It's Not the Losses, It's the Fees

John Stewart had Jim Cramer as a guest last night and it was nice to see someone take a critical look at the meta problems of the financial news industry.  (What does it say about our media that the hardest hitting media criticism comes from Comedy Central?)

I think John Stewart captured "main street anger" toward the situation pretty well:

These guys at these companies were on a Sherman's March through their companies financed by our 401ks and all the incentives of their companies were for short-term profit.  An they burned the f---ing house down with our money, and walked away rich as hell.

I have to pick a bone with this though.  There is no question that the incentives of the money managers that got us here were grossly misaligned with the owners of that money (us).  And there are financial assets whose value has been destroyed that were not supposed to be destroyed.

But...the destruction in retirement savings has come about from the stock market plummeting. And, well, it's supposed to do that.  To me the problem is not that the stock market lost value, but that so many people were so heavily invested in it, perhaps beyond what was prudent.  (And you can't say that this was individual investors going crazy with E-Trade...pension plans, run by "institutional money managers", who are supposed to be well-trained professionals who know what they're doing, lost gobs of money too.)

I don't believe that it is practical to attempt to educate every citizen of the US to be his or her own certified financial planner.  We have professionals for that; I worry whether fiduciary responsibility has been lost.

But a bigger concern to me is not the losses, or the advice that got us into the losses, but the fees.  The financial sector makes its moneys by taking a cut, in the form of fees, whether they are percent of assets, percent of gain, or just fixed fees.  On every mortgage written, every security issued, every hedge fund and mutual fund managed, every stock and option traded, Wall Street takes a piece of the action.

So we should be concerned when growth in the financial sector is double the nation's GDP. That's another way of saying we're paying twice as much as we used to for our financial services. Proponents of securitization can make theoretical arguments about efficient deployment of capital, but if the industry as a whole is being more innovative and prices are going up, that's not the kind of innovation I want.

The side bets and trading and "fast short term dangerous money" that John Stewart rails against is not my main concern - I can simply stay out of it.  But the cost of doing business, the fees, the increasing price of financial services, to me that's the true danger, because they're taking our money, it happens all the time (good market or bad), and there is no indication that it's going to change because of what happened.