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Betrayal PDF Print E-mail
Written by John D. Buerger, CFP®   
Tuesday, 20 April 2010 12:02
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John Buerger

Five Minutes or less!  That's how long it takes me.

Before your mind really gets in the gutter and I get myself into trouble, what takes five minutes or less is for the F-word to pop up in almost any conversation you might have with me.

Hmm.  That doesn't seem to have helped much.

The F-Word

The word to which I am referring is "Fiduciary" and it is a vital term within the realm of financial advice and helping people make good choices with their money.  It also happens to be a virtue that is woefully lacking in modern society, especially within financial services.

A perfect example would be Goldman Sachs and the accusations last Friday by the SEC that they told their clients one thing, selling them a product in the process, while the opposite was the real truth.

I mean, if you can't trust Goldman Sachs, who can you trust, right?

Advice Should Come From a Fiduciary

Goldman Sachs is not the only firm being indicted here.  At the end of the day it will probably be most interesting to notice who is NOT on the SEC list of defendants.  But I can save you the stress of having to wait to find out:

The problem children will get their hands slapped - but that will be about it.  The good guys who won't be on that list will be the fiduciary and independent advisors who hold themselves to the highest ethical standard to do what is in your (the client's) best interests.

The big name banks do NOT operate under this standard.  The people who work for the big banks cannot operate under this standard.  An employee of a major firm (like Goldman or JP Morgan or Merrill Lynch or any other well known name you throw out there) has a fiduciary duty to his/her company and to make them a profit before he has any duty to you the client.

I just wanted you to know where you stood in the pecking order - and it ain't #1, baby!

Buyer Beware

But before you go and beg for help from the government to save you ... you must also understand that the game is rigged against you BECAUSE of government regulation, not despite that regulation.

The fiduciary standard wasn't written into any of the securities laws governing broker-dealers or the big banks.  Why?  I wasn't around in 1936 and 1940 when these laws were being written (I know I'm older than dirt, but I'm not that old), but the big banks and broker-dealers who had the most political clout (and money) did their best to be sure the game was tilted in their favor.

We're seeing the same thing today - and that is why the new laws going through Congress DO NOT apply the fiduciary standard to stockbrokers and wealth managers at these big-name firms.  The big name firms (with the big money) don't want a level playing field.  They don't want to serve you.  They want to profit from you.  They will do everything they can to be sure the laws of the land continue to give them that advantage.

Government can't-won't save you.  Only YOU can save you - and you do so by demanding that your investment advisor / wealth-manager / stock-broker show you the clause in a written agreement that states that they will operate under a fiduciary standard.

If your advisor can't show you that clause, or they say it really isn't that important, I say you run (don't walk) out of that office and find yourself a new advisor.  There are thousands of us (about 5% of all financial services providers, but still thousands) who will be more than happy to actually help you rather than abuse you.

More Betrayal - Leverage

I wrote (one year ago in this blog) that the number one cause of the financial meltdown was leverage - too much borrowing.  Consumers had too much debt.  People were buying homes they couldn't afford (and being encouraged and financed by government sanctioned entities like Fannie Mae and Freddie Mac to do so).  The government was spending more than it made (and it's much worse today).

Most important though was that the banks were leveraged to the hilt.  Even more odd was that the bigger the banks were, the more they were allowed to leverage up.  Even before the funny business of off-balance sheet items, the leverage was 35-to-1 or 40-to-1.

Yes, Virginia - it was all legal ... encouraged even by that government that everybody is looking to provide salvation now.

Expose the Leverage

This goes back to my original point about the fiduciary standard.  The regulators lead you to believe that investors are protected, but they don't even use the only tool that WILL protect you.  If you don't insist on the fiduciary standard, you'll keep getting crappy advice and being sold products you don't need and can't afford.

The same is true for Leverage.  The regulators led us to believe that we were all safe and protected.  That is what regulation is supposed to do, right?  Meanwhile, the regulators not only allowed excess leverage, in many cases they encouraged it.  Now we all end up paying for it.  What is worse is that their "prescription" for the cure is more of what caused the problem - EVEN MORE LEVERAGE.

That just makes no sense.

What You Can Do

The American public started off doing the right thing.  Personal savings rates jumped from an anemic 1% in Fall 2008 to as high as 5% in May 2009.  This was a great start although far from historical savings rates of greater than 10% - the amount necessary to sustain long term investment and economic growth.

It is also unfortunate that the savings rate has slipped back down below 3% as people get back to the old habit of spending money they don't really have.

What you can do - and what I think is every citizen's duty to do - is to operate your financial life in a sustainable way.  Get your savings up to 10% or more of gross income.  Be smart about how much you spend and where you spend it.  Look for contracts with your financial advisors that offer the fiduciary standard of care.  Take your money away from the big banks that abuse the system for profit and put it in local banks and credit unions.

Finally, don't vote for a political yahoo just because he or she promises you some goody or other.  Remember, government does not create anything.  They only redistribute - so that shiny handout they offer in return for your vote just stripped away wealth from someone else.  Meanwhile, they're taking the big handouts from the big banks and tilting the playing field in their favor.

Goldman Sachs made $3.3 billion in profit last quarter.  They didn't do that despite legislation.  They did that BECAUSE of legislation and the favorable treatment from the Fed and Treasury.

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Comments (3)
1 Tuesday, 20 April 2010 21:14
Kevin@OutOfYourRut
You're on the money here John. We need to understand the difference between regulation and protection. Regulation is the product of political compromise; protection is what we wish we had, and like to think we do have.

Caveat emptor never went away--we all need to look out for our own interests and not assume that an institution has our best interests at heart. That can only be possible when someone works directly for us; large companies have multiple masters and they can't possible serve while protecting the interests of their clients.

The best advice is what you gave, to save money and keep it as close to home as possible. The fewer hands it passes through, the safer it is.
2 Wednesday, 21 April 2010 14:30
Tom Carter
Dear John,
As I agree with you about big banks in bed with the fed., I also heard of the huge profits investors made from all those profits. Would you include such an investment in your clients portfolio if it were in his/her best interest? Food for thought.
Best regards,
Tom
3 Wednesday, 21 April 2010 16:05
Kendric
A guy I know just got four and a half years for securities fraud. He seems like the nicest guy in the world, but that didn't stop a billion dollars worth of market cap wipe out. Caveat emptor today, tomorrow, forever.

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Last Updated on Tuesday, 20 April 2010 20:00