Counterparties: The broken brokerage industry

March 22, 2013

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Where the hell should you put your money these days? If you’re like most Americans, you probably haven’t saved enough for retirement. That the stock market is flirting with an all-time high isn’t actually helpful — it’ll make it that much harder for savers to catch up.

People used to listen to brokers for this kind of thing, but the brokerage industry isn’t what it used to be. “Commissions are drying up,” Zeke Faux wrote in October. The industry’s fees are down 31% since 2009,  and average daily volume is down 36%. “It’s an impossibly tough business,” the CEO of ThinkEquity said.

Into that mix, Nathaniel Popper reports, comes LPL Financial, which has quickly become the largest nation’s fourth-largest broker, just behind traditional Wall Street powers like Merrill Lynch and Morgan Stanley. LPL’s lower-cost model uses brokers that are “essentially contractors”, and they’ve targeted rural America. They’ve also been hit with more than their share of penalties “for selling complex investments to unsophisticated investors, for speculative trading in customer accounts, and, in a few cases, for outright stealing from clients.”

Unlike its competitors, the company doesn’t have its own investment products. (JP Morgan has been accused of favoring  its own financial products, but it’s also a classic stockbroker conflict.)

Then there’s the question of whether you should use a brokerage firm at all — especially when lower-cost services like target-date funds or Wealthfront do all the work for you and are showing real promise. Mebane Faber reminds you that you are not a good investor — and, in fact, very, few people are. “Simply picking a stock out of a hat means you have a 64% chance of underperforming a basic index fund, and roughly a 40% chance of losing money!” he writes. Howard Lindzon, on the other hand, argues stock-picking is ok — just make sure it’s a hobby and that you don’t care about underperforming benchmarks.

Tadas Viskanta has one of the best, linky rundowns of the new state of individual investing. His conclusion is ultimately similar to Helaine Olen’s: almost every facet of the personal finance industry has lead us astray, from professional advisers to the traditional 60/40 portfolio. Here’s Viskanta:

In the end it may be the case that our financial goals are simply too ambitious and that we need to lower our sights. What is clear is that we as a society have failed and are continuing to fail the average saver.

– Ryan McCarthy

On to today’s links:

Alpha
Stevie Cohen’s secret sauce: make big bets before market-moving events (and be right) – WSJ

EU Mess
“The future of the euro zone has been put on the line for a few billion euros” – WSJ
Cyprus’s choice: “become a gimp state for Russian gangsta finance, or turn fully towards Europe” – FT Alphaville
Russia turns down Cyprus’s latest aid offer – Rueters
What are the Russian’s playing at? – Felix

Popular Myths
America’s debt is hurting the economy — unless you look at actual, real data – Bloomberg

Ugh
The rich give less than the poor, and when they do give, they don’t give to the poor – The Atlantic
Lose $6 billion in a very public way and you too could be lauded at a Wall Street awards dinner – WSJ
Betting against the London Whale was a “fairly easy and obvious trade to do” – William Alden
“Things to keep in mind when looking at buying a German castle” – WSJ
Google alerts are “broken” and “useless” – Venturebeat

Hope/Change/Etc.
Why isn’t the White House defending its sweeping financial reform bill? – Jeff Connaughton

Retractions
Richard Florida admits that coffee shops filled with graphic designers discussing yarn bombing won’t save cities – Daily Beast
“My response? Bollocks.” – Richard Florida

Billionaire Whimsy
David Rubenstein knows more about panda mating habits than you do – FT

Compelling
“In money management what sells is the illusion of certainty” – Research Puzzle

Servicey
Working on planes is a terrible idea. Just drink – Businessweek

Great Headlines
“Gonorrhoea, online dating and credit card phishing scams” – John Hempton

Vintage Bess
“Text world leaders during late-night bike rides and watch the pounds melt right off – Bess Levin

Hackers
John Doerr still uses AOL, gets hacked – TSG

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And, of course, there are many more links at Counterparties.

More From Felix Salmon
Post Felix
The Piketty pessimist
The most expensive lottery ticket in the world
The problems of HFT, Joe Stiglitz edition
Private equity math, Nuveen edition
Five explanations for Greece’s bond yield
Comments
One comment so far

One particularly troubling aspect of modern personal finance is the growing number of households that simultaneously invest and borrow. This is obviously good for the banks and Wall Street, as they charge you a hefty spread and fees for intermediating the money between your 401k and your mortgage. But is it good for America?

Now I fully understand that the long-term (tax-deferred) returns on a 401k ought to beat the cost of a (tax-deductible) mortgage, especially today with rates so low! Because of this, we did the invest-and-borrow leveraged tango ourselves for a decade. Yet that arbitrage is supported by tax subsidies on both ends — it isn’t free to society. And any remaining spread between investment returns and mortgage rates is bought by adding risk, at both the household and banking level.

Should we be paying people to make the banks rich? Should we be paying people to take risks with leveraged investments? Or should we look for a way out?

Many implications of this choice. If we were to eliminate mortgage subsidies, housing values would fall dramatically. Banks would hate this. Present homeowners would object. But it would make housing far more affordable for the next generation, and help to put our national finances back on a sustainable course.

Neither a borrower nor a lender be.

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