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So Why Doesn't Everybody Do It?

Let me preface what I am going to tell you by saying that I worked at one of the biggest firms on Wall Street for 30 years. I handled some of the firm's biggest individual clients...the "Who's Who" of corporate America! For that reason, I am going tell you these things with some trepidation.


Although I dealt primarily in bonds, I was in a position to directly observe and know precisely how the equity side of the firm operated...covering almost 2000 stocks with well over 100 stock analysts...creating, managing and offering dozens of stock funds...and driving thousands of brokers to place those stocks and funds in the hands of millions of customers.


As commissions on stock transactions got smaller and smaller, more emphasis was placed on getting the customers to put their money into "managed" configurations, either through firm's existing stock funds, or internal or external investment managers. The reason was that doing so could generate guaranteed fees of 1% or more annually...versus dwindling stock trading commissions which were slowly trending toward zero! (This also would steer brokers away from over trading stocks..."churning"...in order to keep up their "production".) 


As has been the case for decades, it was widely known and reported on regularly that the vast majority of stock-picking strategies and funds consistently underperformed the S&P 500. (See "Suckers For Stocks") That was unfortunately true of my own firm's strategies and funds. But our brokers didn't move clients into an S&P 500 index fund to at least match the index, because they couldn't charge a fee or hardly any commission for it. After all, the client could get the index fund virtually free at Vanguard or through many ETFs. 


So what we have had for some time is a situation in which Wall Street must promote underperforming strategies and funds which can generate that 1% or so in annual fees, rather than better performing index funds which generate very little revenue for the firms and their brokers. It's a simple matter of survival!


The strategy described in this site is essentially an "insured" S&P500 index fund. The total commissions paid by the investor would be less than $5 on a $300,000 investment. That same amount invested in a traditional "managed" stock portfolio or fund would cost the investor at least 1% or $3,000 in annual fees.


So very simply...the reason everybody doesn't utilize the insured index fund approach is that almost nobody at any brokerage firm is ever going to recommend it! The brokers can do the math! They're in business to make money, not work themselves into the poor house! The fact that their "managed" strategies and funds are highly likely to underperform the S&P index fund is irrelevant!