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Wednesday, February 08, 2012

Ethical Investing

When you talk about ethical investing, people naturally conflate it with socially responsible investing.

The thing is, nowadays, the financial industry is part of the problem. As Lawrence Lessig described in Republic, Lost, part of the reason carried interest, for instance, is taxed as capital gains instead of income is because of all the lobbying the financial industry did. And who can forget the financial industry's successful lobbying of the repeal of Glass-Steagall, which indirectly led to the financial crisis of 2008.

I'm a firm advocate of not having a financial adviser, but many people choose to use them. (I think it's pretty silly given how little time I actually devote to my finances) If you do choose to use one from the big white shoe firms like Morgan Stanley, Merrill Lynch, or Fidelity, you're in turn contributing to their lobbying efforts and their continual attempts to undermine the "main street economy."

If you must use a financial adviser, I recommend Vanguard, which is a non-profit, or Wealthfront, which is a Silicon Valley startup that currently doesn't have the cash to do any lobbying.

Now, lots of people brag to me about how much hand-holding they get from their white shoe adviser. What's interesting to me is that they're all implying that the service I get from Vanguard must be sub-standard and do-it-yourself. They couldn't be further from the truth. I'll illustrate with an example: several years ago I took a foreign assignment in Munich. While I was there, another visitor from Mountain View showed up on assignment as well. I asked if he needed any help dealing with the banking system in Munich, and he said, "Oh no. Bank of America says they're affiliated with Deutsche Bank, and everything should go smoothly." 2 weeks later he was in the office panicking: he had 3 days to provide a security deposit to his prospective landlord to get his apartment, and nothing had happened. I told him to call Vanguard. Within 2 hours, all his problems were solved, and his security deposit was ready. Now, if this story was about me, you might say, "Sure. Piaw's a Flagship customer, so he gets special attention." But this was for someone who didn't qualify for Flagship. Nevertheless, Vanguard moved heaven and earth to solve his problems, getting his money wired overseas for no fee whatsoever.

Of course, there're still the folks who brag about their financial advisers sending them ice-cream. Given the price difference between what they're paying and what they could pay Vanguard instead (Vanguard's financial advise fee is $250/year, fixed) or even Wealthfront, I calculate that to be $10,000/gallon worth of ice cream. No wonder it tasted so good!

The financial industry is unlike any other industry on the planet: it's the only industry in which the less you pay, the more you get. If you don't already have effectively infinite money, it pays to pay attention to that little detail.

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