Ever since the financial crisis, Wall Street has had a tough time winning back disgruntled investors who believe that when it comes to their investments, big financial companies stack the cards against them. That hasn't stopped big Wall Street firms from doing their best to win back customers, and one way they're trying to get back into favor is with a simple business maxim: giving the customers what they want.
Later in this article, I'll discuss what big brokers are offering to try to woo investors who are bored and dissatisfied with run-of-the-mill investments. First, though, it's important to see just how far Wall Street's finest have fallen, and how they might be able to win back customers that they lost to more cost-efficient competitors.
The rise and fall of Wall Street brokers
Throughout much of the 20th century, Wall Street brokerage firms dominated the financial scene, reaping huge profits on the backs of ordinary investors who paid hundreds or even thousands of dollars in commissions just to buy regular shares of blue chip stocks. With transaction fees regulated, investors didn't have much choice but to pony up for access to the long-term gains that the stock market offered.
Fortunately, those days are behind us, with the rise of discount brokers reducing those costs to just pennies on the dollar. Nowadays, you can go to a variety of low-cost providers for stocks, ETFs, and increasingly other assets like bonds, mutual funds, options, and futures. Whereas transaction costs may have previously represented several percent of a total transaction, nowadays, you can expect to make reasonably sized purchases for just fractions of a percent.
As a result, full-service brokers Morgan Stanley (MS 1.58%), Goldman Sachs (GS 3.30%), and Bank of America's (BAC 2.06%) Merrill Lynch have had to find ways to respond in order to retain business. One of the ways they hope to hang on to existing customers and win new ones is to offer investors products that they can't get elsewhere.
Selling panache
Wall Street prides itself on its exclusivity and wealth-consciousness, and in that light, the opening of investing to Main Street forced big financial firms to up the ante in order to maintain those favorable traits. In particular, full-service brokers are giving their investors access to investment alternatives that they haven't had access to before.
Specific alternatives come in many different flavors. Traditionally, private-equity and hedge-fund investments made up the bulk of what people considered "alternative investments." With regulations setting high barriers to allow accredited investors into these vehicles, Wall Street was hamstrung from offering them more widely. In response, brokerage companies have come up with new investment vehicles, including privately offered real estate investment trusts, market-index-linked securities, and long-short market-neutral funds.
Why it makes sense
Although they may not always be buying for the right reasons, investors aren't being irrational to want to diversify beyond ordinary stocks and ETFs. As the number of different asset classes available to investors has grown, the correlations across many of those asset classes have gotten a lot higher, removing some of the risk-prevention qualities that diversification brings to investment portfolios. Alternatives whose returns aren't closely correlated with stocks and other common investments have real value in anchoring portfolios during times of financial stress.
Yet investors have to come to grips with the risk-reward equation of alternative investments. In many cases, such investments are designed to be complex and therefore difficult to understand, and in the past, similar vehicles have disappointed investors by not responding to changing market conditions the way that investors had expected.
Trust competition
All in all, paying up for a full-service broker just to gain access to some exclusive investment opportunities isn't likely to be a winning proposition. If you're patient enough, you can expect Schwab (SCHW 1.14%), TD AMERITRADE (AMTD), and their many discount-brokerage peers eventually to give you the same access to such investments that they currently give you to stocks. Selling hot investments may help save Wall Street's big brokerage houses, but that doesn't mean you should contribute your hard-earned money to their cause.
