3 Problems with the Financial Services Industry

Here are the main problems with the financial services industry as I see it:

1. Broker/Client Interests are NEVER Aligned

You may be asking, “Well if I make more money doesn’t my broker make more money? And isn’t that good for the both of us?”

Theoretically, yes. However, as long as an adviser is paid based on the number of trades you make or the amount of money you keep in your account then he or she is NEVER motivated to do well for you.

They are not paid based on how well your stocks perform – whether or not your account goes up or down they still get paid a commission every single time you buy and sell a stock.

That’s like having a car mechanic who gets paid for the number of times he fixes your car – he’ll just make sure it stays broken for as long as possible and will continue to steal your money!

2. It’s Never About Making You Wealthy

The other thing to realize is that the people who work on Wall Street don’t want you to become insanely wealthy. If that happened then there’s a chance you’d leave them.

There’s a chance you’d stop playing the game.

So why would they try to make you wealthy? Answer: they won’t!

Instead they feed you products like Mutual Funds and Index Funds so you’ll just mimic the market and do average! Not good, not bad, just average.

3. They Always Keep Control

And one of the biggest scams that Wall Street has going for them is that they convince the investing public that investing on their own is dangerous. They convince everybody that in order to do well you need an army of analysts and bankers to tell you which stocks are good and which stocks are bad. Then, and only then, can you profit in the market!

If that were the case then why do most Mutual Funds have a tough time beating the market? And on the flipside of that argument, why does the most successful investor in the history of the world have an office of only 8 people?

Bottom line: There’s no good reason why you can’t do just as well investing on your own if you equip yourself with the right information!

Blurring The Line

As you can see there’s a serious problem in this business – there’s always a clear line in the sand: “you” and “them”. It’s never “us”.

We need to change that and we need to change it fast. We need to come up with a way where you and those you take advice from are sitting on the same side of the table.

The only way that gets done is if we change the nature of the client-advisor relationship – it can no longer be a “one way relationship”, it has to become a relationship of reciprocation, a “two way relationship”. Let me explain what I mean…

As of right now what happens when you buy a stock?

Your broker calls you (or vice versa) and rattles off a couple of stocks – you pick the one that sounds best and you buy it. That’s a one directional relationship – your advisor pushes information toward you.

Now, think about it this way – what if you could sit down at the same table as your advisor and have him teach you his process for digging through stocks?

Well, we know that would never happen due to the reasons we talked about before – if they gave away the “secret sauce” then you wouldn’t need them anymore. If they showed you how to invest, then you could go off and do it on your own.

Well, for most established companies in this industry that logic makes a lot of sense – it wouldn’t be in their best interests to make you a great investor. It would be in their interests to make you dependent upon them.

That's why I'm so excited about what we're doing at TickerHound - we have a distinct advantage here and that’s why our perspective on the situation is dramatically different from most. Our business isn’t predicated upon keeping you (and other individual investors) under our control.

We want to set the information free and allow you to live up to your fullest investing potential!

There are other companies in this space doing the same thing - Covestor.com, CakeFinancial.com, Wikinvest.com - all great companies and all looking to do the same thing: level the playing field so the individual investors out there have a shot at taking their financial futures into their own hands and making better financial decisions today!

Psychics, Fortune Tellers and Investment Advisors

You may be looking at the title of this article and scratching your head wondering: what do Psychics, Fortune Tellers and Investment Advisors all have in common?

Well, for one thing they all try to predict the future in one form or another. Psychics and Fortune Tellers supposedly use some type of extra-sensory perception to see into the future. They use tools like tarot cards, crystal balls and chanting in order to tell you what your future holds.

Will you be rich? Will you live a long life? Plenty of people out there turn to psychics and fortune tellers for answers to these questions.

Now you’re probably thinking, “Ok Wayne, what does that have to do with investment advisors?”

Answer: PLENTY!

Instead of using crystal balls and cards with funny symbols on them, investment advisors use charts and financial statements. Now, I’ll be the first to admit that investment advisors, stock brokers and money managers are a far cry from the 1-900-PSYCHIC people you see on TV. But that’s not what’s important…what’s important is WHY people feel the need to rely on these “predictors of the future” in the first place.

Why do we, as human beings, feel the unending need to know about the future?

In fact, I’ll share a little tidbit of information with you – human beings are the ONLY animals that conciously plan for the future. And not knowing what our future holds gives us a TREMENDOUS amount of anxiety. So much so that we do everything in our power (and mostly through the “power” of others) to plan for, predict and try to control our futures.

And that’s why fortune tellers, psychics and investment advisors are so successful – they truly understand human nature and they PREY UPON IT! They prey upon your desire to know your future, they prey upon your desire to profit or protect yourself from your future…and most of all, they prey upon your anxieties and insecurities about the fact that you CANNOT control your future.

They tell you that since you can’t protect yourself from, predict or control your future that you should rely on them, “the experts”, to do that for you. And there’s something very comfortable in doing that. It allows people to relieve themselves of the responsibility of their future circumstances.

Didn’t become rich? Well the fortune teller was wrong, not you.

Lost money in the market? Your broker was wrong, not you.

And that is precisely the psychology that MUST change in order for individual investors to break free from the shackles of the “Wall Street Regime”. Investors must realize that they have the power, the intelligence and the ability to do better than the rest of the market.

Your brokers, your money managers and even the “professional mutual fund managers” all try to mimic the market. If they performed as well as the S&P, they brag about it and are given monstrously large financial incentives to do so. In what other profession does somebody get so handsomely rewarded for simply doing AVERAGE?

My friend, we are taught to do AVERAGE in grade school!

If you want to do ABOVE average…if you want to be an extraordinary investor…if you want to unlock those shackles and break out into the world of TRUE FINANCIAL INDEPENDENCE then you have to stop relying on these “stock market fortune tellers” and start empowering yourself!

And maybe you’ve already made that leap – maybe you’ve already taken the responsibility, shed your fears and made the decision to take control of your financial future. If you have, then congratulations! You’re one of the rare few and you deserve all of the rewards coming to you.

But if you haven’t made that leap yet, if you haven’t decided to put yourself in a position to prosper then I ask you – in fact, I CHALLENGE you to make that leap today.

The only way to shed those chains and become an independent and successful investor – one who outperforms the “herd” – is to equip yourself with as much information as possible. You have to take the time and make the effort to educate and empower yourself as an investor.

In fact, at the end of this article I’m going to give you a list of sites and services that I personally think can put you on a path to financial independence. And these aren’t sites you have dole out tens of thousands of dollars to be a part of. These sites are all free and are all there to help put the power back in the hands of the people – namely, you!

But it won’t be easy…no, no, no. The journey to financial freedom is certainly not the path that’s paved with gold. It’s a rough road ahead of you, but I promise that the destination is more fulfilling and rewarding than you could ever imagine.

So begin that journey today, and drop me a line from your yacht once you get there!

Websites Dedicated to Educating and Empowering Individual Investors:

1. TickerHound.com
2. Wikinvest.com
3. Covestor.com
4. Caps.Fool.com
5. SeekingAlpha.com
6. Marketocracy.com
7. TheStreet.com
8. Investopedia.com
9. BullPoo.com
10. TheTycoonReport.com

Good luck to you and God bless – you’ve undertaken an enormous responsibility and while it might be tough at first, you’ll ultimately be a better investor and a happier person for it. Congratulations!

The TickerHound Battle Station

Ok fine, it isn't a battle station, but we love our offices nonetheless. So, we figured we'd share some photos of our lovely office space with you today. If you're ever in lower Manhattan please let us know - we're only a couple of blocks off of St. Marks Place and are always up for a cup of coffee with other TickerHounds.



The view! Silicon Alley at its finest!



The TickerHound conference room -- where all the planning for world domination (oops, I mean for creating a useful site) begins. :)



George, our technology guru, explaining the finer points of how the site works...go George!



The WHOLE office!



Wow, we do have some funny looking people working here ;)

We hope you've enjoyed our little tour of the TickerHound office...come back again soon!

Financial Sector Ravages the Dow

I hate to be the one to say it, but I told you so!

If you take a look at my "Beware the Banks and Brokers" piece I wrote back in September, you'll see just what I'm talking about.

Today we saw massive downgrades across the financial space - starting with Citigroup (NYSE: C) and ending with the Dow dropping over 362 points!

Like I said in my Sept. 19th post - the banks/brokerages (Wall Street) are always several months ahead of the curve. They feel the brunt of an economic downturn first, then it spreads to the rest of the market.

Now, this isn't to say that we'll have an all out crash like 2001 - my feeling is that if anything we'll see a mild dip in economic activity and capital investments.

My main concern for my fellow entrepreneurs is if this will trickle down to private equity financings as well. We've obviously been experiencing a bit of a bubble on the private equity front as of late - pre-money start-up valuations haven't been this high in over 6 years and VC activity is continuing to rise as money gets cheaper and cheaper.

I think we'll come out of this just fine but overall I feel that financing activity could start to see a dip as next Summer approaches. That still leaves time to get some money together but I would definitely be looking to keep my burn low, look for creative marketing strategies and execute my a$$ off! So pretty much what most start-up junkies have been doing, but this time leave "getting funded" out of your business plan :)

Beware the Banks and Brokers!

After reading a post by Fred Wilson yesterday, I started to get a little concerned about an impending economic downturn. While it's always been in the back of my head - considering we've been in a bull market for the last 4 years - I haven't paid it much mind in a while.

Now Fred was talking about a downturn specific to the web - I mean, that's where he makes his bread and butter so it's something that is near and dear to his heart - but my concern is more broad based. I think we can see a major downturn hit the stock market and that will have a reverberating effect throughout the economy, and especially in the fragile tech space.

Here's my take:

After working on Wall Street for a few years you learn a couple of tricks. One of which is, if you want to know which way the market is headed six months in advance, keep an eye on the banks and brokerages.

Once you see the banks and brokerages start to take a dive, you know that the rest of Wall Street isn't too far off - we'll call them a "leading indicator". Every major bear market was preceded by sub-par results in the banks and brokerages.

Now, much of this is going to have to do with the recent mortgage crisis the country has plunged into. A lot of these banks are going to take a monster hit on all of these defaults we're seeing.

In fact, the Wall Street Journal just reported that Morgan Stanley (NYSE: MS) took a 17% hit to Net Income this quarter. Lehman Brothers (NYSE: LEH) showed an increase in profits but took a hit in fixed income due to the mortgage issues.

I also think that many of the banks and brokerages have been reaping the benefits of an unsustainable bull market - the market has been up almost 20% a year for the last 4 years - that means that when this market heads south (or stops rocketing higher) these companies can no longer use their trading and investment banking fees to compensate for losses in other divisions. And that my friends means the brokerages will be headed south for the winter.

When that happens many of the IPO dreams and lofty valuations for many of today's web startups will go into hibernation for the winter as well. But in all fairness this "dot-com renaissance" we've been seeing isn't solely predicated on the public equity markets. But at the very least I think we'll see VC's and other private equity firms tighten the purse strings a bit.

Like I said in my comment to Fred's post, I don't think we're headed for an all out crash in the Internet space, but with the market looking like it might take a bath, investors and entrepreneurs alike need to be cautious now and prepare for a potentially tough winter.

Some steps to take:

1. Batten down the hatches and lower your burn rate: If you're currently supporting high fixed costs figure out ways that you can right-size your Income statement if revenue suddenly takes a hit (i.e. if revenue drops 25%, how can you cut costs by 25%?).

2. Stockpile your supplies: For investors and entrepreneurs this means you need to get capitalized! If you've got enough cash on hand and this downturn isn't "too" bad, you'll be just fine. But for those operating on a shoe string budget already, you might be in for even tougher times if this downturn hits.

3. Focus on the Fundamentals: At the end of the day most of this stuff is beyond any of our control, so there's not much we can do by worrying. So focus on your business - continue to execute on all fronts and proceed with your plan. Don't take your eye off the ball for a single second.

I think James Dean said it best - "Dream as if you'll live forever; live as if you'll die tomorrow."

I prefer, "Act like your company will be around forever; but plan like it could be gone tomorrow."

Random Thoughts...

I've been trying to come up with a really good topic for my next blog post - the last few were just sort of ramblings about current news - but I can't seem to think of anything that is "entertaining, enlightening and informative. " There's a ton of stuff coming out in the news these days about mergers, rounds of funding, new gadgets, etc., etc. But with all the other blogs out there covering this stuff in depth why should my take on the situation matter so much?

The real question that's been racking my brain is, "how do I differentiate myself from the millions (ok maybe not millions) of other blogs covering the EXACT same topics?"

I'm not quite sure of the answer yet but I have a few ideas in mind.

What I'll do for the time being is simply jot down a few of the memes that have been popping up on my radar as of late.

I. Wall Street Journal: To Fee or not to Fee

There are a number of VC's/Bloggers/Entrepreneurs that I really admire who have been talking about the reasons for WSJ.com to go for a free model . BusinessWeek writes one of the most interesting pieces for why it may or may not make sense for WSJ.com to go free. Fred Wilson over at Union Square Ventures has also been writing about this topic since the News Corp./Down Jones merger was announced.

In the end this is going to boil down to a math equation on Mr. Murdoch's desk that will look something like this:

$65million = Annual subscription revenue from WSJ.com online

So the question becomes: At a $30 CPM rate (WSJ could probably get more but we'll be conservative) how many page views would it take to make up for the lost subscription revenue?

Well, let's do the math...

$30 * X CPM's = $65 million
X = 2,166,666 CPM's

Which translates into 2,166,666,000 page views (2.16 billion for those who have a hard time processing that many zero's).

Over the course of 12 months, WSJ will have to serve up 180.5 million pages per month in order to hit that mark. FYI: Compared to some of the larger social networks out there, 180 million page views isn't a lot.

WSJ currently does 1.5 million unique visitors per month - that's a joke when we compare it to some of the larger online financial sites. According to comScore, the top financial sites had the following unique visitors and page views during the month of June:

MSN Money: 12.7 million uniques and 180 million pages viewed
Yahoo! Finance: 10.4 million uniques and 327 million pages viewed
AOL Money: 10.5 million uniques and 206 million pages viewed
CNN Money: 5.4 million unqiues and 50 million pages viewed

Based on this data it's clear that WSJ stands a good chance of replacing its lost subscription revenue with advertising dollars. But, it's still not as "safe" as sticking with a subscription model. The thing that none of these bloggers/magazines have taken into account is the nature of investors.

I was a broker for a number of years and I know from firsthand experience that investors don't mind paying out the nose for good information. And WSJ undoubtedly has some of the best financial editorial on the planet. And with subscription revenue you don't have the ups and downs of ad-based revenue - it's like a utility company, you can reasonably predict how much revenue you'll do each year...that's very comforting for company owners.

Now, that isn't to say that WSJ.com shouldn't begin giving some of its content away for free - I mean, it's pretty obvious that there's going to be a dramatic shift in the investing demographic. As the baby boomers get older, stop investing aggressively (and sadly, begin passing away), this whole web-savvy demographic will take their places as the "investing demographic". This audience won't have a tough time navigating a web site and will be used to getting free access to content.

So to preempt this shift and gain tomorrow's investing audience today, I think WSJ should begin giving free access to some of its content.

Which content should it be? I'm not quite sure.

At the end of the day, yesterday's news is less valuable than today's so maybe giving away older articles would be helpful. It'll allow them to maintain the subscription revenue for those who want their information in a timely manner while still allowing bloggers and those in the non-mainstream press to openly cite and link to WSJ content (which will be very important for building loyalty, brand and traffic).

II. The State of the Web

There has been a ton of talk on this topic...Everybody from Mavericks owner Mark Cuban to the guys over at Read/Write Web have been talking about where we are in the evolution of the web as both a technology and a media platform.

They both raise interesting issues - Read/Write Web focuses more on where we are in the "technology cycle" and Cuban focuses more the entertainment value of the web with respect to its current infrastructure.

The argument that Read/Write Web puts forth is interesting in that they try to map the standard "business cycle" to an underlying phenomenon they view as a "technology cycle". Joseph Schumpeter and other Austrian economists would definitely find this to be a compelling case for their theories with respect to business cycles and economic fluctuations.

Cuban looks even deeper into the technology by arguing that it's not the software that needs innovating but rather the infrastructure (or internet access speeds into the home) is what needs to be upgraded before we'll see another wave of innovation on the web.

I'm not sure who (if any) I agree with yet. I'm still pondering these issues myself but it's definitely forcing my brain to think in a different direction (which I always enjoy).

That's about it for me today, but expect more posts about the "state of the web" throughout the rest of this week/month/year. :)