I have regularly written about the many shortcomings of human psychology when it comes to investing. The emotions of “greed” and “fear” are the predominant drivers of not only investor behavior over time but also the development and delivery of the financial products that they use. As markets rise and fall investors consume products and services accordingly. During strongly rising markets the demand for “risk” related products rise. Coversely, as markets fall the demand for safety and income rises and “risk” related losses mount. Of course, the business of Wall Street is to provide those“products” to the consumers they serve.
It is from this perspective that as we see the financial markets cycle from “boom” to“bust,” that we have seen a series of product and services offerings come and go in the financial marketplace. In the early 80’s, we saw the rise of “portfolio insurance” which eventually gave way in the “Crash of ’87.” As the bull market gained momentum in the 90’s the proliferation of mutual funds exploded on Wall Street as the demand by individual investors grew. Wall Street quickly figured out that it was far more lucrative to collect ongoing fees rather than a one-time trading commission. The age of the “stock broker” was officially dead as the rise of the asset-gathering “financial consultant”gained traction. The mutual fund business was booming, and business was “brisk” on Wall Street as profits surged.
However, as the internet was developed, the next major financial innovation occurred –“online trading.” For the first time, Wall Street could tap directly into the masses and the“Wall Street Casino” officially opened. The marketplace for the delivery of products and services exploded, and Wall Street was happy to deliver a steady stream of new offerings to the newly minted “investing geniuses.” The “financial consultants” were deemed “hooligans” for charging fees for “advice” for something that a “trained monkey”could do online.
“Why would anyone pay an advisor and reduce their returns when all one had to do was point-and-click their way to wealth.”Â
