Wall Street for Dummies Nov 17, 2023

We need to have a talk about the evil F word: Fees! And the even more evil F word, HIDDEN FEES. Like death and taxes in the real world, fees are an inevitable component of the investment process. Also, like death and taxes, we cannot eliminate them, but we can learn to deal with ?them.

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There are two significantly different business models currently operating in the financial services industry. The first model belongs to the full service broker dealers. Their clients have a designated broker who advises them and manages their assets. The discount/internet broker dealers represents the other model. Most of their client make their own investment decisions and place their own trades.

Three decades ago, the Securities and Exchange Commission put forth a dictum that the full service broker dealers must monitor their employees communications with a public. Initially, that meant reviewing and recording their brokers snail mail. Time consuming, but manageable. ?

And then along came social media and the monitoring function grew exponentially. Now the SEC is dealing with how to regulate texting. Suppose a broker texts a clint and says, “Let’s do lunch.” Is that communication with the public. Then the brokers kids asks for a ride home from school. How does a compliance department monitor and retain this smorgasbord of electronic chatter???

Now to the hidden fees thing. So far this year, the SEC has fined full services brokers dealers $1.2 billion for failure to properly monitor their employees use of text messages. Who pays the $1.2 billion? Well, folks I hate to tell you this, but Santa is dead. The fines are a cost of business that is somehow passed on to the clients. ?

The other business model belongs to the internet/discount brokers. Most of their clients manage their own accounts. They place their trades directly without the advice of a broker. Thus, internet/discount firms have no brokers to monitor. These firms do not have the regulatory expense or potential fines incurred by the full-service firms. Nothing to pass on to the client.

Am I say one of the business plans is right and one is wrong? NOT!! Investing is not a one size fits all proposition and an informed investor is a better investor. Successful investing begins with defining what you want to accomplish and then choosing a methodology that will get you there.

P.S. Not only is Santa dead, so are the Easter Bunny and Tooth Fairy. Have a nice day.

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