The Wall Street Buy Machine - Beware

According to the National Association of Securities Dealers (NASD) (February 2006) there are 657,813 registered securities representatives working in 115,946 branch offices for 5,114 brokerage firms in the United States. By comparison the Bureau of Labor Statistics estimated dentists numbered 152,000, which is approximately one quarter the number of securities professionals. Why are there so many brokers? The answer is simple - to entice you to buy stocks, bonds, mutual funds and other investments.

You see the "Wall Street Buy Machine" everywhere. For instance, financial programs on TV and radio routinely tout stocks. Brokerage houses promote their favorite lists of stocks to buy. The popular financial magazines publish article after article about hot stocks and what you should buy. Seductive brochures accompany your monthly or quarterly mutual fund or brokerage account statements espousing the merits of owning stocks. Brokers, trying to earn a living from sales commissions, routinely call you to hawk the latest "great stock" or fund. After you pay for a subscription, a newsletter writer provide lists of stocks you must own now. Stock mutual fund ads tells you how much money you can make in the long run. The Federal government gives you tax breaks to maintain a retirement account that presumably contains stocks. And your employer sets up plans so you can buy stocks for your retirement account.

The Machine tells us to buy stocks at anytime at any price. We retail investors are confronted by a withering campaign of buy, buy, buy. Here are some numbers to help you understand the enormity of the Machine and how its voracious appetite for money is fed.

An Explosion of Mutual Funds

According to John Bogle the mutual fund industry assets have grown from $2 billion in 1949 to $6.5 trillion at the beginning of 2003. The total number of funds (stock, bond and money market) is 8,300. Stock funds total 4,800, a number not much less than the 5,700 stocks included in the Wilshire 500, the broadest index of U.S. based-equities. Obviously, the industry knows how to sell funds to the public. From 1998 to 2000, the top of the 1982 - 2000 bull market, investors were sold $555 billion of mostly speculative stock funds.

According to Criminalizing Capitalism (Forbes magazine, May 12, 2003, pp. 75-80) 71 new technology mutual funds were offered in 2000.

As the market collapsed in 2000 much of that new money simply evaporated. But the commissions and fees did not. Each of these funds needs money to pay its expenses that include salaries, wages, commissions and bonuses, computers to keep track of your account, postage to mail statements and reports, and marketing and advertising to programs to promote the funds.

To cover these and other expenses a mutual fund charges you an annual fee, which usually runs from one to three percent of the total assets under management. So if you own a fund worth $10,000, your annual charge is $100 for a one-percent fee. The $100 doesn't seem like much but when you compute the sum of the fees for all funds sold by the industry, the total amount is enormous. For example, given mutual fund assets were $6.5 trillion and the cost of ownership was 1.28% (as reported by the Investment Company Institute), the total fees would be $83.2 billion (1.28% times $6.5 trillion). And what did the funds do with all that money? They spend it on direct-operating costs, management fees, taxes, marketing costs and portfolio research. And the funds take in these fees whether the fund's value is going down or going up.

Broker's Job Description

What do brokers do for a living? Their job description, as defined by the Bureau of Labor Statistics, includes the following paragraph: "The most important part of a sales representative's job is finding clients and building a customer base. Thus, beginning securities and commodities sales agents spend much of their time searching for customers-relying heavily on telephone solicitation." So when a broker calls, remember he or she must be paid and their sales commissions come from your pocket.

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