The Lies Wall Street Tells Us

By Mike Adams

Suppose you received an email from an advisor that recommended you buy stock AB and hold for a month. You watch, and the stock increases in value. Now that same advisor sends an email and says sell stock CD and cover the short at the end of the month. You watch and sure enough the stock price drops during that month.

Then the advisor sends an email saying to buy stock EF and hold for a month. That stock goes up. The fourth month the advisor’s email says to buy GH and hold for a month. And so it goes for 10 months. The advisor has correctly called every stock price movement. At the end of 10 months, the advisor calls and asks for you to invest $1 million.

Would you do that? That advisor has been right every single month for 10 months. Most people would open the account and deposit $1 million or more.

Even if the advisor had been right just nine of ten times, you would probably open an account.

This is the classic story of the “Baltimore Stockbroker”.. No one knows why it is Baltimore and no one seems to know if there was an actual stockbroker.

But what is important about the story is that it illustrates the appeal when all the facts are not known. It illustrates what Wall Street is not telling us.

What you did not know was the financial advisor in this story started by sending 10,240 emails the first month. To 5,120 the email said to buy and to the other 5,120 to sell. When the stock went up, the 5,120 who received the email to sell never heard from the stockbroker again. But to the 5,120 remaining, 2,560 were sent emails saying to buy CD and 2,560 were sent emails to sell CD. When CD went down, 2,560 who got the email saying CD would go up never heard from the stockbroker again. The 2,560 who had now see two predictions come true were split into 1,280 who got the email saying EF would go up and 1,280 got an email saying EF would go down. And so it went: 1,280 to 640 to 320 to 160 to 80 to 40 to 20 and finally to 10. There were just 10 email recipients who had received emails with 100% correct predictions.

Actually it was not 10 correct predictions. It had nothing to do with predictions. It has everything to do with hiding what was really happening.

When financial advisors leave firms the firms will distribute that advisor’s clients to remaining advisors to call and keep the clients at the firm. As a rookie stock broker in 1986 I received one of those accounts. The client had invested $10,000 in a single mutual fund and the value had fallen to $8,000 after three years.

A mutual fund wholesaler came into the office and was touting that same fund with a 20% per year return for the last three years. I checked. My new client owned that fund but her value had dropped 20% in three years. What happened?

The fund my client purchased was a large fund that was falling in value. The fund company merged a small fund with a good track record with the large fund but used the small fund’s track record.

Fund companies do that all the time. For example Janus Fund was merged into Janus Research. Janus 20 was merged into Janus 40. Fund X studied 10,464 funds and ETFs. After 25 years only 269 funds were still operating. The other 10,195 had either been merged out or liquidated.

Mutual funds publish their expense ratios. While that sounds good the reality is there are up to 17 additional fees, expenses and costs that are hidden:

Asset management fees

12b-1 fees

marketing fees

trading costs

brokerage commissions

spread costs

market impact costs

soft-dollar costs

redemption fees

account fees

purchase fees

record-keeping fees

plan administrative fees, and on and on. Studies show the average cost of a mutual fund is 3.17%. ETFs are supposedly less expensive but they have many of the same hidden costs. Add 1% for an advisor and the fees can run 4.17%

Most people don’t do the math, and the fees are hidden. Try this: if you made a onetime investment of $10,000 at age twenty two, and, assuming 9% annual growth over time, you would have $483,272 by the time you retire at 67.

But, if you paid 4.1% in total management fees and other expenses, your ending account balance would only be $263,115 over the same period.”

You provided the capital. You took all the risk. Even if the fund falls in value, the advisor and fund company keep their fees and costs. You get to keep $263,114 but you gave up $220,152 to a financial advisor and Wall Street. They take 45% of your potential returns? For what?”

That said, the vast majority of financial advisors care intensely for their clients, and more often than not, they are doing what they believe to be the best thing. Unfortunately, many don’t also understand how the “house” reaps profits whether the client wins or not. They are doing the best they can for their clients with the knowledge (training) and the tools (products) they have been provided. But the system isn’t set up for your financial advisor to have endless options and complete autonomy in finding what’s best for you.

Consider the latest “hot product” into which investors are pouring money – the buffered ETFs. They are what I call the chocolate covered hand grenade. They sound so good. The idea is to have stock market participation but limit the downside risk to say 10%. Sounds good, right?

Those buffered ETFs are limited on the upside to 10% gains. Historically the stock market has achieved 20% or greater gains in over 1/3 of the years and 30% or greater gains in 1/5 of the years. If you own the buffered ETF you give up everything over 10% so Wall Street collects more than you do. On the downside every other year the market drops at least 10% meaning you will lose 10% every other year.

Mathematically the expected gain for the investor is break-even: You gain just 10% on the years when the market does not experience a correction of 10% or more and you lose 10% every other year when there is a correction. The big winner is Wall Street.

Consider one other example the 529. Once again it sounds so very good. Earnings are tax free when the 529 is liquidated for education. Contribution levels are high. Funds can be updated to any family member. Anyone can contribute to the funds.

Sounds wonderful right?

What you are not told is this: How many children are paying taxes? The earnings coming out tax free would be tax free in a regular investment account if properly managed. The 529 funds can only be used for education. Only 62% of children go on to college after high school. If the funds are not used for education there can be stiff tax penalties. Finally the 529 will probably count against the child for financial aid.

There are much better choices. But Wall Street doesn’t tell you that. The 529 restricts investments to mutual funds and as shown above: Wall Street and the advisor keep up to 45% of the earnings. Does that sound like a good deal?

Let me say again the vast majority of financial advisors care intensely for their clients, and more often than not, they are doing what they believe to be the best thing. Unfortunately, many don’t also understand how the “house” reaps profits whether the client wins or not. They are doing the best they can for their clients with the knowledge and the tools and products they have been provided. But Wall Street firms are not set up for your financial advisor to have endless options and complete autonomy in finding what’s best for you.

At Adams Financial Concepts we do our own due diligence. We are skeptical of what Wall Street puts out. We intend that every decision we make is in the best interest of our clients, not Wall Street. That is why we stand on our track record, knowing that past performance is no guarantee of future performance. But we want to minimize Wall Street’s share and maximize our client’s share.

If you are not a client and would like to know if you are giving too much of your nest egg to Wall Street, pick a time to talk to me.

Article Written By:

Mike Adams, President & Principal

Adams Financial Concepts LTD

206-903-1019 

https://adamsfinancialconcepts.com/

1001 Fourth Ave, Suite 4330, Seattle WA 98011

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