One reason voters have proven so furious at Wall Street this election season is that they suspect financial agents are finding ways to hijack their hard-earned savings. The fear is not unfounded; Americans are too often victims of Wall Street middlemen each taking a stealth toll as they move money to the next stop on a long investment chain. But could a high-tech tool -- an app suitable for an everyday smartphone -- brake such practices?
First, consider just how far the financial playing field is tilted in favor of the financial industry as compared to the typical saver. Today some 92 million Americans -- or more than one in three adults -- entrust some $37 trillion in savings to mutual fund companies such as Blackrock, Fidelity, and Vanguard. If you count mutual funds and other investment vehicles, more than half of the financial assets of U.S. households is run by firms associated with Wall Street.
What kind of job do these firms do? By some key measures, not very well. A typical American saver will wind up on retirement with a considerably smaller nest egg than he or she should. In fact, someone saving exactly the same amount each year, but living in the Netherlands where rules are different, will end up with as much as 50 percent more money to live on. No wonder the savings crisis is worsening, with the typical American today nearing retirement with inadequate income to meet basic living expenses.
Why is this? One big reason is fees. If you are paying a fund one and a half percent a year to manage your savings, compared to a low-cost 0.2 percent rate, that might not sound like a lot. But you will end up with nearly 38 percent of potential lifetime savings going into financial industry fees. If you pay a top-line 2 percent a year, as much as half your potential pension will have vanished by the time you need it.
Under current rules, investment firms don't have to clearly spell out the full amount that is charged to our savings. Yes, they have to disclose management fees, but other costs along the way are concealed. Much of the potential gross return disappears, having passed through multiple financial intermediaries, each of them taking a quiet cut. Even the pros don't know always know where it goes. So the leakage could be described as a perfect, almost undetectable crime -- except that it is entirely legal.
Fees are not the only culprit. In a little-known secret of the trade, the professionals who handle our savings are typically rewarded for drawing more customers to the fund rather than on efforts to press for better returns among companies they invest in. Incentives produce irrational outcomes. In 2012, one giant mutual fund company spent some $135.8 million advertising how thoroughly it looks after client shareholder interests. But it expended only an estimated $400,000 actually doing it, through voting client shares at corporations held in portfolios. It literally employed a single full-time person to oversee the task of voting shares at more than 10,000 companies around the world, while the fund's big money went to marketing. It is hard to see how such a relatively under-resourced effort could responsibly advance client interests in votes that determine how thousands of corporations behave.
You may ask: isn't someone policing Wall Street to make sure agents act in our interests? Here we come to the biggest hidden failure in today's financial system. There is almost no effective oversight. Unlike practice in many other markets, U.S. companies with retirement savings normally have no board elected by savers to help ensure the right mutual fund choices. The mutual funds themselves are outfitted with boards dominated by independent outsiders who are supposed to look out for our interests. But members are often appointed by the very fund companies they oversee. Even as many directors try their best to do a good job, the system itself is simply misaligned. As author and fellow Red Sox fan Bobby Monks has written, "it's as if the New York Yankees paid the salaries of all the refs in Major League Baseball. Wouldn't you doubt every call?"
We need to re-install checks and balances to Wall Street if we hope to bring financial agents back into alignment with consumer-investors. And to do that, we have to take the veil off Wall Street practices. That's where an app comes in.
Take the example of Buycott, a free app launched in 2013, which aims to help consumers align their values with their purchasing. The first question it asks is: "Have you ever wondered whether the money you spend ends up funding causes you oppose?" You can scan a product at a store to see if the company that produced it is involved in any ethical campaign you support.
Now, let's imagine a smartphone tool that asks a parallel question: "Have you ever wondered whether the money you save ends up funding causes you oppose?" It could compare pension or 401(k) plans, providing you with a picture of how accountable each is, how fees compare, and how well or poorly they align with what you believe. That's a gap just waiting to be filled.
Tech approaches hold other promise. Today, those with a 401(k) plan can easily summon an online page filled with latest data on holdings, transactions, and stock prices. But what's conspicuously missing are real-time updates on how funds you own have voted in your name at portfolio companies on key issues such as CEO pay, or engaged in your name with boards on climate change. Funds don't offer a ready description of how they are governed, or precisely how much in fees is subtracted.
Of course, there is nothing to stop any fund from doing all of that now. All they need is pressure from their consumer-investors. For those frustrated by Wall Street, that would be a way to convert hostility to solutions.