Contact theSOPAbout theSOPSupport theSOPWritersEditorsManaging Editors
theSOP logo
Published:September 8th, 2011 17:36 EST

Managing Your Money: Who is on Your Side?

By Joel G. Block (Mentor/Columnist)

Does the little guy stand any chance anymore? Is anyone looking out for us?

Probably not. The world has become pretty unfriendly to entrepreneurs and self employed people so we have to take care of ourselves. Just keep your eyes wide open when it comes to the management of your financial resources. Understand how the game really plays.

Most financial representatives, whether stock brokers, money managers, financial consultants or otherwise, work for organizations known as broker/dealers. Broker/dealers, as the name implies, sometimes act as brokers and sometimes, they act as direct dealers (owning a position) in securities. These organizations are licensed by the Federal Government (the Securities and Exchange Commission, or SEC) to sell securities, collect money from customers, and execute transactions. Because they receive commissions, they can have a conflict of interest with their customers, but when they act as dealers, the problem is even worse.

Very frequently, broker/dealers, especially the big Wall Street wire houses will acquire positions in securities. You`ve seen movies where the sales managers get on the "horn" and tell the brokers which stocks to move that day. There would be extra commissions if they move those stocks. Brokerage firm sometimes take positions in securities for many legitimate reasons, and when those positions need to be moved, the natural buyers are the clients of the firm. Those buys are not necessarily the best buys for the clients and those buys are certainly not being made for the clients` benefit. Unfortunately, they`re frequently made to benefit the broker and his broker/dealer.

Rather than allowing the fox to mind your chicken coup, some investors prefer to engage a Registered Investment Advisor (RIA). An RIA, works for you for a fee and makes suggestions to you, but does not necessarily take commissions on the transactions that they recommend. They can be much more pure in their selection and recommendation process. A lot of investors don`t like to pay the 1% to 3% advisory fee they charge, but it`s a lot cheaper than the invisible fees " that are paid to your broker/dealer when you get a bad deal.

Transparency in the securities business is very high " if you are an Albert Einstein type with the ability to carefully read the prospectus of every mutual fund and other investments to know how much load, fees and commissions are being charged against your investments. If you`re not reading these materials carefully, you will be surprised to learn how fast the charges add up. The big firms load their investments with tons of fees that make it nearly impossible for investors to generate good returns on their investments. If they share the profits with you, the investor, how will they pay their own commissions and salaries? The system is set up to provide a good but not great return to retail investors.

RIAs frequently make suggestions of both traditional stock and money market types of investments, but they also reach out to limited amounts of alternative opportunities such as real estate, commodities, oil & gas, or start ups to enhance the returns of their clients. Since they don`t profit directly from their suggestions, they can be objective and creative. Keep an open mind when working with an RIA, because sometimes that might be the best way to go.

RIAs are not on the same side of the table as you because they don`t make money when you do, but they are rather independent and are not on the other side of the table " working against you.

Isn`t a better business model one where both you and the investment sponsor make money at the same time? If the deal is successful, everybody wins. If not, everybody is disappointed. The big boys tend to rig the game, but smaller companies can set it up so that everybody wins. Look for this business model in your next investments.

The world of investing is complicated, and it`s further compounded by the self-interest of the people who represent the investments. Trying to mitigate the self-interest component will make a big difference in your investment strategy. And remember, if you want some clarification to help you make better decisions, feel free to contact me.