As with every business, product development is essential for an on-going business. And the Financial Services Industry is no exception. A few years ago, all that creativity led us into the Great Recession and we are still struggling to recover. I have never been a part of the product development at the big Wall Street Banks, but I am betting that new products are judged with the following 3 criteria:
- Is it legal?
- Is it profitable?
- Can we sell it?
It’s doubtful that the question of whether or not the product is good for the investor (buyer) is ever asked.
It was this creativity that gave us Zero Coupon Bonds, but it is not just the hugely profitable marketing of these bonds that they loved, it was the use of these bonds to create products with even more “sizzle.” Think about it. A Zero Coupon Bond with a yield of 10% would double in value in less than 8 years. Now is when the real creativity began.
Let’s assume an investor has $100,000 to invest. The investor has always been tempted to trade commodities or options, but reluctant due to the significant risks. But what if the investor was able to make such investments without fear of losing their money. A very tempting proposition to say the least.
The investor puts in $100,000 and it is then split between a Zero Coupon Bond and a Commodity Trading Fund. If $50,000 is used to buy a 10% Zero Coupon Bond maturing in 8 years, worst case the customer will get all their money back- in 8 years. The remaining funds could then be used to invest in highly speculative securities. Let’s assume the worst-case scenario, a commodity fund that flipped tails too many times. The investor is disappointed, but they have their money back guarantee. Did they incur a loss? Of Course. If they had invested the entire amount in the same Zero Coupon Bond they would have had $200,000, not $100,000.
It’s just one more example that the sales culture of Wall Street has been around for a long time, and it is not about to change. There were the Ginnie Mae Funds sold as if they were as safe as a Money Market Fund (but they weren’t), Real Estate Partnerships with all sorts of conflict of interest etc. etc. It was Greg Smith’s letter to the New York Times that set me off on this walk down memory lane. Referring to the Wall Street Banks as the Financial Services Industry is so appropriate. I just wish they would stop referring to their “customers” as “clients.”
You, as an investor, do not have to be such a customer. You can become a “client” of a true professional, the Fee-Only Investment Advisor. You may have to do a little research, but it will make a huge difference in your financial health.
2 responses to “The Creative Minds of Wall Street”
I run the product management department of a bank and it is like Dan describes. To the 3 criterias I want to add one more
1.Is it legal?
2.Is it profitable?
3.Can we sell it?
4. Is it complex? (The more complex the better you can hide fees)
Remember the “Government Plus” funds?