This Is What's Wrong With the Financial Industry

It's not a coincidence that the ongoing economic downturn has resulted in the collapse or exposure (really, it depends how you look at it) of a fair share of frauds -- an ignominious group that includes the likes of Angelo Mozilo, Kathleen Corbet, and Bernie Madoff. As Warren Buffett has remarked, it's only when the tide goes out that you find out who's been swimming naked.

Just this week, however, we got to add another name to the list: Raj Rajaratnam. The SEC alleges that Mr. Rajaratnam, as the head of hedge fund group Galleon, engaged in lucrative and illegal insider trading.

That's not outrageous, but this is ...
Now, I'm not naive. Crime exists in the world, and that won't ever change. But what gets my goat is the inability of these folks to take responsibility for their actions. Like Mozilo saying it was impossible to anticipate the looming credit crisis, even after he sold hundreds of millions of dollars worth of Countrywide stock, or Madoff mailing off ill-gotten valuables in the hopes his family might keep them, or Galleon's head of risk management saying that the firm might have to shut down because "Too many of our clients are institutions that are prohibited from doing business with alleged felons."

Because Galleon's real problem was that it had clients with ethical standards? Please.

These are the people who want your money
If you seek retirement security, you're asked to entrust your retirement savings to financial planners, money managers, and CEOs who you may never once speak to either on the phone or in person. Or, as a recent Charles Schwab television ad put it, "When my broker said I make money when you make money, he neglected to mention that he also makes money when I lose money, withdraw money, or do nothing with my money."

Many financial professionals, in other words, are not looking out for your best interests, and that should be a scary realization.

What you can do about it
What choice do you have? Investing is not a game that should be played by passive, uninformed amateurs. If you don't have the time, inclination, or wherewithal to pick and follow stocks, then you stand to get burned just as badly as if you had invested with an unscrupulous money manager.

For example, take a look at the following table of stocks, which highlights their price-to-earnings and return-on-equity ratios. Which one would you have invested in 12 months ago?

The first six all look cheap and have very healthy returns on equity. Yet the seventh, the seemingly expensive laggard, has done best of all. Take a look:

Could you have known?
It would have been difficult for you as an investor to anticipate these returns, unless you were paying close attention to the market. Shares of Satyam (now Mahindra Satyam), for example, plummeted after accounting fraud was discovered, while Aetna has gotten caught up in an uncertain health-care reform environment. Yet with good research and the right temperament, we can all beat the market.

This is why Fool co-founder Tom Gardner started The Motley Fool's Million Dollar Portfolio, a real-money, professionally managed, fully transparent portfolio of stocks whose trades you can follow in real time. By joining, you can buy the same top picks from our Motley Fool research universe at the same time we do, and in the same amounts. We hope that by doing so, you can beat the market, and achieve your financial goals without ever having to entrust your money to a profit-driven financial firm at best, or a full-out Ponzi scheme at worst.

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