Investors Today Have Much to be Thankful For

At first glance, it doesn’t seem that investors have much to be thankful for this Thanksgiving.  Though we certainly aren’t celebrating a roaring bull market, there are some things investors take for granted today that deserve a nod of thanks.  When my grandfather started investing in the 1940s right up until I started in financial services in the mid-1980s, investors relied on three main sources of investment information: the daily newspaper, monthly investment periodicals, and then ultimately their stock broker.  Life may have been simpler back then, but that simplicity wasn’t necessarily a good thing. Information was a commodity closely held and guarded from the general public. The industry has evolved and changed for the better since I started my career.

Here are some changes to be thankful for:

Investment fees are significantly lower: The lower the fees and expenses we have to pay, obviously the more money we have in our pockets.  Years ago, before full disclosure high fees were acceptable, I remember when the industry standard was an upfront fee (load) of 8.5% on all mutual fund purchases through a broker and everyone paid it.  In fact, investors paid hefty fees all around back then. In 1980, the average front load for a mutual fund was 7.9%, and the average annualized cost (including expense ratios) was 2.32% for stock funds and 2.05% for bond funds.  Today, there are a myriad of low fee choices for investors, including no-load and exchange traded funds.  Even though the average front load for a stock mutual fund today is 5.3%, the average load that investors actually paid was 1% due to volume discounts (or breakpoints) and fee waivers for such things as purchases made in retirement plans.  Investors today have a huge advantage over investors twenty years ago.

The investors have more resources: In the “old days” brokers controlled information and disseminated it to the investor almost acting as a translator.  Serious investors had to subscribe to services such as Value Line for stock information or Morningstar for mutual funds but at a hefty price.  I recall Value Line being over $600 per year for individuals back then, which translates to about $1,600 today.  The do-it-yourself investors could go to the main library in town to read the library’s subscription.  Investors flocked to local chapters of the American Association of Individual Investors.  Now we have 24 hour streaming business news.  Securities advice and market information is provided with a brokerage account and premium information services are reasonably priced.  With access to so much information, a do-it-yourself investor has many more tools at hand today.

For those who would prefer to work with someone, it’s also easier to find a qualified professional. Before the Certified Financial Planner Board of Standards was officially launched in 1985, the main qualification for a financial representative was to pass a stockbroker’s exam, which was mainly memorization of trading and options.  I am not saying the test was easy. In fact, I personally found it more difficult than childbirth, but all it really tested was how well you can pass a test.

The Certified Financial Planner™ designation changed all that.  A college degree and successfully passing exams in six classes of study in various areas of finance, which included case studies, are required. Planners needed to have a minimum of three years of experience to earn their designation and then once they had it, there was continuing education and adherence to a code of ethics.  I earned the CFP® designation in 1990 because I whole heartedly agreed with the philosophy that investors need a financial plan – you can’t invest in a vacuum. I believe that with a holistic financial plan, more solid financial decisions are made.

The nature of the advisor relationship has changed: The model for working with a professional financial advisor frankly needed to change. Historically, investors worked with a traditional stock broker who made commissions on trades when a client bought or sold. The incentive is obviously skewed toward moving money around so the investors never quite knew whose best interest the broker was working for.  My grandfather fell into a trap of being extremely skeptical of his broker. When she called to make a recommendation, he always assumed she was only calling to make a commission.  Subsequently, he never took her advice at all and ended up losing hundreds of thousands of dollars when his major holdings dropped because he never took her advice to diversify seriously.  I often wonder if he’d had access to a fee-only planner or used a managed account what a difference it would have made to his financial picture and ultimately my extended family’s wealth.  It seems to me that he lost a lot of money needlessly because of a financial services delivery system he didn’t trust.

Today, the financial planning industry has created a model where the advisor and client sit on the same side of the table with fee-based asset management rather than commissions for trades.

A group of planners who wanted to serve the public without being concerned with commissions formed the National Association of Personal Financial Advisors in 1983.  Today, they provide support and education for 2,400 members who provide fee-only financial planning services to the public.  The industry has evolved to become more client focused and less commission focused.    Obviously greed was not eliminated, but we’ve come a long way.

New investors today may be overwhelmed by the amount of information they have access to.  It certainly could be argued there is too much information, but I doubt anyone would want to go back.  Reading stock quotes out of the newspaper seems archaic now, and waiting for the monthly magazine to be delivered to the mail box seems like an eternity.  We can certainly be thankful for the fact that we can choose to read our magazine online, on paper, or even on a Kindle.  On Thanksgiving, we can certainly be thankful for many things.  Another one is that we can also turn off the flow of information as we silence the smartphone and close the iPad to enjoy an evening with our family and close friends.

Nancy L. Anderson, CFP ® is Think Tank Director and Resident Financial Planner at Financial Finesse, the leading provider of unbiased financial education for employers nationwide, delivered by on-staff Certified Financial Planner™ professionals. For additional financial tips and insights, follow Financial Finesse on Twitter and become a fan on Facebook.