Vampires and wolves (Part II)

Continued from Part I ..

Mark Hanna: "Revolutions, you follow?" 

Jordan Belfort: "Revolutions."

Mark Hanna: "Keep the client on the Ferris wheel, and it goes, the park is open 24/7, 365, every decade, every go**amn century. That’s it. Name of the game." 

-- ending of a scene in the movie The Wolf of Wall Street where Matthew McConaughey (playing Mark Hanna) explains to Leonardo DiCaprio (playing Jordan Belfort) how the brokerage business works.

Enter dream customer.

I would imagine this is the dream scenario what comes to milking a client in investment services business:

• investments are inside insurance or other 'wrapper' with a yearly fee and there is significant penalty in changing from one financial services provider to another (e.g. being exposed to taxes)
• inside the 'wrapper', client is instructed to invest into funds-of-funds (many layers of cost)
• to top off the dream cake, client is instructed often to change allocation (because it is both "free of cost" and tax free)

I have been there as a client long time ago so I know exactly how this works.

A smooth-talking person in an expensive suite invites you to a meeting to discuss about investing. The setting will be impressive and everything will be free of charge. You may wonder how these guys are paid. You may even ask it directly (I did). Because they are good salesmen they will have an answer for pretty much anything you will ask. One by one they will eliminate any reason you may have for not investing via their shop.

Naturally they are not going to voluntarily expose all the ways they or their business partners are going to take money from your pocket (extract fees from your investment). Just the surface of it (the obvious commissions and fees).

If you read everything about their products and dig deeper into the funds you will slowly understand all the ways you are getting milked. Because of course you are. How else they will pay for their rent in the most expensive part of your city or get paid ridiculous amounts of money in the top tiers of their management pyramid.

Like you have a fund, which invests in other funds (I wonder how many layers there can be..).
And like you are not charged "anything" if you change from one fund to another, but then you note that there is a significant spread (difference between the bid and the ask price) in all of their funds.



Garlic, anyone?

Avoiding vampire squads is easy.

It starts by avoiding complex hard-to-understand financial constructs and companies who are just men/women-in-the-middle.

You can minimize your costs by handling the investments by yourself and invest directly in stocks and passive low-cost (yet high quality) index ETFs.

Do not be lured into frequent buy/sell flip-flop. I am a customer who mostly buys and rarely sells.

Also, please check my old article 'avoid costs' on why even 1-2 percent periodical holding cost/fee makes a big difference over the years.

THE END