Wall Street’s excess is certainly not breaking news. In the 1940s, Fred Schwed Jr. published his wickedly accurate exposé “Where Are the Customers’ Yachts?” based on his experiences as a professional trader during the Great Depression. His point was, while Wall Street’s biggest brokers seemed to be doing quite well for themselves, with the local harbors filled with their high-end yachts, evidence of their customers’ wealth was far less apparent.
Seas of Fees
These sorts of shenanigans date back even further, but we’ve got to start somewhere. In an introduction to the book’s 2006 edition, Wall Street Journal columnist Jason Zweig observed that “Wall Street has changed so little that Schwed’s mockery, with the passage of time, has become indistinguishable from prophecy.”
Then came the financial crisis of 2007–2008, exposing a number of systemic weaknesses that savaged the portfolios of untold investors around the globe (at least those who could not or would not ride out the storm). The flurry of subsequent analyses, actions, legislation and regulation augured change, or at least a significant slap-down on some of the greatest inequities. Unfortunately, time has told a different tale. Fast-forward to today, and it would appear that Wall Street’s yachts are still floating finely on seas of fees and oceans of opaque interests that continue to eat away at individual investors’ end returns.
A pair of recent articles reminds us of the business-as-usual ways of Wall Street. The first one is a New York Times piece published this May: “Wall Street Is Back, Almost as Big as Ever.”
Acknowledging that “the biggest pay packages for [bank] executives are rarer now,” the article cites Bureau of Economic Analysis stats indicating that just prior to the financial crisis, average pay in the securities industry had peaked at more than four times that of the average American worker. Wall Street’s average pay took an unsurprising dip after the financial crisis, but has since returned to 3.6 times as high by 2013. The article notes that the major investment banks are now offering standard base salaries of $85,000 to recent college grads.
If there were evidence that the higher compensation contributed to a healthier economy and greater wealth for all, we would not quibble over the higher relative salaries. We’ve got nothing against hardworking individuals being rewarded for jobs well done.
But the NYT piece points to several pieces of evidence that suggest quite the opposite may be taking place. The article quotes Brandeis International Business School economist Stephen Cecchitti, who has co-authored research on the relationships between growth of the financial sector and economic growth. He comments: “When pay on Wall Street is so high relative to the rest of the economy, you’re creating incentives for people to go into that industry that may not be the best for society over all.”
The article also quotes University of Chicago Booth School of Business economist Luigi Zingales: “While there is no doubt that a developed economy needs a sophisticated financial sector … there is no theoretical reason or empirical evidence to support the notion that all the growth of the financial sector in the last 40 years has been beneficial to society.”
Seek out advisors willing to agree in writing to put your interests above their own. [Tweet This]
A separate piece published on ThinkAdvisor complements the NYT article with a vengeance: “On Wall Street, If You Earn More You Cheat More, Study Finds.” The article presents the results of a poll conducted by University of Notre Dame and Labaton Sucharow LLP, with more than 1,200 U.S. (Wall Street) and U.K. (Fleet Street) financial professionals participating in an “email-based online panel.”
The poll appears to be based on voluntary self-reporting, which means it may or may not be entirely true to life. But it was interesting to see this statement: “34% of those making $500,000 and up annually say they have actually witnessed ‘or have firsthand knowledge’ of wrongdoing in the workplace, while 21% of those making under $50,000 do.” In addition, the poll indicated that 23% of those at the top salary level say they have felt “pressure to compromise” vs. 9% of those at the lowest salary level.
As the title implies, higher pay may well lead to higher disconnect between what should be an advisor’s true calling versus the care and maintenance of his or her well-appointed yacht.
Putting Your Interests First
Fortunately, there have long been, and remain, several sensible steps you can take if you wish to remain at the helm of your own financial ship. Among the most important of these is to seek an advisor—a co-navigator, if you will—who is willing to agree, in writing, that they will always put your highest interests first, even ahead of their own. The agreement should be in plain English too, like this, free of tricky legal jargon that can otherwise run you aground.
What if your adviser is unwilling to sign such an agreement? We suggest that’s your sign to set sail in a different direction.