Conflict of Interest

Rich Dad's Who Took My Money? : Why Slow Investors Lose and Fast Money Wins!
by Robert T. Kiyosaki, Sharon L. Lechter C.P.A.

(Page 5 of 5)

When I realized that I may have made a mistake, I wanted to blame Mr. Carling, but I knew better. I was the investor. I made the choice to invest in mutual funds without doing enough due diligence about the investment.

Financial planners make their commissions through selling investments and other financial products (like insurance) to the average investor. We need to learn how to ask the right questions. Like, What are the fees related to this mutual fund? What is your commission from this sale? Rich dad was trying to impress on me that I needed to be in control of my own financial decisions and not give that power over to someone else.

A Slap on the Wrist

In 2002, some of the biggest companies on Wall Street were fined $1.4 billion by New York State Attorney General Eliot Spitzer for fraud and conflicts of interest. In a news conference, Spitzer said, "Every investor knows that the market involves risk... . But what every investor expects and deserves is honest investment advice-advice and analysis that is untainted by conflicts of interest." A $1.4 billion fine after $7 to $9 trillion was lost to investors is equivalent to paying a $1.40 fine for causing $7,000 to $9,000 in damages, a mere slap on the wrist-and less than the commissions these big companies earned from the investors who lost the $7 to $9 trillion.

As part of the settlement by which the $1.4 billion fines were levied, reforms were agreed to that establish a set of rules aimed at eliminating conflicts of interest between Wall Street research groups and stock-offering groups. The firms' stock analysts will be barred from being paid for stock research by the firms' investment banking arms.

A Bonus for a Job Well Done

Soon after the slap on the wrist and fine for fraud, The Wall Street Journal ran an article entitled:

"Merrill Lynch Awarded Officers Big '02 Bonuses"

To paraphrase the article: Merrill Lynch & Co. rewarded both its chairman and its chief executive with $7 million in bonuses last year despite the continued stock market rout that has eaten into many of the firm's key businesses. The article continued: During 2002, Merrill reduced its ranks by 6,500 employees, bringing its total job cuts to 21,700 since its employment peaked in 2000.

As I put the newspaper down, I could not help but wonder how a company could award millions of dollars in bonuses to company executives when this very same company had assisted investors in losing trillions of dollars, been charged with fraud, and rather than growing the business, the company's executives had fired nearly 22,000 employees. To be fair and not seem to pick on Merrill Lynch alone, The Wall Street Journal article also posted the annual paychecks of other CEOs from other financial institutions:

Morgan Stanley CEO $11.0 million

Goldman Sachs CEO $12.1 million

Lehman Brothers CEO $12.5 million

Bear Stearns CEO $19.6 million

Some of these companies were also in the group that was fined by the state of New York for fraud.

More Lawsuits Follow

In June and July of 2003, many smaller investors banded together to file lawsuits against Merrill Lynch. The little investors lost even though there was substantial evidence that misrepresentations were made. Although I do not like to see the little investors lose, I tended to agree with the judge's decision that all investors need to be aware when entering the world of investing. In other words, the judge said, "Tough luck."

Mutual Fund Fraud

The New York attorney general turned his attention to the mutual fund industry in early 2003. He stated, "There are undisclosed financial motivations in damn near every transaction involving mutual funds." He is looking into unseen fees charges by the funds and conflicts of interest in the way funds are sold. He is investigating two practices called "late trading" and "market timing." Late trading involves purchasing mutual fund shares at the 4:00 P.M. price after the market closes, allowing the favored investor to take advantage of after-market events not yet reflected in the closing price of the fund. Market timing involves short-term trading of mutual funds, which has a detrimental effect on the long-term shareholders of the mutual fund. While more is being revealed every day during this investigation, the inherent conflicts of interest and insider trading have shaken the average investor's confidence.

Become an Educated Investor

As stated earlier, in the world of investing, money is not lost. It just changes hands. That is why I am hesitant to tell someone what to invest their $10,000 in. If a person does not know what to do with their money, they should first invest some time in their investment education before investing their money. In my opinion, one of the primary reasons why millions of people lost trillions of dollars is because they invested their money but were not willing to invest their time.

So my answer to the question of "I have $10,000. What should I invest it in?" is invest the time learning to be a better investor before investing your money in what you hope and pray is a good investment. Always remember what my rich dad told me years ago. He said, "People without much financial education most often fall for a sales pitch ... mistaking the sales pitch for advice." Hence, this book is about what my rich dad thought was important for me to invest my time in-seeking real investment education-before I invested my money. Rich dad also said, "The better your investment education the better [the] investment advice you will receive."

Sharon's Notes

Recognizing a sales pitch from good investment advice is the subject of the first chapter of this book because it is a huge distinction that successful investors must learn. Is the advice you are paying for the best advice for you and your investments, or is the advice the best advice to generate more fees for your advisors? The salesman's goal is to make money from you, while the advisor's goal is to make money for you.

Park It or Accelerate It?

Most of the average investor's financial education today comes from financial institutions like banks and salespeople. They are telling the investor to invest, or "park," their money for the long term and to expect the market to increase each year. This advice of "saving for a rainy day" is the right advice for many people.

When you look at the table "Why the Rich Get Richer" in the introduction, the left side is where most people live-with the salesmen. They follow the advice of the financial institutions and salespeople and make the decision to save, or park, their money in the following ways and hope that the market will go up and that these investments will be there for them when they are ready to retire:

• Savings
• Personal residence
• Mutual funds
• Equities
• 401(k)s, IRAs, and SEPs

In addition, the most common answer to the question Who Took My Money? is the government, since most people are employees and see their largest expense-taxes-disappear from their paychecks (through withholding) before they get paid.

Rich dad teaches an alternative to the traditional savings and employee mentality. He teaches building or buying assets today that generate cash flow for you today-the method of professional investors. Do you feel trapped working hard for a paycheck? Is it hard to imagine having your money working hard for you? Who Took My Money? will help you make the transition from saver to investor.

Copyright © 2004 by Robert T. Kiyosaki and Sharon L. Lechter

About the Author

Robert Kiyosaki a financier, author and teacher says "that the main reason people struggle financially is because they have spent years in school but learned nothing about money. The result is that people learn to work for money... but never learn to have money work for them."

Co-author of the Rich Dad series of books and CEO of the Rich Dad Organization, Sharon Lechter has dedicated her professional efforts tot he field of education. She graduated with honors from Florida State University with a degree in accounting, then joined the ranks of Coopers & Lybrand, a Big Eight accounting firm. Sharon held various management positions with computer, insurance, and publishing companies while maintaining her professional credentials as a CPA.