Robbing You Blind: Protecting Your Money From Wall Street's Hidden Costs and Half-Truths: Moneymaking Strategies for Today's Investor
, by Mark Dempsey. William Morrow & Co., March 2000; 304 pages.
The slick bucket-shop hawkers portrayed in the latest Wall Street flick
have a special meaning for Mark Dempsey -- they remind him of his days as a broker at
Under pressure to meet commission goals, Dempsey used the hard sell to foist stocks and bonds on clients. "When I saw the technique they used, I thought it was pretty realistic," he told
. "There's a tremendous difference between Merrill Lynch and a boiler room, but the sales techniques that brokers are taught are just the same."
Isn't Merrill Lynch supposed to be a respectable firm? Not according to Dempsey's latest book,
Robbing You Blind
. The former Merrill broker explains in great detail how since Wall Street first came to Main Street in the 1970s, all of its brokerages and investment firms have exploited the ignorance of the ordinary middle-class investor to make a fast buck or three. At the same time, the industry has offered few opportunities for ordinary investors to educate themselves about buying stocks, bonds and other financial instruments.
Most companies that manage other people's money care nothing about the assets of individual middle-class investors, argues Dempsey. "Their focus is on serving their wealthy clients who have substantial portfolios that produce large commissions," he adds. Products such as money market accounts, asset management accounts and mutual funds were designed to capture the assets of the middle class and reduce Wall Street's historical dependence on the very wealthy, he writes. The middle class was a "fertile new market, one that was rich in commissions, account fees and interest payments."
Dempsey sets up his tale with a brief history of Wall Street, encompassing Dutch colonists, the establishment of the
New York Stock Exchange
, the Wall Street crash of 1929 and the formation of Wall Street's securities regulators, then goes on to expose the fishy inner workings of full-service brokerages and discount firms (they favor their wealthiest clients) and mutual funds (they charge excessive fees).
No financial institution, instrument or adviser is left unexamined as Dempsey rails against the monetary world. Of particular concern are mutual funds. While 66 million Americans put over two-thirds of their investment assets into these instruments (over $6.7 trillion invested at the last count according to the
Investment Company Institute
, the mutual fund industry's trade association), many that are touted to investors fail to beat the
, Dempsey writes. This is particularly true of large, well-known funds, like those managed by
This is indeed correct. According to an analysis by
, over the last five years only one-third of the funds managed by the top five mutual fund families ranked by total assets under management beat the index. This group includes Fidelity, Putnam and Vanguard, as well as the
American Funds Group
"Oftentimes bigger is not better," writes Dempsey, "because the performances of mutual funds that manage the most money and have become household names often lag behind traditional indexes like the S&P 500." But while this might be true in theory, it's a little simplistic, says Scott Cooley, senior analyst at Morningstar. To truly evaluate a fund you need to compare a technology fund with a technology index or a large-cap fund with a large-cap index, he says.
Worried yet? Wait until you get to the part about securities regulators, for whom Dempsey saves his gravest criticisms. The
Securities and Exchange Commission
does not have the resources to effectively police the securities industry, he says, nor does it have the compulsion: "When Wall Street looks in its pocket, it not only finds billions of dollars, but senators and congressmen as well." Banks, brokerages and insurance firms donate large quantities of money to political campaigns, writes Dempsey, so how can congressmen protect the financial interest of ordinary investors?
Good points, but are investors really under any illusions about the capitalist machine? The financial world is certainly no Sunday school, so Dempsey's analysis at times seems naive, especially for a former stockbroker. He is shocked that wealthy investors get first dibs on IPOs and preferential treatment from mutual fund managers. "Investors who have given Wall Street all that they have should be the true premier clients and they are the ones who justly deserve to be the financial services industry's top priority," he writes.
Dempsey also scolds financial journalists for their "outside-looking-in perspective," which allows them to report "only what companies want them to know -- not what they may need to know." But on closer scrutiny Dempsey's own reporting is at times less than adequate. While he painstakingly details the sources of his investigations into Wall Street's institutions, those sources often turn out to be news articles. This is most egregious in a chapter on dubious sales practices at brokerages where most of the information is taken from a trade magazine for stockbrokers. Someone should tell Mr. Dempsey that it's bad journalistic practice to rely so heavily on another reporter's work.
Still, in an economy where more middle-class Americans than ever are handing their money over to Wall Street, this book's worthwhile message is that investors should stay informed about financial instruments like 401(k) plans and mutual funds. Nearly half of all U.S. households now invest in equities -- a total of 78.7 million individuals as of early 1999, up 85.6% from 42.4 million in 1983, according to the
Securities Industry Association
, a trade group for the securities industry.
To this end, Dempsey offers point-by-point tips on how to prevent Wall Street from taking you for a ride: Ask the right questions, get specifics about fees and discounts and sift through the information distributed by your broker, the press and other so-called pundits. "I feel it is important for people to know what is going on behind the scenes when it comes to their money," he told
. "Not having the right information will let others rob them blind."
Welcome to Wall Street, Mr. Dempsey.
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