Lifestyle & Culture

Financial Well-Being: Rescuing Your Money From Wall Street

September 14, 2015

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Bobby Monks, an entrepreneur who has developed 19 businesses in financial services, is author of Uninvested: How Wall Street Hijacks Your Money & How to Fight Back, with Justin Jaffe, a software entrepreneur and journalist, and Bree LaCasse, a community builder with experience in private equity investing. Their basic premise is that we small investors outsource control over our investments–but not the responsibility, which can come back to slap us in the face in good and bad times. Also, they point out, very few investors enjoy the financial success equal to that of their money managers. But they have a fascinating idea for how to make the notoriously unlevel playing field just a little more even. I read their book and was lucky enough to grab Monks and Jaffe for a phone chat the other day. Published by Portfolio / Penguin Group, the book can be purchased here and here.

MLB: You say most Americans can be called “uninvested,” meaning not involved in their own investment decisions and unaware of the ramifications of same. I don’t think anyone would disagree with that.MonksWeb

But I consider most of us to be “accidental investors.” We’ve been thrust into the world of investments by our employers, who discontinued their pension plans (for which they had to worry about having enough money) in favor of 401(k)s and other “defined contribution” plans (where we have to worry about it). And we’ve wandered into a financial system that seems to welcome us as prey, not participants.

I know it’s counterintuitive, but no wonder we’re uninvested!

Monks: Companies always wanted alternatives to the traditional pension system, where all the responsibility was on employers to manage the financing of employees’ retirements. But what has happened defies the original intention of the migration from defined-benefit plans [pensions] to defined-contribution plans.

Jaffe: The provisions for the 401(k) and IRA were written [into the tax law] by Congress in the 1970s. That set the stage.

Monks: As larger companies started unwinding their pension systems, a bigger market [of individual investors] opened up. The defined-contribution system unleashed a huge opportunity for layers of Wall Street intermediaries to offer overly complicated products and plans. Of course people are overwhelmed.

MLB: Is financial education the answer?

Monks: The usual argument is that investors need more education. We’re not in any way against financial literacy. Our argument is that people need engagement, that they have to be engaged with their investments and the people managing them. We think it’s important for investors to have a dialogue with their money managers. If you can’t have that dialogue with the people managing your money, can’t get a coherent strategy or rationale about why they have you in one investment over another, or you can’t understand their answers, then you should take your money out of there.

MLB: I can’t imagine having that kind of conversation with a mutual fund manager!

Monks: Well, yes, that’s a significant drawback of working with one of the big-box fund advisers. But if you have an adviser, or work with a trust, you should engage–you deserve to know what they’re doing in your name, with your money.

MLB: Actually, it sounds like an argument against mutual funds, period. In your book you and Justin say that the mutual fund business is “the textbook definition of an ‘agency problem,’ wherein agents (the funds) have incentives that are not aligned with those who have hired them (the shareholders).” And the other day you tweeted, “The mutual fund has become the de facto investment for consumers who don’t understand its costs or implications.”

Monks: Right, our goal is to line up everybody’s interests, not to construct a system that seems intended to rip off its own customers. We want a system that’s far more transparent.

MLB: So you’re talking about your idea for a Cooperative Investment Partnership.

Monks: Yes, that’s a system where everyone has skin in the game. Within the CIP model, the managers are required to invest a significant amount of their own money in the investments they’re making on behalf of the fund. And the profits made from collecting fees are then shared. The plan is set up as a cooperative, with everyone winning or losing together.

The whole risk model of the current investment system is corrupt. Of course there’s no way to eliminate risk. But there are ways to eject legalized corruption from the equation.

MLB: Legalized corruption?

Monk: Yes, like “revenue sharing,” whereby a fund company pays money to the administrator of a 401(k) to have his fund(s) included in the company’s array of offerings.

MLB: Ha! I took the little financial literacy quiz on your website, where you describe this type of transaction. I thought the answer for what to call those transactions was “kickbacks!”

Monk: [laughs] Another thing that we’re recognizing that’s potentially quite risky for investors is ETFs [exchange traded funds, collections of stocks or bonds that are traded all day long; mutual funds are priced only at the end of the selling day]. More and more we hear about liquidity issues, where ETF managers are essentially renting out their vehicles to short-sellers. It’s a complicated issue, but the long and short of it is that the ETF, which can offer investors a pretty compelling product in terms of low fees, still has some serious potential flaws.

MLB: Good grief. What else?

Monk: Another systemic issue is soft dollars. That’s the money a broker pays to a mutual fund company to basically share the commission he earns for making trades on behalf of the fund.

MLB: It sounds as if you really don’t like mutual funds!

I know an investor has no control over capital gains and losses from a mutual fund, just has to take it on the chin when it comes to tax time. But most of us small investors have been insulated so far from that because most of our mutual-fund money is in tax-deferred accounts, 401(k)s and IRAs.

Monks: And if it’s not [tax deferred], investors can find that their mutual funds have made capital gains, but without selling shares they don’t have the money to pay the tax on those gains.

MLB: You advocate–like super-investor Warren Buffett and your iconic Maine investor Willard Dunn Libby–that we as investors should know what’s in our portfolio and should buy only those companies we understand. That’s a lot of work.

Monks: Compared to the amount of information you would need to process to choose an index fund, which contains hundreds of securities, it’s simpler to pick a stock!

MLB: And what about diversification?

Monks: The market is highly correlated. We think you can put together a portfolio of individual stocks–maybe 10 or 12–that will give you a pretty adequate degree of diversification.

Jaffe: Most mutual funds hold a couple hundred stocks. We have serious questions about whether a fund manager can truly comprehend all the holdings, let alone a typical investor.

Monks: Right. And if you look at expenses, 1% [in fees] over time . . .

Jaffe: . . . over 35 years on $25,000, with a 7% return, it’s a forfeiture of $65,000.

Monks: So there’s something to be said for investing directly in a manageable number of  stocks and hanging on to them for the long term! If nothing else, it reduces the amount of fees you will pay, which increases the likelihood of a good return.

MLB: For those of us who would rather have someone else do the work for us, and are willing to pay fair compensation for that work, I’m now wondering about your Cooperative Investment Partnership. Are you really going to do this?

Monks: We are definitely starting a company–we’re working on it. The basic concept is sound, and we believe it will offer investors a more sustainable, more equitable way to relate to their money.

Jaffe: We’ve spent four years researching this book and “socializing” the idea. The people we’ve talked to are very compelled by it. There’s a hunger and thirst for a better way.

Monks: Like all new ideas, it’s a process.

–Nancy McKeon


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