With nearly 35 years experience in the financial services industry, my father has taught my brother and I a very important lesson; “You cannot sell a stock, bond or a mutual fund more cost effectively than online platforms can” he says, “but you can offer clients knowledge that they cannot get anywhere else.” We pride ourselves on our ability to forecast the economy, make predictions, and place our clients in the sectors that will benefit the most. Quite often we have had our predictions validated, most recently in the ETF and Bond markets.
MarketWatch.com featured a piece last week by Chuck Jaffe titled “Hidden costs of ‘free’ ETF trades at Schwab: The price may be right, but the fund selection isn’t.” For years, Exchange Traded Funds (ETFs) have been hailed as the “latest and greatest” products, much how Mortgage Backed Securities were 8 years ago. We argue ETF traders do not truly understand what they own, the liquidity risk that they face, or the possibility that these funds could blow up in their faces. Mr. Jaffe writes how these “free ETF trades” are usually not as “free” as they are marketed, and traders rarely can get their hands on exactly what they want, but rather an equivalent fund.
The market has begun to show signs that investors may not truly understand ETFs, and the people who invented these products may not either. We have made the prediction as a firm that sometime within the next decade, there will be a massive ETF blowup and many investors will lose a bunch of money, with no way of recouping their losses. We stand by that prediction.
Another prediction that we have made relates to the bond market. Interest rates are simply too low to support purchasing bonds. For those that do not know, bonds and interest rates operate like a see-saw; if rates go up, bond prices go down, and vice versa. With interest rates at all time lows, bond prices are at all time highs, and buying at the top typically results in financial hardship.
While unsettling, the Financial Industry Regulatory Authority (FINRA) has decided to get in the business of providing investment advice. For once we support their opinion, but not their decision to provide unsolicited advice to investors. According to Advisors4Advisors.com, FINRA recently issued an investor alert regarding the bond market, for the exact reasons that I previously mentioned. This goes to show that investors should be wary of their exposure to bonds, especially long term fixed rate debt. However, rises in interest rates are rarely confined to one specific debt sector.
Forecasting events and investment environments is a big part of what we do. We encourage all readers to shop around when looking for investment advice, and ask yourself if your broker or rep is providing you with valuable information, or selling you a product. Your broker cannot sell you any stock or fund that you cannot purchase yourself for less money online; however their knowledge could save your hard earned money from experiencing misfortune.