I BEGAN MY CAREER in investments as a junior analyst at a public endowment fund. It was 1980 and I’d just finished my last investment class at college, where I learned about Modern Portfolio Theory. Why, decades later, is it still called “Modern”?
The Dow Jones Industrial Average was below 1000, versus today’s 27000. Men wore suits in 100-degree Texas heat. We had individual offices. We researched companies by reading brokerage reports, talking to brokers and requesting annual reports from companies. Those requests were typed up by our secretary and mailed to each company’s investor relations department.
The Wall Street Journal had just one section. There was no electronic version. Brokerage firms were happy to provide us with “free” proprietary research, since trading commissions were extremely high. The arrival of fax machines was a real game-changer in delivering those research reports, which could be hugely valuable. Regulation FD hadn’t arrived, so brokerage firms often obtained information that hadn’t been fully disclosed to the public. If we liked a brokerage firm’s trade ideas, we’d buy or sell through the firm and its compensation was the commissions earned.
Twice a day, we could see stock prices on our Quotron machines, which also provided trading volume. A year or two later, our first personal computer arrived. This was before the internet. The only stock market TV program was PBS’s Wall Street Week with Louis Rukeyser, who broadcast from Owings Mills, Maryland. CNBC and Bloomberg Television were nowhere in sight.
Pensions were commonplace, while IRAs and 401(k)s were only just taking off. I remember sending checks to Fidelity Investments since its money market funds paid north of 15%. This was the era when Salomon Brothers’ economist Dr. Henry Kaufman warned us that budget deficits would lead to higher interest rates and President Reagan’s Budget Director David Stockman was a political force. Soon after I began my investment career, Federal Reserve Chairman Paul Volcker broke inflation’s back with sky-high interest rates.
Fast forward 40 years and the landscape has changed radically. Trading commissions are essentially zero. Brokerage firms that thrived on commissions, such as PaineWebber, Dean Witter and EF Hutton, have all but disappeared. Regulation FD puts individual investors on a level playing field with institutions, who now gather their information on public conference calls. Discount brokers like Charles Schwab, Fidelity and Vanguard Group are driving changes in Wall Street’s business model.
The focus is no longer on trading commissions, but instead on gathering assets and charging for financial advice. The late great Jack Bogle, founder of Vanguard, proved that index fund investing was a smarter way to save for retirement. Fund management fees—which used to be regularly above 1% of assets—are, in some cases, dropping to zero or close to it. Celebrated investment stars like Peter Lynch—everybody’s favorite example—have been replaced by robo-advisors, index funds and target-date funds.
Meanwhile, CNBC and Bloomberg provide constant stock tips, while showing rising prices in green and falling prices in red, all designed to stir up emotions. But it seems many investors have moved on from stock-picking. Now that indexing has replaced the need for individual stock selection and trading, the accumulation part of investing seems relatively simple. Going forward, the focus of financial advice will, I believe, be on creating lifetime income from retirement accounts in a low interest rate environment. Tax planning, guaranteed income through annuities, spending rates and health care planning are where the baby boomers are looking to get help.
Fidelity, Schwab and Vanguard are targeting just this sort of advice. They have Certified Financial Planners on staff, while often using investments as a breakeven proposition. It will be fascinating to see how financial advisors, who positioned themselves as investment managers, will compete against the planning advice managers at these large, low-cost financial firms. I suspect these big firms will link up seamlessly with insurance providers to deliver a one-stop retirement shopping experience. Over time, the percent-of-assets fee structure will probably shrink. Instead, I suspect financial advisors might begin to charge hourly fees, similar to lawyers and accountants.