The answer to the question, "Who needs a broker?" (Cover Story, Feb. 22) is probably the same as the answer to the question "Who needs a magazine?" And when the value of information equals the value of wisdom, the answer to each question will be "nobody." Until then, each has the potential to provide something that a portion of the public values greatly, a service that some do well while others don't, and in markets that will continue to reward those who do.
There is one thing that the full-service brokerage firms haven't considered. Every one of those older, richer clients whom the big firms service has a kid who is showing them how they are paying for information that is free on the Internet. The kid is probably as informed as the average broker. They will convert to the Internet brokerages in record numbers.
Your article hits the mark. I would suggest that speed and flexibility are the most attractive characteristics of online investing, with cheap prices as a close second. Based on my own experience as a relatively small investor, brokerage houses have typically been eager to recommend an investment strategy and accept money, but their subsequent advice is either nonexistent or untimely.
I unfortunately reentered the market in June, 1998, watched it plummet in September and then slowly climb back over the past four months. My broker's advice throughout was to wait it out, as my investments were made for the long term. That still may be the case, but once I opened an online account, I found myself getting personally involved in my investments by reading free online advice and by subscribing to selective online services. The fact that I can now get information quickly at any time, day or night, gives me flexibility to make decisions according to my schedule and to increase the speed of reaction time.
And, of course, having to recover relatively high brokerage commission expenses is no longer a significant factor.
Here's who needs a broker--the countless thousands of new investors who believe the following:
1. Making money in the stock market is easy.
2. Long term is three years.
3. You can't lose money in an index fund.
4. A two-for-one stock split means that the stock is half-price.
5. Margining stocks is a smart thing to do.
6. The risk of being out of the market is greater than the risk of being in it.
7. Bonds are for losers.
You're right. Investors like these don't need my advice. But they will someday.
Dave Jonsson, stockbroker
Your article ignores a serious downside of [investing online]--the tendency of such investors to neglect research in favor of going with recognizable name-brand companies. This ensures that undervalued companies stay undervalued and that capital flows disproportionately to the large-cap blue chips. This is not healthy for small companies in need of capital nor for the market as a whole. The vital function that stockbrokers contribute is getting the word out about well-managed, undervalued companies that are good buys.
Byron R. Wien has it wrong when he advises readers to bet on money managers who have done well in the past. There are reams of studies showing that investors cannot reliably pick future winners by selecting past winners. It simply fails as a long-term investment strategy.
Beyond that, Wien is using gross returns, which do not reflect things like sales charges, capital-gains taxes, and, as John C. Bogle points out, risk. On a net return basis--which is what matters to investors--index funds win hands down.