Ideas in the Wild: Gil Baumgarten is Pulling Back the Curtain on the Tactics Used by Wall Street Brokerage Firms

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Zach Obront Last updated: May 7, 2021

Wall Street brokerage firms won’t be happy about Gil Baumgarten’s new book, FOOLI$H. That’s because brokerage firms have built their businesses on profiting in the shadows, and they surely don’t want the lights to come on. After twenty-five years on Wall Street and another ten years as a fee-only fiduciary RIA, Gil knows all the brokerage tactics that make portfolios inefficient and put the average investor at a disadvantage. He also understands the common, self-destructive tendencies that make every investor vulnerable to brokerage firm schemes.

FOOLI$H pulls no punches—it’s an inside look at the complicated brokerage ecosystem and the realities of investor behavior. Readers will discover the staggering differences between brokerage and advisory systems and walk away with actionable advice to help them stay on guard. I recently caught up with Gil to learn more about his journey writing this book.

Published with permission from the author.

What happened that made you decide to write the book? What was the exact moment when you realized these ideas needed to get out there?

I saw how investors subject themselves to the same thought processes over and over again, thinking they are helping themselves. Investors can be their own worst enemy without even recognizing it. Those same people did business with acquaintances who were employed in a brokerage business model that did not look out for the client. Those investors needed information about how the system is built. Brokerages operate on both sides of the transactions and are often not the best facilitators of advice.

Prior to the mortgage crisis in 2008, a top-three brokerage firm approached a hedge fund client that did trades on their platform. The hedge fund wanted to create a trade that allowed it to cherry pick the most overvalued areas of the mortgage arena, betting on its demise.

This would require the brokerage firm to find another client on the opposite side of that trade to take the opposite risk, for which the brokerage firm earned a commission. That investor was wiped out in the aftermath. This is testimony that the brokerages are only interested in being a facilitator, not an advocate. Mix in the individual investor’s self-harm tendencies caused by fear and greed, and a facilitator can do much damage.

What’s your favorite specific, actionable idea in the book?

The section about having the abundance mentality vs scarcity is the most profound part of the book. Money is like a wet bar of soap. The tighter you try to hold on to it, the more likely it is to escape you. A proper risk perspective cannot be achieved when we try too hard to protect our money. We must expose it to risk to achieve return.

Many investors are just savers that desire more return, but never fully reconcile the risk that must be endured. These investors are doomed to failure because they act like turtles and retreat when market choppiness ensues. The metamorphosis that must occur requires a proven pattern of successful risk taking and a reasonable time horizon coupled with a generous spirit and disciplined giving process. This can break the “saver’s bondage.”

What’s a story of how you’ve applied this lesson in your own life? What has this lesson done for you?

I came around to the abundance mentality by forcing myself to be generous with friends and charities. It has revolutionized my risk-taking appetite and increased my investment results significantly. It takes a certain humility to recognize that not all our choices are wise. More than a few minor mistakes get overlooked in reviewing our successes and failures since we are gentle with our egos and are biased accordingly. These overlooked and mentally justified mistakes can kill returns while we proceed in our oblivion.

As my mentality grew towards abundance, I evolved from my need for reinforcement of the wisdom of my choices, developed a more objective review of my failures, and began utilizing more broadly diversified holdings in my investment strategy.

This lowered my overall risk, allowed a larger exposure since I was taking less risk, and extended my time horizons allowing greater tax benefits. Those tax benefits also have application in sophisticated charitable giving strategies, which circles back to reinforce the process of using charity to loosen my grip and encourage more risk-taking.