Trust has been kicked to the curb by Washington and Wall Street. Not a smart move, as the former prepares for mid-term elections and the latter feels the effects of investors voting with their feet. Many clients and brokers have fled the big Wall Street firms for independent advisors. Washington and Wall Street may realize too late that trust is a terrible thing to waste.
The bailout of Bear Stearns, Lehman’s bankruptcy, the controversial merger between Merrill Lynch and Bank of America, and Citigroup’s near collapse had little to do with their client brokerage accounts. In fact, brokerage accounts seemed to have been forgotten pre-crash, since as much as 50% of revenues for some of these firms came from trading in their own accounts, not the accounts of their clients.
Brokers are leaving and taking their clients with them. The reasons are obvious: concerns about their firms’ futures and their employee stock options, which have cratered. Boston-based research firm Cerulli Associates projected that brokers leaving major firms would take $188 billion in client accounts to independent advisors in 2009.
Individual investors aren’t stupid, and have moved on, tired of wondering if their brokerage firms will be in business tomorrow. “Financial statements from the biggest brokerage firms, including UBS AG and Bank of America Corp.’s Merrill Lynch Wealth Management, show a collective net outflow in 2008 of about $20 billion in client money, counting both money removed by departing brokers and money withdrawn by clients whose brokers didn’t leave,” reports The WSJ.
In the three years ending in December 2008, the number of brokers serving individual clients at major firms fell by 14% while the number of independent advisors rose by 29%. Brokers want flexibility in their product offering and not pressure to sell from a menu of products pushed by the firm. And advisors’ clients take comfort in the fact that advisors are held to a higher fiduciary standard, not just the suitability standard to which brokers are held.
In the last decade of the 21st century, the Dow lost 9.3%. This was the worst decade for stocks since the 1930s. Bonds were the big winner as treasuries (10-year total return index) were up 85.4%. Gold was up 279.6%, and the dollar (J.P. Morgan dollar index) lost 12.8%.
Anyone who thought a balanced portfolio was boring may want to look at the numbers of Vanguard Wellesley-my winner for the investment of the decade. It has a 10-year average annual compound return of 7%-a compound rate that doubles in just over 10 years.
Over the past 52 weeks, Wellesley is up 16.88% and currently offers a yield of 4.38%. Young Research’s Retirement Compounders program, which includes 32 dividend-paying common stocks, was up 30% in 2009 and currently yields 5%. At our family investment company we are laddering corporate bonds, keeping maturities short, and buying through Fidelity’s institutional desk. We like Vanguard’s Short-Term Investment-Grade and GNMA funds. For simplicity, I recommend investors not working with an advisor stick to bond funds . We own gold through the SPDR Gold Shares (GLD) exchange traded fund, and other commodity names probably not found in a fund like Wellesley, so make sure your portfolio is counterbalanced.
Bonds face a serious headwind, with rates less than zero when factored for inflation. Ironically, as of November, $4 billion was withdrawn from stocks, and $285 billion was added to bonds. Is there any doubt how investors feel about this environment? Ultimately, 2010 is the year of trust: trust in who you vote for and trust in who you invest with. Wall Street and Washington may find it is a terrible thing to waste.
E.J. Smith is Managing Director of Richard C. Young & Co., Ltd. an investment advisory firm managing portfolios for investors with over $1,000,000 in investable assets.