Wall Street is Nickel-and-Diming You

We all have the helpless feeling that America has been taken over by the rich and powerful.

For “regular” Americans, it’s harder to make ends meet these days because we are nickel-and-dimed to death. Cell phone bill, cable bill, health insurance, gasoline prices, food prices… even the movies.

If I want to take my kids to a movie, I’m going to drop nearly 40 bucks. My kids know not to even ask about the $8 bucket of popcorn. We always smuggle in our own candy — and sometimes some Royal Farms fried chicken.

(One of the great perks of living in Baltimore is Royal Farms chicken. You can almost hear the other moviegoers’ stomachs rumble when we bust out a box of fried poultry goodness as the opening credits roll.)

So maybe I’m cheap. But you know what? It’s my money. I work hard for it. And I am deeply pissed off at how many hands are in my pocket…

You wonder why the U.S. economy is so sluggish? This is one big reason. Incomes are stagnant, and corporate profits are hitting records.

At least in many cases we have a choice. I’ve told Comcast to pack sand — I’m not paying $160 a month for Internet and cable TV. And I’m not going back to Sprint for a $108 cell phone bill once my current contract runs out in a few months.

Still, in the grand scheme of things, these are small moves to take back some control…

But here’s a story of one New York man who may be about to end a 10-year gouge of 715,000 New York teachers, firemen, and policemen that may have cost them $2.5 billion.

How Not to Invest

Scott M. Stringer is the New York City Comptroller. He’s in charge of supervising the quality of accounting and financial reporting for New York City. He recently completed a 10-year study of the city’s five pension funds to answer a simple question: “Are we getting value for the fees we’re paying to Wall Street?”

What Mr. Stringer found was shocking: Over 10 years, New York City’s $160 billion pension funds had paid out $2.5 billion to Wall Street money managers.

Wall Street managed around 20% of funds — about $32 billion. So $2.5 billion amounts to fees of around 7%. Obviously, that’s far more than the typical 1% to 2% you’d pay with a mutual fund. And it dwarfs what you’d pay for a simple index fund — around 0.2%.

You might think such high fees would indicate a high degree of investment success on the part of the Wall Street managers. Well, you’d be wrong.

After Wall Street took its $2.5 billion from New York’s teachers and firemen, the total gains over 10 years amounted to $40 million.

That’s not a typo. The New York pension fund paid $2.5 billion in fees and earned a paltry $40 million.

Money managers: $2.5 billion. Teachers and cops: $40 million.

And when you consider the amount that these pensions could have made if they had simply put the cash in S&P 500 index funds, you’re talking about another $2.5 billion…

This should be an outrage. It’s pretty much robbery. The Wall Street fat cats get fatter, sucking off the retirement of real workers who provide an invaluable service to the citizens of New York. 

I honestly don’t understand how these money managers can look at themselves in the mirror every morning. How do you justify such obvious inequity?

Yeah, I’m in a similar business. If you want to get my analysis and investment recommendations from my Wealth Advisory newsletter, it’ll cost you 49 bucks a year.

But if you don’t like it, you can have a full refund. You think these Wall Street types ever refund money for poor performance?

The Death of Wall Street

Now, if you’re wondering why it took New York’s Comptroller so long to figure out how badly those pension funds were being bilked, well, that’s a good question.

Ten years is a long time to go without auditing your investments. But the thing is, the money managers don’t just come out and say, “Hey, we made $2.5 billion, and you made $40 million.”

No, when the annual statements come out, they show a gross number — the amount the funds have grown before the fees are extracted.

And because of the way capital gains taxes are calculated, Wall Street money managers and hedge funds usually leave their fees in the fund. That way, they get taxed at 15% instead of 28% or higher.

So not only do these money managers make 15 times more than the teachers and cops, but they also pay far less in taxes!

Fortunately, Americans are starting to see the men (and women) behind the Wall Street curtain for what they really are. They are not investment wizards with an arcane ability to pull profits out of the stock market. They are just shysters who give the illusion of mastery with jargon and parlor tricks.

The California State pension fund, or CALPERS, is already taking its money back from the grubby hands of hedge funds. I’m sure New York will be making some changes now that this information is becoming public.

But that fact is, around 25% of the $2.7 trillion in hedge funds right now comes from state pension funds. And usually a state’s investment rules have to be changed in order for pension money to wind up in hedge fund managers’ hands.

In 2014, former Texas governor Rick Perry signed into law measures that allow the Teacher Retirement System of Texas to invest up to 10% of its assets with hedge funds.

Also last year, New Jersey governor Chris Christie made headlines when it was revealed that the New Jersey pension fund was one of the biggest hedge fund investors. The predictable result: poor performance and huge fees.

In four years, the New Jersey pension fund paid $939 million in fees. And of course, the performance was much less than what your average index fund would have returned.

It’s a typical kickback scheme between Wall Street and our politicians.

Fortunately, these stories are getting published, and voters are demanding change, like the kind that has California taking its pension money back from Wall Street.

What You Can Do

The simple fact is mutual funds can’t beat the stock market consistently. In 2014, just 15% of large-cap mutual funds beat the S&P 500. As an investor, I hope you look at that and say, “Heck, I can do better that.”

And I agree — you can.

For one, you could just buy an S&P 500 index fund. Such a fund will have a miniscule fee, so your performance will pretty much match the index itself.

Individual investors have figured this out. The Financial Times just reported that in 2014, investors took a net $92 billion out of U.S. equity mutual funds and put a net $156 billion into so-called “passively managed” index funds. (Of course, there’s still more total money in actively managed funds, but the trend toward passive index funds is clear.)

Or try this: Pick four stocks that can go up 20% over the next year, and you’ll beat 95% of Wall Street pros. And here’s a hint: Find something with a nice 4% to 5% dividend, and you’re off to a great start.

Either way, you’ll do better than Wall Street, and you won’t be paying fees.

I wonder how long before all pension funds simply ignore Wall Street? The sooner the better…

Until next time,

Until next time,

Briton Ryle

@BritonRyle on Twitter

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.