The Main Elements that are Wrong with our Economic System – First Item on my 10 Point Checklist of Dec 9/10 – Continued from blog of Dec 20, 2010
Let me begin by saying again that I am a Capitalist. I believe Capitalism to be the only economic system that the Western world should follow. In my previous blog, I compared a manufacturer of autos, to a manufacturer of financial instruments, and I pointed out how we have been trained to accept a financial system that is terribly flawed.
Now that the reader understands how financial products are flawed, one must next understand how these flawed products are sold to Mom and Pop, and why we meekly accept that this is the way things are supposed to be done.
Most people purchase their financial investments through a Financial Advisor who supposedly is highly regulated and your advisor (also known in the industry as an IA or Investment Advisor) is supposedly to be highly trusted.
Pardon me, if I have a moment of nausea when I write about how you should trust your advisor.
The Company That Employs Your Advisor
First understand that each Advisor is licensed. What you may not understand is that the license under which the Advisor works, actually belongs to the company that employs that Advisor. Interesting, isn’t it.
The profits of the Employer Company rely on essentially two factors.
Firstly, their share (usually 50%) of the commissions earned by your personal advisor, and secondly, but more importantly, by creating the products that are sold to you and profiting on the creation and sale of those products. The profits earned by creating these products are enormous and are mostly based on how well the product sells. So it also is essentially a commission based income.
Obviously what helps sell these products, is the size and number of the retail advisors selling the product to the public, and the ‘investment bankers’ that sell the products to mutual funds and retirement funds.
There are no criteria as to how well the product will perform.
Usually there is no benefit to the seller (your Advisor) if the product does well. There is no penalty to your Advisor or to the company that he works for if it flops. It is a system based on the ebb and flow of whose last deal did well. If the last deal did well, the current deal is supposedly the one to buy.
The other factor is that this is a copycat industry. If one firm sells a product that sells well, or is in a sector that does well, every other house and institution jumps on the bandwagon and works to create similar products.
These products then become the next big hot thing. More and more are created, until the number is excessive, the demand dies off, and that sector of the Market collapses. This is a cycle that repeats itself non-stop.
When that happens, all of these people that live off the commissions of what they sell to you, scramble to get on the next big wave, and create slightly different products to sell to you on which they make their commissions.
What a wonderful merry-go-round. Never look behind you. Never care how well the last thing sold is doing. Just create more product to sell to you.
What Regulates These Companies
Supposedly there are self regulating bodies made up by the membership of these firms themselves. It is an exclusive club that is difficult to join.
These self-regulating bodies do a reasonable job, but their job is essentially to keep the retail Advisors in line and following an established code of conduct, and to make sure that all firms adhere to a reasonable established mode of conduct.
For the most part they work reasonably well. Only no one looks behind to see how well what has been sold works. No one cares.
This failure to care about what is sold and how well it does, is an elemental fault in the Capitalist system. In every other walk of life, there are penalties for misdeeds or losses, there are laws forcing manufacturers to honor their products, there are overseers that make sure the consumer receives a fair deal, and so on. Except for the financial industry which operates without a care in the world as to whether what they sell is good or bad.
How do These Firms Choose What is Hot and What is Not
The big guys on Wall St are the real market makers. They wield enormous power and the rest of the world follows their lead, although a bit less so since the last great meltdown.
The sheer size of the money that these Wall St firms have at their disposal is impossible to ignore, as is their world wide influence. They move the markets easily, and they set the standards for what is hot and what is not.
To continue as part of the financial industry, firms watch Wall St. To lose track of what is going on is to imperil your very existence.
Wall St makes money – lots of money. They make money by selling stuff. No one there looks behind to see how well the last thing sold is doing. They only look behind to figure out what next to sell.
Next Blog on Capitalism
Now that you have some comprehension of how the system works, in my next blog we will discuss normal warranties and standards regular everywhere except in our financial system.
