Whether a simple language blunder or insight into the psychology of the rich and powerful, Svanberg’s comments touch on a belief held by many – that in this world there are rules for the privileged and then rules for the rest of us little people, conjuring up memories of the late Leona Helmsley’s famous statement that, “only the little people pay taxes”.

Wall Street is founded on the little people premise. One manifestation is seen in the ubiquitous conversation by wealth managers about AUM or Assets Under Management. AUM is the measuring rod of their success and compensation -a topic of their urbane, cocktail-party banter. Every wealth manager or investment adviser is aware of his AUM as well as that of their friends and competitors because it indicates how much one earns.

Wealth managers trim 1% to 1.5% in fees off of “their” AUM every year. The bigger your retirement account, the more you add to your manager’s AUM and you become a “bigger person” in his eyes. If your account is under $500K, you are likely a little person. Some top managers won’t even answer you’re call if you can’t add $5 million to their AUM.

While AUM is the accepted business model, we have a huge problem with it. What value does a wealth manager add that gives him the right to extract a fixed percent every year off the spoils of your life’s work?

We deliver our advice to all for the same low cost regardless of a portfolio’s size. We treat every investor as a big person. There are no special investors who are on the inside track with access to special insights or favors.

At MarketRiders, we’ve begun measuring our success, in part, by AOM, or Assets Out of Management. We track the amount of draining fees from the AUM game that we’ve helped you escape. This week, we celebrate reaching $500 million of AOM and you — our thousands of investors that are now saving millions in fees. Here’s to no little people!

Sadly, it was no surprise to learn the Goldman Sachs threw their clients “under the bus” by deceitfully selling them mortgage securities while at the same time making a killing on shorting the housing market.  Their slogan, “Helping clients build and preserve their financial wealth” needs a minor adjustment. “Helping clients build and preserve OUR financial wealth.” This is a paragon of the Wall Street ethic – make money (hmmm – a lot of money) even if you must trample your client under foot. When you manage your own diversified portfolio of ETFs through a MarketRiders account, you truly get Wall Street out of your pocketbook by removing the intermediaries.

The Wall Street gurus seem to have a closet full of tricks to help investors outperform the market. Unfortunately, most of this advice is unproven and ineffective. In this MoneyWatch article, James Picerno points out one of the ONLY scientifically proven secrets to boost portfolio returns year-upon-year – disciplined rebalancing. Mr. Picerno underscores that rebalancing can deliver a 0.5 to 1.0 percentage point annual bonus compared to what you’d earn on the same portfolio that’s left alone. Our research shows that by using MarketRiders’ advanced rebalancing algorithms rather than a simple calendar based approach, investors add up to 2% additional growth in some portfolios and market conditions. We have more on this topic here: “How Often Do I Need to Rebalance?”.

When it comes to retirement investing, remember that you don’t have as many friends in the financial services industry as you think. By taking the time to learn the virtues of low cost indexing, global diversification and disciplined rebalancing, you will truly build and preserve YOUR wealth.

To draw a parallel, we assembled a few articles that describe how random investment success really is.  For example, if you own actively managed mutual funds, you’ll retire with a lot less money than if you’d just bought, held and rebalanced the boring ETFs others and we recommend.  This is a non-debatable fact that’s been proven over and over again.

But why do so many want to believe something that just isn’t true? Ivy League MBAs who are smart, motivated and work hard must be able to beat a dumb computer managing an ETF or an index, right?  Wrong for two reasons.  First, investment pros charge fees that are an impossible handicap to overcome.  And second, unlike other professions like a surgeon, litigator, race car driver or a pilot where success can be accounted for by how well one manages risk, most professional investors who beat the market one year, are just plain lucky.  They win for short periods of time because of random events, not skill or intelligence. Just luck.  We all became acutely aware of this in 2008 when all the gurus somehow didn’t see it coming.

Consider it likely that the great professional investors may really be no better than the 4 finalists in the 8th round of a 1000 monkey coin-flipping contest.  Yes, there will always be a winner. But why did the winner win?  Did someone know something?

This point is made in an article in The New Yorker:  “Blowing Up” by Malcolm Gladwell author of “The Tipping Point” and “Blink.”  Gladwell interviewed Nassim Taleb, a professional options trader.  Taleb’s book “The Black Swan” describes about how random events in the financial markets are common and unpredictable – essentially dismissing 90% of the value of professional investing.

“Wall Street was dedicated to the principle that skill and insight mattered in investing just as they did in surgery and golf and flying fighter jets….  For Taleb then, the question of why someone was a success in the financial marketplace was vexing.  Taleb could do the arithmetic in his head…”

In another article in Fast Company, called “The Myth of Mutual Funds,”  Chip and Dan Heath the authors of “Made To Stick,” explore why we don’t always want to believe the truth about investing.  “Let’s pull off the Band-Aid quickly. You’ve come to believe that mutual funds are a smart place to put your money. They’re not. That’s the assessment of the smartest minds in finance, supported by a mountain of historical data. So two questions: How can this possibly be true? And why, in gleeful defiance of the data, do more people keep buying mutual funds every year?”

Last, read Moneywatch’s  “Hedge Funds – Case Against, part 2” if you’re considering investing in one. Allan Roth writes some compelling pros and cons for doing so.  He addresses the question:  Are these fund managers lucky or smart?   “If I had a dime for every time I’ve heard that hedge funds provide above market returns with lower risk, I’d be a very rich man. Every time I hear this claim, however, I ask for any evidence that supports it. I have had no takers to date, though maybe this column will change that.  Unless you happen to have a few billion to invest (and give me a ring if you do), I’d steer clear of hedge funds as they provide too much risk with too little return.”

Think of the conversations that occur behind closed doors at the White House, corporate boardrooms or U.S. Central Command. We all understand that there are elements of those conversations that are deemed, for whatever reason, unsuitable for public consumption. They are tucked into the classified file, sworn to secrecy and solemn oaths. But every now and again, some of the untold story leaks out – finds its way to the common person. Sometimes the information is so unbelievable, that it is marginalized as ridiculous. Other times it is corroborated with such credibility that all we are left with slack jaws and nodding heads.

Below are three brief but shocking behind-closed-doors accounts about Wall Street and investing that left me stunned.

CEO of a Top Publically Traded Tech Company: Having participated in the Silicon Valley for years and sat on the board of Baidu, I come into contact with a broad network of technology leaders and professionals. Recently, I became part of a stunning conversation with one of the top executives in The Valley.  This individual, while surprising humble, is also profoundly wealthy. For years he used the “top” wealth managers who have access to elite money managers who in turn “outperform” the market to justify their fees. After years of high cost and poor performance and tens of millions lost, this executive was seriously underwhelmed. He pulled his money out, embraced a simple indexing strategy and global diversifications. It takes him only a few hours a year to manage the money himself. He save hundreds of thousands if annual fees and achieves a much better result. Why don’t we ever see that ad during Wimbledon?

Former Banking Firm Top 500 Producer: Imagine being an investment advisor who has built a dream business – over $1B in assets under management (AUM) and a coveted Chairman’s Club member. Making just over 1% a year on AUM, this wealth manager was grossing over $10MM annually in fees. Unfortunately, he had a huge problem – he still had a conscious. The more he study active money management, the more he learned that it not only failed to add value to his customers, but was in fact deleterious.  When he approached management about this problem and sought an indexing approach, he was run out of town. After a legal battle and negotiations, the firm and the manager struck a settlement. He left his customers in the hands of the banking firm and he had to move on. I guess someone is now making money “the old fashion way – earning it.”

$750 An Hour Tax Attorney to the Uber-Wealthy: I was once invited into a private conversation with the uber-wealthy about tax management. The strategy was architected by top legal minds in the country. Profoundly expensive to set-up and maintain, this apparently legal and sophisticated offshore strategy would result in profound tax reduction. Imagine most of your wealth free to compound without tax consequence. These uber-wealthy could invest in the most sophisticated and elite products. When I asked the attorney what the majority of his clients were investing in, he just snickered. Over 60% of their dollars were dedicated to simple and diversified indexing strategies. There was no Wall Street, no active managers, or Jim Cramers – just hundreds of millions, even billions, going into a simple, proven approach used by those in the know.

I hope you are doing the same.

With such a huge gap between those feeling comfortable investing in stocks themselves and those that feel stocks are an important component of their portfolio, comes the opportunity for one to turn to stock index funds and exchange traded funds.  With index funds you are still a player in the stock market, but the risks are less as you own a basket of stocks, not one individual company, and purchasing them through your discount broker is cost effective and quite easy.  Stock picking and market timing, though claimed to be figured out by many on Wall Street, is hardly ever done time and time again with great success.  The fundamentals of investing 101 might help you make a solid educated guess on what companies to invest in but let’s face it, investing in individual stocks, for beginners and experienced investors alike can still be a risky venture.  So, for those currently not comfortable investing in stocks on their own, check out index funds.  While you are at it, check out some of the on-line portfolio management tools out on the market to help you manage your overall portfolio.

Who or what is this bad, ugly beast called “Wall Street?”  Does anyone really know how Wall Street works?  When we blame it for all financial woes, who are we blaming?  Goldman Sachs?  Warren Buffett (he owns alot of Goldman)?   Is Wall Street your life insurance company, credit card companies, mutual funds, brokers, banks, and investment banks?  All or some?

The fact is, none of us are sure and it doesn’t matter because we don’t have much power over this ominous Wall Street — whatever it is.  But there is a Wall Street that we, as individuals can prevent from damaging us.

Most financial institutions want to control our money, which in turn, gives them a unique opportunity to bill us through fees that we don’t see or worse, don’t understand.  Because we’re not writing checks for these fees, we tend not to pay attention as our money flows out of our pockets and into theirs.  And that’s where the trouble starts!

Put $25,000 into a mutual fund and you’re hiring a Wall Street stock picker and paying him around $400 per year.  He and his fund now control your money.  Hire a financial adviser or a broker to manage your account – there you go again!  Wall Street now controls your money.

But here’s where Mr. Eberlin has it wrong — its investing 101.  If I buy an ETF of 1500 US companies, I own a part of all of them – IBM, Coke, Disney and Microsoft.  There’s no Wall Street.  A broker may hold my security, but they’re not charging me to invest.  I own great businesses, and my distrust of Wall Street should have no bearing on my decision to do so.

Buying low cost ETFs according to a prudent asset allocation, takes Wall Street’s hand out of your pocket.  You’re in control of your own money.

Our friend John Spence writes about this remarkable breakthrough.  When you trade Schwab ETFs or now iShares ETFs at Fidelity – you pay no commissions.  This lowers the cost of implementing an all ETF portfolio that is periodically rebalanced.  Schwab and Fidelity will also manage your ETF portfolio for you for about .6%.  While not as good as our service and way more expensive, it validates our approach and educates investors.  Go Schwab and Fidelity!

Responsible journalists like John Waggoner of USA Today are helping investors learn which ETFs to stay away from. He has a great style for helping beginner investors understand risk and financial information.  He gives a balanced view of ETFs and how to know which ones to stay away from.  We were quoted in this article, so we’re biased

Jason Zweig, is one of the most respected finance journalists in America.  In this article, he posits:  “For many investors, the market’s turbulence hasn’t just destroyed wealth. It has shattered their faith in the financial system itself.”

In the coming years, these trends will reduce Wall Street’s fees which will in turn, weaken its grip over Americans and their money.   We hope you’re riding these trends.

Second, according to the NY Times, if you want to be considered “in the know”, just start talking about ETFs at your next party.  The wave is sweeping the investment landscape and investing in them might soon be considered “cool.”  ”Average investors haven’t really latched onto perhaps the biggest investing innovation of the past two decades.  Despite being low-cost, tax-efficient and easy to buy or sell at a moment’s notice, exchange-traded funds remain largely the domain of institutional investors and stock-market aficionados.  ‘Main Street still barely knows what they are,’ acknowledges ETF expert Matt Hougan of IndexUniverse, an independent Web site on exchange-traded and other index funds. That may soon change.”

Third, one of our Experts at MarketRiders is John Bogle, the founder of Vanguard.  When he writes in the Wall Street Journal, we listen.  There’s a group of investors so enamored with him, that they host a popular and growing website dedicated to following his investment theories: www.bogleheads.org. Jane Bryant Quinn lists this site as her favorite. Bogle’s editorial is well worth reading.  He writes:

“(At the end of 2009) I concluded that ‘the faith of investors has been betrayed.’ How so? Because the returns generated by our corporate stewards have often been illusory, created by so-called financial engineering and produced only by the assumption of massive risks. What’s more, too many of our professional money managers have failed to act as vigilant stewards of the money that we investors entrusted to them.”

We can’t emphasize it enough — maintain an asset allocation that’s good for you so that you have diversification, and own ETFs in each asset class.

Wall Street interrupts the Law of Compound Returns.  Wall Street would have you believe that you need to interrupt this force of nature with heavy-handed human intervention and hefty costs that drain away your investment. Working counter to the Law of Compound Returns, Wall Street dooms you to failure. But it will succeed in taking your money-if you let it.

So what is one to do?  Investing in low cost index funds, ultimately exchange traded funds,  and taking on a more passive investment style will allow your money to grow efficiently-without the oversized management fees and tax implications that are Wall Street’s bread and butter (and caviar and steak).  Diverting the 1-2% you have paid in fees over the years into your own pocket will over time be a substantial gain for you.

An example of compounding:
Let’s say you are 40 years old and invest $100,000. You earn a 9% return the first year, so now you have $109,000. You reinvest your $9,000 and it continues to earn 9%, so you have $118,810 by the end of the second year. If your investment keeps growing at 9% (and you don’t withdraw any of the gains), your money starts growing at an astounding rate.*  The same holds true for the 1-2% you would keep by managing our own money.  The percent itself may seem small but over time is significant in savings.

So for all you beginners to ‘do-it-yourself investing’, look to building a portfolio of low cost index funds or ETFs.  With a good asset allocation and attention to rebalancing your portfolio as needed, you will benefit with more retirement dollars to spend in the future than if you hired an advisor to manage your money for you.

* Of course 9% is just an example, but it is consistent with the average annual compounding rate of the U.S. stock market over the past (80) years.

“If it sounds too good to be true, it probably is.”  Instead, I encourage serious retirement investors to stick with the strategy used by the world’s best investors.  Focus on asset allocation, globally diversify, keep fees down with indexing, and rebalance to stay the course.  For many that have gotten caught up in a Ponzi scheme or know of friends that have, now might be the perfect time to take matters into your own hands and start to manage your own investments.  Many of the tools available today will guide you on how to invest your money with the goal of generating the most returns for retirement, accounting for risk and time frame, at a low cost.  Try reading several Investing 101 articles that are out there as they are loaded with lots of great tips on finding the best investment vehicle for you.