In an age of do-it-yourselfers, handling your own investments might sound like a good idea. But many have found out during past crashes that tackling the stock market is not as easy as some online stockbrokers made it seem.
Investing on your own requires proper education in investments and finance. You need to know how to analyze economic and financial information thoroughly so that the process becomes "investing" and not "gambling." This knowledge is obtained through proper training, continual research and study of the financial markets, which requires a lot of time and dedication; time that many are not willing to spend.
For those who cannot or do not want to spend free time crunching numbers and researching financial data, entrusting their money to someone else is their best option (as long as that person is qualified to take care of it!). That basically leaves you three options: a stockbroker, a banker, or a money manager. What's the difference between these types of advisors?
Stockbrokers are people that, based on passing various state- and federal-mandated exams, can work for a stock brokerage firm that opens investment accounts for the public. While there are online stock brokers that cannot give investment advice to their clients (they can only open accounts and take orders), the brokers that I am referring to are full service brokers who can give advice to their clients about what investments to buy or sell.
Many of these full service brokers have taken a lot of heat during the last few years because so many of their clients have gotten crushed in the stock market due to their recommendations to invest in financially shaky companies (like the "dot-coms" or should I say the "dot-bombs"). A lot of investors fell pray to the brand-name syndrome; that is, assuming that because their stockbroker worked for a well-known stock brokerage firm, their money was safe. These investors would boast at parties that their money was with Merrill Lynch or Solomon Smith Barney. Wrong!!! An investor's money is not with "Merrill Lynch." It is with an employee of Merrill Lynch (or of another well-known full service brokerage firm) who could be great at investing or not. Remember one thing, stockbrokers work for full service brokerage firms as long as they meet their sales quota (yes they are salespeople). They do not keep their job because their clients are making money in their investments. They keep their jobs because their client's trading commissions and investment fees generate enough money for the brokerage firm they work for, even if the clients are losing money. Please don't be shocked by this. This is the way full service brokers work. This is also one of the biggest disadvantages of letting a stockbroker manage your investments. Another disadvantage is the fact that in order to survive as a full service stockbroker, a person must open a lot of investment accounts and thus, have a lot of clients. After a certain point, it becomes impossible to safely manage too many investments. Typically, the biggest clients get the red-carpet treatment and the rest are sort of forgotten, like certain New Year's resolutions. But we don't want anyone to misunderstand this information. There are also good stockbrokers. You just have to do a lot of interviewing to find a good one. Asking a lot of questions is very important, especially "What is your investment philosophy (that is, when and why do you buy a specific investment and when do you sell it)"?
The second option for an investor who needs someone else to manage his or her money is to go to a banker. Even though bankers that offer investment advice to their clients are technically full service stockbrokers, I decided to put them in a separate category.
In the last few years, banks have aggressively expanded into the investment field, taking advantage of their already existing client base that have CD's and mortgage loans. It is interesting how banks automatically create a feeling of security in a lot of people. This is a result of social programming. Think about it. Complete this sentence by filling in the blank at the end: "Work hard, make a lot of money, so you can put it in the _________." Probably ten out of ten people would admit that the first word that pops into their heads is "bank." This is social programming at its best. Despite the fact that banks have obtained a solid footing in the investment industry, they do not have nearly enough experience managing investors money as the stock brokerage firms do. It has been less than 20 years since banks have entered into the investment arena. So, even though you might be tempted to sit down and talk with your bank's investment person the next time you go deposit your weekly personal or business checks, I suggest that you pass. Go to a bank when you need a loan. They are good for that and have been doing it forever, but go to a stockbroker or money manager when you need someone to manage your investments; they have a lot more experience.
The last place an investor could turn to for investment management is to a money manager. Most people assume that the term "money manager" refers exclusively to the manager of a mutual fund. Even though a mutual fund manager is considered a "money manager," investing in a mutual fund is usually not the best option for someone with more than $50,000 to invest (despite popular belief). The inherent restrictions and narrow investing strategy of a mutual fund can hamper even a good investment manager from performing well.
As far as "money managers" go, a much better option for an investor in need of investment management is an investment adviser. Investment advisers (assuming that they don't work for a full service brokerage or insurance firm) are independent money managers; that is, they do not have a sales quota to meet and can thus, have a greater degree of flexibility and freedom to focus on what is best for the client. Investment advisors come in many different varieties. Some cater to smaller investors, while others accept only high net worth clients with a minimum investment above $1,000,000. Protect yourself by working with someone who has experience in the field of managing " not selling " investments for others. Having prior institutional experience (managing money for large corporate investors) is a great indicator. It tells you that the investment advisor has previously gained the trust of other professional investors. There are too many advisers nowadays that are hiding behind the excuse of "financial planning" and "diversification," and do not know how to do the analysis required to choose solid investments for their clients. Therefore, if investors want to make sure that their investments are being managed correctly, they must ask any potential adviser a lot of questions; questions that would demonstrate the adviser's knowledge about selecting investments. This is the only way that investors could rest assured that their money will be well taken care of.
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