Abstract
The best advice is hard to come by in financial advisement. The US system makes sure that this restricted resource is allocated to very specific groups. Furthermore these groups are already the most monied interests in the country. The resulting tiered returns in the market demonstrste that the US investment apparatus is designed to give returns from the less monied to the more monied.
Tiered Advice
There are most certainly different levels of advice given to investors of different asset and income levels. In order to understand the alternate views its important to review a few different common theories on how investment advise is dispensed. The first, which is the most widely believed, is that investors have an equal opportunity to benefit from various investments. The idea is that through research and intelligence anyone with some money to invest can match or beat the returns that come to high asset individuals. This is supported by the many books and articles as well as news programs that focus on “beating the market” which are targeted at the general public. In this model, tiered advice or inside information counts for very little. The second theory, which is understood by far fewer, is that the investment companies and investment banks control the markets in a way to funnel higher returns to themselves and to their more valued or higher asset clients.
IPO Stock Distributions to Connected Investors
Investment companies provide information of different qualities to different investors based upon their income. Take for instance what happens when investment banks take a company public. The investment bank takes as part of their fee a small share of the overall stock float. They then distribute this to their executives and to highly valued (i.e. high asset owning) clients that have significant assets invested with them. This way of taking a company public is called bookmaking and it results in a lower income from the IPO for the company being taken public. This income taking could be lower (and the money raised for the company higher) if the IPO was an auction, however the underwriting banks don’t want this as it reduces their income. Because the large investment banks have significant monopoly power, if companies want to go public they most often must accept the investment bank’s terms. In return for these monopoly profits the investment bank is agrees (all with a wink and nod of course) to give the IPO a positive spin and increased interests through their analyst arm of the company, their knowledge of PR and their ability to manipulate the media through contacts and advertising. The income derived from the subsequent stock appreciation of options that are received in return for underwriting an IPO is not due to anything except the receivers of such IPO issues being in a privileged position. This return on is simple investment is not available to less monied investors.
Insider Trading
Insider trading is common in US equities. There are websites that track the sales of stock by executives and this is used to predict the future value of stock. Executives are timing their sales when they think the stock is at its peak and they are using their access to non-public information to do this. Furthermore they certainly tell others who are close to them as well. Why wouldn’t they, the SEC exists mostly as a website. This is only the most obvious form of insider trading, there are many more “less provable” forms. After all, people don’t write blogs about their insider trading gains.
Stock Options
Stock options provide a return that is not available to non-elite investors. A stock option is always sold to the option holder at a discount. However this return counts in the calculation of average return that is so frequently referred to as an endorsement for stocks. However, this return is only available to stock option holders. The use of averages to calculate prospective stock returns is one of the great myths of the stock market.
Tiered Investment Advice
Investors at different asset levels receive different levels of advice. Because investment banks can control stock prices with their analyst reports, they can take positions in stocks prior to issuing positive buy recommendations. Furthermore they can push particular stocks to particular categories of investors through their investment advice. When an investment bank seeks to eliminate shares that it owns, it recommends these shares to their lower asset clients through its personal investment advice department. This eventually moves out to the retail branches which repeat the recommendations made back in New York. There is supposed to be a “Chinese Wall” between the investment banking and investing/trading parts of the bank and the analyst side of investment banks. However, this “Chinese Wall” is violated as as matter of routine by the investment banks according to accounts by insiders and described in detail by Michael Lewis in his book Liar’s Poker. If investment banks actually respected this mythical wall, their profits would be far lower. These four characteristics each concentrate financial returns to higher asset owning individuals:
- IPO distributions to connected investors
- High concentrations of economic power
- Insider trading
- Stock Options
- Tiered investment advice
Excess returns to a particular category of investors must necessarily bring down the average return for other categories of investors. Therefore when the term “average return of the market” the question to ask is “average for whom?” At the upper end of the income and asset spectrum there are significant advantages which no investment bank, investment publication or the SEC would want non-elite investors to know about. For the system to bring high returns to select investors the big fish must cheat the small fish. The system does this to perfection.
The Investing Funnel: An Unequal System
The investment system in the US can be viewed as a system which funnels the largest returns to the wealthiest individuals and for providing reduced returns to the rest of the investing community. At the lower end of the asset continuum, the returns are actually negative, because many of these individuals perpetually borrow money, so they pay for money, and they are not paid a return on the money they own. This has become particularly unequal as usury laws have been circumvented in the US in the past several decades. The repeal of usury laws is why credit card companies have moved their operations to Iowa and Delaware. Concentrated power used the one-time event of high inflation to pass legislation (following the shock doctrine) that removed caps on interest rates in these two states. Since companies with credit operations in these states can loan to individuals in any other state, there are in effect no more state usury laws. Any bank that attempted to abide by state usury laws of the other 48 states would be short sold by Wall Street and its executives would have greatly shortened careers.
The Necessity of the Smaller Investor to the System
The smaller investors are important to the system because they buy investments from the larger investors and they pay them a premium to do so. The largest investors are able to do this because they get information first and actually are connected to institutions that control the projections of future value of companies. For instance Merrill Lynch or Smith Barney not only participate in asset markets, but control the future projected value of assets through their large analyst arms. They would propose that they do not make money off of their access to information, however history shows a very different story. Owning an investment bank is very close to having the ability to print money because these banks can take positions in assets and then release “analysis” which shows these assets are somehow undervalued. (that is others should buy their personal holdings from them). Aside from the US central bank there are very few institutions that can create objects of value from pieces of paper in this way. However, investment banks do not disclose their positions in stocks, or the various fees they receive (including lucrative underwriting fees) from stocks they recommend. In this way the terms undervalued or overvalued take on a different meaning when issued by investment banks. “Overvalued” or un-showcased are those companies that do not pay the investment banks any fees for their services or securities that the investment bank does not already own. “Undervalued” comes to mean companies that do pay the investment bank fees or which the bank already owns. These investment banks share information to varying degrees with different customers based upon their account sizes with the bank, and help perpetuate the “cascade” of returns through the system. The biggest investors take the biggest returns leaving fewer returns for the rest of the investing public. The media participates in this ponzi scheme by taking advertising dollars from the investment banks to uncritically repeat the investment bank’s recommendations and by pretending that the whole system is completely legitimate.
The Market Hypothesis
The model outlined above is the opposite of that which is promoted in the industry. In the industry’s propaganda (television and print), investment banks are fair and extol traditional values. In commercials these companies seem to only care about protecting people’s retirements and increasing their net worth. Furthermore their integrity is beyond question, even through each of these investment banks has multiple SEC investigations against them documented on the SEC website. Still their primary concern in your 401k. Here are some other myths which are part of the financial system in the US:
- The average investor can get hot tips from television shows on stocks
- The market is regulated so that fair rules apply
This propaganda is necessary in order to keep the system working as it does, that is providing hope to the many and above average returns for the investment bank and high asset owning individuals. This is because the system is based upon providing disproportionate returns to the very wealthiest of investors by selling assets which have been touted by the advertizing - pr - advisement - propaganda apparatus to smaller investors. If the non-elite investors drop out, the carousel stops spinning. This is why it is so important for investors to have “faith in the market,” and why the frequent violations of the mythological market are chocked up to “a few bad apples” by concentrated power. In fact this is the exact analogy used to explain the 2000 stock market meltdown by many commentators.

(Many smaller investors may misunderstand their position and role in the capital markets. Their role, as seen my the asset creators is to funnel investment funds into the stock market to allow bigger investors to sell assets to at a higher price. Its very difficult for people to brought up in a culture that celebrates and perpetuates an egalitarian system to accept this view. Its the job of pop finance books, MSNBC and other media outlets to make sure they don’t figure this out)
Interpretation vs. the Standard View
This is a different way of looking at the investment system. However, let us set the framework correctly. Just because it counters the present view does not necessarily mean it requires more evidence than the standard view. In fact the standard view is directly contradicted by research into the returns on investment received by different classes of investors as explained in The Inaccuracy of Average Return, however people talking up the stock market are very rarely asked to make an evidenced based argument for why the stock market is good for non-connected investors to invest in. In a world of free ideas, each idea would have to prove itself true. The present view has never been proven true and is generally not expected to prove itself true. This is because it has a vast array of marketing and PR dollars behind it. The advertising deals with emotions, and when actual data is used to recommend an investment, the average return is used as justification. Furthermore investments are cherry picked, as if anyone could have selected the specific high performing stocks before the fact. Investment banks support this childlike view the market as do television shows on finance and finance publications, thus most Americans have grown up believing this interpretation without analyzing its underlying assumptions. If the standard view, that returns are not highly dependent upon wealth is correct, there are some interesting questions is need to answered:
Questions to be Answered if Present System is Market Based
- Why are investment banks allowed an allocation of stock, bought at very low prices which they are then allowed to sell at much higher prices later?
- If the intent of the SEC is to police insider trading, why do all of its top officers come from large investment companies it is ostensibly set up to regulate?
- Why are accounting firms paid for by the companies they audit rather than by shareholders if their role is to protect the shareholder?
- Why are the same companies that purchase companies for clients allowed to control the recommendations for other investors without stating their position in the stocks or fee relationships with the companies they are recommending?
- Why are returns in the market so highly related to the investor’s net worth
There are more questions, but these are a good places to start.
