Wall Street Crisis vs Alternative Investment Schemes Failure – Part 1

Today the craziness continues on Wall Street, after dropping by 18% last week stock prices rebounded by 11.1%.  For the expert investor the situation is totally frustrating but the average investor is totally confused.  What should one do? Where should one put their money?  Before answering those questions it is important to ask a more important one, namely, “how did we get into this situation?”  I have heard many analysts debate this problem but only one hit the nail on the head.  The reason that he gave was the same reason that led to the collapse of Olint and Cash Plus – Greed.

That is not to say that people were not tricked into believing that the assets that they were buying had value but it is the greed of the Banks and Brokers coupled with that of the investors that led to most of the problems.  The banks sold the assets (mainly mortgages) to other banks and these assets were highly rated by the bond insurers.  However the bond insurers are paid by the banks and brokers who sell these instruments.  Therefore if you want to make money you ensure that you rate the assets highly.

Gone are the days when the interest of the customer is considered.  Sadly the same situation is beginning to occur in Jamaica, companies (banks and brokers) sell products to customers that they themselves do not think are good but which will generate income for the company.  These schemes only work for as long as the customers have confidence in them; once confidence has gone the scheme comes crashing down. When these investments fail, and they will, they then try to cover themselves by saying that the contract set out all of the risks.

To further understand the conflict for the “wealth advisors” consider the case of a person who buys a mutual fund.  When stock prices are falling the correct thing to do from the perspective of the customer would be to sell the units in the fund.  However if the customer encashes their units then the company will not receive the commission for retaining the business.

Feedback question: Do Wealth Advisors in Jamaica give you good advice?