Can a major Wall Street firm help you beat the market?
Posted September 6, 2012on:
When talking to prospective clients, I am upfront about what I can and can not do. I can NOT beat the market.
Recently, that straightforwardness caused me to lose a prospective client to a major Wall Street firm. Apparently, the financial advisor from that firm was able to convince him that with their exclusive location, expensive brochure, and nice Armani suits, they could beat the market.
This led me to do a mental exercise.
I compared the best Wall Street firms’ stock prices to the S&P 500 index over the last 10 years.
|Stocks or Index||Returns|
|S&P 500 Index||53.54%|
|Bank of America (Merrill Lynch)||-79.96%|
|Citigroup (Smith Barney)||-91.26%|
During this period, the S&P 500 Index rose a total 53.54%, but Morgan Stanley, Bank of America (who now owns Merrill Lynch), and Citigroup (who used to own Smith Barney) lost a lot of money. Even the best of the bunch, Goldman Sachs, was soundly beaten by the market index. Wouldn’t you think if their financial advisors knew how to beat the market, their firms’ stock prices would be the first to benefit?
Some of my prospective clients ask a very good question: If you can’t beat the market, what value do you add?
There are at three areas I can add substantial value. I am able to:
- Prevent conflict of interest. A typical Wall Street financial advisor will charge you 1% for directing your money to investments that will cost you another 1.5% because he works for the firm, not you.
- Prevent performance chasing. The average investor loses 3-4% in returns every year chasing investments that he or she hopes would beat the market in the future.
- Watch over your overall financial well-being in the areas of taxes, wealth protection, wealth transfer and gifting, etc., so that you can have the peace of mind that your personal finances are in good order.
So you see, my value is stopping my clients from trying to beat the market, thereby protecting them from being beaten by it.
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