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Uninvested: Understanding the Pitfalls of Wall St


Today we interview Bobby Monks and Justin Jaffy about their book, Uninvested and understanding the pitfalls of Wall Street.

Bobby Monks calls himself a “chronic entrepreneur” and as such, understands the dirty dealings happening on Wall Street and how they effect the average investor. Justin was new to the subject of finance but a journalist who wanted to know more. Together with a third author, Bree LaCasse, they wrote Uninvested: How Wall Street Hijacks Your Money and How to Fight Back.

The Book

To the average person, investing seems like this complicated thing that no lay person can possibly understand. So they hand their money over to a “financial advisor.” The authors wanted to demystify investing for the average investor using simple language. They spent four years interviewing people like Barney Frank, Jack Bogle, Carl Icahn, mutual and hedge fund managers.

Financial Advisors

There are 450,000 people providing financial services in the United States and 90% of them are sales people. Just 10% are registered investment advisors. What’s wrong with that? When you go to a car dealership, 100% of the people are sales people.

The difference is that you know the person trying to sell you a car is a sales person. The standards for most of these advisers is low. They are under no obligation to put the best interests of their clients first and many of them don’t. Their priority is making money for the company they work for.

There is a lot of confusion among consumers about who is and who is not a sales person in the realm of financial advisors. Financial advice that is skewed by a conflict of interest costs investors $17 billion a year. If you were a paranoid person it might be enough to make you think the industry has been deliberately set up this way.

The Fiduciary Standard

The fiduciary standard was established as part of the Investment Advisors Act of 1940. Investment advisors are regulated and required to put client interests above their own. Investment brokers are only held to a standard of “suitability.” Under this standard, a broker can look at two funds which are similar but still recommend the more costly one that will also give him or her a higher commission.

Brokers are paid based on the dollar amount of assets they manage so there isn’t necessarily any incentive to recommend the best investments, just to get the highest amount of assets under management. They often still get paid even if they lose you money.

Isn’t More Expensive Better?

If one financial advisor is more expensive than the others, doesn’t that mean he or she is better, smarter, more educated? Not in this case but it’s a common fallacy. None of these people can predict the future and past experience does not indicate future experience. The more fees you pay, the less money you have. Generally, the lower the fee, the better the performance of your portfolio.

The Retirement System

Many workers used to have a defined benefit system, a pension basically, that paid a certain amount of income for life after retirement. The system went bankrupt and had to be bailed out by the government.Uninvested...

That system has largely been replaced by the one we have now, which relies heavily on 401k’s and IRA’s. But it’s expensive to manage a 401k and you’re paying for that. The average fee is over 2%.

That doesn’t sound like much does it, a 2% fee? Consider this; if you have $25,000 invested over 35 years with an average yield of 7% and a fee of just 1%, that will cost you $65,000. The fees are often obscured because people tend to focus on the employer match and the tax advantages.

Index Funds And Individual Stocks

The best way to increase the chances of a good return over time is to pay the lowest fees possible. The lowest fee way to invest is to buy individual stocks yourself. The advisor industry has done their best to discredit the idea that you are smart enough to choose stocks without their help.

But by doing your research, you can pick at least as well as a paid advisor. Choosing stocks by letting monkeys throw darts at company names and buying stock in the ones they hit have gotten better returns than average.

It’s important to be diverse which is why things like ETF’s are so often recommended but you can be diversified while buying individual stocks. The authors are not suggesting that ETF’s are a bad way to invest, merely suggesting ways to take the next step and make your investing experience better.

I Don’t Want To Do Research!

Yes, doing research on individual companies is not particularly interesting or exciting for most of us but how long do you spend researching a good credit card or lap top or vacuum cleaner? None of those things are terribly exciting either. You’re spending time to save a few hundred bucks but you won’t spend a little time to potentially save tens of thousands!?

Ask The Hard Questions

If you do want to use an advisor, ask them some questions;

  • Are you legally required to put my interests before your own?
  • What are the fees, both disclosed and undisclosed?
  • Do you yourself invest in what you recommend?
  • Do you still get paid if your advice loses me money?
  • What is your reporting like?
  • Can you articulate to me what my investments are?
  • Do you vote my proxy?
  • Are you a registered investment advisor?

If you want to do a little digging on your own, you can go to the Financial Industry Regulatory Authority (FINRA) website and find out if a broker or their employer have ever had a bankruptcy or criminal complaint against them.

Legal Larceny

This sounds like it should be illegal but it isn’t.  A fund can pay an administrator to get on the list of choices for investors. This is known as “revenue sharing” within the industry but it’s just a kick back with a fancy name.

Mind Your Future

If you don’t bother to investigate your fees and do what you can to minimize them, it can have a great impact on your future.

Show Notes

Uninvested: How Wall Street Hijacks Your Money and How to Fight Back: Bobby and Justin’s book.

Univested The Book: The website where you can learn more.

LMM Community: Join the money revolution!


Featured Image Photo Credit: “Wall St.” by Esteban Chiner on Flickr

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  • Steve Parker

    Glad to hear you challenge these guys a bit. They made some good points, but I think the recommendations that people should just g pick some individual stocks has been proven to be a bad idea.

    An example of someone that is NOT a fiduciary, would be an Ameriprise “financial adviser” that sold me a VUL. I know now that this was totally not in my best interest, and that there was a nice fat commission in it for the adviser.

    • bythedog

      Totally agree with you on the stock picking part. Even if one does it responsibly by somehow picking 10 different stocks from different sectors, diversifying, etc., there are still behavioral issues that can’t be ignored. Do I choose to buy Microsoft, Google, or Apple? When the one that I bought isn’t doing as well as the others, I’ll end up regretting it.

      I’ve been playing on Investopedia’s stock picking simulator, and it has really shown me that I don’t want to deal with trying to pick stocks. Sometimes I think I’m a genius, only to find out a month later that I was such a dope. Imagine if it were real money! I’d lose it all by trying to buy winners and sell losers.

      • Couldn’t agree more – especially on stock picking generally not working. Case and point, I’m generally against getting in on an IPO but I’m such a big fan of Lending Club that I actually did. Checking out any graph will immediately show you that I must have lost a lot of value (which I did).

        That said, I’ve profited enormously on Apple having got in at the first iPod. I got very lucky. It also makes you wonder though, how do Venture Capitalists stay in business? Are they the luckiest people alive? Or is it that they do monstrous amounts of research such that they really only need to pick one winner every 20 choices in order to come out on top. Of course, you need to ready, willing and able to put the time and work in and even then you likely wont come out on top.

        Most of my wealth is in funds but I do play (mostly because I enjoy it) so I don’t want to fully discourage people from trying it but just be really heavy handed on the caution. Most of our writing/episodes that give specific portfolio allocations say to not go into “risky” things like individual stocks or Lending Club with more than 10% of your wealth.

    • Steve, I absolutely agree and the example you gave is perhaps the worst thing we have to fight. It’s not that picking individual stocks are inherently bad but doing so without your own research is and it’s unfortunate that we often PAY for people to give us bad advise and since we’re paying we figure it isn’t necessary to do the research.

      Picking individual stocks/funds can provide the highest returns but they require the most work. Funds are the safest, highest returning approach that involves the least amount of research/work. For 95% of people, funds are it.

      The line we try to walk is in educating on 100% (not just 95%) yet making sure the people listening know if the topic is for the 5% of nerds or the core 95%. I’ll admit we don’t always do the best job of that but I figure knowing is half the battle :)

  • Randy Brenny

    I really appreciate that you guys consistently advocate paying attention to your fees/costs when it comes to the investments we choose. I also agree it is important to understand what an individual’s motivation is for helping you with your investments. We all have to make money…it is definitely important to understand clearly how our financial advisors do.

    However, I really have a lot of problems with the guests on this show. I agree with Steve in that I was happy you pushed back a little bit. i almost felt like this particular show was just some guys trying to sell a book. Kind of made their quality of being guests, well…”chinsy” I didn’t believe their motivation to “help us” was genuine. I just felt like they wanted to sell a book. You would ask them a direct question and their response repeatedly was “we discuss this in the book” and then didn’t answer the question. I just felt like it decreased the value of the episode.

    I do enjoy listening to the podcast. I love it in fact. I enjoy a majority of the guests you guys choose. Just felt like this one just kind of missed the mark.

    Thanks for all you guys do!

    On a side note…you know what might be worth while. Engage some listeners who currently have 401Ks and are willing to share specifics about it. You could have them as guests and dissect the actual amount of fees that they are paying. Might be nice to see specific examples of these “extremely high” fees or…maybe they may not be so high…

    • Steve Parker

      I read several reviews of their book, and they came to a similar opinion. Good info about fees, but really no answer on how to avoid them other than pick your own stocks and don’t own mutual funds.

      The topic of someone being a fiduciary is worthwhile of more discussion. If their numbers are correct, not many in the financial industry are fiduciaries. Insurance salesmen stand out, along with guys that sell retail mutual funds.

    • Thanks Randy re: the low cost/fees. It’s hard for me to imagine someone not getting infuriated by how much money is lost passively (and very quietly).

      I agree with you that they were pretty hard with shrilling for their book, of which I’m not sure I was really sold on it myself. Problem is, a lot of these things don’t play out until the episode is already happening and while we do throw away plenty of episodes because they don’t hit the mark, we’re also very careful and what we keep for two reasons:

      1. I’ve found that I’m terrible at predicting what episodes do well and which don’t. Often it winds up being the opposite of what I think. For example, I’m beyond excited for the December 7th episode which is super nerdy but I doubt it will do as well as Joan’s episode for example (which was one of the most fun interviews we did this year).
      2. I feel there’s as much to learn in direct teaching as there is in the subtext. You know we’re against advisors in many cases (but not all) and generally dislike people who lean towards the “get rich quick” side of things but how better to drive things home than to approach the topics head on and leave the decision up to you. Kind of like that whole bring a horse to water analogy ;)

      As to bringing real people on and breaking down their situation – we’re working on a refresh for This Financial Life. Haven’t quite found “it” yet but it should be soon and very much like you’re suggestion.

  • dek

    I purchased the book recently. It’s a decent, quick read. There isn’t a lot of detail about alternative strategies (though they do mention a VERY interesting future possibility), but there is much to think about here. And they do lay out considerable evidence for their argument, which (if I remember correctly?) doesn’t come through as strongly in the episode.

    The value of the book comes through more in helping the reader to understand the larger context and history of investing, from which the reader should be able to draw appropriate conclusions.

    • Dek, thanks for coming back and sharing your opinion. I agree they didn’t do a great job at sharing the meat in the episode. Perhaps that’s my fault for not dragging it out of them kicking and screaming. Good to hear that the book was a solid read though!

  • jb1907

    it isn’t rocket science to invest. You can keep it low key to 3-6 funds and be perfectly diversified. FA’s have a place for some, but in general, they don’t provide a huge benefit. They are best for talking you off the ledge when the market is volatile. Buy and hold for the long term. Buy on dips in the market. K.I.S.S. My last 10 years of investing has generated about an 8.5% return. Could someone out there get me 11%? Maybe, but how much more risk would I incur? According to Personal Capital and Future Adviser, I have proper diversity and risk profile for my age and risk tolerance. i don’t agree with some of the suggestions I get, but in general, not bad for doing it myself.