Money Made Simple How to Flawlessly Control Your Finance in Minutes a Year

1 A Tale of Two Pities Finance is the art of passing currency from hand to hand until it finally disappears. Robert W. Sarnoff It was the best of times; it was the worst of crimes. In this chapter, I'm going to pluck a few items from recent news, pretty much at random, that should serve to convince you that it's really not safe to trust anyone else to help you with your money, no matter how well known or trusted the names may be. If you do nothing more than watch national news on TV, you may know that Wall Street has not been acting in your best interests for some time now. Recent examples? Two of the most respected names in the financial services industry: Merrill Lynch and Salomon Smith Barney. But before I begin, I want to make something clear. I'm not telling you this because these examples are the exception. I'm telling you this because these examples are the rule. Always have been, always will be. Let's talk about Merrill Lynch first. In terms of number of retail investment advisers, Merrill Lynch is one of the largest financial services firms in the world. And even when the stock market is lousy, it still makes a ton of money. According to its Web site, www.ml.com, Merrill's profits for a recent three-month period (a period when stocks stunk) were $693 million. Its chairman, David Komansky, was paid $16 million in 2001 while the stock market fell 7 percent that year. Of course, there's no law against making money. That's the backbone of capitalism. But let's consider how some of it was made. To fully understand this story, you'll have to learn some basics of financial advisory firms like Merrill Lynch. These firms make money several different ways. One way is to collect commissions from little guys like you and me when we buy investments. We could go to places that charge a lot less in commissions to buy investments, but we're willing to pay extra to "full service" firms like Merrill Lynch because they promise that in exchange for paying them more than necessary, we'll get something we couldn't get at cheaper places: unbiased, expert advice. The process of exchanging our hard-earned money for their objective advice is part of the business known as "retail brokerage." But there's another completely different way financial advisory firms make money. They collect huge fees from big companies when these companies raise money by selling stocks and bonds to the public. This business is called "investment banking." If you're a company that wants to raise money by selling stock to the public, a firm like Merrill is a great place to go. That's because it has so many investment advisers who will help the stock get sold. For example, say you've got a great idea for a new Web site: www.ineedthemoney.com. But as you put your idea on paper, it turns out that developing your new Web site will cost $50 million, and you've only got 150 bucks in the bank. Where will you find the other $49,999,850? A place like Merrill Lynch. You visit its investment banking division and explain your slight cash shortfall. If your idea seems reasonable, the folks there might just offer to take your company public by selling stock. They help you issue five and a half million shares of stock and sell them for $10 each. (Notice that although you needed only $50 million, Merrill raised $55 million for you . . . that's because it's charging you $5 million for its assistance.) But how will Merrill sell millions of shares of your stock to the public when nobody outside your immediate family knows you're alive? Simple. Its thousands of retail brokersthJohnson, Stacy is the author of 'Money Made Simple How to Flawlessly Control Your Finance in Minutes a Year' with ISBN 9780345455659 and ISBN 0345455657.