2013 February 10 Sunday
Mutual Funds Corrupt Stock Brokers

How much of the money earned by stock brokers is pure value transference with no value returned to the customer? It is not like stock brokers have any special skills for stock picking. Do not trust stock brokers trying to sell you on a mutual fund.

Toronto Brokers are supposed to recommend investments that are in the best interests of their clients.

But a study published in the February 2013 issue of the Journal of Finance has found that mutual funds offering higher broker fees attract the most investments, especially when the broker is not affiliated with the mutual fund company. Every additional dollar paid to a broker corresponds with another six dollars invested into the fund, and another fourteen dollars if the broker is an unaffiliated third party whose compensation depends exclusively on sales commissions.

Half Sigma has written about the problem with value transference versus value creation. Some people make money both ways. Others only make money by creating new value. Still others are pure parasites and only get money from value transference.

The amount of value transference via entitlements programs is growing. What is less clear: is the amount of value transference in markets increasing? While Wall Street has a lot of value transference going on some forms of it have declined. So, for example, fewer people use full service brokers (i.e. brokers who try to convince you to buy stuff they'll make money off of). Also, more people invest in index funds that have lower management fees (i.e. value transference fees).

It might seem that value transference is increasing because for most people incomes have been stagnate or declining. The assumption is that incomes are stagnating because more money is being funneled off by value transference activities. But we should be so lucky. That might be a fixable problem. I see other causes of the great stagnation.

On the other hand, with worthwhile value creation activities harder to find value transference firms might be able to outbid value creation firms more often than was previously the case. What are some good metrics for trying study this?

Share |      By Randall Parker at 2013 February 10 01:26 PM 


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