Compliance & regulation

Penny Pinchers

Is there an institutional campaign underway to steal millions of ‘decimal dollars’?

by Steve Selengut

Mr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at

Did you see the 1999 comedy “Office Space”? It describes a software scheme to embezzle pennies from random financial transactions and funnel them into a hacker’s bank account. A year later, Wall Street changed its pricing protocol from an ancient fractional system to a state of the art decimal methodology.

“Watch the pennies, and the dollars will take care of themselves…” – Ben Franklin.

Some conspiracy theorists suggest this was a “front runner” for an institutional campaign to steal millions in decimal dollars from investors. But, why would the “Masters of the Universe” bother when they can perpetrate their larceny in plain sight, shamelessly, every trading day… and with regulatory blessing.

Most “Office Space-ish” of all the insidious fees tacked on to commissions and One Flat Fee Only Accounts (OFFOAs) is the “Activity Assessment Fee” deducted from every “sell” transaction on Wall Street…

Google “SEC Fee – Section 31 Transaction Fees” to learn how these “regulator and exchange fees” find their way onto your confirmation notice… even your OFFOA.

At approximately five million “sell” trades per day, roughly $200,000,000 pennies are siphoned from our investment and retirement portfolios into Wall Street’s already deep enough, don’t ya think, pockets.

Paying Twice

Investors big and small (the largest bloc of taxpayers), are paying twice to regulate Wall Street…

  • the regulatory posse stands idly by, approvingly, as the industry boomerangs SEC Fees targeted at the securities markets right back at consumers… two million bucks per day.
  • yes, we’re just getting started.

Most individual equity investors recognize the benefits of including top tier foreign companies in their portfolios. Individual MCIM portfolios, for example, may contain one or more of a select group of ADRs (American Depository Receipts)… those meeting the fundamental quality and dividend income requirements of IGVSI companies.

The withholding of foreign taxes on dividends is as much a tax on the middle class as it is on the rich ‘n famous, while the latter are most likely to benefit from an income tax credit. Foreign taxes paid may be used as such unless:

  • You fail to file the proper paperwork, or (go figure),
  • The ADRs are housed in a tax deferred portfolio (IRA, 401k, etc.).

ADR dividends earned in your “deferred taxation” IRA and 401k accounts are taxed as ordinary income when taken at retirement, even though you paid the foreign income taxes upon receipt…

Questions: When taxing the frugal, those who have planned for retirement, why do we punish them with 100% “ordinary income” tax rates when we have the technology to separate the distributions into lower tax rate categories. Should they and Social Security recipients be taxed at all?

And then there’s the Custodian’s “Office Spacey” hand in your pocket….

  • If your ADR does not pay a dividend, your custodian takes a fee of from one to three cents per hundred shares (but never less than $2.00), directly from your investment account, pretty much just because they can. If there is a dividend, the custodian “pass-through fee” is deducted from it.
  • One can only imagine how many billion pennies this process produces. Conservatively, I’m guessing that my average six figure client holds 200 shares of 5 different ADRs per year. If there are 25 million similar portfolios, that’s roughly 50 billion more pennies annually to the “Masters”.
  • Why is it more expensive for more shares? Why can’t these pennies be part of the total cost to the broker dealer of doing business with the custodian?
  • For IRA accounts, custodians also charge annual maintenance fees, and termination fees if you have the audacity to move your account… or die.
  • Approximately 50 million households pay roughly 55 maintenance fee dollars each, per year, in custodial fees… 275 billion more pennies for Wall Street, at $9,000 per second.
If you added all of these consumption and usage charges to your federal state and local taxes, what would your actual income tax rate become? The king of England may not have been such a bad guy after all...

So, in reality, there is no such thing as a flat fee only or a commission only arrangement… there is always another fee, just like the $34 I just paid for the checks used in my “no fee” bank checking account.

Custodial Fiduciary Responsibility?

Question: If we pay for every conceivable custodial action, shouldn’t the custodian have fiduciary responsibility, at least as much as the generous employers who provide the benefit programs (how backasswards is this)?

Observation: I’m beginning to understand how Wall Street Institutions can afford to pay and bonus executives as outrageously as they do… it’s our damn pennies!

Aren’t you about sick of the “service fees and charges” that slap you around almost everywhere: utility bills, rental cars, hotel rooms, ad infinitum? If you added all of these consumption and usage charges to your federal state and local taxes, what would your actual income tax rate become? The king of England may not have been such a bad guy after all…

Why not one consumption tax for each political subdivision, just think of the bureaucracies that could be eliminated, including the IRS!

Wall Street, as you might expect, picks our pockets without any explanation whatsoever. Their creative and versatile “Service Fee” is paid by almost all investors, even those who have an OFFOA… I know of only one OFFOA arrangement that excludes nearly all “service” fees.

No, these are not the “Postage and Handling” charges of the distant past (Google Investor Bulletin: Broker’s Miscellaneous Fees):

  • The SEC explains that these fees “help to reimburse the broker for expenses incurred in performing the transaction or a service for you.” It says nothing of P & H, and your “broker” probably gets absolutely none of it.
  • Shouldn’t the flat fee or commission cover “expenses incurred to perform transactions and/or services”? Are “Service Fees” necessary because the institutions don’t know how to calculate management fees or commission charges accurately?

Service fees vary from “as little as” $3.95 per trade to as much as $7.50… dependent, it seems, upon the size of the institution. All brokers (yes, discounters too) charge service fees and it is difficult to find evidence that they are, in any sense, “pass-through’s” from custodians.

  • They are charged whether or not you opt for “on-line” confirmations, quarterly reports, class action notifications, etc. If you get three paper confirmations stuffed into one envelope… how many fees should you pay?

The only good news about them is that they are variable expenses, dependent upon account activity. I have been unable to find any information about the specific additional transactions or services we are paying for.

  • There are roughly 6 million trades per day on the New York Stock Exchange. At an average $5 per trade, that’s three billion more pennies a day, every trading day, variable expense or not, taken from your pocket and/or retirement account… with the absolute approval of Uncle Robin Hood, and his band of merry regulators.

There are additional service fees that can be traced to actual client initiated expenditures, the $2.95 monthly charge for extra statement copies comes to mind, check fees, wire transfer charges, direct payment fees, etc. If the statement fee applies to you, why not just let your accountant/trustee/spouse access your information themselves on line, for free.

Questions: Are all of these fees assessed as ruthlessly on transactions within Mutual Funds, ETFs, and other Wall Street products? How about when firms trade within their own accounts?

NOTE: I purposely didn’t include NASDAQ in the analysis… my calculator doesn’t have enough zeros.