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The Charles Schwab Corp. Fined $119 Million


“THE CHARLES SCHWAB CORP. AGREES TO PAY $119 MILLION TO SETTLE ALLEGATIONS OF FRAUD”

By: Tim Butt

Who pays? …and…Who loses?

(Hint…it’s not Charles, his management team or his employees)

We hope your New Year is off to a productive start and the resolutions don’t need dusted off already. This article hit home this week as one of my sons is employed by a company whose retirement plan is administered by none other than Charles Schwab. I know Schwab administers many company’s retirement plans and that made my frustration even that much greater. You see, the vast majority of investors do not realize the impact these costs are directly having on their financial futures.

If you are a Gen-X or Gen-Y investor, current or future, this is of huge significance to you and your future financial success.

The answer to these two questions listed above may not surprise anyone. The long-term consequences on every investor’s future wealth accumulation over their lifetime, however, should make them pretty upset. As a result, they should want to join the mass exodus of investors trying to escape the tyranny of Wall Street and the financial services industry.

Let’s look at the answers to these previous questions and then decide their importance as to one’s financial future.

Who pays this fine…and how?
Customers of Charles Schwab will cover most, if not all of this $119 million fine!

Whether investors are in a plan administered by them, trading online with them or just investing with them, investors will pay in some way, shape or form. There is NO escaping it across the industry.

You see, when people invest with an advisor and the industry, they are playing the industry’s game, under their rules, and with their hired officials. Almost makes one think the odds are slightly stacked against investors…not quite.

The odds are TOTALLY stacked against investors!

These expenses are nothing more than a cost of doing business when dealing with a financial services company, whether it’s Charles Schwab, Goldman Sachs, Merrill Lynch, UBS, Edward Jones, etc. (they are only different in name). These companies, and the financial services industry, don’t discriminate who pays for their mistakes and bonuses; as long as it’s the investors…all investors, all the time. There are billions in fines paid to settle charges within the industry and billions in bonuses paid annually. An estimated $10 billion will be paid in 2010 for fraud charges alone and an estimated $144 billion in Wall Street bonuses is projected to be paid in 2010 as well (footnote #1, #2). All paid graciously and unknowingly by investors.

For every dollar of fines or bonuses paid, there’s a dollar of investor losses incurred. It is directly proportional and this “tyranny of costs” when compounded over an investor’s lifetime is staggering.

How is the money generated to pay these costs?
Fees, Fees, and more Fees!

All those fees that you think (and told) are minuscule: fund operating expenses, marketing fees, brokerage commissions, transaction costs, investment management fees, legal fees and advertising costs. These fees all totaled average in the range of 2.5-4.0% annually and reduce an investor’s return proportionally.
But who is watching those fees when the industry has investors focused on the performance of what they are going to sell them next? The industry makes money by moving an investor’s money and keeping it in perpetual motion.

These fees generate, to a large extent, the revenue to cover the cost of doing business and provide the enormous profits for the financial services industry (ALL at the expense of an investor and his/her future wealth accumulation). This is a great business model for the industry, but NOT for you as an investor!

Who loses?
One word: INVESTORS…and in a big way!

In the short-term these fees may not seem like much, a percentage point here, a percentage point there…but in the long-term, they have a dramatic impact over an investor’s lifetime (thanks to the power of compounding).

These never-ending fees will confiscate 75% or more, of an investor’s potential wealth accumulation over his/her lifetime! (footnote #3)

Consider the following example:

If the markets are generating a return of 7% and an investor is paying 3% in fees to an advisor and the industry for services rendered, the investor nets the difference and earns 4%. Not bad but could be better. It’s certainly not the 7% the markets returned.

That 3% fee doesn’t sound like a lot until you exercise the power of compounding over time. To a 25 year old whose life expectancy is 85, they would forfeit approximately 75% of their earnings potential to their advisor and the industry over the next 60 years. That’s painful, but the facts don’t lie. We simply want to stress the importance fees make over an investor’s lifetime.

This has been an extremely painful lesson for those baby-boomers that have been investing in the industry and playing the industry’s game for 30 to 40 years. They have been paying those never-ending fees without knowing the consequences to their financial well being. And have you ever wondered why so many retirees, or those nearing it like the baby-boomers, are working well beyond their planned retirement years, having to reduce their standard of living, not traveling as planned, or cutting back on medical visits? The answer is simple. The financial services industry did not serve these investors best interest and in too many cases, destroyed their retirement dreams.

Will the Gen-X and Gen-Y investor make the same mistakes as the baby-boomers and continue to play the industry’s game? Let’s hope not.

The Self Empowered Investor is committed to serving investors and helping them achieve financial success and realize their retirement dreams. We will empower investors to escape the tyranny of Wall Street and the financial services industry through our Mission Statement’s two fundamental objectives;

1. To teach you how to become your own most trusted financial advisor
2. To have your investment dollars build wealth for YOU…not an advisor and the industry

You have two choices when it comes to investing:
Play “their game” or play “your game”…whose wealth will you choose to build?

If you found this of value, share it your friends, co-workers, and family members; they’ll be grateful you did.

We wish you all the wealth and prosperity you have worked so hard to earn. You deserve nothing but the best!

#1 – InvestmentNews Daily, January 4, 2011 “2010 Fraud Charges; Nearly $10B in estimated investor losses”.
#2 – The Wall Street Journal, Business, October 11, 2010 “Wall Street Pay; A Record $144 Billion” by Liz Rappaport, Aaron Lucchetti and Stephen Grocer
#3 – The Little Book on Common Sense Investing by John Bogle

*Title from InvestmentNews Daily – Jan. 11th, 2011

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