I take a dim view of Wall Street. The financial crises that began in December 2007 exposed an industry that couldn't manage the risk of its own portfolios, much less provide accurate, objective advice to its clients. Yet 85% of individual investors continue to invest with brokers who claim to add value by "beating the markets," even though the overwhelming data indicate the opposite is true.
Here are 10 Wall Street sales pitches that should make you run for the door.
1. We offer free access to our extensive stock research: Their research may be "free," but it's overpriced if it induces you to rely on it and trade. Information about every stock is instantly disseminated. Tomorrow's news moves stock prices, and no analyst can anticipate tomorrow's news. Stock prices are random and unpredictable. Unless he has inside information (which is illegal), the views of one analyst are unlikely to be any more accurate than the views of his counterpart at another firm. All "research" about stocks is not only useless, it's misleading.
2. We offer low-cost trades: Low-cost trading encourages more trading. More trading increases your costs. Higher costs mean lower returns. One study compared the returns of frequent traders to those who traded less frequently. The frequent traders had lower returns.
3. We provide estate planning advice: Many brokers and life insurance companies offer estate planning advice, but it's typically a loss leader to bring in your assets. The big money for these individuals is in the recurring fees for managing your funds. You don't want an estate planner who has an interest in selling you products, much less one who may insert a provision in your will appointing the planner to manage your assets after your death. You'd be far better advised to retain an experienced estate planning attorney.
4. We are very conservative: The same brokers who encouraged their clients to buy tech stocks (which collapsed in 2000), have had a major conversion recently. Now, it seems every broker touts "conservative" credentials. Really? Ask them if they were conservative prior to the crash in 2008 and stayed out of the markets during the 2009 market rally. Being "conservative" or "aggressive" is irrelevant, since no single investment strategy is right for everyone. You need an adviser who will ensure your asset allocation is suitable for you.
5. We focus on the stocks of excellent companies: Excellent companies like Lehman Brothers, Bear Stearns, General Motors, Chrysler, Enron and Washington Mutual? At one time, most "experts" thought these companies were "excellent." We all know how those stock picks turned out. What's more, no data indicate the stocks of so-called excellent companies outperform the S&P 500 index. Indeed, for the five-year period from Oct. 1, 2002, to Sept. 30, 2007, even the most "excellent" of excellent companies, Berkshire Hathaway (BRK.A), significantly underperformed the S&P 500 index. Berkshire Hathaway stock returned 59.72%. The S&P 500 index was up 104.07%.
6. We can put you in managed accounts. Managed accounts, also called "wrap" accounts, are great -- for your broker. He gets fees averaging 1.17% a year for endorsing your check over to an "exclusive" fund manager. When you add the cost of the investments, total fees can exceed 2% a year. Big fees. Little work. No wonder brokers love these accounts. But they're a bum deal for investors. There's no evidence these "top" fund managers do any better than their peers at beating their benchmark index, and the performance of their peers is pretty dismal. If you want a managed account, consider Vanguard's Target Retirement Funds. Their total cost is a miserly 0.19%. The historical performance of these funds is superior to the vast majority of actively managed funds (like those in managed accounts).
7. We believe the markets are [fill in the prediction]: For the same reasons that analysts can't predict the future price of a given stock, brokers can't predict the direction of the markets. Late last year, I wrote a article on DailyFinance that detailed some of the terrible predictions of well-credentialed stock market experts. One who really missed the mark was Jeremy Siegel, a contributing editor to Kiplinger's, an author of several leading financial books and a professor at the University of Pennsylvania's Wharton School. Siegel predicted we would avoid a recession in 2008 and financial stocks would outperform the S&P 500. Flush with confidence, Professor Siegel also predicted Hillary Clinton would take the Democratic nomination and Rudy Giuliani the Republican nomination. All predictions about the direction of market are useless and dangerous: Useless because there's no such skill, and dangerous because investors rely on them to their detriment.
8. We think you should get out of that mutual fund and into this one: Why? If past performance doesn't predict future returns, why are you being told to move to a fund with stellar past performance? If your broker had the ability to pick outperforming mutual funds (and he doesn't), how did he make a mistake with the fund you're currently invested in? Investors who jump in and out of funds chasing the next hot fund manager end up getting lower returns than those who stay invested in a globally diversified portfolio of low cost stock and bond index funds.
9. We recommend this alternative investment: No data indicates alternative investments or private-equity deals beat the returns of a globally diversified portfolio of low-cost index funds. These investment options share one common denominator: high fees and commissions. That's why they're aggressively sold.
10. We focus on private wealth management: This is a sales slogan, not a viable investment strategy. Based on my experience, many firms that repeat this mantra successfully "manage" to transfer your wealth to themselves.
I know what you're thinking: "What's left? These 10 statements are just about everything brokers offer me. Why should I use them at all?"
Now we're making progress!
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