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The Biggest Personal Finance Story of the Past 30 Years – Part 3
There is no reason to believe that industry self-regulation or governmental regulation will ever fix these problems. Only those individuals who become wise enough to be proactive and seek out lower cost financial products will stop getting fleeced. The vast majority or individuals will just keep on paying excessive costs to the financial industry, while they receive inadequate value in return.
The financial industry will continue to flood the market with endless combinations of new and “innovative” financial products and services and tell individuals that they are doing them a favor. Individuals will grow increasingly befuddled, and the historical trend indicates that most people will keep paying too much. (See these related articles on The Skilled Investor website: The heavy burden of recurring investment fees and The investment industry is not your investment partner )
When it comes to personal finance, only those who make money from individuals will have the motivation to approach individuals to sell to them. These financial sales people have a strong incentive to spin yarns about how they will help people to do better than they otherwise would do. The financial industry will keep making promises without making any guarantees. When confused individuals pay too much for financial services, they cannot help but end up with less than they could have had, if they had bought lower cost financial products.
You might ask, “How can you look at Figure 4 of the Siegel and Schwartz paper and say all this?” Well, it is not that difficult. First, let us take a look at what it means for Financials to be almost 21% of S&P 500 market capitalization and twice the market capitalization of the Energy sector.
The S&P 500 Index currently represents about 75% of total U.S. public equity securities market capitalization starting with the largest companies and working downward to assemble a list has 500 firms. The inclusion of a firm in the index is not based solely on market capitalization, but it is a major part of the Standard and Poors index methodology. Use this link to Standard & Poors, if you want more information about the management of this index.
While Standard and Poors has published the S&P index since 1923, it was not until 1957 that the index first had 500 equities. [...]