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Sallie Krawcheck, the most popular interview choice among Money magazine's readers, answers your top question.
Can investors trust Wall Street again?
If we mean by "Wall Street" large financial institutions, I'd say that they are no doubt safer today than before the Dodd-Frank law and the new financial regulatory changes, but it is still unclear whether they can make it through a significant downturn like we had in 2008.
If we mean financial advisers, in my experience running Smith Barney at Citi and then Merrill Lynch, I found that the vast majority of them are good people, looking to do good things and committed to building long-term relationships with their clients. You know, the cartoon representation of so many of them as short-term-focused is wrong.
For example, back in 2007 and 2008, Citi had sold some financial products that we believed would only go down a few cents in a bad market, but which actually [lost most of their value]. Instead of reading investors the fine print, the advisers pounded the management team to partially reimburse their clients for our stupidity. I advocated for that too, the bank eventually relented, and I subsequently lost my job.
Many of the people who were on Wall Street in 2007 and 2008 are still there making big money. How is that possible?
A number of people lost their jobs at Citi, including the CEO, the head of the corporate investment bank, desk heads, and traders.
Is Wall Street getting any better at managing risk to avoid catastrophe?
Everybody's learned something, but are we going to have the breakthrough to reduce risk in the system? There's a reason crowdsourced problem-solving works: You put a problem to groups who have different experiences, and they'll often solve dilemmas that the experts couldn't. The chemists solve the physicist's problem.
Part of me wants to open-source bank risk so that we have some sharp college kids in some corner of the world trying to solve it, as opposed to the same folks with the same tools. It sounds fanciful, but there is not a tremendous amount of new thinking on these issues of risk. The problem is, banks will never allow positions or performance information to be made public.
What's the next financial risk out there that people don't broadly recognize?
The first one I would point to is bond funds. There is still an incorrect but widely held view that you don't take particularly big losses on bonds unless there's a credit issue. [This is true only if you can hold to maturity.] Bond funds are different. If the economy gets better and interest rates increase, bonds may suffer losses. There's going to be some surprise out there.
You've also raised concerns about money-market mutual funds.
The funds do take on risk. It's a $2.6 trillion market. Lots of individual investors participate. They believe it's cash, in part because the brokerage system puts it into CASH on their statement. And they redeem 100¢ on the dollar in good markets and bad.
But back in 2008, a money-market fund "broke the buck" [couldn't redeem for 100¢]. If we learned anything in the downturn, implicit guarantees not backed by capital are very bad things. What worries me about money funds is managers who take on more risk just to get a tiny bit more return. It's not worth it.
Do you believe high-speed computerized trading gives Wall Street an unfair advantage over individual investors?
It's faster. I would make sure to worry about first things first and second things second, and last things last.
So first things first. How do I want to live? How much money do I need to do it? Can I reasonably get there? Then you've got to go to second things. Do I have the right portfolio to get me there? Am I properly diversified? Third things: Are you in a mutual fund that has an average management fee of 1.2%, 1.3%, when you could be in an ETF that has an expense ratio of 0.3%?
Once you've done all that, then let's start to talk about the fractions of pennies that the institutional traders are getting over individual investors. Most individuals really shouldn't be trading often anyway.
What about the "flash crash," when computers seemed to cause the Dow to briefly plunge 9%.
It was very scary, but the good news was that there was not a tremendous amount of money lost by individual investors.
You first built your name as a stock analyst covering Wall Street. A Money reader asks whether banks are a decent investment yet.
Today the markets feel fine, right? The economy feels good enough. If the economy and the markets are in good enough shape, overall banks will be in good enough shape.
One caveat: Individual banks are difficult to analyze. They're very complex. Even when they give out 100-plus pages of 10-K and 10-Q disclosure, it is really impossible to know what's on their balance sheet at any point in time because the banks' individual loans and trading positions can change quickly between earnings reports. And as we've learned, idiosyncratic accidents do happen.
So my advice is, if one wants to invest in financial institutions, own a group of them, or an ETF that owns them, rather than individual banks. That's what I do.
You've talked about banks alienating customers with high and hidden fees. Why do they do it?
Banks, having had their earnings reduced, are doing what companies do: looking to replace earnings.
What new fees should bank customers expect?
It's well known that if you transfer a credit card balance, you can get a low teaser rate that will then move up. What is less understood is that when you give a deposit to a bank, there can be a teaser rate that is later taken down.
In this low-rate environment, the numbers are not large. But if you look for a future fee stream, it would be that. The average checking-account agreement is, I believe, 111 pages. You can find the formula for how the leap year affects the calculation of your interest payment. It's harder to figure out the rate they'll actually pay.