We are on the cusp of a massive upheaval in financial services and, no, it is not because firms have to comply with the new DOL rule. Let's look at what's going on today.
80% of the daily market trading is electronic, and all the traders are buying the same things. Amazon (NASDAQ:AMZN) accounts for 1% of the S&P 500; Facebook (NASDAQ:FB) accounts for 1.5%. For you mathematicians, 1/250th of the index stocks accounts for 2.5% of the value. And where do you think they are going? Up, down or sideways? Of course, yes.
Investors are obsessed with performance, and our industry is responsible for that obsession. We've done a terrible job of educating investors, because we've done a terrible job of educating advisors. I challenge advisors and investors to refute this with facts: "Past performance is an unreliable predictor of future performance."
ETFs are today's darlings. There are more ETF shares outstanding than originally issued, and they can change their market valuations. Depending on the issuer, ETFs are not created equal. Fees are dramatically different. And, an index-type (say an S&P 500) fund doesn't hold the 500 stocks in the index, just a "representative" sample they think replicates the index. They are not riskless. Let's not even talk about the idea of actively-managed ETFs or, even worse, options on ETFs. They can implode. Implode!
Our market today requires stock pickers, and where are they? Few and far between. I only know three that are outstanding. Hedge funds have cut their own throats. Their process/formula followers can't be stock pickers. Hedge funds died in 2008; we just haven't cremated them yet.
Advisory firms and broker dealers are knee-jerk panicking at complying with that DOL fiduciary rule. The ridiculous thing there is that it is NOT a big deal. Complying is easy and I'll put out a 4-page guide in detail - all they need to know - next week. So, the firms are scared of ghosts and shadows. Independent advisors are confused. I think in 10 years, we'll have half of the advisors we do now. Maybe that's not a bad thing.
The markets are at historical highs, according to PE ratios and earnings analysis; yet the smartest momentum and economic analyst I've known in 43 years in this industry (no, he doesn't sell his research or work for a firm) agrees and says he thinks the market is going up. At the same time, he says that the time to look for a bear market is next year after the Fed's second rate hike. One of the best money managers I've ever met who analyzes free cash flow says there are great buying opportunities out there, but he thinks the market is going down.
Buyers and sellers: For every buyer of a security there is a seller. That's why prices fluctuate. It's basic supply and demand. Would you want to be a market maker today? And, DIY investors and rep-as-portfolio-manager advisors think they can beat a market which is not efficient? Investors are not rational, and Markowitz is archaic. Go figure.
Personally, I'm glad I have somebody handling my investments, providing consistency in the chaos.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.