Sunday, August 25, 2013

It's time to meet the Muppets

Barry Ritholtz's latest column:


Since the era of Adam Smith, the following has been held to be true:

Individually optimal decisions often lead to collectively inferior solutions.

Do Brokers watch out for their clients (i.e. their investment returns)? Or are they watching out for themselves (i.e. broker commissions)?

What do you guys think about Brokers?
Let's just ignore the "ideal" when considering the "real" factors in this situation and instead choose to follow a more cynical truth: no rational, self-serving capitalist would ever watch out for shareholders. Why would someone sacrifice their own livelihood for someone else's? Practically no one would. Unless they had to.

And to some degree, Brokers must serve shareholders. Just enough to not lose them entirely. But not out of the goodness of their hearts.

Unfortunately, not every Broker has to respond to a higher authority that says "do no harm" (not exactly - most Brokers do; but how some skirt their fiduciary duties is beyond this post), and that's where the client must fend for himself.

Wall Street Brokers are not particularly evil; if these astute vendors convince clients to buy into their miracle financial product spiels and dizzying factual presentations, they're no different than the very savvy salespeople that perniciously sell the $100-dollars-a-pop miracle Dead Sea salt scrubs every day at the local mall. 

Both the Wall Street Broker and the Mall Merchant know how to sell their product beforehand. Both are selfishly watching out for their own self-interest, and both know how to play with their client's emotions.

Granted, there's nothing wrong with Dead Sea salt scrubs or complex financial products - choosing them out of ignorance; that's what's wrong.

A quick solution: becoming financially literate and learning the basics of how investing works. Investopedia, Yahoo, Wikipedia and MIT's Open Courseware are all excellent educational resources. 

An additional pragmatic piece of advice: asking financial advisors if they're working under the fiduciary standard, questioning them about how they're being paid and demanding they explain the credentials they hold can be a first step.  

The doer alone learneth.

No, I'm sorry, we only let you know the price once you've promised to buy the product.