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Investment portfolio manager. I've worked at a large multinational private bank and at a small trust company.
I've had too many little 85 year old ladies that come to me for asset or trust management. And guess what? Somebody just sold them a large annuity that they cannot cash without significant penalty for another five years - and which pays them no current income. Or they are frustrated with their broker who just bought and sold the latest series of high flyers that generated fees but little equity return. Or they are 100% fully exposed in equities when they really would benefit from a few nice boring muni bonds. Probably the worst "strategy" I have ever seen was peddled by some guys who were selling senior citizens "actively managed" securities (translate that as margined mutual funds holding options and derivatives) that were coupled with and "secured" by the sale of an annuity that accepted a third party assignment back only to be further invested into the same house of cards (another variation in lieu of the annuity was to use a REIT that largely financed church construction). In my experience, these are not uncommon occurrences. That said, there are some very good financial planners, brokers and other financial professionals.
Anybody who works on a commission basis selling anything has a direct financial incentive to put their interests above that of their customers. Most people who buy a car - used or otherwise - recognize that. **You** may not churn accounts - but far too many of your peers do. And some of them hand out some very, very bad advice.
Even the best brokers lack the information and tools to offer the same investment services as professional money management firms. The average small investor is at a decided disadvantage. That is simply how the financial services industry works. Small investors simply do not receive the same level of service in the financial services industry as large investors do.
Unless a broker buys his own equity research from an independent or unless he invests a small fortune into a Blomberg terminal and the time to do the primary research then he simply does not have access to the same kinds of information that investment firms do. And, that is to the detriment of his clients. Analysts from different brokerage houses will issue a wide range of opinions and recommendations regarding the same security. Want an example? Look at GM. Presently there are 4 analysts with a strong sell recommendation, 2 analysts with a sell recommendation, 9 analysts with a hold recommendation, 2 analysts with a buy recommendation, and 1 analyst with a strong buy recommendation. The safe bet is not to buy or sell but to hold. But if you want to take a chance at juicing return then by all means buy GM stock. There are, after all, plenty of good excuses if the bet goes bad. Oh, wait. What you really want, Mr. Analyst, is for somebody else to buy the stock because your company already holds too much in inventory? Then by all means put a buy recommendation on that stock. How many folks really know that your brokerage house keeps an inventory of stocks that they might occasionally want to reduce through market sales? How many folks really understand the inherent conflicts of interest between investment bankers and brokerage houses and their analysts?
Brokers usually cannot and do not offer clients portfolio modeling. The multinational private bank where I worked had about 300 investment models at any given time. And they had the technology to instantly identify accounts by multiple characteristics - and to simultaneously trade in all accounts. This means that all the accounts were treated the same and traded in the same. No client was given preference over another. Brokers usually have to get client direction for trades. Who do you, as a broker, call first? Or last?
Brokers who do offer some kind of equity modeling lack the resources to offer continuously updated equity models designed to maximize client objectives - and their clients are neither willing nor able to incur the fees from the frequent incremental trading required to maintain that portfolio. When was the last time you saw any broker trying to get a client to implement a portfolio strategy based on a theoretically optimal mean variance portfolio modified to meet client objectives (e.g., maximize dividends or return or minimize risk or variance)? It is just not practical except on a large scale.
Small investors face other problems of scale. If you want to implement a balanced investment objective (roughly 50% equity and 50% bonds) using a diversified equity portfolio of at least 25 stocks then, realistically, you probably need an account in excess of $250,000. If you adopt a more conservative investment objective then you will need an even larger account to buy that equity portfolio. This is where it starts getting costly for the average small scale investor. Why? Because they either have to (1) buy stocks in lots of 100 shares and have a portfolio that is not properly weighted, or (2) buy stocks in odd lots and pay the fees associated with doing so, or (3) choose to buy mutual funds (and the associated services of their professional money managers) and pay the fees associated with doing so. Even sophisticated investors will find it difficult to properly diversify a small equity portfolio without incurring additional costs.
Professional money management is cost prohibitive and many management firms will refuse accounts valued at less than $1 million. The most practical way for small investors to obtain professional money management is to buy mutual funds and pay the fees associated with them. And those fees are higher than what is typically charged by professional money management firms where fees are usually about 1% of the average annual account value with direct trading costs somewhere around 3 cents per share. Professional money management fees go up or down based on investment performance within a particular account. There is a strong incentive to provide good long-term advice and to continuously monitor securities held.
Small investors can do well in the market. Historically, the best performing stocks over the long-term are value stocks. These are the stocks that are priced cheap relative to their long term expected return. The trick is understanding whether or not they are cheap for good or bad reasons. Find one that is unreasonably cheap, buy it and hold on to it for years. Ignore all the market ups and downs - unless something fundamentally and significantly changes the long term expected return. Now go replicate that 25 times across market and industry sectors to diversify your market exposure and reduce your risk.
As in everything else, let the buyer beware.
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