Gil Baumgarten, who has 36 years experience in the securities and investment industry, quit a brokerage after decoding a nexus of Wall Street operators who were routinely putting their own interests above those of the client.
“There's something of a cartel that exists between the brokerage firms, the separate account managers, and the mutual fund business,” Baumgarten explains. There are enough kickbacks and overlaps between the money manager, brokerage and the mutual fund for all three to benefit at the cost of the client when recommending aggressive stock market moves. “They're kind of in cahoots with one another and the investing public has no concept of how that is run.”
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After 25 years on Wall Street, Baumgarten grew weary, having caught a doubtful trade for a client, and was determined to take a contrarian approach at Segment. Here, the rules were governed as per the US Securities and Exchange Commission (SEC), rather than the less secular ones at industry bodies that oversaw the nexus. Baumgarten considers this a move that happened ten years late.
To remain focused on a customer, “a wealth management firm and the advisor, in particular, have to be agnostic about how he or she is getting paid commissions, and various pay schemes really cause the advisor to give less than optimal advice to the client.”
The most common mistake investors make is underestimating the tax implications on a stock trade. “Most people believe nowadays that because commissions have gone to zero, the friction of the process itself is now also zero, and that is so far from the truth,” the investment consultant said, adding, “an unrealized gain is 60% more valuable than a realised gain.”
“Most people believe nowadays that because commissions have gone to zero, the friction of the process itself is now also zero, and that is so far from the truth”
This concept is lost on investors, because they sell shares to lock profits and “have a very difficult time exercising discipline” to hold onto notional gains. Still, tax structures are created to favour long-term buys most optimal for a lifetime investment. “So, in a joint account between, say, husband and wife, either one of them dies, all of the unrealized gains that have been amassed for their entire lifetime, are tax-exempt,” Baumgarten explains.
On the other hand, cashing in on profits is a costly affair. “The taxes that you pay on a short-term gain, a position that you buy and sell within 12 months, is essentially two times the tax, if you would have just simply waited till you get to 12 months.”
Around 60% of Segment’s Exchange-Traded-Fund strategy comprises of broad market ETFs with a low holding cost for the customers. “We break it down as we have more than half the portfolio towards low, super low trade turnover type ETFs and extremely low fee ETFs. That way, we can address both issues of low cost and low turnover for the client.”
The rest of the portfolio has an industry concentration. At the moment, the oil and healthcare industries are amongst those in the portfolio, Baumgarten said. While limiting the exposure of these to the customer because they are expensive products, these portfolios can justify themselves, as oil has done over this year.
“We break it down as we have more than half the portfolio towards low, super low trade turnover type ETFs and extremely low fee ETFs. That way, we can address both issues of low cost and low turnover for the client”
Baumgarten has had a consistent award-winning streak, including nomination as a multi-year recipient of Barron's top 1200 financial advisors in the US award. A “lot of that just comes from the ability to stay focused on the long term.”
To hear more insights from Baumgarten, listen to the full episode on Opto Sessions.
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Listen to the full interview and explore our past episodes on Opto Sessions. You can also check out all our episodes via our YouTube Channel.
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