Mega-Institutions Damage Investors

The Dallas Federal Reserve Bank just issued a scathing 34-page report titled in part "Why We Must End Too Big to Fail -- Now." Too-big-to-fail financial institutions "were at the center of the financial crisis and the sluggish recovery that followed," Harvey Rosenblum, executive vice president and director of research of the Dallas Fed, warns in the report. "If allowed to remain unchecked, these entities will continue posing a clear and present danger to the US economy."

In his most recent Dow Jones column, Al Lewis described big banks as an "untenable oligarchy that buys off politicians, captures regulators, and eats up our money."

I have a different take. I'm fed up with financial behemoths that enter businesses solely to generate as many revenue streams per client as possible. They do not make acquisitions or enter businesses because their clients would be better off as a result. In fact, their clients would be better off if these companies did not become too big to fail.

Let me share two examples of industries that are running amok with investor assets.

A few years ago, I met with the key executives of a major bank. They had decided to begin marketing investment products. This decision was based on three business principles. First, the bank had millions of customers. Second, those customers trusted the bank. Third, the bank would be more profitable if it generated additional revenue streams from those clients. There was zero discussion about how the decision would benefit the bank’s customers. In fact, the meeting took a turn in the opposite direction when the CFO announced an intent to manipulate clients to maximize profits.

The scam was to sell an open architected platform of investment alternatives that gave customers freedom of choice. That sounded like an investor-friendly platform until the CFO announced a hidden strategy. He said the bank’s real goal was to offer freedom of choice for only half of the customers’ assets. The other half would be routed into fixed-income products managed by the bank.

I had three problems with this self-serving strategy. First, the bank’s products were expensive and produced inferior results compared with third-party products. Second, the bank’s motive was to help itself and not its customers. And third, the bank’s marketing strategy was to use the trust it had built up over decades of providing traditional products to sell alternative products.

This is a strategy that is based on deception and the abuse of trust. Does it sound like Goldman Sachs (NYSE: GS) to you? Bank customers will suffer the consequences of trusting an institution that is not trustworthy.

However, it's not just the big banks. I recently met with the agent who handles my car insurance. At the end of the meeting, he tried to convince me to move my assets to his company’s broker/dealer. I don’t know about you, but I view car insurance and investments as separate and distinct businesses. It takes specialized knowledge to recommend the right car insurance. It takes specialized knowledge to recommend the right investments.

I do not want to invest my retirement assets with the agent who sells me auto insurance or with the teller who used to process my deposits. I also think it is a sleazy business practice to establish trust selling traditional bank or insurance products and then use that trust to sell nontraditional products.

Why is investing a much bigger deal than processing checks or selling car insurance? The assets we are talking about will fund retirements and provide financial security late in life when people need it the most. They need quality advice they can trust from real experts -- not sales reps who view investments as an additional way to produce additional commissions.

I believe the deregulation of these industries was a huge mistake, and investors are paying the price for the greedy business practices of the big banks and insurance companies that are categorized in many cases as too big to fail.

— 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.