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In part one of the Sub Prime lender mess, I outlined how the whole real estate industry preyed upon the innocent home buyer. Today, I’m going to tell you how the Investment industry preys on the innocent investor.

First let’s make sure you understand the analogy to the real estate industry. A quick cast of characters:

  • Real Estate Agent is similar to a Financial Adviser
  • Mortgage Broker is similar to a stock broker
  • Bank officer is similar to Mutual Fund Manager
  • Appraiser is similar to Analyst

So now that we have a cast of characters, let’s see how the play unfolds:

A person has some money and they want to invest it. Person seeks out financial adviser. Financial adviser, in theory, should do what is in the best interest of the client but he also wants to MAXIMIZE his profit so his judgment becomes a little cloudy and recommends broker that gives him the biggest kick back.

Broker should do what is in clients best interest but decides to push stocks and investment vehicles that give him the biggest kick backs to MAXIMIZE his profit so he suggests various mutual funds run by certain companies.

Mutual funds should do what is in the best interest of their client but they stray from their primary duties and with the help of Analysts, they bloat the value of worthless stocks because of some conflicts of interest from the underwriters of IPOs, their bosses and the Analysts.

The Analysts want to MAXIMIZE their profitability so they form a perverted partnership with mutual funds managers to give glowing recommendations to stocks that aren’t worth crap. Mutual Fund managers make decisions based on analysts recommendations and presto both profit off the client.

The real deterrent to the real estate scammers and investment scammers is education. Unfortunately, people would rather watch 60 minutes of TV garbage than spend 60 minutes reading prospectus or loan documents and hence you have the fleecing of the innocent.

In real estate, things like Zillow.com, Buy Owner, Redfin are disruptive technologies that help the consumer. The real estate industry does everything it can to block innovations that make them more honest.

In the investment world, things like Exchange Traded Funds, hedging strategies, and even PF Blogging can bring some transparency and make the investment industry a little more honest. There is some really great content out there in the PF Blogger world from capitalist bloggers. I hope you give them and Get Rich Slick a few moments of your time each day.

I rarely invest in mutual funds and stick to ETFs and other investment vehicles.