ARE STOCK BROKERS AND INVESTMENT ADVISORS IRRELEVANT IN TODAYS MARKETS?
For some time now I've wondered: is the concept of the stock broker or investment
advisor (or whatever they call themselves today) relevant any longer?
The concept of a broker/advisor was that this individual would help you navigate
the minefield called investing. This individual, WITH YOUR BEST INTEREST IN
MIND, would help you make decisions and you would pay them a fee either as commissions
or as management fees. Trust was key.
While never a perfect system, those who did right by their customers prospered
as brokers, those who did wrong or were incompetent did not prosper. As
the years have passed, so has this concept.
This help that was provided to the retail client was called "transactional
business" since each decision to invest was called a transaction.
Today, most firms like Merrill Lynch, Morgan Stanley, Smith Barney, UBS,
and just about every firm on wall street have made a decision that they no longer
want their brokers/advisors to soliciate or even execute "transactional
business" any longer.
"Transactional business", the buying and selling of securities,
stocks, bonds or options has become too risky for the brokerage firms because
their "broker/advisors" may not be properly trained to do transactional
business. Further they may no longer trust that the "transactional business"
being done by the broker/advisor is suitable for the client. So why do
it at all.
Instead, they want their brokers to "gather assets" (your money)
and place those funds in "fee based accounts"
"Fee based accounts" are typically moneys placed in a managed account
where neither the client or the broker/advisor make any investment decisions.
ALL investment decisions are left up to a third party, the money manager".
So I return to the premise: Are stock brokers and investment advisors
irrelevant?
It certainly seems so. Go to any firm and you will get a "Chinese
menu" of money managed investment choices. Pick one from column A
(for equities) and one from column B (for fixed income).
Do you need to pay a big commission to a broker for this kind of advice?
I think not. If you got rid of the brokers commission for money
managed products then you could earn an extra 1% each year. After all,
most brokers/advisors just following the "pick list" provided by their
firm or they are pushing the product of the week. Instead of your interest
as a priority, the firms best interest is the first priority.
In fact, many firms have long felt that their retail accounts (that's you)
are simply there to lay off the garbage products and odd lots that they can
not get rid of institutionally.
Now the big question is, are your brokers working for YOU or for their firms?
Here is an actual example of how they did not work for me.
Recently I purchased a new issue stock (IPO) from one of my brokers. The
stock starting trading at a nice premium. I called my broker and said sell!
He said "YOU CAN'T, you have to hold it for 30 days". I
said "but millions and millions of shares have already traded, so why can't
I trade mine." He said, " because if you trade before the 30
days they'll take away my commission and not let you buy any more IPO's"
Well, at least he was honest with me. Finally, as the price of my
stock fell more than 2 points, I brow beat him enough to get him to sell. His
commission for "doing me a favor" $1.20 a share. over $280. Had
I been able to do this trade at a discount house, $10-$20. So much for
MY best interest.
Since I've been at this for 30 years, I could give you hundreds of examples
of how the broker/advisor system does not work for you. But in fairness,
I could also give you hundreds of examples of how it has worked for me. The
problem is the examples that did work would all be in the early years of those
30 years when brokers actually did work for their money.
Institutional accounts are not really treated any better. In the recent
financial collapse, it has been suggested that while ONE OF THE BIGGEST
INVESTMENT BANKS was selling institutional clients CDOs, that firm actually
felt so strongly that those CDOs would fail, that the firm actually shorted
the very investment it was recommending in its own account and sold them to
institutional accounts. On Wall Street this is not unusual, it actually
may be the rule. But how would we ever know?
Brokerage firms (now knows as "investment banks") would all love
for you to think that you actually mean something in the brokerage transaction.
But you don't. If anything, most experienced investors feel that they
are more of dumping ground than a valuable client.
Broker/advisors actually have it pretty good. They no longer actually have
to think about the clients well being, they just hand you off to a 3rd party
who has all that responsibility. They collect a big check and rarely contact
you. Usually you have to contact them. Have you ever tried to get
your broker on the phone late in the afternoon? How about after 4:00pm.
I know that when you most need them, their not around.
Are broker/advisors irrelevant? Think of some of the great advertisement
lines you've seen for brokerage firms in the past years trying to convince you
they are relevant:
- "Talk to Chuck"
do you really think that "Chuck Schwab" is going to get on the
phone an talk to you?
- Morgan Stanley ran ads a
few years ago telling you how your advisor would be their for your child's birth
and their college graduation and would even
give a toast at their wedding. ( give me a break: the average broker/client
relationship last 4 years or less)
- Smith Barney famous for "We
made money the old fashioned way, we earn it"...... OK, sure. (it's 3PM and I just called my
Smith Barney broker, he's gone for the day. Do you know where he is?)
Obviously, none of the above slogans actually come true, they're just advertisements.
Aren't we allowed to lie in advertisements just to get your attention?
Actually, no. The above slogans are or should be a violation of the NASD
( now FINRA) fair advertising policies. but they are not.
FINRA, the new combination of NYSE and NASD regulators say that any advertisement
that can be construed as misleading is a violation of policy. So
let me ask you: Can you really talk to Chuck? I guess that's not
misleading.
Because the financial markets are self-regulating, the white shoe club called
Wall Street allows all the big players like Merrill, Morgan, Citi/Smith Barney,
UBS, Schwab, and other lots of "leeway" with the rules. While
the little player is keep on a very short leash, the big boys have a leash a
mile long.
Because of all of this, you really need to wonder: Are broker/advisors
relevant any more?
This article is not to be construed as investment advice and may not be the
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