard variable annuities (VA’s) pitched as “safe” alternatives to investing in the stock market and as a safe way to get market like returns without the risk. This is malarkey of the highest order and greatest magnitude. There is nothing worse for investors and nothing that eats away at your wealth like VA’s. Hopefully you haven’t bought one of these toxic “investments.” If you have, I apologize I wasn’t there to stop you.

For starters, these are not investments. These are insurance contracts and their guarantees are only as good as the company standing behind them. And let’s not forget insurance companies can and do go bankrupt. If the company that issued your annuity goes bust, your contract may only be worth a doughnut and change.

VA’s are sold as a safe way to attain growth without market downside. In reality nothing could be further from the truth. These are insurance contracts with mutual fund investments (called sub-accounts) wrapped into the contract. The fees alone are money killers and cash burners that will eat you alive and bleed you dry leaving you with little upside potential.

Fees, fees and more fees; VA’s are notorious for the exorbitant fees they charge. One reason Wall Street corporations have to charge you large fees are so that they can cover the large commissions they pay their brokers that sell these products. Typically, the salesperson (i.e. your advisor) receives 6 to 10 percent of total dollars put into a VA in the form of a commission. In some contracts these commissions can run as high as 14 percent! For example, if you put $1 million into a VA, your broker may receive $100,000 or more for a single sale without doing much work other than perfecting the sales pitch. In other words, if you buy one of these, you are placing a BMW M6 Convertible in your broker’s driveway or helping put his kid through college.

It’s true that VA’s can have the benefit of tax-deferred growth, but ironically, many investors buy and hold these in their IRA (i.e. an account that already allows tax-deferred growth) defeating this very reason to buy the VA; analogous to holding two umbrellas in a rainstorm. Moreover, since withdrawals from a VA are considered income, any growth inside the annuity is taxed at ordinary income tax rates, not at the more preferable long-term capital gains rates.

If you have the ability, I would recommend getting out these as quickly as possible, and staying out of them. VA’s are like a bad marriage and divorce seems impossible, but through proper evaluation there are ways to get out. Annuity salesmen know how to sell these and make them sound safe and promising. Don’t believe their advertising and public relations. Wall Street companies spend billions of dollars to make us think they’re nice and they just want to help us out. They want us to think they have all the solutions. They don’t. Also, these are not a smart alternative to investment growth because whatever growth you receive will have to compete against the huge fees you will be paying to the Wall Street corporations.

Wall Street Executives Circle the Wagons

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Wall Street executives come to the rescue of Goldman Sachs’ reputation. Morgan Stanley CEO James Gorman and JPMorgan Chase & Co. CEO Jamie Dimon warned their staffs not to circulate Gregg Smith’s op-ed criticizing that firm.

Gorman also said it wasn’t fair for a newspaper to publish the article. I guess it was fair for Goldman Sachs to package $1 billion of toxic mortgages and sell them to clients as a safe investment. Sachs’ clients lost $700 million.

Gorman said it was the view of a single, random employee and not a consensus opinion. Does Gorman really believe a group of current Goldman Sachs’ employees are going to risk their jobs by coming clean about the culture at that company? Give me a break. They would have to leave Sachs like Smith did before they would be willing to talk.

Even if they left they would keep quiet so another Wall Street firm would hire them. Do you believe Gorman would hire someone who told the truth about the culture at Goldman Sachs? Not very likely! Morgan Stanley has its own skeletons.

What was Goldman Sachs response to this public relations nightmare? It sent a memo to current and former employees, saying “most” of its workers believe it provides exceptional service to clients. What else would it say?

Don’t expect current employees of Goldman Sachs to go public criticizing the firm. They make too much money. Plus, they would be black listed by other Wall Street firms.

Do Psychopaths Really Run Wall Street?

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According to Al Lewis (Al’s Emporium; Wall Street Journal) psychos run Wall Street. How else do you explain the continuing string of Wall Street scandals and fraudulent activities that rip-off investors. For example, why would a prestigious firm like Goldman Sachs package and sell a $1 billion CDO and then bet against the performance of the product. Investors lost more than $700 million and GS was fined $250 million.

Sherree DeCovny in CFA Magazine that said 10% of Wall Street professionals have psychopathic tendencies based Lewis’ article on an article. That would explain a lot if this analysis were correct.

Psychopaths have anti-social tendencies: Lack of empathy, no regard for consequences, and unlimited risk-taking. Lack of empathy explains how Wall Street executives could damage millions of people and still get a good night’s sleep in their mansions. Lewis also said many of these psychos were charming, narcissistic, glib, had great senses of humor, and could spin the truth like a roulette wheel.

Unless the 10% dominate the Wall Street’s executive suites, I believe the number is much higher. I also think the psychopathic behavior is driven by a massive sales culture that puts huge importance on company profit and very little value on ethical standards that protect investors.

I also believe politicians are paid millions of dollars to allow this culture to flourish. You may have noticed Goldman Sachs paid a fine, but did not have to admit guilt, when its executives made decisions to rip-off investors. This means the psycho executives have huge upside (multi-million dollar bonuses) and no downside (prison). Based on the events of the past few years, fines have become a cost of doing business for companies. Psychopaths in Washington D.C. and Wall Street flourish in a mutually beneficial environment.

Are Mutual Funds Eroding Your Wealth?

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You may not realize this, but if you own mutual funds in your portfolio then you may be paying substantial fees to each mutual fund manager every year, in addition to an annual advisory fee to your investment advisor (An advisor simultaneously collecting both a commission and an advisory fee on the same portfolio is an extremely unethical act known as Double Dipping, please see my earlier post).

Mutual funds charge annual management fees and hidden 12b-1 expenses that can cost you on average about 1.5% a year and many of these funds may not provide you any better diversification than an index fund or ETF that only costs you 0.20%. Imagine if you are paying your advisor an additional 1.5% annually to put you into these funds; your annual investment cost would reach 3% per year. These may not seem like big numbers, but compounded over decades these fees could erode a very large portion of the value of your portfolio.

Costs matter – tremendously.

What are Legal Investment Scams?

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Everyone has read about illegal Ponzi schemes and Wall Street’s fraudulent investment scams that have resulted in major fines to companies.

What you don’t read about are legal investment scams that impact millions of investors. Following are examples of frequent abuses.

Definition: Legal scams benefit the advisor or the advisor’s company more than they benefit you.

Advisors sell inferior investment products because they pay bigger commissions.

Advisors sell company products so they can continue receiving subsidized health insurance.

Advisors tell you they are investment experts when they are new to the industry.

Advisors recommend equity investments that exceed your tolerance for risk because they produce bigger fees and pay higher commissions.

Advisors require you to sign one-sided service agreements.

Advisors recommend a variable, tax-deferred annuity investment for your tax-deferred IRA assets because the commissions are higher.

Advisor do not provide a performance report so you do not know how your assets are performing on an absolute and relative bases.

How can you protect your assets and future financial security from these legal scams? Use the free tools and services on the Investor Watchdog website.

Investors Have Short-Term Memories

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Wall Street companies cheat investors to maximize earnings, share prices, and executive bonuses.

When they are caught, companies pay fines to make the problem go away.

The latest example is Citigroup’s agreement to pay a $285 million fine to settle an SEC action that stated it sold investors $1 billion of a CDO then bet against the performance of the CDO. Investors lost $700 million and Citigroup made $160 million.

Citigroup is one of the biggest financial institutions in the world. If you can’t trust Citigroup, who can you trust?

Citigroup agreed to pay the fine without admitting guilt. If they didn’t do anything wrong why did they agree to pay the fine?

First of all, fines are a cost of doing business for Wall Street firms. They probably have a contingency fund to pay fines.

Second, they want the “problem” to go away as quickly as possible to minimize adverse publicity.

Third, Wall Street knows investors have very short-term memories. Very shortly, Citigroup’s alleged fraud will be yesterday’s news and it will be business as usual. I bet not one investor pulled their Citigroup accounts because the “problem” did not impact them.

What about the investors who lost the $700 million? Can they still afford to retire when they want to? Can they maintain their desired standard of living during retirement?

What about the executives who made millions from their decisions to package toxic assets and sell them to investors?

What about the fiduciary responsibility to always put investor interests first? I know the answer to this one. Brokerage firms are not held to fiduciary standards. Shame on FINRA and the SEC.

Investors Lose $1 Billion

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Brett Arends for MarketWatch said “How about those investors who got suckered by Wall Street this year in the disastrous initial public offerings of closed-end mutual funds. Their investments have been absolutely massacred by fees and poor performance.”

Thomas Herzfeld, who’s been following closed-end funds for decades, says “the losses are the worst he can ever remember – $5 billion of investment and more than $1 billion of losses.” Meanwhile stockbrokers and their companies pocketed $250 million of fees and commissions.

Why would investors commit that amount of money to investments that have terrible long-term track records? No doubt they liked their stockbrokers and trusted their recommendations. When are investors going to learn that people they like will take advantage of them to make money.

Stockbrokers want clients to like them. People automatically trust people they like. Once trust is established brokers are free to sell whatever makes them the most money. Getting people to like you can be a sales skill. At a minimum it is a deceptive sales tactic. A positive personality has nothing to do with broker competence or ethics.

No wonder Wall Street fights full disclosure and higher ethical standards for brokers.

Merrill Lynch’s Latest Anti-Investor Edict

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What does it mean to investors when Merrill Lynch tells its 15,000 stockbrokers they must produce at least $250,000 of annual revenue or they will be fired?

Merrill Lynch brokers have two major choices to make. First is whether they do what is best for their clients or do they do what it takes to save their jobs at Merrill Lynch. Since most brokers don’t want to be fired they will do what it takes to preserve their jobs.

That leads to a second choice that is also ominous for investors. There are certain types of investment and insurance products that produce more revenue than other products. Many of them produce inferior results, charge excessive expenses, or both. Merrill Lynch brokers will feel increased pressure to sell these inferior products.

Most Merrill Lynch clients won’t even know they are being taken advantage of. That’s because they do not believe their trusted, friendly Merrill Lynch brokers will take advantage of them for money.

They couldn’t be more wrong.

Legal Investment Scams

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You have read hundreds of stories describing Ponzi schemes and other illegal investment scams. But, investor losses from those scams are a drop in the bucket compared to legal investment scams.

Legal scams are perpetrated by unscrupulous, licensed advisors who deliberately sell bad investment products that benefit them or their companies. An example of a bad product is a mutual fund with a really bad track record. Why did the advisor sell this fund? Because it is owned by the company that holds his licenses. This is a common strategy of banks, insurance companies and others that produce inferior investment products, but require their representatives to sell them. Companies make more money at your expense.

The other scam occurs when advisors make more money. The crummier the product the higher the commission that is paid to sell the product. Unethical advisors sell the products that pay the highest commissions. For example, most annuities pay 5-7% commissions with a seven year penalty for early withdrawal. However, there are annuities that pay 15% commissions and have 15 year penalty periods. A very, very bad deal for consumers.

You are in real trouble if you are unlucky enough to like or trust an unethical advisor. That’s because your returns will be eroded by excess fees and your performance will be lackluster. You should always interview multiple advisors and compare their recommendations to each other. Then hope one of them is ethical and puts your financial interests first. You should also select an advisor who gives you freedom of choice and does not limit your choices to company products.