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A Warning About Wall Street Advice

For this week's article, I want to get away from the ongoing economic mess. I want to give my thoughts on so-called professional money managers, financial advisors, etc. My thoughts are based on my 20+ years experience in the investment business.

Woody Allen had a humorous definition of a stock broker as someone who invests your money until it is all gone. He's not far off.

I think the first thing that people need to keep in mind is that Wall Street firms rarely have the best interest of their clients at heart. If anyone has spare time, I highly recommend that they read the new book by John Kay of the Financial Times newspaper. The book is called The Long and the Short of It.

In his book, Mr. Kay says that individual investors should avoid most so-called "professionals". One point that Mr. Kay makes is that professional money managers need to make money off of your investments, whether you make money from your investments or not. Just think of all the fees paid out in 2008 by investors to money managers, only to have these "professionals" lose a large chunk of their money for them.

Another reason that Mr. Kay thinks that individual investors can do a better job of managing their own money rather than "professional" money managers is that the individual can focus on LONG-TERM returns and ABSOLUTE returns, not relative returns.

Here is a direct quote from the book - "The major risk a financial advisor runs is not the risk that his clients do badly, but the risk that his clients do worse than other people", meaning other advisors' clients.

So if a person goes to their financial advisor and says, "Hey, I lost 30% last year!" their Wall Street advisor will say something along the lines of "Yes, but you outperformed the averages!"

This is a key point which I found to be true throughout my career - the emphasis of "professional" money managers is on RELATIVE performance, not ABSOLUTE performance(did you actually make money?).

Another key point which Mr. Kay points out in his book is that most Wall Street "professional" money managers think only in the SHORT-TERM. Their primary goal is to beat the "benchmark" on a quarterly basis. If the benchmark is Negative 30%, Wall Street money managers are very pleased to have clients' portfolios return a Negative 20%. That would mean that they are a "star" in the Wall Street universe!

Unfortunately, this type of Wall Street "outperformance" can be very damaging to a person's LONG-TERM portfolio, such as a retirement fund. But such concerns don't really matter to Wall Street "professionals". Where your portfolio stands in 5 or 10 years doesn't even cross their radar screen.

There is another key point which I would like to emphasize about Wall Street. Most Wall Street "professionals" DO NOT think for themselves. They just run within the supposed "safety" of the herd.

Professor Richard Sylla, financial historian at New York University's Stern School of Business, says that Wall Street analysts and money managers have little incentive to produce anything that deviates significantly outside of the Wall Street consensus.

Professor Sylla says, "They reinforce each other. That's the only way they keep themselves off the hook." In other words, Wall Street money managers have their views skewed by one thing - self-preservation. If they stay inside the "safety" of the herd, their cushy jobs will be safe.

This "herd" behavior is why nearly every mutual fund, financial advisor, money manager,etc. lost a lot of money in 2008. They all think alike! Very few Wall Street people think outside of the box for fear of losing their job. What Wall Street needs are more independent thinkers.

My best advice to individual investors is to Think for Yourself! No one is going to care more about your money and your financial future than you!

One last item - I loved one line from Mr. Kay's book which nicely sums up my thoughts on investing in general, and on the financial "professionals" who give advice and that people may see on CNBC - "The best way to use the expertise of the financial services industry is to do the opposite of what they recommend".

As always, please contact me directly or at the forum with any comments or questions you may have.

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