You’ve probably heard the story. It’s a classic of the finance world. A visitor to New York City is being shown the sights by a wealthy stockbroker. They walk down to the Battery, where the broker points out the magnificent sailing vessels anchored in the harbor. "Look," the broker says with immense pride. "There are the brokers' yachts. And over there, those belong to the bankers." The visitor, a bit naive but clearly sharp enough to spot a glaring hole in the logic, looks around and asks the legendary question: Where are the customers' yachts?
Fred Schwed Jr. wrote the book on this back in 1940. It’s called Where Are the Customers' Yachts? or A Good Hard Look at Wall Street. Even though it’s been over eighty years, the core truth of that anecdote hasn't aged a day. Honestly, if you walk through any major financial district today—whether it's Wall Street, the City of London, or Hong Kong—the cars are nicer, the suits are more expensive, and the bonuses are bigger. But the clients? Most of them are still just trying to keep their heads above water while paying for the "privilege" of underperforming the S&P 500.
Wall Street is basically the only industry where the people providing the service get richer than the people they are supposed to be helping.
Think about that for a second. If you hire a contractor to build a house, you end up with a house. If you hire a surgeon to fix your knee, you get a working knee. But in the world of high-finance money management, you can pay hundreds of thousands of dollars in fees over a lifetime and end up with less money than if you had just shoved your cash into a boring index fund and gone to the beach. It’s a bit of a circus.
The Fee Machine and the Illusion of Expertise
The reason we still ask where are the customers' yachts is because of the fee structure. It's a silent killer. Most people don't realize how much 1% or 2% actually costs them. Over thirty years, a 1.5% fee can eat up nearly half of your potential wealth because of the way math works—or rather, how it works against you. You aren't just losing that 1.5% every year; you're losing the compounded growth that money would have generated for the next three decades.
It's a wealth transfer from the many to the few.
Jack Bogle, the founder of Vanguard and basically the patron saint of the "common sense" investor, spent his whole life shouting this from the rooftops. He pointed out that the financial system as a whole doesn't create value; it subtracts it. The market returns X. Wall Street takes Y in commissions, management fees, and trading costs. The investor is left with X minus Y.
When Y is large, the investor gets hammered.
But why do people keep doing it? Because the marketing is incredible. If you walk into a high-end wealth management firm, you’re greeted with marble floors and mahogany desks. They show you "proprietary models" and talk about "tactical asset allocation." It sounds smart. It sounds like they have a secret. But as Schwed famously noted, "Speculation is an effort, probably unsuccessful, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little."
The problem is that brokers have a massive incentive to keep you speculating. They need "churn." They need you to buy and sell because that’s how they generate commissions. A client who buys a total market fund and doesn't touch it for twenty years is a "bad" client for a traditional broker. They can't buy a yacht off of that guy.
Active Management vs. The Harsh Reality
There’s this persistent myth that if you pay more, you get more. In almost every other part of life, that’s true. A $100,000 car is usually better than a $20,000 car. But in finance, the relationship is often inverse. The more you pay, the less you keep.
The S&P Indices Versus Active (SPIVA) scorecard tracks this every year. It’s a bloodbath. Year after year, the data shows that about 90% of active fund managers—the guys with the Ivy League degrees and the Bloomberg terminals—fail to beat a simple index over a 10 to 15-year period.
90 percent.
Imagine if 90% of commercial pilots crashed their planes. You wouldn’t get on a plane. Yet, we line up to hand our retirement savings to these people. Why? Because we all want to believe we can find the 10% who are the "winners." We want to believe in the next Warren Buffett. But here’s the kicker: even Buffett tells people to just buy index funds. In his 2013 letter to shareholders, he laid out his will's instructions: put 90% of the cash in a low-cost S&P 500 index fund and 10% in short-term government bonds.
He knows where the yachts are. They aren't in the active management lane.
The Psychology of the "Expert"
We are wired to seek authority. When the world feels chaotic, we want someone to tell us they know what’s going to happen next. Brokers leverage this. They provide "comfort." They tell you they can navigate the "headwinds" and "tailwinds."
But let’s be real. Nobody knows what the market will do tomorrow. Not the Fed chair, not the guy on CNBC, and definitely not the broker trying to sell you a loaded mutual fund. If they actually knew, they wouldn’t be working for a salary or a 1% management fee. They’d be on their own yacht in the Mediterranean, far away from a telephone.
The "experts" are often just people who are very good at explaining why they were wrong after the fact. Schwed was particularly cynical about this. He observed that many of the most successful people on Wall Street weren't actually trying to scam anyone; they truly believed their own nonsense. That’s the most dangerous part. A salesman who believes in his product is far more persuasive than a liar.
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Modern Complexity: New Wrappers, Old Problems
Today, the question of where are the customers' yachts has shifted toward more "sophisticated" products. We’re talking about private equity, hedge funds, and complex derivatives. These are the new frontiers for high-net-worth individuals who feel like they're too important for a standard portfolio.
Hedge funds often charge the "2 and 20" fee structure: 2% of total assets and 20% of the profits. It’s an insane amount of money. If the fund makes 10%, the manager takes a huge chunk. If the fund loses money, the manager still gets that 2% management fee. They win either way. The client only wins if the performance is so astronomical that it overcomes the massive drag of the fees.
Spoiler alert: it rarely is.
Research from people like Larry Swedroe has shown that on a risk-adjusted basis, most of these "alternative" investments don't actually provide better returns for the client. They do, however, provide very consistent yachts for the fund managers.
And let’s talk about the "retail" version of this. Crypto, meme stocks, and "finfluencers." The medium has changed, but the game is the same. The people selling the picks, the platforms charging the "spreads" (which is just a fancy word for a hidden fee), and the exchanges are the ones getting rich. The "community" of investors? They’re usually left holding the bag while the founders "exit" to their private islands.
How to Actually Get Your Own Yacht (Metaphorically)
If you want to stop wondering where are the customers' yachts and start building your own wealth, you have to stop playing the game by Wall Street's rules. You have to be "boring."
The truth is that successful investing is a lot like watching paint dry or watching grass grow. If you want excitement, go to Vegas. If you want wealth, you need to minimize three things:
- Taxes: High turnover in a portfolio creates capital gains taxes that eat your returns.
- Fees: Every basis point you pay is a bite out of your future.
- Ego: Thinking you can outsmart millions of other participants and high-frequency trading algorithms is a recipe for disaster.
The most successful investors are often the ones who forget their login passwords. There was a semi-famous (though possibly apocryphal) study by Fidelity that suggested the best-performing accounts were those of people who had died or forgotten they had accounts. They didn't trade. They didn't listen to the news. They just let the power of the global economy do the work.
Real Evidence: The Power of Low-Cost Indexing
Look at the growth of Vanguard or BlackRock’s iShares. There’s a reason trillions of dollars have flowed into these products. People are finally waking up. When you buy a total market index fund, you are essentially saying, "I don't know which individual company will win, but I know that humanity is generally productive and that the economy will grow over time."
You're capturing the "equity risk premium" without paying for someone's corner office in Midtown Manhattan.
It’s not flashy. You won't have a "hot tip" to talk about at a cocktail party. But you will have a higher probability of reaching your financial goals than 90% of the people who are trying to be clever.
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The Conflict of Interest Nobody Talks About
We have to address the "fiduciary" issue. Not every financial "advisor" is a fiduciary. A fiduciary is legally obligated to act in your best interest. Many people who call themselves "financial consultants" or "wealth managers" are actually just salespeople. They are held to a "suitability" standard, which is much lower.
Basically, "suitability" means they can sell you a product that is "okay" for you, even if there’s a much better, cheaper version available, as long as the one they sell you makes them a higher commission.
It’s like going to a doctor who only prescribes the medicine that gives him a kickback from the pharmaceutical company, even if a generic version is better and cheaper. Most people find this concept appalling in medicine, yet they accept it as "just business" in finance.
If you want to find the customers' yachts, find the people who are working with fee-only fiduciaries who don't take commissions. Or better yet, educate yourself enough to manage the basics. It’s not as hard as the industry wants you to think it is.
Actionable Insights for the Modern Investor
Stopping the drain on your wealth starts with a few very specific, very unsexy moves. This isn't about "beating the market"; it's about making sure you actually get the market's returns.
Step 1: Audit Your Expenses
Go through your statements. Look for "Expense Ratios." If you see anything above 0.50% for a standard equity fund, you're likely overpaying. Many great index funds have expense ratios as low as 0.03%. That difference—roughly 0.47%—might look small, but on a $500,000 portfolio, that’s $2,350 a year. That’s a vacation. Or, better yet, more shares.
Step 2: Question the "Alpha"
If someone tells you they can "outperform," ask for their 10-year track record net of all fees and taxes. Then compare it to a Vanguard 500 fund. Most will hedge. They’ll talk about "downside protection." They’ll talk about "volatility." Don't get distracted. If they can't prove they add more value than they cost, they are the ones building the yacht, not you.
Step 3: Simplify Your Strategy
The "Three-Fund Portfolio" is a legendary concept for a reason.
- A total domestic stock market fund.
- A total international stock market fund.
- A total bond market fund.
That’s it. You own almost every publicly traded company on Earth. You're diversified. You're low-cost. You're done.
Step 4: Ignore the Noise
The financial news cycle is designed to make you feel like you need to "do something." Doing something usually involves a transaction. Transactions involve fees. When the market drops, the news will make it feel like the end of the world. That’s when most people sell low, which is exactly when the "smart money" (the guys with the yachts) is buying.
Schwed's book remains a masterpiece because it highlights the absurdity of a system built on the premise that the middleman deserves more than the producer or the investor. The next time you see a commercial for a big investment bank with soaring music and talk about "building your legacy," just remember the harbor at the Battery.
The yachts are still there. They’re beautiful. They’re expensive. And unless you’re careful, you’re the one paying for the fuel.
Next Steps for You:
Start by calculating your "Personal Inflation Rate" and your "Investment Drag." Look at your 401k or IRA today and list out every single fee you are paying. If you can't find the fee, call the provider and ask them for the "Total Expense Ratio." Once you see the numbers in black and white, the path to keeping more of your own money becomes incredibly clear. Eliminate the middlemen, embrace the "boring" index, and stop funding other people's summer homes.