Your Savings Are Their Profits

TDC Note – If you still have the majority of your wealth in the banking system, shame on you, and good luck. by Adam English, Outsider Club The corporate beatings will continue until revenue improves. Unfortunately, we won’t merely go along for the ride. Giving back gains from the last several years is painful, but we need to watch far more than the percentage gain/loss column in our portfolios. We also have to watch the middlemen with more vigilance than ever. The S&P 500 gave up a little over 2% in 2015. Year-to-date, almost another 10% has been lopped off. Bond yields are flat, or outright negative in some cases. For the brokers, fund managers, and other profiteers that depend on inserting themselves between small investors and the market to make a profit, that leaves only one consistent way to make a buck. Us. From Every Angle With net losses coming from trading desks, the fees you pay are becoming even more important for the bottom line of brokers and institutional investors. Another increasingly lucrative way to dig into your pockets is to straight-up bilk you out of your savings. It may not be entirely legal, but is not being prosecuted. As a result, a whole slew of skeevy and immoral business practices will be increasingly brought to bear upon us. The breadth and width of these efforts is depressing and horrendous, and the fact that these retirement account skimming methods arose while the stock market had a nearly unprecedented bull run can only make what is coming at us that much worse. We see it in the fees we are being charged. Flat fees for trades leave little room for “creative accounting,” but they are but one of many. We see, or rather don’t see them, in the fees hidden within our 401(k)s and other accounts. We see the largest retirement account companies — like BlackRock, Fidelity, and Vanguard, amongst others — heavily lobbying against a requirement to give investors a proper itemized bill. Perhaps even more importantly, they want to remove the requirement that when a hired advisor tells you that this investment is in your best interest, that they are not lying to your face and taking a bigger piece of the pie than they deserve. These powerful lobbying efforts managed to delay implementation of the Dept. of Labor’s new rules, purely in an effort to erode and invalidate them behind closed doors. We see a similar issue receiving renewed attention after to a settlement regarding the use of dark pool trades. Barclays and Credit Suisse just agreed to pay a combined $154.3 million to the government for lying via omission regarding how they managed their private trading platforms. This is without prosecution by the SEC or admission of wrongdoing, of course. However, all indications are damning. The companies claimed they didn’t prioritize traffic or traders, yet gave high-frequency traders first pick and preferential treatment. They choose to make us pay more, in exchange for very lucrative fees collected from the HFTs. Them over Us. Only Getting Worse There are worst things out there than skimming efforts though. Take, for example, the details featured in a Bloomberg article from June 2014 about Kathleen Tarr. She visited the homes and offices of AT&T employees, advising them on retirement plans. However, she didn’t work for AT&T at all. Instead, she worked for a brokerage firm owned by AIG, Inc. Through her advice, hundreds of departing employees moved balances into high-commission, high-risk investments and pulled in hundreds of thousands of dollars a year in commissions and vacations. One former administrative assistant cited in the article said her account fell to $100,000 from $390,000, wiping out decades of savings. $324 billion was rolled over from 401(k) plans in 2014, the last year data is available. That is up 17% from 2013 and over 50% over the preceding decade. Every trick is being brought to bear in a push to make a living off other’s savings. Cold calls, online ads, storefront signs, and cash incentives included. Allegations that investors were not provided with details about the investments, often private placements or non-traded REITs, are legion. With SEC intervention very rare, and always resulting in fines less than profits, perhaps the only thing actually countering these predatory practices is short-selling from other investors. For example, Texan hedge fund manager J. Kyle Bass outed himself as the short seller of one of these REITs, United Development Funding IV, calling it a “Ponzi-like real estate scheme.” Allegations include using new investor money to pay existing investors, misleading track record and financial condition information, and targeting “mom and pop” investors who do not have experience vetting such investments. And as the term non-traded certainly implies, once you’re in, it is virtually impossible to get out. There is a bare minimum of investors and almost no volume. On Our Own The bottom line is that only you will work in your best interest. Patsies will fight to keep their jobs, and perpetrators will drive new and worse schemes. Even if blatant fraud isn’t the plan, more than enough damage is being done as we are nickel-and-dimed over decades. Research from nonpartisan research group Demos has found that 401(k) managers will eat up nearly $155,000 over the lifetime of an account. That is roughly one-third of investment returns for the average American family. If we allow others to manage our accounts, or even provide percentage fee advice, this is a reality we must face. The most tragic aspect of this worsening scenario is that it really isn’t hard to replicate the “proprietary” holdings that we are being charged so much for over time. The management “expertise” sold to us is a sham. A vast majority of funds simply hold S&P 500 companies that are more than happy to give you everything you need to do it yourself. They will give you all the information about their business and stock. They even provide ways to buy shares, without fees, often with hefty discounts to publicly-listed share prices. The only requirement is a single share, registered with the company by taking five minutes to fill out a form. Take the time, do it right, and keep as much of the money you invest as possible. It will take some work — after all, the government and lobbyists have made sure they can’t be advertised — but they are easy to use. It will only get worse this year as we become increasingly exposed and preyed upon. Take Care, Adam English Adam English


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