It is certainly something you don’t want to hear from a Wall Street firm, especially after the financial crisis of 2008 and 2009.
But when JPMorgan Chase recently sustained a trading lose of more than $3 billion, CEO Jamie Dimon’s “defense” was that this, “should never have happened. I can’t justify it.” Meanwhile, an additionl $18 billion-plus was shaved off the firm’s valuation as its shares dropped significantly.
While all this has little direct impact on most advisors and their clients, it represents another reason for public dissatisfaction with Wall Street. Some analysts have suggested that perhaps JPMorgan should have followed the adage: If you don’t understand it, don’t invest in it.
Wall Street may still be in love with complex financial instruments, but more and more investors are choosing a simpler, more prudent way to invest, and that’s why the assets under management with independent wealth advisors continues to grow, especially with advisors utilizing an index— or asset class — approach to investing.
According to the Investment Company Institute’s 2012 Mutual Data Fact Book, the demand for index-type mutual funds grew from $170 billion in 1997 to over $1.1 trillion at the end of 2011.
And as more clients adopt an index/asset class investing philosophy, one of the resulting benefits is declining investment expenses. According to the 2012 Mutual Data Fact Book, the asset-weighted costs for equity mutual funds’ expense ratios have fallen 20% in the last two decades. In 2011 alone, the average equity mutual fund cost declined by 4 basis points. This trend is also seen in the fixed income mutual fund market as well, where the average cost declined by 2 basis points in 2011.
These stats should thrill independent, fee-based wealth advisors who focus on the things they can control —managing risk and reducing the taxes and expenses their clients pay for their investments. They know it’s a waste of time to try to time the market or pick today’s stock winners, since these are things they cannot control. And as J.P. Morgan’s expensive example shows, even sophisticated financial instruments in the hands of well-paid experts are no guarantee of stellar performance.
There is hope for change when you see brave folks like former Goldman Sach’s Executive Director Greg Smith publicly reject the greed and rampant self-interest still too prevalent on Wall Street.
In his searing Op-Ed in the New York Times, “Why I am Leaving Goldman Sachs,” Smith laments his former firm’s loss of direction and purpose, “And I can honestly say that the environment now is as toxic and destructive as I have ever seen it….The interests of the client continue to be sidelined in the way the firm operates and thinks about making money.”
Despite the attention and acclaim Smith has received, I doubt Wall Street’s “company first” ways will end any time soon. To these companies there may be still too much money to be made by ignoring — even betting against — what is best for their clients.
The bright beacon of hope remains independent wealth advisors who have their legal and ethical fiduciary duty to act always in their clients best interests. This fiduciary duty, along with controlling what you can control, and being honest about what you can’t, may be the surest formula to prevent a future, “Oops, my bad.”
Steve Atkinson, CFS, is Executive Vice President of Loring Ward, Head of Advisor Relations, providing support and coaching to help advisors grow their businesses.