Investors Flee Full-Service Brokers

Many investors feel that their brokers led them astray when the market collapsed. Brokers may not have suggested moving money to safe havens, or they may have suggested that clients double down as the market dropped as a means to make up losses. The trouble is that the prices of  most stocks and mutual funds kept dropping.

Full-service brokers have a distinct disadvantage, particularly in a recession. They change fees that tend to be much higher than those of discount and online brokers.

According to a new study by Reuters, “since the start of the financial crisis, $32.2 billion has flowed into the two largest online outfits, TD Ameritrade Holding (AMTD) and Charles Schwab (SCHW).” Similar records show full-service firms including Smith Barney and Merrill Lynch have lost $100 billion in assets.

A lack of trust in the ability of brokers to manage money during a crisis may have started the exodus, but changes in the way the high-end investors manage their money will cause the trend to accelerate. Sophisticated investors have access to free financial content on websites ranging from MarketWatch to CNNMoney. Discount brokers also give their clients access to state-of-the-art trading tools and research from major Wall St.  firms.

Trading online can be done for as little as a few dollars a trade. Investors who lose money in the market can at least know that they made their own poor decisions and were not “victims’ of the recommendations of a broker. The investors also get the satisfaction of knowing that when they do make money it is because  they outsmarted the pros.

Douglas A. McIntyre