Mirror, Mirror On the Wall… Who’s the Culprit For My Financial Fall?
As an investor advocate, I’m always on the lookout for easy-to-understand materials that can readily explain why investors should be wary of stockbrokers, insurance salesmen, and other peddlers of financial products that are supposedly a “sure thing” or “totally risk free.” One of the best legal documents on this subject is the fraud complaint Massachusetts’ securities head William Galvin filed against Merrill Lynch in connection with the sale of auction rate securities. The document is rich in detail about how Merrill Lynch always put its interests ahead of its customers.
Neil Weinberg, a senior editor at Forbes and one of the most knowledgeable personal finance journalists in the business, earlier this month published a feature that decidedly is one of the most insightful articles I’ve read about Wall Street in recent memory. Weinberg candidly warns his readers that the markets are a “rigged game” and provides a litany of evidence showing how investors are constantly being duped and deceived. Among his examples: Nearly three quarters of the tax-deferred annuities sold in the first quarter were placed in IRA and other retirement accounts. Annuities are great products for insurance brokers because they carry whopping commissions; but for investors, they are pricey and “dim-witted” (Weinberg’s words) for a retirement account.
Weinberg also quite possibly is the only mainstream financial journalist to appreciate the significance as to why Wall Street and the insurance industry fought so aggressively — and ultimately successfully — to eliminate a passage in the recent financial reform bill that would have held brokers and insurance salesmen as fiduciaries. Under this standard, brokers and insurance salesmen could be held liable for selling products that were not in the best financial interests of their clients. The upshot: bye, bye, 8 percent commissions for dubious annuities products. But Congress once again opted to put Wall Street’s interests ahead of investors.
Fortunately, there are signs that individual investors are getting wise to Wall Street’s shenanigans. Merrill, Morgan Stanley, and Smith Barney last year controlled 25 percent of the industry assets under management in 2009, down from 32 percent in 2007, according to Cerulli Associates statistics cited in Bloomberg Businessweek. Independent advisers and regional broker-dealers have increased their percentage of assets to 32 percent from 28 percent in 2007. That’s a comforting trend.
Merrill, now part of Bank of America, and Wells Fargo, the third-largest full-service U.S. brokerage, apparently are racking up some nice profits cross-selling banking services. It might behoove investors to be wary of this cross-selling as big banks can no longer claim they adhere to a higher moral standard than brokerage firms. A District Judge recently accused Wells Fargo of “gouging and profiteering” for changing its policies to process checks, debit card transactions and bill payments from the highest dollar amount to the lowest, rather than in the order the transactions took place. This, in turn, caused customer accounts to be overdrawn, thereby allowing Wells Fargo to pocket additional overdraft fees. California also charged Wells Fargo with fraud for its aggressive sale of auction rate securities.
The warnings signs are as clear as day. As Weinberg pointedly tells readers: “Wall Street gets rich while you eke by. If you are looking for a culprit, look in the mirror.”