Five Most Scandalous Areas of Financial Services

Everyone has been picking on ETFs lately, but if you want to REALLY see scandalous behavior, here's where to look.

First Matt, there's no way I'm coming around to the widespread 30+ percent real estate price plunges anything short of a depression, and me and my gold are good to go, thank you very much.

And I AM coming around to my 5 ETFs I like, but thought I'd come around to another top 5 list...5 scandalous behaviors or big problems in the financial services industry. This came up recently in an email exchange with Joe Lisanti, a reporter with the NY Daily News who had recently written an article about backtesting.

I do think there are a lot worse problems out there, but I also think some of the more active ETFs have been able to get away with backtested reporting in ways that would be impossible for active funds (though even more insidiously, active finds get away with "incubating" many funds at small asset levels and then pushing out the handful of winners and promoting their strong 'historical returns'.)

Here's my big bad 5 list. Send me more ideas if you have them.

1) The insanely obfuscated share lending market. This is at the top of my list. All the big boys are making TONS of money on a crazy, completely opaque market. Not even the big institutional investors can tell what's going on. Why isn't this market open-platform? I would LOVE to see that change.

2) The 401(k) system...the most inefficient rip-off industry cash cow imaginable. I'd scrap the whole thing and start all over. There's some legislative effort happening around this, but it would take massive doing to see a significant overhaul.

3) Pension plans. Full Stop.

Pension plans have done a lot for a lot of people, but the trend toward massive scale has also brought massive problems. With all the buying aggregated, there's just not enough decent corporate governance going on. Majorities of companies are not REALLY voting their shares for increased shareholder value...much. Corporate management is humming along unchecked, even after all the recent scandals. It's a tough problem, because that kind of policing can arguably be more expensive than the value it brings, unless plan sponsors (and mutual funds) act more cooperatively and aggressively. And don't even get me started on the massive non-matched liabilities we're seeing in the system...the market's answer has seemed to me more defined contribution and fewer defined benefit plans...something clearly worse for most investors (see 401K section above).

4) Ridiculous marketing that is allowed to proceed unfettered. In the fund industry, the worst products still gain the most assets the fastest, because they are SOLD, with the salespeople being heavily compensated to pump out the loaded, high-priced closed end funds, mutual funds, annuities, etc. Fee disclosure isn't what it should be, incubated performance is regularly reported as actual past performance and Morningstar Stars (which mean NOTHING) are used to show the value of funds (which have a great recent history and studies show are the most likely to underperform).

5) The scam of alpha pursuit generally. The overwhelming majority of existing investors would be better off to just 1) save their money 2) calm down and let it SIT in the lowest fee, most diversified fund possible. Instead, everyone chases the home run, and almost all of them end up hitting weak grounders to short.

There you have it. And really, I'm just getting started. So send in your thoughts and we'll add them to the list.

Written by Jim Wiandt