The Fee-Only Alternative to Business as Usual on Wall Street

Traditional Wall Street firms have failed to deliver credible, objective advice.  Their commission-based compensation system irreparably taints the advice process with conflicts of interest and hidden agendas.  But there is a viable alternative to the commission-crazed, churn-and-burn stockbroker.  The independent, fee-only registered investment advisor offers objective advice, superior service, and economical and effective execution

The vast majority of these firms are relatively small, without the marketing clout of the giant institutions.  So, they are not “top of mind” when investors seek out advice.  But they offer a key invaluable advantage: objective advice.  Because a fee-only advisor derives all of his income from fully disclosed fees paid directly by the client, conflicts of interest are virtually eliminated.  There remains no financial incentive that would prevent the advisor from providing the very best advice for each individual.  So, while the advisor may not always be “right” in his counsel, there are no hidden agendas, or conflicts of interest to cloud his vision or taint the relationship.  And, after all, what good is advice if it’s not objective?

The demand for impartial professional advice is enormous and growing.  For instance, since 1989, assets with Schwab’s Financial Advisor Service have grown to nearly a half trillion dollars managed by 5,600 independent registered investment advisors!  Fidelity and Waterhouse are also experiencing exponential growth in similar services, with others entering the fray close on their heels.  Clearly, Americans are looking for unbiased professional advice and an intelligent alternative to Wall Street’s commission-induced conflicts of interest and voodoo-based investment schemes.

The Problem with Hearing it Through the “Grapevine”

My recent post from yesterday talked about how it feels like an eternity when going through a period of negative performance in one’s portfolio.  And how relative pain is remembered more than relative joy during a downturn.  Continuing from that topic: The proverbial “grapevine” makes matters worse.

Marvin Gaye’s hit song, “I Heard It Through The Grapevine” is about gossip, but for our purposes, it is about two investors, one is producing positive returns in his portfolio, the other is producing negative results in his.  This is almost always the case, no matter how bad things may get for our investor, somewhere somebody is making money.  Those people will certainly tell all within earshot, to make matters worst.  Most investors have a very selective memory.  We all seek approval, and we all would like to be considered astute, sophisticated, and successful.

During social gatherings or casual conversations it’s not unusual to stress the positive and repress the negative.  So the investment winners in our portfolios tend to get talked about more than the losers.  Investors with disappointing recent performance will say nothing.  After all, who wants to broadcast failure?  So, the winners brag, and the losers keep silent.  Soon, it may seem to our poor investor like everybody with an IQ over room temperature is making money except him.

So the temptation to second-guess himself grows and grows.  If only his advisor had been more astute, he would be making money too.  Perhaps it’s time to try something else like all those other smart investors are doing.

Once this kind of cycle starts it can deteriorate into a tail-chasing fiasco.  At least dogs that chase their tails remain on level ground.  Investors can dig themselves into a hole as they ratchet themselves ever downward chasing yesterday’s hot stock, hero fund manager, or top performing mutual fund. 

It’s easier said than done, but we have to ignore the grapevine.  And the braggarts of today, will become tomorrow’s silent listener.

The Market Can Beat Up Rambo

America is a can-do country.  Our heroes are action-oriented and full of the right stuff.  Most successful people got that way by using their skills to make something happen.  Rambo claimed authority by showing up with the biggest gun!

Business responds well to can-do, positive, and active management.  If business turns down, there are lots of things a smart business person can do:  Make more phone calls, hire more sales-people, buy advertising, change the product, have a sale, fire the sales manager, buy the competition, increase commissions, or move to a better market.  Success in business depends on active management.

Investing on your own (particularly in stocks, bonds or mutual funds) is a different kind of animal.  It is a very passive activity.  Markets don’t respond to our can-do attitude.  We can’t just whip them into shape. It doesn’t care if you brought a knife to a gun fight.  They have their own flow.  So, we must attach ourselves to the market’s movements and allow it to carry us to our goals.

More often than not, if you have a good strategy in place, the best single thing an investor can do during a disappointing season is nothing.  Of course, this type of thinking can make a successful, can-do, action-oriented, gung-ho investor just a little crazy.  During times of stress, negative performance, or no performance, he wants to do something.  All kinds of self-defeating behaviors come to mind:  Fire the advisor, liquidate the account, move to another brokerage, sell the funds, anything other than sitting still!  The fund that looked so good during last year’s big recovery now looks like a turkey. An advisor who remains focused on the long term, staying put, and maintaining the course of the plan, obviously must be some kind of wimp right?  Any idiot can see things are falling apart and the Rambo in all of us demands action now!

Investor impatience is compounded by a relative pain, relative time problem.  Portfolio downturns hurt a lot more than good times feel good.  it is much more painful to see your portfolio lose one percent than pleasant to see it gain one percent.  And it feels longer.  Two years of back-to-back declines, underperformance, or even just no performance can feel like a lifetime.  And, as we have seen, even a superior portfolio will go through occasional extended periods of disappointment.