Is the Investing Industry Trustworthy?

Many of us have had our confidence shaken.  If you're like me you might have thought of your advisors as not just hired hands, but trusted allies.  I was confident that I had a crack team working for my best interests and that they were taking initiative to make sure I was safe.  The subsequent crisis left me with the question of who I could trust.  Were these people looking out for my best interests at all?

Are They Crooks?

If you're trying to decide whether to trust someone with your money, you certainly don't want to do so if they're criminals.  Many of us, after the results of the recent crisis, are left to wonder whether our investment advisors weren't just being negligent but in fact deceitful.  You seriously have to wonder if they were routing your money to their friends, or getting kickbacks or some other under-the-table deal. 

Ultimately after my initial outrage I've become confident that they are not criminals.  I don't think they wanted to see me do poorly and are honestly upset that I didn't do better.  I don't think the financial sector and the investing industry are thieves per se, but that's not a complete answer to whether they are trustworthy.

Are They Acting in Your Best Interests?

This is ultimately the question that you really want to understand.  It doesn't matter whether there's malice involved are not.  Is the investment industry working for you, or fleecing you?  Even if they would like to see you do well are their interests aligned with yours?

Sadly for the most part the investing industry is a no-lose proposition for its members in the short term.  For example, your broker gets paid commissions on what you buy and sell.  He doesn't get paid commission on what you earn.  Obviously he wants you to do well so you have more money to invest and he gets to keep your business, but ultimately the amount he earns has more to do with how many trades you make, not how successful they are.

You see a similar structure in corporate management.  Most executives are paid by short term performance.  Thus they're much better off having 3 good years followed by a collapse than just having 3 mediocre years, especially when their competition is having meteoric years at the same time.  It's very difficult to be the CEO, or fund manager, or any other financial person who's having modest returns while everyone else is skyrocketing.

Ultimately the answer to the question is that the investment industry is trustworthy if you make them so.  If you take the time to monitor your investments and make sure that what they're doing makes sense for you, then they can be a useful tool.  But blindly assuming that they will act in your best interests is a path to ruin.