problem with wall streetWhy do multi-millionaire executives, who run big Wall Street companies, continue to rip-off investors? I think I know the answer to this one. You can never have too much money! The executives can make additional millions with no downside risk. If they are caught, their firms are allowed to pay fines without any admission of guilt by the executives. The fines are a cost of doing business for the companies and their executives avoid time in jail.

Headlines tell us the investment business in America is rigged to benefit the executives who run Wall Street. The executives make money at investors’ expense. Greed and ethics are documented problems, but they afflict an entire industry. Why?

Hopes & Dreams 

There is a simple explanation for Wall Street success. People need financial planning and investment services to achieve their financial hopes and dreams. These firms invest trillions of dollars of retirement assets that determine when people retire, how they live during retirement, and their financial security late in life.

Wall Street operates a critical franchise that should be driven by ethical business practices that benefit their clients. But, that is not the way it works. It has a history of putting its needs for revenue and executive bonuses ahead of investor needs to achieve their financial goals. This has been documented by headlines that describe rip-offs that have cost investors hundreds of billions of dollars.

Executives who run companies make more money when they do what is best for them versus their firms’ clients.

Random Walk Theory

Wall Street sells performance that is supposed to beat the market. It uses finely honed sales pitches to justify the high fees it charges for its advice and services. This is almost too easy a sell. People want to believe what they are told about superior performance. However, there is substantial evidence that shows their results, after the deduction of all fees, lags market returns 80% of the time.

A large number of experts believe Random Walk Theory that says the variables that impact the future performance of the securities markets are impossible to predict. No one has a crystal ball that is that accurate. Consequently, it is close to impossible to produce superior performance over longer time periods.

Its foundation is based on a lie. Stock brokers do not produce superior results that justify the fees they charge their clients.

Business Practice

Wall Street is not the first industry to lie to its customers. Big tobacco companies lied for decades about the health hazards of smoking. Big pharmaceutical companies lie about the side effects of drugs that continue to damage physical health.

How real is the problem? Watch the TV ads of the big firms. They claim exceptional knowledge and extraordinary resources, but they do not claim superior results. The track records of their products have disclaimers that state past results are not indicative of future results. I assume this means they have no idea what your future performance will be.

Lying is a way of life because no one knows what will happen in the future. And, you may not buy what Wall Street stock brokers are selling if they told you the truth.

Sales Culture

If Wall Street can’t deliver what it says it delivers it better have a sophisticated sales force that can sell the illusion of superior results. That is exactly what has happened to them. It has become very adept at marketing an illusion that it knows is not true at least 80% of the time.

Their business practices are dominated by a powerful sales culture that makes the production of revenue the pinnacle of success. Stock brokers are called producers. The brokers who produce the most revenue get the most recognition, the biggest incomes, and the most luxurious offices.

It is dominated by a sales culture that creates hidden risks.

Protect the Franchise 

Wall Street would like to you to believe it is on your side. This is one more sales pitch that is not true. Consider the following facts.

  • These firms spend more than $300 million per year on lobbyists who make sure industry regulations favor them and not you.
  • They control FINRA that is supposed to protect you from industry abuse. If you have a dispute with your stock broker, you are limited to FINRA’s one-sided arbitration process.
  • They fight any form of mandatory disclosure requirements for stock brokers. It is your responsibility to ask the right questions, obtain documented responses, and know good answers from bad ones. It is your fault if you select the wrong advisor or buy the wrong investment product.
  • Wall Street fights fiduciary standards for stock brokers. It does not want its sales reps held to higher ethical standards. The most important fiduciary standard it fights is putting your financial interests first. 

Its business model is based on unethical business principles that corrupt the executives who run these firms. 

The Independent Alternative

You need planning and investment services. This allows firms to succeed with badly flawed business models. You should assume Wall Street is not going to change business practices that produce billions of dollars of profit and big bonuses for executives. You will have to seek an alternative that puts your financial services interests first.

Why limit your choices to the big Wall Street firms? Your best alternative is a smaller, locally owned financial services firm that provides the same services without all of the conflicts of interest.

These firms are Registered Investment Advisors who are financial fiduciaries that are required to put your interests first. And, they are compensated with fees like the other professionals you depend on for specialized knowledge, advice, and services.