August 12, 2006 –
In June, 2006, www.marketwatch.com (an online financial news service) reported that global investment firms Bear Stearns, Goldman Sachs, Lehman Brothers, Morgan Stanley and Merrill Lynch all declared double digit profit increases in the second quarter of 2006. In fact, upon closer inspection, this statement understated how profitable some of these firms really were. Morgan Stanley reported profits that more than doubled, while pre-tax income from their retail brokerage unit rose 33% and their asset management income rose 28%. Merrill Lynch reported that 2nd quarter 2006 profits rose by 44% while asset management revenue rose 24% and commission revenue rose by a hefty 27%. Bear Stearns reported that 2nd quarter profit rose by 81% while their private client services revenue rose by a rosy 22% due to increased management fees and commissions. And of all these windfalls of profits, most of the executives of these investment firms paid themselves hefty, fat portions.
Now we know at maalamalama, from anecdotal stories, that most people who had individual investment portfolios being managed by these firms were not happy with their returns in the second quarter 2006. In fact, many of the people we spoke to lost substantial amounts of money during this quarter. So how could these same firms be declaring record profits?
Sell, Sell, Sell With No Regard For Client Returns
Of course, these firms have many business units that are profitable such as their Treasury desks, their foreign exchange desks, their institutional business units, their private equity business units, their bond desks, and their investment banking units. We want to acknowledge that to be fair. But that’s why we chose to focus only on certain statistics above that only delineate the profits from their retail brokerage units, their private client business units and their asset management fees. Even during difficult markets, these companies still managed to make 22% to 33% increased revenues off of the money individual investors placed with them. Wouldn’t you be happy if your portfolio earned anywhere close to 25% quarterly returns?
Furthermore, we cite the overall statistics of 81% rise in profits, over 100% rise in profits and so forth, so that you may understand that again, during difficult markets, these institutions truly know how to make money and could easily make money for you as well if that was their end goal. All investment firms have corporate investment accounts in which they invest money for themselves. Ask your financial consultant what stocks your firm is buying for their corporate accounts and you will discover that they very rarely are the same stocks that they are recommending that you purchase for your portfolio. Or more likely even yet, most of them won’t even be able to answer that question.
There are numerous reasons why investment firms don’t train their financial consultants to maximize your returns — much to numerous to discuss in detail here. But what should be apparent to you from a cursory analysis of the numbers above is that most global investment firms have a hidden agenda and goals that are not in alignment with yours. If you follow the moneymites, this becomes even more apparent. So follow the MoneyMitesâ„¢ to make more money.
The first time I left my sensei to train under another instructor due to a move cross country, I asked him how can I find another good instructor. He told me that there were three things to look at. One, to watch his students very carefully as students are always a reflection of their teacher. If the sifu or sensei exhibited phenomenal skills but none of his student exhibited a high level of mastery, that would be a red flag. Secondly, he told me, measure the purity of the teacher’s intention. I went to a lot of dojos that no further than five minutes into the conversation, they were asking me to put money down for an “assessment”. I was fairly sure that though some of these masters might have had higher rankings than me, that my expertise in close quarters defense was higher than theirs, and that in a straight fight, they wouldn’t stand a chance against me. And they wanted money for an assessment? I immediately walked out of these dojos in disgust as these charlatans were defiling the very philosophy of the martial arts. Thirdly, my sensei instructed me, “Closely observe the interaction between the teacher and students.” If the students seemed afraid of the teacher, this was also a red flag, he told me. I went to a couple of other dojos were I witnessed the teacher literally breaking up his students – to the point where if this was the everyday interaction, these students would probably be arthritic later in life. Again, a selfish teacher that just used his students for personal practice to further his own skills was the biggest red flag of all. In investing, you should be aware of these red flags as well. If a financial consultant calls you and wants you to rebalance your portfolio, is it because of the added commissions that goes into his or her pocket, or are the returns going to be so signficantly higher from this shift in strategy that it merits such action? Be aware of conflicts of interest.