The financial industry is becoming one big fraud

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Do you pay for information? Who does in this age of information technology? We often only read free versions of reports but refuse to pay to read the sections that will cost some money no matter how useful it might be. Information is available for free everywhere so surely we can find what we need elsewhere for free, right?

In the financial world, people pay others for “expert-networking” services that "connect consultants with investors looking for detailed information about industries and companies". [See: Big arrest in insider-trading investigation]

Some Singaporeans would drive all the way to Johor Bahru and brave the traffic jam to buy cheaper toilet paper but they would readily hand over money to "financial advisors" to receive information or "expert advice". They comfort themselves by thinking that they are not paying for information but for an "expert" to "manage" their money.

They're not paying for information but they are paying for their money management service... whatever that's supposed to be...

If your advisor is telling you to sell when the stock market goes down and to buy the stock market goes up, to diversify and "balance your portfolio" (btw, I think the use of the word portfolio should be limited to artistic work. For any other usage, the person is trying to sell you abstract art), you need to know that information can easily be found in any book available for free in the library... and many books will tell you that your advisor is completely wrong!

Well, maybe not really wrong depending on whose point of view we're talking about. From the advisor's perspective,
- anything that makes you think he's doing some work works well for him because it will make you feel like you got his "expert" advice, and
- anything that makes you part with your money is fine.
Whether you make a profit or lose money is not his foremost concern. Why? Simple. It's not his money! He gets paid upfront. There is no penalty imposed on him if he managed so well to lose all the money. The stock market is unpredictable! It's not his fault! So what advice was he giving in the first place? That the stock market is unpredictable and returns are not guaranteed?

What stops advisors from giving you correct advice? Let's pretend I'm a financial advisor. The majority of people believe that they should get on the bandwagon when the market is going up and to "cut losses" when the market goes down although this is the fastest way to lose money. You may not believe me. Many people may not believe me and it would take too much effort to convince them. If they don't believe me, I'll have to prove myself. And because nobody - not even Warren Buffet - can make money on every stock 100% of the time, there are bound to be times when I am wrong. Then it'll be my fault! So if I'm smart, I'll know that it's easier to hide behind common misguided beliefs and save myself a whole lot of trouble!

"Wall Street is the only place that people ride to work in a Rolls Royce to get advice from those who take the subway."- Warren Buffet

I would think that with the Bernard Madoff investment fraud, insider trading, investment products such as previously popular investment-linked products, mini-bonds, a "glitch" that caused exchange-traded funds (ETF's) dropping to almost $0 within minutes, people would be wary about trusting financial advisors and so-called industry experts but, no, they are throwing in even more money. Recently, Senior Ministor Goh (I like him!) called on the life insurance industry to put more emphasis on protection and NOT wholelife plan. [Read more] Something had better be done before the entire financial industry becomes one big fraud in which all the big boys just cover one another's asses.

Related posts:
[Evaluating the performance of unit trusts against the benchmark]
[I've had it with irresponsible insurance agents!]

9 comments:

fx911z said...

As an undergraduate in finance right now, you are 100% wrong. The financial industry is not becoming one big fraud, it already is. But what can I say or even do? Nothing.
By the way keep up writing these articles, they are pretty good.

Savahn said...

As one who participates in the particular industry you write about, I agree with fx911z above to a point.

What can anyone do? A LOT. If you choose to do nothing, then you are part of the problem. Heck, its likely that you'd do it too.

What should you do? Stop it. The problem is a failure of professional ethic. Report the frauds and uphold strong, good ethics.

Every wealth manager, they know it isn't their own money. They know they better do a good job managing it.

Now, this article is confusing two issues - one that is wealth management and another which is insider trading. Which are we really addressing? The author's mistrust of wealth managers or her opposition to insider trading?

Yu-Kym said...

There's nothing to report because the way the investment industry operate is what I call legalised fraud. They always make customers sign documents that free the advisor and company of any responsibility.

This article applies to "wealth management": advising customers how to invest their money, telling customers that wealth managers (I called them financial advisor in my article) do a better job at managing money than them, earning commission which customers are paying for while denying all responsibility for the advice.

"Every wealth manager, they know it isn't their own money. They know they better do a good job managing it." The second line is a fallacy. There are many "laymen" who do a better job at managing their money, and I count myself among one of them.

fx911z said...

Well Financial advisers are not exactly the same as wealth managers though.Wealth managers do a lot more. They also generally leave investing to the investment bankers.
The reason I say there's nothing we can do about it stems more from the fact that the world's economies are way to used to the easy credit and capital flows that stems from the financial industries. The major problem is that, well and those derivatives.

Yu-Kym said...

Are financial advisers the same as insurance salesmen? Wealth managers, investment bankers, etc, etc. They all essentially do the same thing - they make a living out of other people's money.
The problems seen in the recent years go deeper than availability of easy credit. The underlying economic model needs to be questioned. Old economic theories and models may not be applicable any more.

fx911z said...

Yes you are right, it's the economics and politics that spawns them that's the problem. Honestly the Neo classical economic theories of Adam Smith to me are sound. But ahh well all that is another topic for another time and would take entire books worth of writings lol.

Anonymous said...

Just a note of Caution;

if you do not know how to look after your money, there are 99 crooks (including banks & insurance companies; especially THE banks & insurance companies) and maybe just 1 honest broker; who is available to look after it for you!

So what can a clueless girl or guy do with his/her hard earned money?

I'm sure you have some annual leave. Use some leave days to read up books on how to invest your money. Dont like these type of books? Too bad, learn to like it or lose your money.

All financial companies and or instruments are designed to make money - no, not for you/the buyer/the sucker/the client; for them. Since you dont know what to do with your money, these predators will surely teach you how they intend to use it for their benefit!

Be careful out there!

Regards, Leo

Anonymous said...

Just a note of Caution;

if you do not know how to look after your money, there are 99 crooks (including banks & insurance companies; especially THE banks & insurance companies) and maybe just 1 honest broker; who is available to look after it for you!

So what can a clueless girl or guy do with his/her hard earned money?

I'm sure you have some annual leave. Use some leave days to read up books on how to invest your money. Dont like these type of books? Too bad, learn to like it or lose your money.

All financial companies and or instruments are designed to make money - no, not for you/the buyer/the sucker/the client; for them. Since you dont know what to do with your money, these predators will surely teach you how they intend to use it for their benefit!

Be careful out there!

Regards, Leo

Anonymous said...

Banks are selling clients products with limited upside and unlimited downside, such as "Equity Linked Notes" and "Dual Currency Investments". They are basically put options which clients sell to obtain some yield. Little do clients know that the sales folks cream off a large chunk of the yields, often taking 80% and giving clients 20%. Since all these are hidden, they are none the wiser. For example, selling a put on SGX at 95% strike for a month by right should give about 5% flat, not annualised. But Relationship managers take 4% and give clients 1%, calling it a yield enhancement product.

Of course, sales folks and banks love it because it gives them recurring revenue. But when the stock market tanks or when a currency tanks, clients will be delivered the stocks / currencies that are fast plunging. In return for 12% per annum return, they face 50% downside risk. How stupid they are.

Clients are averse to buying unit trusts or ETFs because there is an upfront charge. But they don't understand that at least the returns are symmetrical.