The Hard Truth in Finance: We're Failing You

Last week was a tough week for the tattered reputation of the world of finance. Legal and moral problems in some well known financial services firms have exposed parts of the industry, which is supposed to help clients make money for a better life, as little more than a scam that is self-serving for too many involved.

JP Morgan (NYSE: JPM  ) , the financial behemoth who advises millions of clients and provides millions of people with products like mortgages, bank accounts, and credit cards, revealed that its trading loss has now reached $5.8 billion. This is up from a $2 billion estimate when the bank first announced the blunder and raises the question: Why does the company's chief investment office have a $323 billion portfolio in the first place?

Banks have losses, I get it, but a bank of JPMorgan's size instills responsibilities in shareholders, policy holders, depositors, regulators, and countless other stakeholders. How are the same people who benefited from a taxpayer bailout now back to betting on instruments they don't understand and racking up billions in losses that put the bank's future in jeopardy? Somehow at the end of the day I think it's not Jamie Dimon who will be left holding the bag.

More tragically, brokerage firm Peregrine Financial Group came unwound after the company's CEO and founder tried to commit suicide, regulators seized the broker's assets, and nearly 20 years of lying and fraud came to light. The company was supposed to be on the side of investors, not stealing from them. One of the company's front-page banners even says, "Good investing habits start early. What are you teaching?" This seems a little ironic considering the events that transpired over the last week.

To make matters worse, this is so similar to the collapse of MF Global, which was just a few months ago. How can the people we trust with our money be so reckless?

Finally, there's the story that hits home for me as an online analyst trying to dispense wise and useful information to the readers of this site. Lenny Dykstra, a former Major League Baseball center fielder turned writer and analyst on TheStreet.com, filed for bankruptcy in 2009 and last week pled guilty to bankruptcy fraud, concealment of assets, and money laundering, which only adds to his myriad legal troubles. Somehow, we were selling him as a financial "expert" online.

Sadly, these events happened in just the past week, piling on years of financial abuses by Bernie Madoff, Rajat Gupta, and Allen Stanford among others. We're somehow supposed to trust these people with our money and listen to their advice? What are retail investors to do when the very people we are supposed to trust turn out to be the biggest crooks of the financial world?

The Foolish approach -- the only record is a public record
Many of us have taken the responsibility onto our own shoulders for our financial performance and freedom, but even the most independent investor relies on the thoughts of others to formulate investment theses. So whose advice should we trust? This is a question each investor must answer herself. At The Motley Fool we've made an attempt to be more open and transparent to our readers about not only our financial interests, but also our track record. It's what founder David Gardner calls "Moneyballing the financial world."

For example, we clearly disclose what we own ourselves (click here for my current holdings) at any time, and, maybe more importantly for you, is that we track the stock calls that we make in our articles in an initiative we call CAPScalls. It's a way to build a track record of our public picks that should provide some level of confidence that we know what we're talking about. For example, you can track my picks in my CAPS portfolio here, or follow a portfolio of weekly picks I make with fellow Fools Alex Planes and Sean Williams here. Our newsletter service performance is also easy to see right on the front of fool.com.

I don't write this to be an advertisement but rather to point out that websites, advisors, and money managers should provide a level of honesty and open disclosure that has been lacking. Maybe these tracking methods aren't perfect, but they show that we're trying to be as honest and upfront as we can in our stock picks and advice because it means something to our readers.

The Foolish truth -- it's up to you
The sad part of these revelations is that more and more of the financial burden falls on your shoulders if the professionals can't be trusted.

Just remember that there's no such thing as too much disclosure from those whom you're trusting with your money, whether it be a financial advisor, a broker, or your favorite analyst online. In the financial world we are little more than our reputations, something that can only be built over a lifetime but can evaporate in an instant.

It's sad that those who had so many self-serving interests, rather than the success of clients, as priorities have upended the reputation of the industry as a whole. If the opposite were true maybe Wall Street and Main Street could form a more symbiotic relationship. Here's to building that reputation up again -- one article at a time.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of JP Morgan Chase. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 19, 2012, at 10:57 PM, xetn wrote:

    "The sad part of these revelations is that more and more of the financial burden falls on your shoulders if the professionals can't be trusted."

    If we had a free market (free of government regulation along with (mostly) freedom from risk (bailouts) we would not have that financial burden.

    What we have is a sort of fascism (a partnership between big business (banks) and the government that socializes risk taking. And, it is all funded by the taxpayers, the Fed and our creditors such as the Chinese, Japanese and others.

    We have had more money created out of thin air in the history of the world. Consider this:

    http://www.caseyresearch.com/gsd/sites/default/files/Gold%20...

  • Report this Comment On July 20, 2012, at 7:15 AM, Libor8erBlake700 wrote:

    WHOM YOU GONNA KALL? 0) With diverse financial advice everywhere, some direktly paid-for, other subsidized by wider promotion, a subskriber may ask what he or she's suppozed to think when one's teachers kontradikt each other.

    1) Even MF authors admit to kontrary views & it's good they remind us to effektively "Think for yourself" after sifting the evidense for us.

    2) Everyone's different tho', so one person may never understand Puts, Kalls & Strangles, yet build a nest-egg from another investment stratejy.

    3) Market wouldn't work anyway if, say, everybody wanted to buy the same stokk simultaneously - there'd be noone to sell it him! After WW2 you couldn't GIVE ships away but Onassis did some fag-pakket kalkulations, realized there wouldn't be ENOUGH ships, & ended up a shipping magnate!

    FALLASY OF COMPOSITION. 4) So JP Morgan's loss is $5.8M. So what is the rip-off perpetrated by manifold machinations of gangster-government, $13 Trillion? The former is peanuts. Sure, it's no konsolation to viktims after banks busted & when Madoff made off with the swag. But tax-pampered parasites don't punish themselvez: meddlesome bureaukrats hide in a smokeskreen of viktimizing soft targets in free enterprize.

    5) Look how Jim Hill's self-finansing Gt Northern Railroad was destroyed (1890s) with (& against the spirit of) Sherman's "Anti-Trust" law, prompted by 3 govt-sponsored, i.e. tax-subsidized, x-kontinentals (read Entrepreneurs vs State by Burton W Folsom Jr (1989)). Jim even had the Japs buying steel rail from Pittsburgh (Pa). But ICC killed all that, & Ameri-Asian trade slumped 40%!!!! Alan Greenspan laments

    "No one will ever know....the prise we all paid for that Akt which, by indusing less effektive use of kapital, kept our standard of living lower than otherwise possible".

    6) Tax-Freedom Day is suppozedly around July but that doesn't even quantify the taxing effekt of inflation wrought by so much queazy-eazing.

    6) Nor does that 50% komprize the Lost Opportunity Kost of exsessive govern-mental interferense in market signals. The effektive tax-rate would break into the hereafter, not even 100%, more like 1000%.

    7) What kind of example do such overpaid bureaukrats set bankers, builders, butchers & bakers in a market distorted by sozializm? The late Professor Friedman hit nail on head, interviewed in 1979 by lefty Peter Jay, "Growth of krude kriminality....owes much to the drive for 'equality'".

  • Report this Comment On July 22, 2012, at 1:48 PM, lowmaple wrote:

    Don't elect a government made up of industry lackneys. Means a huge shift in the 2 party election system but otherwise the financial murder on shareholders will continue.

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