Ive 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, theyd 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 organizations 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. Lets 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 didnt make any profit, but yet still paid me and my buddy both nearly $500k a year!

Finally, lets 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 doesnt, its 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. Ill pass.