I came of financial-career age at E*TRADE in the late 90s. The commercialization of the Internet was in its infancy back then, and so too was the world of online stockbrokers like E*TRADE and Schwab and Ameritrade and Datek (long ago hobbled and then subsumed into Ameritrade).

At the juncture of those two things stood the promise of people investing on their own — of taking-out the middle-man (stockbrokers) and the middle-company distributors for which they worked (Wall Street stockbrokerages) and then replacing the Wall Street stockbrokerages with Internet-only stockbrokerage websites and by replacing the stockbrokers with a promise to yourself that you would do your homework and figure out how to smartly go about, all on your own and all by your lonesome, smartly storing some or a lot of your money in the stock market (yes, that promise is to be double-smart about it).

Before then and going back many decades, Wall Street had erected a veritable wall around itself, through which only the well-to-do could pass (why they chose to erect that wall is a topic for another day). Given commissions in the hundreds of dollars, coupled with restraints on buying any chunk of stock smaller than 100 shares, the normal price of admission for investing in, say, a stock that sold for $50 per share was 100 times $50, or $5,000 (equivalent to, say, $15,000 in today’s dollars), and the commission for buying those 100 shares of stock might have amounted to $250, which is $2.50 for each $50 share, amounting to a 5% commission, which you would also have to pay when you sold the shares, for a total round-trip commission of 10%. Commissions in the 10% range are pretty noticeable when applied to a round-trip in and out of an investment that you hope will provide you with a return of, say, 5 to 10% per year. And by my recollection back then commissions also scaled up along with the size of the purchase, so you paid a bigger commission for buying, say, 200 shares than you did for buying 100 shares.

All together, then, prior to the beginning of the commercialization of the Internet the scale of the dollars involved in investing was off-putting for normal people to say the least: putting together a diversified portfolio of, say, 100-share chunks of ten different $50-per-share stocks would’ve set you a back a cool $50,000 (about $150,000 in today’s dollars), and the transaction cost of a round-trip into and out of those investments would have cost you $5,000 (~$15,000 in today’s dollars). That’s not such a great cherry to put on top, is it?

And then there was the talking on the phone with these broker guys, too, who, back then, were just about entirely of the male persuasion, and who might not have been all that skillful at making you feel comfy and imbuing the whole thing with an aura of being taken care of well and honestly.

So, all in all, the investing marketplace prior to the mid-90s was not a happy place for your average Jack or Jill investor . . . or Pat or Terry for that matter.

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Embracing Change: Will You Jump, or Do You Need to Be Pushed?

Wednesday, July 10, 2013 at 12pm
By John Friedman

Richard Thompson, guitar hero to many (me not so much) and all around very-much-a-Brit sort of fella, along with his lovely-voiced then-wife Linda, on their seminal getting-divorced album called Shoot Out the Lights, did a song called Did She Jump or was She Pushed?

Far more of a music guy than a poetry guy, I never really listen to all the words of most songs, but I do usually hear the words in a chorus, and in this song the Thompsons repeat the chorus a good dozen times or so: Did she jump or was she pushed?

So that phrase stuck with me, and now it’s been with me and part of my linguistic and consultative repertoire lo’ these thirty-some-odd years the song has been around.

The way I hear it, the line has a very specific meaning, which is likely quite different from what the Thompsons heard when they wrote it. The way I hear the line is this: sometimes we change voluntarily and sometimes we change because we haven’t a choice, as in, sometimes we need a big ol’ push to get a move on, and sometimes we just jump right in and hightail it in the direction in which we’re facing.

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Replacing “Assets Under Management Fees” with “Net Worth Under Management Fees”

Tuesday, July 9, 2013 at 3pm
By John Friedman

The other day I asked a money manager I was getting to know whether his firm charged a lower fee for managing bond portfolios than it charged for managing stock portfolios. He said no — that his firm charged the same for both.

I asked him about this because some money managers do indeed charge lower fees for managing bond portfolios than they charge for managing stock portfolios, and because bond mutual funds typically charge fees considerably lower in aggregate than stock mutual funds charge in aggregate. And, as this piece explains, asking this question can also give you a good chance to peer into the soul of the person to whom you pose the question.

Signpost: this is a fairly long, fairly wonkish piece.

What follows is about a thirty-minute read for most folks. It’s also inside-baseball’y, in that it talks about the way investment advisors, money managers and financial planners and the like calculate their compensation, and then receive it, and suggests some alternatives.

This piece can also be a good and worthwhile read for other folks, too, especially those who are curious to know more about (a) business models and revenue models generally, and (b) the business models and revenue models the financial services industries use, and (c) some of the more clever ways those industries get people to part with their hard-earned dollars, sometimes without those people even being aware that those dollars are departing for other parts unknown.

Alright?

Alright.

Let’s go.

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Living Trusts are All About Avoiding Men in Black Robes

Tuesday, June 11, 2013 at 3pm
By John Friedman

This edition of Friedman’s Law of the First Thing is about living trusts — what are they, what are they good for (absolutely somethin’) and what are they not good for?

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In a weird way, Dave Ramsey is my muse — I hear him say something on AM960 in the a.m. and it gets my mind a whirring and leads me to set fingers to keyboard.

Yesterday Dave was answering a question from a woman whose mother was soon to die. The daughter had no idea whether her mother had a will and she wanted to hear from Dave about what the daughter should be doing right now, given that her mother’s death was close at hand.

Dave said much in response which I thought was correct, such as (a) make funeral arrangements, and (b) talk to a lawyer who specializes in estate planning, which is the type of law having to do, most centrally, with who gets your stuff when you die, and how they get it.

But Dave also said one thing which, in my experience, was stupefyingly not correct, when he said something along the lines of this:

If later on you find that something’s not right, then you can always just go on down to the courthouse and get that fixed up no problem.

(Aside: I can find no transcripts online, whatsoever, for Ramsey’s shows, and I really don’t want to wade through lots of ads and listen to the show via kludgey streaming site that appears to lack fast forward or reverse controls, so going on memory is the best I can do here . . . ).

Now you have to understand that this statement came from a fellow who seldom passes up an opportunity to bash the federal government as a bloated ineffective stupid bureaucracy. Yet here he was making it sound like a trip down to the courthouse is no biggie, like a walk in the park on a sunny Sunday afternoon.

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Towards an Industry of Pure Financial Advice

Wednesday, June 5, 2013 at 12pm
By John Friedman

I admire Paul Krugman in lots of different ways.

People think of Krugman above all as an economist and as a liberal. Those who don’t like one or both of those labels argue that he’s wrong about everything. I won’t take those folks on here, other than to say that, just as I would trust a good engineer to design a tall building more than I would trust a child who can’t add two and two together to build even a small portion of a short building, so too would I trust a good economist to predict the economic future more than I would trust a politician with an axe to grind to explain the supply and demand function of employment.

But I do not come here to talk about Krugman’s economics. Instead I come here to talk about his writing and, in particular, his blog writing.

Krugman writes short and simple. For obvious reasons, I seek to emulate him in this regard!

More relevant here, Krugman is also not afraid to beat the same tune out on the same drum over and over and over and over and over again.

Krugman’s drum beat the past many years has been that, in responding to The Little Depression (his term for what most folks call The Great Recession), we are making the same mistakes that we made in responding to The Great Depression, i.e., we have fallen short on using fiscal stimulus and, as a result, are building an underclass of folks who are apt to be permanently under- and unemployed, with the even larger result being that we are coasting along at far less than optimal utilization of our nation’s productive capacity, all of which equals pain and misery unnecessarily courted, as in oh the humanity.

I, too, have a drum to beat. I’ve beaten it fairly often in here. The difference today is that, here today, I am announcing that I am going to start beating it on a regular basis. Drip drip drip drip. And bang bang bang.

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