After Stan’s first transaction in the bond market, he learned that the broker had a clear conflict of interest (which was not resolvable). Brokers are motivated to sell to their customers the bonds with the biggest "spread" to maximize the broker’s profit on the trade. The spread is the difference between the price the broker paid for the bonds and the price that the broker sells the bonds to its customers.
Stan learned this simple explanation of how the bond market works:
- The house owns the bonds that it sells to retail investors
- the broker represents the house
- you, the customer, are on your own
A book publisher asked Stan if he would write about his experiences with bonds. He, the master delegator, thought Hildy should write it.
Hildy had no interest in money and investing. Stan suggested that they should visit the U.S. Trust Company to create a trust in order to protect her in the event of Stan’s death.
The meeting was a disaster. Hildy realized that without her trusted partner, she would be floating in the financial soup.
Two years later, in 1985, our first bond book, Income Without Taxes: An Insider’s Guide to Tax-Exempt Bonds, was published by Carroll & Graf.
It was written from an outsider’s point of view—a view that we still retain as investors in bonds.
It took an outsider to write the insider’s guide—because the insiders did not want to reveal the secrets of the trade. No money in it.
The business model that Stan and Hildy created for the Scarsdale Investment Group reduces conflict of interest by representing our clients as a fiduciary. We put the clients’ interest before our own.
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