Last week the advisors of Veritas Financial were in Colorado Springs for a Matson Money Conference. It was an excellent conference, and I thought I would summarize a few of the takeaways that I had after the conference, and how this applies to investors.
We always thought the "enemy" was active management-- or retail mutual fund companies, and the brokers who unknowingly preach that failed way of investment thinking. However, there is a new, much more powerful force waging war on the American investor. This is the true "Evil Empire" as they were coined. Collectively, these four companies hold a vast amount of investor wealth, and are accumulating more each day: Fidelity, E Trade, TD Ameritrade, and Charles Schwab.
Just how big are these firms? E Trade: $201 Billion. Schwab $1.9 Trillion. TD $481 Billion, and adding $160 M each day. Fidelity $1.7 Trillion. Many investors are by and large ditching their brokers and going to do it themselves. Why? Well, these four firms are doing an all out assault on advisors, spending hundreds of millions on advertising. Secondly, the average investor, with their own experiences, have lost faith in the brokerage industry (which, of course, we would say you could predict with their behavior as it is). And the traditional broker dealers see the writing on the wall. Did you know that LPL now has it's only "direct" channel to investors? No longer do you need your friendly LPL agent, go directly to LPL itself!
These firms tell you to ditch your advisor, and save boat loads of cash in expenses. The problem is, that these firms a) do not have the investor's best interest in mind, and b) are not all that cheap after all. E Trade has it's own advisory fees. You want Fidelty's low cost trades? Better be ready to trade 110 times a month. You also may be pushed to trade in complicated securities, like options. Many of the same costs you think you are avoiding, will crop up again. Instead of disciplining investors, these firms amplify bad investor behavior by encouraging constant trading in pursuit of the best investments.
Investors are their own worst enemenies, and it is very difficult for them to resist this urge to break away. Many believe they are "sophisticated", and don't need an advisor. Here is one concept that is very hard to swallow for investors: THERE ARE NO SOPHISTICATED INVESTORS. Just take a look at the victims of Bernie Madoff. There were professional money mangers among that list, people who worked in the industry for years, yet fell victim to the most simple of all schemes: the ponzi scheme. Secondly, we think that investing is so easy... how can we possibly mess it up? We just have to follow three basic rules: diversify, rebalance, and own stocks.
Lets look at something also very "simple". We all are taught at an early age to brush our teeth and floss regularly to keep our teeth and gums healthy. But in 2002, we spent over $70 Billion dollars in dental expenses (much of it was surely preventable). A very simple thing, but we fail to do it. We also have an obesity epidemic in a country where almost everyone knows what they need to do to stay fit; with fitness centers in every city and easy access to athletic trainers. But investing has an added element: If you skip brushing your teeth for one day, or you splurge on the dessert for a weekend we can fairly easily repair the damage. But with investing, one lapse in judgement can destroy thousands in wealth. Just one.
So what is the bottom line? It is this. Investing isn't all about the portfolio. True, a good portfolio is important. But why investors fail is not that we have people with portfolio problems, we have portfolios with people problems. If investors are to be saved, it will take not just academically sound portfolios, but actual disciplined guidance. As financial coaches we work hard to educate our clients. It's good that you trust us, but unless you are educated and disciplined, eventually your emotions will betray you. We won't be there at 2am when you are up at night, worrying about the market, or when that annuity salesman knocks on your door. Only a good investor education can keep an investor grounded for the long term.
This is the true "Evil Empire" as they were coined. Collectively, these four companies hold a vast amount of investor wealth, and are accumulating more each day: Fidelity, E Trade, TD Ameritrade, and Charles Schwab.
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