Early in my career, I interviewed at all kinds of places on Wall Street — including lots of the big names like Jefferies, Bernstein, and Morgan Stanley.
But my most memorable experience was at a place that ended up resembling Jordan Belfort’s place in “The Wolf of Wall Street.”
I’ll never forget the guy I met. He was exactly what you imagine — right down to the tanned face, pinstripe suit and flashy jewelry.
He wasted no time explaining what the job entailed. Here’s a really brief version of how I remember it:
“OK. You get in early, and read The Wall Street Journal to get up to speed on what’s happening in the markets.
“Then you start making phone calls. We mostly target the U.K. first since they speak English and it’s later in the day there.
“You pitch the ideas we give you. And you keep doing that all day.”
Would my own security analysis factor into this? Would we base our recommendations on fundamental developments? I started asking some of these questions and talking about my own thoughts on investing.
Rather than address any of that, my interviewer started talking about a current employee’s rise to fame …
“Two years ago he was hopping the subway turnstiles to get on the train. Dropped out of high school. Didn’t know a thing about investing.
“Today he’s one of our best producers. Just bought a condo on the Upper East Side, has money coming out of his ears, and is engaged to a very attractive girl now.
“All you have to do is follow the approach I just told you about and you can be there, too.”
Needless to say, I passed.
And while the “boiler rooms” of the 1990s are a dying breed these days, the irony is that the bigger-name firms continue to take money out of Main Street investors’ pockets on a daily basis.
Sure, their methods are more subtle than pitching you no-name penny stocks. But that doesn’t mean the financial outcome is any better!
3 Ways Wall Street Continues to Line Its Pockets With Your Money …
We don’t need to talk about Madoff-like Ponzi schemes or the possible problems with high-frequency trading.
Instead, just consider the following points …
First, the average financial adviser charges 1% a year to manage your money.
That means the typical investor who uses a professional adviser could be handing over $1,000 a year on a $100,000 portfolio before one single penny is earned from the lump sum.
Put another way, it means that same investor has to BEAT a benchmark’s return by one percentage point a year JUST TO BREAK EVEN.
Do some advisers provide great information for their fees? Absolutely. Some are worth far MORE than 1% a year. But a lot of others aren’t.
Second, the typical actively-managed mutual fund carries an annual expense ratio of 1.1%.
So whether or not you use an adviser, you could be losing more of your money just to pay a mutual fund’s marketing materials, managers, and other operating costs.
On top of an annual expense ratio, many mutual funds also slap on plenty of other fees — for getting in or out. They may even level additional fees for every year you stay IN.
Obviously, a lot of investors are getting wise to this and switching to low-cost index funds and ETFs.
However, there are still billions in unnecessary, unjustified fund management fees going into Wall Street’s coffers every single year.
Third, most actively-managed funds are consistent UNDERPERFORMERS.
It would be one thing to pay for performance. In fact, you will often hear Wall Street describe its compensation structure this way.
But the reality is that the majority of actively-managed funds — whether you’re talking about mutual funds or hedge funds — fail to beat their benchmarks.
The number varies year to year but it usually sits right around 80%.
It’s the same thing with hedge funds, too.
And remember, you still have to factor in their typical management fees — 2% of assets and 20% of any profits earned!
No wonder the California Public Employees’ Retirement System (CALPERS) decided to pull out all of the money it had invested in hedge funds ($4 billion).
That was after they paid $135 million in fees during 2013 and received only 7.1% in returns from their hedge fund investments.
As a point of comparison, the S&P 500 Index rose 29.6% that year!
So if you’re looking for the biggest way that Wall Street is ripping off investors right now — whether large or small — forget penny stock scams, Ponzi schemes or other esoteric maneuvers.
You may never see a movie made about it. But the grim reality is that they are simply eating away your portfolio through annual fees and expenses while giving you underwhelming trading strategies in return.