Investing in the Future of Investing
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Change is a powerful force when it comes to producing investment opportunities. As investors; we are always looking for the newest trends and innovations in different sectors, in our search for the best growth possibilities. We should not forget, however, that the investing industry itself is changing rapidly; new and profitable opportunities are emerging from the changes in the way people manage their savings and make investment decisions.
The investment banking industry is one of the biggest losers from the changing paradigm in investing. Clients of Goldman Sachs (NYSE: GS) won´t probably forget those trades in which the bank was betting against the positions it recommended to its clients during the subprime crisis, or the more recent scandals in which high level executives in Europe were said to refer to their clients as “Muppets” while trying to squeeze every cent out of their pockets without much regard for their financial interest.
Why would you choose a much more expensive option like Goldman when you can use a much cheaper alternative in discount brokers like Charles Schwab (NYSE: SCHW)? The level of service and investing advice that investment banks can offer used to be an important differentiation factor versus discount brokers, but it looks more like a liability than an asset nowadays.
Companies like Schwab have very scalable business models, so they can continue reducing costs and generating revenue growth as investors choose a more self-directed approach to manage their portfolio. The acquisition of Option Express gives Schwab an attractive position in the profitable business of online option investing.
JPMorgan (NYSE: JPM) was believed to be one of the best-run banks in the industry, that was until we learned that the company was involved in multibillion dollar loses due to complex operations involving derivatives in the context of serious faults in the company´s internal risk control structures. These people are making some serious mistakes in managing their own assets, and that´s hardly a nice presentation card to earn the trust of potential clients.
Speaking about trust, it would be hard to trust Barclays (NYSE: BCS) after the LIBOR manipulation scandal. The company will pay the settlement, some senior executives will be removed and the bank will try to make its clients believe that this was an isolated one-time event which will not be repeated. However, we have seen too many situations of incompetence and dishonesty in the investment banking industry, this looks more like a trend than an isolated event.
Investors can now manage their investments via discount brokers like Schwab, which offer the possibility to trade for a fraction of the costs that big investment banks charge to their customers, and in most cases they require lower minimums and provide higher flexibility in terms of assets and execution. When it comes to investment research or advice, there are many alternatives which look much better than trusting the discredited investment banking industry.
Independent financial advisors can offer more transparency than investment banks for those who need a personalized advice, and sites like our own Motley Fool can be a great source for researching investment opportunities, subscribing to different services or relying on the strength of a community for better investment decisions.
Not only investment banks are looking vulnerable as investors shift towards a “do it yourself” approach, relying on discount brokers for trade execution and on independent sources for research and advice. The mutual fund industry seems to be in serious difficulties, since investors are noticing that the higher fees charged by their mutual funds are in most cases unjustified when looking at investment performance.
Investors will continue shifting from mutual funds to ETFs, appreciating the transparency and cost efficiency that these vehicles provide. Companies like WisdomTree Investments (NASDAQ: WETF) will be the main beneficiaries from this trend, as their assets grow in size, costs tend to remain relatively much more stable, so profit margins can rise notoriously for ETF managers as they grow. Wisdom Tree has launched a series of innovative offerings like dividend focused or foreign currency funds, which look quite promising in terms of growth possibilities.
The investment industry is changing, and as investors, we are in a privileged position to analyze the new trends and benefit from them. Not only when it comes to managing our portfolio and investment decisions in the most efficient manner, but also in regards to investing in those companies which stand to benefit from changing industry dynamics.
acardenal has no positions in the stocks mentioned above. The Motley Fool owns shares of JPMorgan Chase & Co. Motley Fool newsletter services recommend Charles Schwab, Goldman Sachs Group, and WisdomTree Investments . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
