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Wall Street Rebooted for 2017: New technology, increased market access, and better transparency usher in a new wave of investment planning

Dec 30, 2016 10:48AM ● By James Houck
By James Houck

If you’re doubting the investment opportunities of Wall Street and beyond or recent market volatility across the globe (see Brexit ripples from quarter four), you’re not alone. The bad news first: yes, there’s concern that specific industries (particularly energy, commodities, and retail as of the time of this writing) aren’t doing well enough to drive new investment and markets up; nor will they for some time (one year, three?).

The good news: history sides with the savvy investor in it for the long haul; the government is helping; and financial technology (“fintech”) is making it easier than ever to enter the market. Couple these factors with educated portfolio management/advice and you have a recipe for strategic wealth built on the power of compound interest and investment.

Aided, in part, by trending investment instruments and fintech, the Millennial generation deserves a thank you; they are finally embracing the market. According to a recent survey conducted by BlackRock, the Millennial generation is 45 percent more interested in investing than it was just five years ago on the heels of the recession and, according to another Millennial survey by The Wall Street Journal, 30 percent stated they are more loyal to brands that are up-to-date in regards to technology. And it’s easy to hypothesize why.

New Tools

Investment decisions can be made in the palm of their (and your) hands and for pennies on the dollar…literally. A wellspring of brokers (and you’ve heard of them: E-Trade, TD Ameritrade, Scotttrade, etc.) have broken online and tech-ground with investment platforms and smartphone applications that allow the end-user instant access to markets, primarily stocks, ETFs, mutual funds, etc. From buying stocks outright at a moment’s tap of the finger to “background” or “robo” investing—for example, tying an investment account to one’s checking account and having the rounded-up amounts of every purchase applied to a pre-selected investment plan—there are options that play to anyone’s comfort level.

This new wave of market access also comes with fingertip tools, analysis, and news. Financial news aggregates (Yahoo! Finance), social media platforms for swapping advice (Tip’d Off), analytical tools (example: TD Ameritrade’s Thinkorswim software), and “paper trading” (mock investment accounts), are empowering investors and advisors. Or are they?

With these advances also comes caution. “Popular wisdom would have one believe that advances in technology and news flow would benefit the individual investor…[but] what technology and news flow has done is facilitate the types of behavioral biases that hurt investors where it counts—their pocketbook,” suggests Carlos M. Sera, founder of Sera Capital Management, LLC and of Chicago Wealth Management, Inc. “The expression ‘give them enough rope and they will hang themselves’ applies in this case. As an example, the bulk of mutual funds and exchange traded funds are investments that should be held for at least a decade and in most cases for decades. Yet the average hold time is dropping and is now approaching two years.

“But let’s not poo-poo technology altogether. The advances have enabled advisors to create the equivalent of private mutual funds on an account-by-account level. For example, if a client would like their money managed the same way that their advisor manages their own money, all they need to do is link to the advisor’s portfolio through a mirrored account and every trade the advisor makes for their own portfolio is made for the client in their own account. This type of ‘mirroring’ technology was unavailable as recently as three years ago.”

Gregory Ostrowski, managing partner of Scarborough Capital Management, offers more optimism. “In many ways, we’ve been such a complex, yet antiquated industry that hasn’t had some of the digital disruption that arguably should have happened sooner. Be it services that allow data to be aggregated from multiple different sources allowing for a better ‘big picture’ analysis; or software or ‘robo-advice’ that can trade portfolios using algorithmic strategies, there’s increased choice for both advisors and clients.”

New Legislation

Of course, if one is unsure where to begin, especially for long-term financial planning, it’s certainly worth consulting an investment advisor. And here’s how the government is now lending a hand at that.

For the first time in a long time, the investment industry is about to experience a significant shakeup with regards to transparency and regulation. The U.S. Department of Labor issued a ruling, effective April 2017, that investment advisors must act in a fiduciary capacity for their clients with respect to retirement accounts and retirement accounts only. The term fiduciary translates to mean that they must act in the client’s best interest. They can still act in their own self-interest with respect to non-retirement accounts, but no longer in retirement accounts.

“What this means to the retail investors is a savings of an estimated $17 billion in unnecessary fees. What it means to the financial services industry is a loss of $17 billion in fees,” Sera says. “Whenever there is a loss of revenue of this magnitude, there will be significant changes. This ruling is retail investor friendly and will produce significant disruptions. While many have opinions as to the outcome, the one thing that is agreed is that the industry is headed to transparency, lower fees, and a fiduciary expectation.”

Ostrowski agrees. “The goal here is to have a universal standard of care—and it makes a great deal of sense. Do you really want to work with someone who’s not working in your best interest? The key takeaway that I see here is that we’re going to continue to see the ‘professional financial advisor’—those who take a holistic approach to financial planning and investment management—rise to the top and shake out some of the ‘sales folks’ that have joined the industry for other reasons.”

Sera advises the significance of this ruling for the retail investor depends on the size of your portfolio and the business mix of your present advisor. “You may very well find yourself without an advisor, but if your advisor is one of the survivors, expect to be paying them a fee instead of a commission. “I love the new DOL ruling and can only say ‘why did it take so long and why didn’t they expand it beyond retirement accounts?’”

So whether you’re new to investing or have been in the game for a long time, a consultation with an investment advisor is likely in order. At the least, research your options and begin the process of investigating investment strategies. Change is on the horizon. And the earlier you start, time will be on your side.

Investment Terms in this Article

Fintech: short for “financial technology,” a term that now includes front-end and back-end data platforms, software, smart phone applications, and any technology innovation in the financial sector.

ETF: acronym for exchange traded fund, a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange.

Robo Investing (or Robo Advisor): an online wealth management service that provides automated, algorithm-based portfolio management without the use of human financial planners. 

Paper Trading: refers to using simulated trading to practice buying and selling securities without actual money being involved.

Mirroring Technology or Mirror Trading: a forex strategy developed in the late 2000s that allows investors to copy the forex trading behavior of experienced and successful forex investors from around the world

Source: Investopedia