Bull Market ‘Febezzlers’ Riding High — For Now

Investing
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By Tony Isola (2430)

Learn more about Tony on NerdWallet’s Ask an Advisor

Bull markets often hide very shady practices, as investors found out all too well when the economy imploded in 2008 and all the malfeasance of the financial services industry rose to the surface.

It doesn’t take a stretch of the imagination to predict that some ugly truths will be unveiled when this bull market eventually ends, too. And it’s a good bet that some of those ugly truths will involve “febezzlers.”

Charlie Munger, Warren Buffett’s right-hand man for the last half-century, coined the term febezzler, which he defined as a financial advisor who overcharges his clients and provides poor and sometimes illegal advice. President Obama did not use this term when he spoke to the American people recently, but he did talk about “back-door payments or hidden fees for steering people into bad retirement investments that have high fees and low returns.” The White House Council of Economic Advisers has said that conflicted investment advice for retirement accounts costs $17 billion each year.

Individual investors need to be aware of the effect this price-gouging can have on their retirement planning. These illicit fees can lead to shortfalls and extended working years. This issue needs to brought to the forefront with today’s six-year bull market in stocks.

As Munger states, “As long as the market keeps going up, the guy who’s wasting all this money doesn’t feel it, because he is looking at these steady rising values. And to the guy who is getting the money for investment advice, the money looks like well-earned income, when he’s really selling detriment for money.”

Translation: If the market goes up 14% and someone charges you 3% in fees, you still made a nice 11% on your money, and you’re happy. The problem occurs when the market goes down and your 25% loss becomes 28%.

While we cannot predict the future, we can agree with Mark Twain when he said, “History doesn’t repeat, but it often rhymes.”

Individual investors need to be vigilant. A simple way to prevent becoming a victim of a febezzler is to go to the Financial Industry Regulatory Authority’s website and use its Broker Check and Fund Analyzer features. These tools will give you a clear grasp of what you are paying in fees and the background of the person who sold you your investments.

Don’t wait for the storm to arrive and face the double whammy of getting poor investment returns and the realization that you grossly overpaid for that privilege. Even worse, you could risk a loss of all your investment capital if your advisor was doing something illegal rather than just overcharging you.

Investors lose billions of dollars each year to various schemes and abusive fees. Fight back against the febezzlers and become your own best advocate. Heed the words of Charlie Munger. If he is wise enough to be Warren Buffett’s general counsel, his advice can also serve you well.

“Economics doesn’t pay enough attention to the concept of febezzlement,” Munger said. “It has a wonderful stimulating effect on the economy because the guy who’s been embezzled thinks he is as rich as he always was and spends accordingly, and the guy that had stolen the money gets all this new purchasing power. When the embezzlement is discovered, this will all quickly reverse.”