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Inside Wall Street: How to Avoid ‘Murder Holes’ & ‘Garbage Products’

Jeff Macke

Josh Brown, author of "Backstage Wall Street: And Insider's Guide to Knowing Who to Trust, Who to Run From, and How to Maximize Your Investments" wants to make one thing clear up front: This book is not just another "tell all" chronicle of financial evil-doers.

"This is not 'everyone is terrible on Wall Street,'" Brown says in the attached clip. Instead he's offering a how-to guide for avoiding what he colorfully refers to as "Murder Holes."

Taken from the WWII movie Saving Private Ryan, a murder hole is more or less just what a sounds like, in financial terms. In short, it's an investment in which unwitting investors are piled into with no chance of financial escape. Why would a firm do such a thing to investors? If you have to ask you're probably new to this game.

"The worst investments have the highest compensation scheme for the people who sell sell them," says Brown, ticking off Chinese RTO's, heavy-load mutual funds, and the ETNs made famous by the ongoing TVIX debacle. If it's too complicated to easily understand, it's probably something to avoid.

Of course the greed runs both ways. If not for investors looking for a "sure thing" or access to the hottest sector of the day, murder holes couldn't exist. That's where the marketing comes into play. The instant a sector becomes hot, Brown says, Wall Street starts inventing products to serve the demand. "Green" funds, internet funds, and ways to play China are often ridiculed today but the game never goes away, it only changes it's name.

Today the hot sector is Social Media and the IPOs hitting the Street weekly. "They'll bring them all out to get in front of Facebook (FB)," Brown says. Those wanting to know what he thinks will happen after the Facebook IPO should watch our conversation from last week.

All is not lost. Help is on the way from Congressional moves that Brown thinks are already in the works.

"Sales people of financial products are going to be forced to adopt a fiduciary standard as opposed to suitability," he says. The distinction is fiduciaries are charged with looking out for clients' best interests; an investor being suitable just means they have money.

Under the system Brown says will be in place, the incentives between brokers and customers will be far more aligned than they are currently. Huge load mutual funds will go away because it's not in any investors' best interest to pay a 5% load for a mutual fund.

"The whole thing is hideous and it has to go," Brown says of the current system. "There's a right way to do this and it doesn't include selling people garbage products."