Darwin Meets Investment Advice!

THE EVOLUTION OF ADVICE!

The more articles you see on how “advice” is sold, the more you want to run for the hills! I think Jonathon Chevareau has been trying to get to the meat of the matter with his recent articles on how different advisors charge fees, but sheeeeesh, should it be this tough?

Perhaps we need to take a trip back to a simpler time when trading stocks was the purview of the elite (i.e. you and I were not invited into the game)

Step 1: Back before Darwin, Brokers sold stocks to wealthy people who paid big commissions for the right to own companies…..you and I bought GICs and looked at the rich with awe and envy!

Step 2: That was good into about the early 1980’s. Then we demanded the right to play in the market; but being simple people we were not likely to understand the complexity of buying one stock! So the smart people set up little baskets of stock we could buy (mutual funds….even sounds a little socialist) at a modest fee. Since we were indeed quite simple, they decided not to bother us with the cost of owning these…they would use hidden fees and trailer fees we wouldn’t have to see for fear it might confuse us!

Step 3: As we paid these high fees without complaint the dollars rolled in and brokers split into two groups, the old guard serving the rich and Mutual Fund Salespeople to milk….er service the rest of us!

Step 4: Then along came a tough challenge for the industry, “discount brokers”! That allowed the mutual fund crowd to get their feet wet in stocks without paying the old guard their full stipend! It also caused fee leakage from MF’s into the DB’s (discount brokerages).

Step 5: Ever on the lookout for ways to make those fees, the smart guys started to stoke up the marketing machines and overwhelm the new investors with new products that they could buy. Soon discount brokers were the home of the money machines known as “day traders”! The average guy/gal thought it they read enough on the internet, watched enough ROB TV, and read the huge ads in the newsprint (think RRSP time); we could do it faster, better, and more frequently than the old guard brokers! Of course our dreams were quickly dashed when the “tech wreck” showed most of us we really were not that good at finding winners!

3b. (love my new math) So we had to back track and return to the MF guys, tails between our investing haunches, and buy more funds. However, we were a more educated bunch now. We knew the cost of a trade and we did not like the MERs on those funds any more!

6. (we are making progress again) Now the field began to divide up depending on our aptitude, level of over confidence/ability,and willingness to do our homework. A few who did not lose their shirts stayed on in the DB channel, those who lost total confidence went to GIC’s, some went back to the traditional broker but now the trade prices had to come down and even “buy &hold” became popular! Through it all, the rich stayed rich (big surprise) but with common folk now in stocks, more of the rich went to Portfolio Managers (fancy schmansy and an entry level deposit requirement to keep us out). Of course many, poorer but wiser, remained with the funds even though the heady days of fantastic gains seems to have gone away!

7. (we’re getting to the end) The deal breaker, earth shaker, and transformational change that occurred next actually began with but a whimper. Out of the U.S. came Index Funds”! They were cheaper than MF’s, they typically outperformed most other funds, and you did not need to pay an advisor! The marketing machine of the “buy side” kicked into high gear and the battle continues to this day! Brokers created new complex products that you had to have; index linked notes, structured products, hedge funds….i don’t know what they do but all the “smart money” is buying them! Heck, they even have this phenominal deal where they keep your money like seven years then guarantee they will give it all back!!!!!!

Finally: Love or hate MF’s or Equities or Bonds or Income trusts….the fact is investors today have more choice than ever! The real issue is the smoke screen of competing products, different fee structures, different types of advisors (fee-based,fee-only,commission sales and trailer based) and a marketing machine that changes the landscape daily with new commission schemes disguised as new products.

Now: What are we to do? Well, do what you understand! Regardless of what channel you decide to invest in WATCH YOUR FEES, ask questions, do not buy what you do not understand! Do not look for the friendliest advisor, look for the cheapest advisor and then monitor your account to make sure it is going up at least as much as the relevant benchmark indexes!

The Future: Planning advice will be bought separately from the securities selection advice! Overall strategy and planning decisions come from one advisor and decisions on what to buy or sell come from another totally separate source. One will not be allowed to impact the other, and like any good balanced approach, each keeps the other honest!

…..at least that’s how I see it all evolving! soismike