The investing public is a generally trusting bunch – unfortunately, to a fault. They will entrust their money to large organizations and corporations in the often mistaken belief that these organizations have their best interests in mind and are too big to do wrong.
This week, we were reminded by the fallacy of this belief when it was announced that Wells Fargo had been ordered by the Consumer Financial Protection Bureau (CFPB) to pay $3.7 billion in penalties and victims’ compensation for alleged illegal practices – including institutionalized practices that caused thousands of customers to lose their homes and vehicles.
The CFPB ordered the bank to pay $2 billion in consumer redress and a $1.7-billion civil penalty, the largest fine the CFPB has ever levied against a single financial institution.
According to the CFPB, Wells Fargo customers had their vehicles wrongly possessed, were illegally charged erroneous fees and interest charges on auto and home loans, and were also charged “unlawful” overdraft fees. More than 16 million consumer accounts were affected, the agency says.
This is not the first time Wells Fargo or other large financial institutions have had their hands slapped by the CFPB.
The following graph provided by the CFPB shows the amount of relief ordered by the CFPB since 2012. The dollar amounts are staggering:
Amazingly, the latest Wells Fargo fine pales in comparison to the top 3 largest fines in history:
#3 – Bank of America, $11.8 Billion
As part of the National Mortgage Settlement in 2012, Bank of America alone was asked to shell out $11.8 billion over subprime mortgages sold to Fannie Mae. About $1 billion went to the Federal Housing Authority, which Bank of America’s Countrywide subsidiary conned. As part of the deal, its principal mortgage deductions were $100,000 per mortgage.
#2 – JPMorgan Chase, $13 Billion
JPMorgan Chase reached a $13 billion deal with the U.S. Department of Justice in October 2013 to settle several lawsuits and investigations. Most of the investigations and lawsuits were related to mis-selling toxic mortgage debt to investors. JPMorgan purchased Washington Mutual and Bear Stearns during the 2008 crisis. It also inherited its legal obligations in the process.
#1 – Bank of America, $16.65 Billion
Bank of America is topping the wrong top-10 lists. In 2014, it paid a record $16.65 billion to settle allegations that it misled investors into buying subprime mortgage-backed securities. It acquired Merrill Lynch and Countrywide Financial during the 2008 financial crisis. The claims were related to mis-selling done by Countrywide and Merrill Lynch before the crisis.
Wells Fargo will shrug off this fine as it has shrugged off all its previous fines. When these large institutions misbehave, the ones left holding the bag are the irreparably harmed consumers and investors who see the share prices plunge due to their holdings in these companies.
Smart investors avoid investing in large corporations and organizations run by nameless, faceless execs pulling strings from behind the curtain, often leading to unethical and illegal activities that harm consumers and investors. Instead, they prefer to invest in real people – people they can see and meet. That’s why they avoid robotic machinations of the public markets in favor of opportunities in the private markets promoted by real people with objectives that align with investors’ needs and goals and not just their own.
While the average investor is happy to put their money into large but recognizable corporations, smart investors prefer investing in small firms for multiple reasons. In their mind, the problem with large organizations is they are often too bloated and bogged down, which is a fertile breeding ground for mismanagement and even fraud led by management indifferent to the plight of the consumer or investor.
Large firms are adept at hiding warts until they get caught.
Unlike the rest of the investing public, savvy investors like ultra-high-net-worth investors (“UHNWIs”) prefer smaller, private companies over large, bloated organizations for various reasons.
Here are the most prominent ones:
Transparency. The managers of small, private companies offer transparency into themselves and the company’s financial and business affairs for investors to make calculated investment decisions that align their personal and financial interests with those of the company.
Accessibility. Small companies with accessible management allow investors to assess the competency of the sponsors and managers to assess the likelihood of a company’s success adequately. Highly valued management qualities include a track record of success, stellar backgrounds, and relevant and impressive experience and expertise.
Investors First. The compensation structure of small, private companies is often designed with investors taking priority. Management compensation is typically tied to company performance, and managers often don’t get paid until investors get paid.
Smart investors invest in real people – people who are accessible and willing to answer questions about their company and their competency.
Do they prefer small, agile companies that hold management accountable to investors and often only compensate their managers if they have been successful in providing returns to their investors – tired of investing in large unethical organizations? Consider investing in real people.
Kyle Jones is a co-founder and Key Principal of TruePoint Capital, LLC. Kyle is responsible for the company’s strategic planning, investment decisions, asset management, and overseeing all aspects of the company’s financial activities, operations, and investor relations.
Kyle obtained a Bachelor of Science degree from Texas State University – San Marcos, where he also played Division 1 Baseball.