Tag Archives: investment firms

The Trend: Fewer “Self-Directed” and More “Advisor-Reliant” Investors

According to Cerulli Associates more households rely on advisors than ever before.

Since 2010, the households classified as “self-directed” investors had shrunk from 45% to 33%, while households termed by Cerulli as “advisor-reliant” investors — regularly consulting with an advisor — had grown from 34% to 43%.  What drives this trend?

I can think of several reasons.  Two that come readily to mind are:

  • the increasing complexity of financial markets and
  • the number of dramatic financial shocks that people have experienced in the last 15 years.

I can remember a time, back in the 20th Century, when “investing” meant calling a well-know investment firm and buying a stock, like General Motors.  Well, good old GM went bankrupt a few years ago and since then about 25,000 mutual funds have appeared.  In addition there are options, derivatives, structured products, and – of course – ETFs (exchange traded funds).  And that’s just here in the good old USA.  But there’s a whole world out there that people can invest in: foreign stocks, foreign funds, world stock funds, emerging markets, commodities, to say nothing of foreign bonds and currencies.

Few people have the time to study all of these, so the rational thing to do is to find a financial advisor to help you make sense of it.

And then there are the financial disasters that decimated many self-direct portfolios.  In the year 2000 the dot-com bubble collapsed, devastating the portfolios of those riding the tech boom.  And who can forget the housing bubble that led to the financial crash of 2008, wiping out some of the major banks and investment firms and ending the dreams of a comfortable retirement for many people?  Professional advice should be concerned with risk control as their first objective, followed by getting a fair rate of return on your invested assets.

During all this time, financial advisors who were once employees of the major investment firms decided that they could best serve their clients by declaring their independence.  They set up their own firms, becoming Registered Investment Advisors (RIAs) offering fiduciary services.  That is another development that has helped to make financial advice more accessible to individuals and families, the mom and pops of the investment world.

If you’re one of the shrinking do-it-yourself crowd, check us out and see why you may be much more comfortable with us as your advisor.  And if you are one of those with an advisor but wonder if you could do better, feel free to get a second opinion.  We’re a family firm.  We deal with several generations of families that look to us for guidance.  We look forward to hearing from you.

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The use and abuse of securities based lending

According to a recent article in Fortune magazine, the latest push by the big investment firms is to get as many of their clients as possible to borrow against the value of their portfolios.  Clients can borrow from 50% to 95% of their portfolio’s value.

Securities-based lending, also known as non-purpose lending, is Wall Street’s hottest business. From UBS to Bank of America Merrill Lynch to JPMorgan, high net worth investors are being enticed to take out loans against their brokerage accounts at a blistering pace. A May 2014 article in The Wall Street Journal told the story of Jason Katz, a UBS broker who has arranged portfolio loans for 21 of his clients in the prior year, a four-fold jump from the year before. The Journal reported that portfolio lending jumped by 28% at UBS between 2011 and 2013.

The loan has an interest rate, which may be either higher or lower than a bank loan.  But what many borrowers may not realize is that their portfolio can be sold out without their approval.

Supposed someone “has” to have $100,000 for a new boat.  With a stock portfolio worth $200,000, that individual can get a quick loan without a single transaction taking place.   But if the value of the portfolio drops, the firm has the right to sell the portfolio instantly, without notice.

Should market volatility result in a capital call, securities held directly by wealth management customers can be liquidated instantly with very little risk to the brokerages who’ve extended the credit. In essence, we’re seeing re-leveraging amongst the 10% of America that owns 80% of the stock market, while the other 90% of the country has been forced to deleverage in recent years.

As a fiduciary, it is our job to advise our clients on risks.  While taking an occasional short-term loan may be the right thing to do in special circumstances, borrowing against a portfolio, especially near the limits is very, very dangerous.  Wall Street is pushing these loans to fatten it’s bottom line.  Don’t get hooked.

 

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