What do potato chip manufacturers and mutual fund companies have in common?
They both have to pay for shelf space.
Potato chip makers pay supermarket chains for prime space on store shelves. Fund management companies pay brokerage houses for pushing their products. There is a difference, however, between the two. The potato chip deals are legal, and represent an incentive for the chip makers to make sure that good product is on those expensive shelves. In the mutual fund case, it is not so legal, and presents brokerages with an incentive to push poor performing funds on their unsuspecting customers. I hope the latest SEC crackdown puts some additional shady deals in the spotlight, and the perps in the hotseat.
Let’s remember something, boys and girls. Brokers are not money managers. They are sales organizations. They will sell you their grandmother’s kitchen sink if the commission is good enough. And when it comes to kickbacks (and that is exactly what the funds’ payments to brokerages are), they are seen as more desirable than sugar sprinkles on strawberry shortcake. If this garbage continues, it will eventually result in global distrust and a systemic breakdown of the US’s securities markets.
For more information, check out this article from Institutional Investor.
On a lighter note, the gouging that takes place in the securities markets is finally taking its toll, this time on Deutsche Bank’s telephone system (see Phone Gremlins Strike Deutsche Bank). Imagine being a dot-com billionaire, sitting on the back porch of your estate in Woodside. You decide to call your broker, to buy a million shares of Apple Computer, and hear “We’re sorry you have reached a number that has been disconnected or no longer in service.” Now, if you are fairly saavy (which you obviously are, if you are a billionaire living in Woodside), what is the first thing that comes to mind?
The brokers stole my money and skipped town!