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Notes From the Fieldby Martin Weil

February 21, 2013

“Some of the wrong people work in finance”

Barry Ritholz asks himself “What is wrong with the financial services industry?” and comes up with this pretty good shortlist for an answer.

Simplicity does not pay well: Investing should be relatively simple: Buy broad asset classes, hold them over long periods of time, rebalance periodically, get off the tracks when the locomotive is bearing down on you. The problem is its easier in theory than is reality to execute this.

Confusion is not a bug, its a feature:   Thus, the massive choice, the nonstop noise the confusing claims, all work to make this much more complex than it needs to be.

Too much money attracts the wrong kinds of people: Let’s face it, the volume of cash that passes through the Financial Services Industry is enormous. Few who enters finance does so for altruistic reasons.

Incentives are misaligned: As I’ve written previously, too many people are unwilling to get rich slowly. Hence, some of the wrong people work in finance, and some of the right people exercise bad judgment.

Too many people have a hand in your pocket:  The list of people nicking you as an investor is enormous. Insiders (CEO/CFO/Boards of Directors) transfer wealth from shareholders to themselves, with the blessing of corrupted Compensation Consultants. Active mutual funds charge way too much for sub par performance. 401(k)s are disastrous. NYSE and NASDAQ Exchanges have been paid to allow a HFT tax on every other investor. FASB and Accountants have done  an awful job, allowing corporations to mislead investors with junk balance statements. The Media’s job is to sell advertising, not provide you with intelligent advice. The Regulators have been captured.

What’s the net impact of all this on your investments ?

The Financialized US Economy: The above list reflects nearly half a century of the financialization of the broader US economy. Instead of serving industry, finance has trumped it. This led directly to the financial crisis and economic collapse of 2007-09.

“Where Are The Customer’s Yachts?” Fred Schwed famously asked in his classic book of the 1920s.  Finance has always been a place where ambitious people could make a lot of money very quickly for themselves. As Ritholz writes there is a lot of money (customer’s money I should point out) floating around and often the wrong people get to be in charge of it.

There are client-centric solutions to the issues (called “agency problems” in economics), and they start with asset managers and advisors whose financial interests are closely aligned with those of their investors or clients. A good way to start educating yourself is to ask your financial advisor how they get paid.

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