Retirement Income Blog

After the dot-com bust, the 10 largest securities firms paid a $1.4 billion fine to the SEC for inappropriately recommending stocks to investors.  But the public still had faith and the big firms seemed to be little harmed as to their reputation.  In 2008, we have some of those same big financial asset management firms going under or being merged: Bear Stearns, Lehman, Merrill Lynch (more to follow  in 2009).  This time, the employees, specifically the brokers, have lost faith and are leaving to start their own financial asset management firms.

As employees of these larger companies, the brokers often work on a commission basis.  When they leave, they obtain a Registered Investment Advisor certificate from the SEC to set up shop on their own.  They can no longer charge commissions but rather, operate on a fee basis (e.g. charge a 1% fee to manage your stock portfolio).  It’s estimated that there are 1,000 of these independent financial asset management shops being set up annually.  Can you trust an individual with no “big firm” backing?

How much trust you have in a big firm is up to you.  Understand however that if an individual broker becomes an independent financial asset manager, your portfolio is still maintained at a large firm such as Charles Schwab, TD Ameritrade, E-trade, Fidelity, etc. So you are trusting the intellectual capacity, integrity and advice of your financial advisor but your assets are actual on deposit with a large well known custodian. 

It appears that affluent investors, the typcial clients of independent financial asset managers, have embraced the services of these independent providers. Charles Schwab’s semi-annual “Independent Advisor Outlook Study” for 2008 reports affluent investors turning to independent financial asset managers and away from full-service financial asset management firms. Mutual fund manager, Rydex, found the average registered investment advisor was already doing well before the recent turmoil and had increased their client base by 7 percent in 2007.

Michael Weiss, founder of Frontier Financial Advisors says, “Investors are moving their accounts from the
large brokerage firms and banks to boutique financial asset management firms….For the first time in years, the small boutique asset management firms are better positioned than the larger firms to serve the individual investor.”

For you as the investor, you need to decide if your comfort comes from the individual that you deal with and your relationship with that financial advisor or if you feel batter about your financial asset management being handled by a big name.

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Whether you do it yourself or hire an asset manager, your choices of financial asset management are several.

Mutual Funds
The favorite choice of American investors for their financial asset management, mutual funds delegate the day to day decisions to a professional management team.  But the average fund charges about 2% annually (management fees, plus 12b-1 fees plus slippage costs) not including any front or back end loads.  Because the day to day portfolio management decisions are delegated, you only need to select and monitor the fund categories you select.  In recent years, asset allocation has been the buzzword to even make the selection of mutual funds easier with an allocation that looks like this (perhaps 1/6 invested into each category):

• Large US company stocks
• Small us company stocks
• Large foreign company stocks
• Small foreign company stocks
• Bond fund—domestic and International
• REIT (real estate) fund

Complexity (and potentially better performance) can be added by shifting money between the above categories annually by taking money for the categories that have appreciated and adding to the categories that have declined.

Individual Stocks and Bonds
The smaller investor has shunned the purchase and management of individual securities as a financial asset management choice because of lack of knowledge and ability to do the necessary research or lack of time or interest.  Larger investors tend more toward individual securities because on larger portfolios, the 2% fee inherent in many mutual funds gets to be expensive.  The costs to buy or sell stocks at a discount brokerage is insignificant at less than $10 per trade and there is no annual or management fee.  The burden is on the investor or his financial advisor to know what to buy and sell and when to buy and sell.

Managed Accounts
Wall Street created the managed account as a way to offer the best of both worlds (supposedly) as a financial asset management choice.  In this type of financial management account,  you have your own individual account.  Your funds are not commingled with other investors as with a mutual fund.  You appear to have personalization and an individual strategy.  In fact, you have the same portfolio as thousands of other investors (it is really not personalized unless your account is $1 million+) and depending on which type of firm you select, your fees will range from 1% to 20% annually.

There is no “right” answer to the above financial asset management choice that you make.  In all three situations, commodities are being added to the asset mix as investors realize that rising demand for commodities from China and India presents an attractive appreciation opportunity.

Note that your choice of a solution is secondary to larger strategies issues like your tax planning and retirement income needs which can be ascertained by using a retirement calculator.

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