In order to manage a portfolio effectively you need time, discipline, a plan, and access to information. At one time, even if you had the first two, you probably lacked the rest. That is, you may have had the time to devote to your portfolio and the discipline to make objective, unemotional decisions; however, most people lacked a plan and the access to information.
For an investment plan, most people considered, “buy low, sell high, and don’t lose any money” as their plan (That still holds true!). Retirement planning was left to the largesse and/or profitability of employers and the federal government in the form of Social Security.
Investment information once consisted mainly of articles in business publications, reports by rating agencies such as Standard and Poor’s or Moody’s Investor Services, and research reports and analysis generated by the large brokerage firms. Magazine articles were not timely. Access to Standard and Poor’s and Moody’s reports required a costly subscription and were not timely. That left the broker.
The broker was the one with access to timely and (hopefully) accurate information on stocks, bonds, mutual funds, and the like. The investing public was lead to believe, rightly or wrongly, that a registered representative/stockbroker/financial advisor/financial consultant/ financial executive, or whatever label the industry used to describe its sales force, was a trained professional, much like their doctor, lawyer, or accountant. And that this individual had knowledge of and access to all the financial data and information necessary to manage and create wealth and financial security. Without this person to impart this knowledge and acumen, the investor could do little more than throw darts at a board to make financial choices.
Limited access to limited information is no longer a problem. In fact, the pendulum has swung the other way. Investors are bombarded with information from all sides from magazines such as Forbes, Fortune, Smart Money, and Business Week; papers such as Barron’s, the Wall Street Journal, Investors Daily, and USA Today; cable stations such as CNBC, MSNBC, and Bloomberg; and the ever-present Internet with instant news and chat rooms. Additionally, there are numerous books to assist you. All combine to effectively overload potential investors with information, or in some cases misinformation, on any given investment strategy, opportunity, or investment vehicle. A lack of information is not the problem, but rather the inability to process and synthesizeall the available information into a useful investment plan.
In the past, the broker positioned himself as one of the only sources of knowledge and information. Now, given the sheer magnitude of growing information, the industry positions brokers not necessarily as sources, but instead as managers, distillers,and filterers of that information.
Brokers take on many titles that incorporate the terms, “manager,” “advisor,” “specialist,” and “certified.” Their goal is to convince you that you need them to develop an active, long-term investment strategy that will outperform a passive, index based portfolio (net of expenses), while at the same time doing so with less volatility. They need to convince you that the products and services they recommend are worth the upfront costs and ongoing expenses associated with them. The retail brokers and brokerage firms of the past were much more reliant on the traditional “commission per trade” model.
In recent years they have become much more dependent on ongoing revenue streams from products that charge annual expenses and fees, as well as earning margin interest by convincing you that borrowing against your securities for whatever purposes is suitable. Therefore, their ability to convince you that you “need” them is all the more critical to their profitability.
So, do you need a broker? Like many things in life the answer is, it depends. The issues are still much the same as they were years ago: saving for retirement with growth measured against tolerance and ability to withstand risk and volatility, preserving purchasing power, and not outliving our savings. Can you or, maybe more importantly, do you want to manage these issues on your own given the plethora of information and resources available to guide you without paying a fee or commission? If the answer is yes, in all likelihood you do not need a broker. If, however, you feel you do not have the desire to arm yourself with the tools and information to manage these issues, and you are willing to pay the price (sometimes exorbitant) to have someone else do it for you, then a financial advisor should probably be in your life or in your future.
To learn more about Richard Lewins, visit his site at www.lewinslaw.com.
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