The 5 Big Reasons Why Savers Will Soon Hate The Money Management Industry

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Stock market investing is for those who cannot create wealth.

Which, unfortunately, includes most Americans.

About a year ago, my brother unexpectedly passed away at the age of 37. What happens next is the almost year-long account of getting his assets liquidated in a typical rant-style most readers who have known me for years have come to expect and appreciate.

What you’ll get from this when all is said and done is a new perspective on where your money is being held, and 5 huge reasons you’ll soon hate the money management industry.

Allow me to begin…

My brother Thomas worked on Madison Avenue in NYC — which is the high road of the fashion industry. He worked for Tiffany & Co for approximately 17 years before moving to Hermes, the high-end French retailer.

Unlike many in our Generation, he was a saver. That’s not to say he was an investor, those are two mutually exclusive terms.

Tiffany & Co. took very good care of their employees. As it stands now, he had both a defined contribution and a defined benefit plan.

But what does that mean?

Well…

Defined Contribution

Defined contribution is what most people have today and it essentially takes the form of an IRA or 401(k) voluntary contribution into a tax advantaged vehicle.

When I say he saved money, I mean he always dutifully made his maximum IRA contributions to his Financial Advisor at a big name shop — like most Americans do — in addition to his 401(k) contributions — also like most Americans do.

He didn’t invest it, his Financial Advisor did.

The term investing means different things to different people.

To me, it means having a actively managed account where someone — perhaps you — is investing into and out of assets. If you have less than $500,000 in investable assets, these types of services aren’t available to you as it is simply economically prohibitive for a firm to do this for you.

If you have less than $500,000, then you are relegated to the redundant world of mutual funds. These high-fee financial products are peddled to the masses under the banner of “invest for the long term”.

The word redundant is used because there are more listed mutual funds than listed, publicly traded stocks.

However, the purpose of this post is not to remind my faithful readers why this mantra is growing long in the tooth, you can simply read those articles here, here and here. And don’t forget this one also here.

When people say they are investors, what they really mean is that they have been paying high-fees (via loads) to buy retail class mutual fund shares.

Those fees continue on to perpetuity until you liquidate the mutual funds. As in my brother’s case, even after you die, the Financial Advisor still makes fees off of those investments.

Now that we have that out of the way, let’s continue.

Defined Benefit

Tiffany & Co also provided for some form of a pension (seeming a defined benefit program). Usually this is carried out through a larger life company.

Usually the larger life company like a Prudential or a MetLife holds on to that money and then releases it.

What the gray-haired men and women on the commercials fail to disclose to you is that these life companies are incentivized to hold on to that money for as long as possible. The reason is because they ride the float of those proceeds; meaning they’re making money off of your money.

So the painful cycle starts to resemble this:

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This can go on for months. And it has.

If I really had some time on my hands, I would launch a class action lawsuit against these firms as there is no need in a digital world to operate your business like the IRS does. It’s manipulative and done on purpose for their benefit.

I also feel as though this advantage of the elderly who depend on those proceeds. But I digress.

So now you have a very thorough understanding of why I dislike the retail (meaning: mom-and-pop) investment business. They have no alignment of interests with you as the customer.

We now find ourselves on…

January 11, 2016

For those who forgot, this is the time when the global stock markets sold off.

And it was a perfect reminder for me (and many, many others it turned out as well…) to place their sell order.

Nobody likes Mondays, but that happened to be a bad day for me. I made the call to sell approximately $56,000 and to sit in cash. The order didn’t get placed immediately but I’ll get to that later. I was driving down to a conference after leaving the gym at the Encore in Las Vegas.

I can tell the Financial Advisor on the phone was probably not having a good day. I get that. I tried to make small talk and said I wanted to sell.

So while on speaker phone and on the highway en route, the financial advisor said…

You know what, Sal? Why don’t you take this account and move it to Etrade. I don’t play the markets short term.

I was shocked. I said OK and hung up the phone because I found myself going 92 mph and nothing good could come from anything at that moment.

Disclaimer: I had went through this before in December 1999 with this same Financial Advisor when my father passed away. So he knew I angered easily after I saw that he had him in 4% fixed income mutual funds when the 10 year was trading at 6.28%.

So you can understand I was livid that instead of putting my father’s money into the riskless 10 year, it was inefficiently placed into a mutual fund yielding approximately 33% less and cost him fees! Now, compound that over 30 years and that adds up to real money. This was the exact calculation I was doing in my head while driving 92 miles an hour on the I-95.

The trade never cleared, I made the call to his assistant on the following Monday when I didn’t see the funds settle into the estate account.

Here’s where I was more focused and not behind the wheel.

First came the apology that he didn’t know I wanted to sell. So now I wanted to make absolutely clear he knew I wanted to sell and be in cash.

Then I said he had some nerve not wanting this account anymore after he’s padded his pockets with fees – regardless of performance.

There was the apologies, etc. and I get that and it’s been détente since then.

After the dust cleared, I lost about $2,300 in the markets free fall in the week it took me to sell, only after being threatened to being abandoned because the account size of $250,000 was too small for the financial advisor to deal with.

5 Reasons You’ll Soon Hate the Money Management Industry

So what do my life’s problems have to do with commercial real estate?

Here’s where I see this going today, folks.

Generally speaking, most Americans who have 401(k)s or IRAs have started to realize that they decks are stacked against them. They have absolutely no alignment of interest with their mutual fund salespeople.

But they are also trapped.

Because of the Federal Reserve’s easy monetary policies, rates have been artificially low for the past 10 years. Interest rates of less than 1% is a tax as it robs savers of wealth and also forces them into riskier assets, like, you guessed it, the stock market.

I will also add some more controversy here by placing on the record that I firmly believe there is no catalyst for rates to increase at any time over the next 20 years.

After all, rates have been flat for the past 10 years, and if you really want to get technical, you can go even further back to September 2001 when Treasury Secretary Alan Greenspan cut rates after the horrific events of September 11th.

So, ask yourself what the inflation would be now in the midst of such geopolitical and economic instability? I don’t see any.

Yes, the Fed may “raise” rates a ¼ of a percent or more, but the 10 year hasn’t really budged at all. So I’m using the 10 year treasury as my basis to validate and gauge my assessment here.

They can raise them to 2% tomorrow, but that would mean that perhaps there would be a flight to safety and people would pull out of the stock market and drive the yields lower on the 10 year.

So let’s build the case here on how you can benefit from this (and this should be your lead in to use when you’re speaking to family and friends to lay the foundation for them investing in your real estate deals…).

(NOTE: Want access to my business vault? Right now I’m offering access to my systems, strategies, templates, trainings, and recordings. It’s all included in The Investor’s Syndicate, and all available to you here.)

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1. Rates Will Not Be Moving Upwards Anytime In This Generation

In actuality, in Denmark, Sweden, and Switzerland and Japan yields have actually gone negative.

And please don’t be so naïve to think this virus can’t hit our shores as Canada has also entertained this idea of negative rates.

2. People Want More Intimate Money Management

I remember the wife of one of my early investors calling me out of the blue one day wanting to see if I could liquidate her investment in my deal – which was illiquid – because the shares she held of Martha Stewart Omnimedia in late 2003 sank 40%.

I told her, politely, that this is an illiquid investment and to refer to the docs as to what a lockup period was.

Then I asked her to call Martha Stewart and see what it was she could do for her.

Incredulously this woman stated, “I can’t do that! I don’t have Martha’s number!

To which I replied…

But you have mine and that’s why you’re calling me even though your husband explained this before you called me, only to have me tell you personally that real estate is illiquid and there is a lockup period?

Here’s what I’m getting at: People want control.

Today they have no control. If Martha does something stupid again, good luck getting her on the phone if you don’t own at least 1 million shares of her stock.

Which is why I say private investors may, all things being equal, be better served by
small, unlisted, private partnerships than by global, publicly listed, full
service investment brands.

This type of intimacy you’ll see as more and more people look at real estate as being a “traditional” asset class rather than an “alternative” investment class as it is today.

Your edge here is people being able to call you and talk to you. Picking up the phone in a more relationship focused business. Not hiding behind the float of a publicly traded company where the wealthy investors only have access.

3. Taxes Are Only Going Higher

The Affordable Healthcare Act is decimating the Middle Class.

What other taxes will the government think of and where will savers get the income to pay for those taxes?

Well, let me tell you one…

Part of the deal for these Defined Contribution programs is that the money goes in pre-taxed, but you’ll have to pay your taxes later when you withdraw.

And to make sure the government gets theirs, the mandatory withdraw is when plan participants hit 70.5 years of age.

So do you think that the taxes when you withdraw from your account will be higher or the same when you hit 70 ½?

What about those Roth IRAs?

This darling gave the Clinton Administration a tax revenue windfall and created a budget surplus. How exactly did it do this?

They offered to let you convert your your Traditional IRAs, pay the taxes now, and convert into a Roth IRA. With the promise that they wouldn’t tax you later when you withdraw.

With the government’s debt looming, do you think that the government will hold to those promises?

Do you think that the estimated 14 trillion dollars in defined contribution stock market investments is too small for the US Treasury to ignore?

4. Cyber Terrorism Bringing Down The NYSE and NASDAQ Exchanges

I’m invested into a biotech deal in NYC. Its biggest asset is how its encrypted its medical data.

Do you know how much a stolen credit card number goes for on the black market? About $10.

Do you know how much your stolen medical records will sell for on the black market?

About $1,000.

When I was last in the investor meeting, I was speaking to the person who was the Head of Data Security for this startup.

He stated to me that some countries — North Korea to name one — actually have camps where they train hackers much like we have colleges here.

Where it gets scarier is that these hackers are given unprecedented prestige from the government if they are able to penetrate high-profile targets successfully.

You may remember in late 2014 JPMorgan Chase was hacked. There have been other instances too however, don’t think for one second that the NYSE and the NASDAQ exchanges are impenetrable.

So not only does the saver need to deal with market risk, they can also wake up the next morning and see that their accounts have been decimated by 50% or more because a rogue bunch of hackers posing as traders are putting in electronic sell orders so fast and vicious that it crashes the markets.

5. Inflation

You’re noticing it if you have healthcare or drive a car or eat food. If you only buy iPads, then it’s not an issue.

In fact, this vicious tax won’t always manifest itself as higher prices, but rather in other forms. Such as the same box of cereal that looks close to the same size as your used to and costs the same.

So how does a saver pay for higher food and fuel costs?

This is why I think that for those real estate investors out there, who are looking to create wealth without having to use traditional sources, the golden era has just begun.

(NOTE: Want access to my business vault? Right now I’m offering access to my systems, strategies, templates, trainings, and recordings. It’s all included in The Investor’s Syndicate, and all available to you here.)

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Salvatore M. Buscemi
A former investment banker for Goldman Sachs in NYC, Sal is one of the nation’s leading authorities when it comes to investing in residential and commercial real estate. He’s raised over $50 Million in capital for his real estate hedge funds.

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Salvatore M. Buscemi

About Salvatore M. Buscemi

A former investment banker for Goldman Sachs in NYC, Sal is one of the nation’s leading authorities when it comes to investing in residential and commercial real estate. He’s raised over $50 Million in capital for his real estate hedge funds.
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