As I ponder Goldman's $3.3 billion profit for the quarter, one thing is clear: The financial services industry wins in all markets. Investors are left to fend for themselves, hoping to save enough money to retire with dignity, and failing miserably in that effort.
While there is much talk of regulatory reform, don't count on it. The obscene profits these firms generate are funneled to lobbyists and directly to members of Congress. This is another investment that pays big dividends and will continue to do so.
Real reform will come by changing the habits of individual investors so they no longer play the role of victim in a process that is set up to separate them from their money. Maybe what is needed is a new lexicon to guide investors in this process. Here is my contribution:
Broker: Salesmen who sell an expertise they don't have to investors who continue to believe they do;
Wealth Management: The process by which financial advisory firms transfer your wealth to them, by selling the ability to "beat the markets", even though all the data indicates no one has this expertise;
Target Price: A way to generate sales and commissions through trading activity by predicting the price projected for a stock, even though there is no evidence anyone has this predictive power;
Technical analysis: Both the red and green lights indicate profit for the sellers of these systems and losses for those who buy them;
Buying quality stocks: A way to generate commissions by encouraging the purchase of stocks meeting a particular criteria, even though there is no data to support the oft-cited claim that this is an intelligent way to invest.
"Ten-bagger": An appeal to greed by holding out the prospect of outsized returns (a "home run") while hiding the outsized risk.
"Our analysts think": An oxymoron, intended to generate trading and commissions;
Stock research: A way to convince investors to buy stocks by engaging in a process that should make sense, but doesn't.
5 star Morningstar rating: A sales technique for encouraging the purchase of actively managed mutual funds which generate meaningful commissions, even though these funds are unlikely to outperform lower cost index funds of comparable risk;
Investing guru: Often applied to a "hot" fund manager on a winning streak (like once revered Legg Mason manager, Bill Miller), right before a precipitous fall. Akin to calling someone who flips 10 heads in a row, a "coin flipping guru."
Alpha: A fancy word indicating the value brokers are supposed to add to your portfolio. It is used to hide the fact they usually add "negative alpha."
"We are very conservative": Mantra used by brokers when markets crash, reflecting concern for market risk which was not present before the crash;
Managed accounts: An appeal to exclusivity which generates a steady income to brokers for outsourcing the management of an account to a fund manager who is unlikely to outperform a globally diversified portfolio of low cost index funds;
Variable and Equity Index Annuities: High commission, complex products rarely suitable for the vast majority of investors to whom they are aggressively marketed;
Hedge funds: A way for fund managers to make unbelievable profits by convincing wealthy investors, pensions and trusts they have discovered a way to achieve high returns without commensurate risk. Qualifies as one of the greatest wealth transfer vehicles in modern times.
Asset management: Typically refers to the mismanagement of your assets by investing them in actively managed mutual funds and individual stocks and bonds;
Expense ratio: When used by actively managed mutual funds, refers to outrageous fees deducted from returns by funds that typically underperform much lower cost index funds;
Risk: Something to be hidden from clients when brokers attempt to sell them investments lauded for their high returns;
Possibility of bankruptcy of various countries: An excuse for self-styled experts to make predictions about the direction of the stock markets, notwithstanding the fact there is no basis for their musings and no data to support their ability to engage in this exercise with any degree of accuracy;
Mandatory arbitration: The requirement investors agree to as a condition of doing business with brokers, which prevents them from obtaining any meaningful recovery for losses due to the misconduct of their broker.
FINRA: An acronym for the misnamed Financial Industry Regulatory Authority. It is really an industry trade association which acts in the interest of its members. It spends a lot of money to convince investors that it is protecting them. Don't be fooled. It should be abolished and regulation of the securities industry should revert to a governmental agency with real teeth. That would be meaningful financial reform. Don't count on it.
401(k) plans: A faux retirement plan system geared to enrich mutual funds, brokers and advisors at the expense of plan participants;
Financial experts: Self appointed pundits who shamelessly predict the unpredictable, causing no end of harm to those who believe they actually know what they are so confidently talking about.
The next time you hear any of these phrases, keep this new lexicon in mind. It could save you a lot of money!
Dan Solin is the author of The Smartest Retirement Book You'll Ever Read.
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