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Best Financial Help is Between Our Ears By Stephen J. Butler

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A perennial favorite of New Year's resolutions is weight loss according to various surveys, but a close second these days is saving more money and investing more effectively. "Where can I find good help?" is the question that echoes in the void left by major players in the financial services industry.

The dozen largest companies in the brokerage business have just offered to pay $1.5 billion in penalties in an effort to avoid years of litigation from angry investors. It's not clear in my mind who will receive this money. It's only clear that the industry has to pay it. Not that long ago, one of the nation's largest brokerage firms, alone, had to pay yet another $1.5 billion to settle years of shareholder suits over limited partnerships that had turned sour. Lawyers presumably received a major portion of that money before the trickle-down effect benefited investors in any material way. It reminds me of the class action suit against some dungaree seller where the lawyers received millions and the buyers each received about $5.00 if they bought their jeans within a certain specific time period. If a financial institution takes advantage of us, we can't count on the justice system to wreak vengeance and make us whole. For all practical purposes, we are alone with our money.

The first lesson is that bigger is not better. These major institutions with huge ad budgets and admittedly smart people need to be viewed with a healthy dose of skepticism. The size and national stature of a financial institution is no guarantee that the contact person we work with is giving us good advice. U.S. Trust, a venerable financial advisor for high net worth Americans (and now owned by Charles Schwab and Company) had an especially embarrassing period back in the seventies when, according to financial writer Andrew Tobias, it advised many of its clients to invest in what turned out to be very bad real estate deals. At the time, the company had one of the best reputations in the business.

Even Vanguard's management exhibits a touch of self-serving behavior. This unique, giant cooperative, effectively owned by its mutual fund investors, has been faulted in recent years for what some would consider to be excessive compensation coming from its so-called "Partnership Program." The latter is apparently a compensation system put in place to meet the advantage other financial institutions had in the form of stock options. Vanguard's unique ownership structure precluded stock ownership, so this "partnership" approach was adopted. In the light of what has happened to stock option values in the financial services industry, it may be time for Vanguard to do some course correcting and further reduce investor expense ratios.

The rising markets of the 80's and 90's turned all investors into self-styled "Masters of the Universe." It was intoxicating to get those statements in '97, '98, and '99 and see what for most of us were dramatic gains. Now, for the past three years, we have found ourselves having to "duke it out with the Dark Side of the Force." The temptation to throw in the towel and turn to an expert---any expert --- is probably greater than ever. It's in this state of mind when we can be most vulnerable.

A constructive first step is to determine the soft underbelly of our investment and savings program. Are we dealing with substandard investment results or just a lack of self-discipline that leaves us saving less than we should.

When it comes to substandard investment results, we should ignore the actual percentage loss of assets and focus on whether or not we had been adhering to basic investment rules of thumb. The markets have lost 40% or more overall, and the best money managers in the world are, for the most part, stuck with something close to those losses. To have known, prospectively, what advisor or money manager could have helped us avoid that loss would have been impossible. My mail is full of these investment newsletter people who have claimed to have "timed the market," but according to Mark Hulbert who tracks their long-term performance, most have had dismal records over the years.

After having lost almost 40% over the past three years, the market as a whole is now on a par with its long-term 10% rate of return. In other words, we could draw a line of hypothetical performance illustrating a rise of an even 10% per year and then compare it with an equivalent line reflecting actual market performance. These two lines today, thankvetica,Geneva,Swiss,SunSans-Regular" color="#002200" size="4">Stepin Shop for Stocks

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