Should You Trust Wall Street's Financial Advice?

Wall Street employs an army of highly-paid analysts, brokers and investment managers to help you invest successfully. Or do they?

Aug 16, 2014 at 8:00AM


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Wall Street is an interesting place and certainly a magnet for ambitious finance graduates from the best business schools in the country. Harvard Business School or Columbia Business School, two of the top educational institutions in the United States, regularly send a respectable number of graduates to Wall Street firms which then seek your investment business.

So, with well-educated and ambitious finance professionals telling you how to invest your money, nothing can go wrong right?

Not so fast.

Investors need to understand a very important concept that has a tremendous influence on investment performance: Interest alignment. Yet, many investors have never heard of it. And that should worry you.

Interest alignment
The concept of "alignment of interest" can best be explained by utilizing an example from the fund management business.

Assume you invest in a plain vanilla mutual fund, which charges you a fixed management fee for its services, independent of achieved performance results.

In other words: Whether the fund does well or not doesn't matter. It earns the management fee, which often amounts to a couple of percent of assets under management.

Put differently: The fund and its management couldn't care less if it made money for you, because it is getting paid either way. Not exactly a sweet deal for investors who would reasonably assume that the fund managers are incentivized to do well.

Compare this, for instance, to a hedge fund that charges only performance fees. If the fund does well, so does the fund manager because he gets a bigger paycheck for delivering strong results and a smaller paycheck if he messes up. Interests between investors and fund managers are strongly aligned.

It is noteworthy that not only investors' relationships to fund managers are characterized by an improper alignment of interests. Relationships to other finance professionals may also be influenced by misguided incentives to the detriment of the investor.

Therefore, investors need to make sure they understand the incentives these professionals have, which is often to get your dollars first and put your investment success last.

Interest alignment problems also exist with respect to stockbrokers.

Stockbrokers benefit when you make transactions. The more you trade, they more they earn. This is a good value proposition for them, but not for you. Having someone encourage you to trade in order to benefit from your provisions, is not only bad business practice and unethical, but also not helping your returns.

Investors again need to understand that interests in the stockbroker business are not aligned with those of investors and that they might not get the best advice from such professionals.

The Foolish Bottom Line
Investors with relationships to Wall Street institutions, whether its asset management and private wealth management businesses, mutual fund companies, or stockbrokers, need to get a thorough feel for the underlying incentives which govern Wall Street's business practices.

Make sure, that anybody who wants your money is properly incentivized to work for you.

Investors should only listen to Wall Street's financial advice if they can be sure, that client interests will be put first or, better yet, that their interests are aligned with the interest of the advisor.

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4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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