Paul Farrell had a post a couple of days ago noting that financial literacy is hoax. He isolated some of the human behaviors that make it impossible, in his opinion, to retrain the brain to succeed and for good measure he threw in all the reasons why Wall Street brokerage are hell bent on preventing people from being financially literate.
Farrell is correct that human behavior gets in the way of financial success with financial success being defined as proper budgeting, effective debt management, sufficient savings rates and moderately competent investment results. I don't necessarily agree with the magnitude of his sentiment about brokerage firms in that they clearly have their own interests ahead of yours in a structure where interests are not generally aligned but I don't think they are out to "get you." Putting themselves first is not the same thing as trying to hurt customers but make no mistake, they do put themselves first.
To the point of financial literacy, people can learn from their own mistakes and the mistakes of others which serves to make them more literate. This does not remove all obstacles but people can improve in certain aspects of this. Unfortunately not everyone can become more literate and not everyone can make progress on every front but how much better off would a couple around 40 making a combined $50,000 be if they figured out how to get by with never using a credit card again? Or what if this same couple figured out how to save another $2000 per year? These would be incremental improvements but still big positives.
As for the Wall Street out to get us aspect, one way to look at it is whether people are allowing themselves to be the victim or instead making use of product innovation and access to more information to achieve a moderately competent result while minimizing doing truly stupid things.
The reason I say moderately competent is that that type of result can get the job done provided there is an adequate savings rate. I'm not sure what Farrell thinks of ETFs but obviously I think they are a great democratizing force in investing and allow people willing and able to put in the time to build an effective investment portfolio and bypass the wire houses (if Farrell is actually correct about them).
Farrell's articles are often interesting to read but I don't think they do anything to help people solve the problem. People can learn to think ahead to remember that occasionally markets panic lower, this has always happened and will happen again. People can learn to have parameters in place ahead of time to take defensive action or to get more invested. People can learn to pre-plan for when they realize they were wrong about something and need to make a change. People can learn to avoid big bets in their portfolios. This list is endless, or people can say "woe is me" and play the victim.
Wikinvest Wire
26 comments:
People thin financial literacy is having a good credit score and being in debt. financial illiteracy is having a bad credit score and being in debt.
They do not get your wisdom of avoiding debt.
Heck there are people who post to this blog that believe our country can reach prosperity by going deeper into debt.
Asia is rising in wealth and power and we are going the way of Greece.
On Tuesday the talking heads on CNBC's "Fast Money" were chatting up stocks and the continuation of the bull market. The next day, Wednesday, retail investors got their heads handed to them . . . again. IMHO Italy is "too big to bail". Spain is next, followed by France.
The 1% I'm making in my AmEx money market account ain't much, but it helps me sleep at night.
interesting comment about the TV show, FWIW the people I follow on Twitter shred on that show for the appearance of their always having perfectly timed shorting this or going long that
Here is what I learned from your blog and my own experience.
Avoid most CEF's. One is ok, two may be a problem, 3 or more, bad, very bad.
Beef up savings, even in light of a low interest environment.
Be careful about your allocations. Having too much of one thing/theme can be good on the way up and very bad on the way down.
I have definitely learned a lot along the way, I am just recently realizing that I probably would have been better off with at least some of my money under management as more experienced people would have known to avoid some of the bad things.
thank you 8:08
Wall street may not be out to get us, but they do not care about our success or failure. All wall street wants is their fees and laws to protect them when we lose money.
I also know the public is its worst enemy buying high and selling low and a lot of it is the public's own fault.
But would society ever accept a doctor or engineer or manufacturer to not care about how their work affected the consumer?
I think there are some responsible places like vanguard mutual funds along with others. But lots of wall street does not care about our success and yes more than a few are out to get us. I do not need to start listing insider trading cases or other SEC actions and those are only the ones we know about.
not sure insider trading makes the "wall street out to get us" argument as I believe that is more about greed and personal gain than trying to hurt someone.
Even if you include the buy side (such as hedge funds) as part of "Wall Street" -- probably not what the poster had in mind -- is it really the case that most insider cases involve abuse of non-public information by people working for financial institutions, rather than by employees of the company whose stock was improperly traded?
Roger, the preceding was only part of my comment which got cut off. It was supposed to begin with: wouldn't you have been more helpful and accurate (in rebutting the "Wall Street / insider trading" equation), if you had pointed out that most insider trading probably has nothing to do with Wall Street?
I think you slipped up there... pretty badly (given that you've set yourself up here as a dispenser of financial literacy).
aside from have lost the context and knowing who said what, you are implying that financial literacy would be solved if people understood insider trader? what the what?
OK OK
Insider trading was not a perfect example even if I think wall street is more corrupt than you.
When I was young and stupid I opened an account with a major brokerage firm. The broker kept on steering me to high fee low performing mutual funds with a load run by the brokerage company not lower fee better performing no load mutual funds. At that time he knew better and did it any way. One book from a friend on no load mutual funds about 30 years ago and I closed my brokerage account.
How can you not say wall street does not act against the best interest of there clients?
i did not say that, i said you are not the top priority, probably not the second or third either which is differeent than proactively trying to hurt people
Roger,
not their top priority????
The guy tried to intentionally sell me an under performing mutual fund with a LOAD to line his pockets and the brokerages pockets instead or recommending to me low cost no load mutual funds that performed better.
That is at least scummy if not criminal IMO
sounds like he put two things ahead of you; his monetary interests (which sound unaligned with yours) and protecting the shield a little with one of their mutual funds.
questioning the ethics is spot on but this does not sound like trying to cause you harm.
A financial adviser who enriches himself at the expense of steering his client into bad investments is nothing more than a thief IMO.
If you do not get that or think it is OK then like I said earlier to day. Wall street is not interested in their clients they are just interested in laws that protect them from their clients.
I am not aware of any other profession out their that is legally allowed to treat their clients so poorly.
Roger,
Reada the Farrell article the other day and had much the same reaction as you.
Though MarketWatch still carries reasonable and informative columnists like Jaffe, to my dismay it seems more and more more of their columnists veer toward the reactionary.
Makes the quest for financial literacy all the more illusive.
12:17, you have added 1+1 and gotten eleven. All I said was hurting people is not their objective. I never said or implied it was ok.
Assertion of fiduciary relationship is an assertion of client priority and when client priority is actually secondary or tertiary then that becomes an intent to harm by definition: Fraud is a function of building trust and betraying it (e.g., http://youtu.be/Rz1b__MdtHY); the quibble of whether harm was directly intended or not is a red herring.
I blew off the sell-side more than thirty years ago and have profited since but others have not been so fortunate.
Several years ago Farrell wrote a column on Monday saying something controversial like gold was going up. On Wednesday his column said gold was going down. Friday he wrote "I just wanted to get a reaction out of you readers." He has written several times he writes essentially to provoke. He's a very smart guy (PhD) but I think he's dangerous as a columnist.
that brokerage firms have no fiduciary obligation has been widely covered in the media and highlighted as a "watch-out" for prospective clients.
the literacy question then shifts to people understanding the concept of fiduciary
Assertion of fiduciary relationship is an assertion of client priority and when client priority is actually secondary or tertiary then that becomes an intent to harm by definition: Fraud is a function of building trust and betraying it (e.g., http://youtu.be/Rz1b__MdtHY); the quibble of whether harm was directly intended or not is a red herring.
I blew off the sell-side more than thirty years ago and have profited since but others have not been so fortunate.
I'd have to double check but I am 99.9% sure brokerages and brokers do NOT have a fiduciary relationship to dlients. They do NOT have to put client interests first. The only question is one of suitability.
In contrast, Registered Investment Advisors DO have a fiduciary relationship to put client interests first.
Most people do not understand the difference between having a stockbroker run their money versus a registered investment advisor, and sell-side brokerages do everything they can to muddy the waters/confuse the issue.
Like most things in life, there is an aspect of caveat emptor and people really need to due their due diligence when hiring professional services whether money managers, lawyers, doctors, whatever.
In the meantime, savings HAVE TO GO SOMEWHERE whether that is cash in a shoebox under your bed, a savings account earning 0%, a money market earning .5%, or financial assets such as stocks, ETFs. Each one of those is exposed to some type of risk but most people don't understand purchasing power risk
Anon 9:18
Vanguard led many people off the index fund cliff in 2000 all in the name of saving a few bips.
Putting your money in an index fund regardless of valuation is crazy. Vanguard continues to get a free ride.
Roger and MikeC, correct, but I was not speaking to the legal definition of fiduciary -- a product of lobbying more than logic or justice -- but rather to the false representation of a sales person as a fiduciary, an adviser, where that relationship had no binding quality.
Logic chopping and legalisms avail little in moral philosophy: A system that leaves the identification of fiduciary responsibility to the "literacy" of the person who knows the least about how that system works is a system that is designed to strongly favor the insider and facilitate the predator.
The logic is inexorable: Sorry.
anon 10:54
please have a miserable life with your no-load funds. BTW do you work for free??
RW, there is a gap in your argument in that the brokers on the front line need their clients to make a living. Proactively hurting them as you appear to believe runs counter to the primary interest of having a job which means keeping enough clients to be a profitable employee. Hurting people means losing them faster than they can be replaced.
Roger, there is no logical gap in moral or ethical terms but I agree that in practical terms your point is completely valid: A broker is being asked to supply a service and, where the structure of compensation for that service requires sales volume and/or AUM, the client relationship is likely to become ambivalent and prone to abuse.
There is no cure for this other than transparency: If the client does not have priority then they must be informed of that fact; sales people must identify themselves as being in the sales business and any advising is secondary to that.
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