There are more than one million stockbrokers, financial planners, investment advisors, money managers, and insurance agents in this country. This massive sales force, along with hundreds of thousands of support personnel, is collectively defined as Wall Street.
Wall Street is a marketing machine that dominates its relationships with investors. Even the most prestigious names in the industry -- Goldman Sachs (NYSE: GS), for example -- take advantage of investors to increase profits and bonuses. The public calls it Wall Street greed. Wall Street executives call it smart business.
Following is a description of just a few of the more common tactics that Wall Street uses to dominate investors.
Wall Street Power: Wall Street tactics work because investors need financial advice, services, and products. It is no different from people needing life insurance, which forces them to deal with the insurance industry. There are no reasonable alternatives, so Wall Street has a receptive audience for its marketing tactics.
The Politicians: Wall Street spends more than $300 million per year on lobbyists that make sure industry regulations favor companies and not investors.
The Regulators: The financial services industry is regulated by Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC). FINRA is a self-regulated organization that is financed and controlled by Wall Street interests. Politicians who receive large sums of money from Wall Street companies control the SEC.
Disclosure: Disclosure for financial advisor credentials, ethics, business practices, compensation, and investment expenses would level the playing field for investors. However, Wall Street spends large amounts of money on lobbyists and friendly politicians fighting disclosure. It does not want investors to have the facts they need to make informed decisions.
The Likeable Advisor: Wall Street firms hire likeable advisors because it's good business. It knows investors trust people it likes. Once trust is established, advisors can sell the products that make them and their companies the most money.
The Mature Advisor: Financial services is a high turnover industry. Consequently, Wall Street has to hire tens of thousands of new advisors every year. However, Wall Street does not want investors to know advisors are new to the industry. One solution is to hire people in their 30s and 40s, and hope investors assume chronological age equals financial wisdom.
Advisor Standards: What is Wall Street hiding about advisors? It turns out there is a lot of information that Wall Street does not want investors to have. For example, there are no minimum education or experience requirements to be an advisor. Advisors with numerous investor complaints can retain their securities licenses. And convicted criminals can obtain securities licenses.
The Sales Pitch: In a Wall Street-dominated world, investors make decisions based on the sales pitches of advisors -- pitches that include claims for performance, risk, and investment expenses. There is no written record of what was said to induce investors to buy what the advisors are selling.
The Sales Agreement: When investors accept Wall Street advice and buy recommended products, they are required to sign a one-sided service agreement that minimizes company and advisor liabilities. Plus, investor recourse is limited to an arbitration process that is dominated by Wall Street interests.
The bottom line: Investors should recognize the risks and take necessary steps to protect themselves.
—Jack Waymire spent 28 years in the financial services industry, and for 21 of those years, he was the president of a registered investment advisory firm. He left the industry in 2004 for a career as an author and blogger. You can reach him at Jack@InvestorWatchdog.com.