American Association of Individual Investors (AAII) Review – The Numbers Behind The Non-Profit

I’ve been getting letters from the American Association of Individual Investors (AAII) for years now, and another one arrived yesterday. Their stated goal is to “assist individuals in becoming effective managers of their own assets through programs of education, information and research.” In big print on the front of the envelope, they declare that they are a 501(c)(3) non-profit “education” organization.

But after reading their pitch about investing in little-known small-cap stocks and their claims of earning 6% a year more than the averages, I just got the feeling that this was another stock tip newsletter. Keep in mind that if someone could beat the market by just 2% a year consistently, they’d be very rich folks.

From previous research on charities, I know that a lot of “non-profits” have top executives making a lot of money. On the extreme end, there are shell charities that are basically really good-paying jobs that hide behind helping veterans or orphans. Of course, there are many situations where an executive can justify their salary, especially if the organization’s administrative and salary costs are a small percentage of donations and most revenue goes directly into the community.

Usually non-profits have to file an IRS Form 990 that is similar to an annual report, and this document is legally required to be open for inspection by the public. Let’s take a look at the 2009 AAII Form 990 from Guidestar.org.

In 2009, AAII declared revenue of $5.8 million, mostly from annual membership dues and subscriptions to their stock newsletters. That $29 a year adds up! Out of that, the salaries of the employees took up $3.1 million, over 50% of the revenue. The top 5 employees get paid a total of over $1.3 million a year. The top two officers both paid themselves approximately $450,000 each in 2009. Here are the exact numbers from a snippet:

$1.1 million was spent on marketing costs of printing and mailing all those letters, and the organization actually lost $1.6 million for the year. I wish I could start a non-profit that actually didn’t make any profit, but yet still paid me and my buddy both nearly $500k a year!

Finally, let’s take a look at their performance claims. According to the site HenryWirth.com, AAII appears to use the shady tactic of only releasing performance numbers after they know they beat their desired benchmarks. (If it doesn’t, it’s swept under the rug.) After the Hulbert Financial Digest monitored their true performance based on public, replicable stock picks, the newsletter was found to have subpar returns over the last 8 years. It lagged the Wilshire 5000 index by over 2% a year, and lagged the Vanguard Small Cap Index by over 7% a year.

I know there are some happy AAII members out there. Teaching individuals to invest independently seems like a good idea, although promoting unrealistic returns is sketchy in my book. Mostly, I find the fact that they are using non-profit status to increase their own wealth very irksome. I think AAII should be run as a for-profit business, and then they can charge whatever they want and pay themselves whatever they want. If you are happy with how this non-profit enjoys their tax-exempt status and how they spend most of their revenue on themselves, then by all means keep on sending in your money. I’ll pass.

Comments

  1. Wow great information about the AAII. It makes me wish there was a real association out there that really looked after my portfolio interests without being a scam.

  2. I feel like there has been a consistent erosion of the intent of non-profit status over the last decade or two. Schemes like this are not at all uncommon. Think of the fancy offices and high salaries of the Girl Scouts national office, the congressional hearings on military charities that revealed big salaries (including news letter writing wives being paid six-figures) and little actual aid, lobbying groups with plush offices and salaries and more. Battelle is one of the biggest defense/federal contractors in the US but is a not for profit.

    Not for profit is just a business organization strategy where they make any profits disappear by the end of the year. Not to be confused with a true charity.

  3. Some Dude on the Internet says:

    I got this mailing the other day, rolled my eyes, and pitched it in the trash. Glad to see my instincts were correct.

  4. I hate these kinds of newsletters! or worse email campaigns. If you could beat the market consistently you wouldn’t be trying to sell me your $29 subscription! You would be running a hedge fund bringing in $5mil instead of 500K!

    Jonathan you may like,

    http://www.myjourneytomillions.....-purchase/

  5. The salaries seem excessive.

    They may excuse their salaries by comparing to what they could make in private industry.

    I’m not familiar with AAII so I don’t know if they’re legitimately educating their uses and actually have any kind of nobile goals as a charity.

    Seems like a business pretending to be a charity more than not.

    On the other hand I don’t know how much it really matters. The executives still have to pay regular income taxes on their incomes. And it seems like they’re dumping all their profit into their salaries. Basically they’re using nonprofit status to avoid corporate taxes but then giving themselves all the money and then paying income taxes on it. So it doesn’t seem like they’re avoiding taxes. I don’t know if being a non profit is being used to fool their members into thinking they’re more legitimate or that they have more nobile goals. But maybe they do honestly have those legitimate educational goals but are just dipping into the till a little too much?

  6. As a country we definitely need to redefine the meaning of nonprofit organizations. The kind of excessive executive pay seems to be a lot more prevalent than most people realizes.

  7. Michael says:

    I recently subscribed for a year to this AAII. I’m not sure it’s really any more value than a general google search for many investing topics. They sure like to hype conferences in far flung places away from home that I’m sure do nothing more than boost tourism.

    Disappointed for sure. I don’t think the subscription price was horrible at the time of signup. Have been rethinking that since.

  8. Great post… As I market to non-profits, it is always interesting to check out the 990 PFs and I always take a glance to see what people are pulling in.

    As disheartening as your post is, be aware that there are many leaders of non-profits (especially on the investment side) who are making far less than they could in the private sector. It’s always nice to visit a major foundation and realize their CIOs office is a cubicle. Many of them take their philanthropic mission very seriously… Of course, many don’t.

  9. Phoenix says:

    Jonathan thanks for the great tip on GuideStar. I used to audit non-profits and i never knew this platform like this (to check on non-profit returns) existed.
    As for the personnel expenses as % of revenue, i don’t see 54% as extravagant for a service entity. That’s not to say that their salaries reflect the work they are putting into the organization.

    Right or wrong, there are many people who begin non-profits as a way of running “their own business” and many of these founders probably look at salary as a way to get guaranteed returns on “their business”, since the losses don’t flow through to the individual’s bottom line. Someone might create a board (appointing family/friends), have the board set a high salary for the founding executives (including retirement) and now the founders get paid while running a losing business. Technically a board is supposed to set the executive pay but when the board is made up of the CEO and the CEO’s friends & family, you can bet the executive compensation won’t be less than reasonable.

    So your comment “I wish I could start a non-profit…” is probably exactly what the founders of AAII thought when they started.

  10. Careful Phoenix… the IRS is very concerned about how conflicts of interest are handled and they do look into cases where the CEO sits on a board that determines their own salary. That’s why the highest paid exec’s salaries get reported directly on the Form 990. They do review the tax returns and if something is out of whack, they look into it. You cannot shelter money from being taxed by the IRS without a legit cause. Estates and politics are the areas they watch the most but they do keep an eye on the others.

    And for those that are confused, non-profit does NOT mean a zero bank balance at the end of the year. It does mean that any positive cash flow is not distributed to shareholders, partners, or otherwise. Salaries are separate, which is why they are reported and are public knowledge, so if they get disproportionate, they are audited.

  11. Phoenix says:

    Scott, i agree completely and i was not intending for my comments as advice or recommendation of any sort. I actually believe i feel the same way Jonathan does about what AAII is doing.

    The motivation behind starting a non-profit should come from the desire to help others, and there are plenty well-paid employees at non-profits that are providing wonderful services. However, there are also many self-serving persons who might first think, “I wish I could start a non-profit that actually didn’t make any profit, but yet still paid me and my buddy both nearly $500k a year” and they end up carrying out their wishes. I wouldn’t be surprised at all if AAII was started by somewhat unscrupulous investment bankers determined to pay themselves handsomely while cutting their risk of loss on the business.

  12. If this upsets you, why not look at mutual insurers? Or Vanguard? Or TIAA-CREF? Or USAA? Or credit unions? Lots of rocks to pick up and find slugs underneath…

  13. vijaianand says:

    It makes me wonder, what is the difference between these guys and Madoff? They both gives false figures and trick people to sign up and fall into their investment trap. I know its tricking the system to get away with it but why not SEC consider this as one type of SCAM as well. Anytime some one promises things which are unattainable and make money from themself, don’t it suppose to considered as SCAM artist.

    Thanks for info Jonathan.

  14. BRAVO!

  15. As an AAII member I think looking at the performance returns is an illogical metric. AAII does not recommend stocks to buy as part of their membership. They offer a service that does that, but it is separate from the AAII membership and it is rather expensive. I paid a one-time fee for a lifetime AAII membership many years ago, so I am not paying any monthly fee for their newsletters, and I am not getting any stock picks. The Hulbert newsletter was likely only analyzing the success of that separate stock picking service.

    When I was starting out investing in individual stocks, I found many of their articles helpful. One thing I like is that if an author writes a book describing a stock picking strategy, they analyze what the author recommends, identify stocks that meet the criteria, update that list every month, and track the performance of that stock picking strategy. You won’t find that level of strategy analysis on any free Web site. Another thing I like about AAII is that they have a good yearly tax guide that I still use every year to identify all the various limits and tax changes. They also review investing/accounting/tax software and investing Web sites.

    Considering I’m not paying any monthly fee, I am not too concerned with how much the executives are making. I would rather get a financial education from someone pulling in $1,000,000 per year than someone struggling to put food on their table. Most people involved in the field of finance are at the top of the pay scale, especially ones with 20+ years of experience on Wall Street. High pay is the primary reason to be in that field. I would be more upset if the president of a company that provides food to staving orphans was pocketing $1M per year.

    Based on the comments, some people seem to be getting the impression that AAII is some stock recommendation newsletter. It is an investment education newsletter. It used to be a print-only newsletter. Now they have everything online, so I unsubscribed from their printed version.

  16. Nick Doyle says:

    Generally concur with Mike C (above). I received the mailings for several years before I finally decided on a one-year subscription. The information in the monthly newsletter is useful — especially for those interested in investing in stocks.

    Over the past decades, I’ve shifted to mutual funds, and while AAII covers funds to a limited degree, their focus was clearly on varying collections or sets of stocks.

    I let the subscription expire after the first year — not because of the quality of information but because it was far more than I needed. For anyone interested in learning about investing, it’s a pretty good place to look, and for a $29 subscription, you might find that it meets your needs.

    Until I read this post, it had not registered with me that AAII was a non-profit (even though as you mention, it’s on the envelope), but I don’t think that it would have affected my decision to subscribe and to ultimately not renew.

  17. Rajendran says:

    I received the promotional envelope yesterday. My dictum is: If it is too good to be true, it, probably, is not. I am not surprised by the contents in the blog. In America, the principles of capitalist, free market philosophy has been abused enormously. The power brokers in Washington D.C. are diluting the controls progressively. The tragedy of unrestrained capitalism comes in evidence again and again. How is AAII able to hold on to a non-profit status while rewarding its top honchos such monstrous compensation? Bulk of the population is struggling to make ends meet and a small percentage of the Nation is cheating the rest to fill its ever enlarging pockets. What happened to ethics and morality in the USA?

  18. I’m a member of aaii,I have learned a lot about investing and have picked up some stocks from their screens and have done well. For the price of $29.00 I think it was money well spent. There is a lot of information you can get on their web site. I don’t really care what the pay scale is for them. What I have learned from them has raised my AGI 20% since I’ve been a member

  19. I’m also a member of AAII. Their monthly journal sometimes contains useful articles, but my main interest in AAII is on account of the stock database they sell ($200 per year) with their software Stock Investor Pro. The software itself is lousy and outdated (it is written in Foxpro, which is no longer supported by Microsoft, and exports to Excel 2003 file format!). I only use it to download the data into Excel where I ply it. The dataset has hundreds of data points and metrics for about 7000 stocks. The data is updated only weekly (hence the low price), but that is good enough for long term investors. The problem with AAII is that they do not spend on improving their software and its data processing. The dataset originates with Thomson Reuters, so it comes from a reliable source, but it frequently suffers from errors and typos. When I recently used their lethargic forums to point out that their industry medians were miscalculated, AAII just deleted my post. I could not believe they deleted the post, so I re-posted, and they deleted it again. Instead of thanking me for correcting a serious systematic error that would have harmed their investors, they just deleted the post. That is very dishonest and it fits with the pattern described in the article and comments above.

  20. I’m sure glad I did a search for reviews on this. $450.000.00 would make me a very happy man.. I’d forget the stock market. I’m retiring on a helluva lot less, calling this group nonprofit is a joke. I think it’s an illegal joke….

  21. With the rise on independent investment research like Value Line, Morningstar, and Zach’s AAII has become pretty much obsolete.

  22. I recently became a member of this organization. Quickly realized that the low cost of annual membership is just a bait to sell more of their products to lead you chasing a mirage of learning how to invest. Most articles prompt you to buy their stock screening tool “stock investor pro”. I am still looking to see if anywhere they teach you the actual basics of investing. How to evaluate the true value of a company. There is a lot of blah blah.

  23. Thank you for this, Nathan. I just got a letter from these people and am glad I read your blog before wasting any money. Best Regards, Scott

  24. Thanks for this post. I just got a letter from them and had never heard of them before. My # 1 rule for increasing my net worth is not wasting money. So now I’m worth $29 more. It’s better invested in IBD and Motley Fool.

    Its also good to know that they pitch the $29 deal as a “member drive” discount. I’m sure their “member drive” happens all year every year.

  25. Susie Mejia says:

    Thanks for the info, I just got the letter and had never heard of them before. The non-profit part almost got me, but thanks to your blog you saved me some money.thanks!!!

Speak Your Mind

*