Monday, October 5, 1998

A Threat to Our Financial Lives?
by Brandon Starr ([email protected])

There was an interesting article in The Wall Street Journal last week. It was from the September 22, 1998 issue and was written by Journal staff reporter Rebecca Buckman. In it John Steffens, Merrill Lynch & Co.'s Vice Chairman in charge of overseeing the brokerage firm's 14,800 stockbrokers, said:

"The do-it-yourself model of investing, centered on Internet trading, should be regarded as a serious threat to Americans' financial lives. This approach to financial decision-making doesn't serve clients well and it's a business model that won't deliver lasting value."

Naturally, there are some details that are striking about Mr. Steffens's comments. First among these is that Merrill Lynch is not in the business of online investing. In fact, they have no plans to offer online investing at all, except for existing clients --and the commissions will be nearly or exactly the same price as trades placed any other way. Thus, it can be seen as simple competitor-bashing by an old, stodgy industry leader.

It reminds me of the '60s and '70s when Japanese cars were seen as no threat to Detroit. Japanese-car bashing was rampant throughout the Big Three and, indeed, in the general public. That of course changed as the Japanese gained larger and larger market shares.

Now, Mr. Steffens does say some things I rather agree with. "If people turn their account over two or three times a year, they are guaranteed not to make money." While I would hardly guarantee such a thing, it has been shown that even among professionals such as mutual fund managers, those who have lower turnover have better long-term gains on average than those who have higher portfolio turnover. They also have lower average fees.

But I hope he doesn't expect anyone outside his sales force to take him seriously. The option of doing-it-yourself is an American tradition. True, not everyone should do their own stock picking, just as not everyone can or should do their own electrical wiring, automotive repairs, software installation, and so forth. But I have faith that for at least a significant minority, if not a majority, do-it-yourself investing can be done successfully.

That's not to say that professional help shouldn't be used, even by hardcore online investors. There are people out there who are well-trained who can help with many tricky matters, including tax laws, estate planning, insurance, retirement plans, and so on. When difficult decisions must be made on such matters, why not consult an expert?

In other words, do what you can yourself to keep costs down and keep a handle on your finances, and search for professional aid when needed. Given the right tools, I can change my oil -- and I have. But I don't change my axle bearings if they need replacement.

Then too, there is a third option. There are those out there who probably could handle their own investments, including picking their own stocks, who probably SHOULDN'T. Take for example a crackerjack salesperson, doctor, lawyer, or small business owner who makes lots of money doing what they do best: their jobs.

For them, it doesn't make sense to take the time to do the research, watch the markets, hunt for opportunities, and seize them when the moment is ripe. It makes sense to pass off those functions to a pro. This would be like someone who can change their oil, but doesn't because it's worth the few dollars to have the convenience of a drive-in oil change.

So, is online investing a scourge on the face of investing? Hardly. But that doesn't mean it's right for everyone, or that everyone who ends up doing online investing will do it well. Mistakes will be made. But freedom and competition are worth it. Let folks make their own mistakes. For those with the interest, aptitude, and time to do it, let there be a less expensive way to invest.

[For the Fool's take on online trading, read 10/01/98: Merrill Lynch: The Big Bad Wolf.]

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