It’s never been easier for new investors to get started in the markets. Stock commissions have dropped to zero at most discount brokers, annual account fees are almost eliminated, and minimum balances are almost a relic of the past. We can now buy fractions of stock shares for as little as $5. No-load mutual funds and low-cost exchange-traded index funds make it easy and inexpensive to buy a well-diversified and tax-efficient stock portfolio.
These low-cost innovations…”finnovations” have been boons to retail investors. More of their money goes to work for them right away instead of paying stiff fees. There’s also more beginner-friendly advice available online than ever before. There’s good and bad to that part though, and it’s related to how easy it is to start making videos and how creators make money through them. Financial influencers (“finfluencers”) pump out hours of videos on how (allegedly) you, too, can outperform the market, simply by watching a few more videos or maybe stepping it up by investing in ever-riskier financial products.
Finfluencers live and die from the number of clicks and ad views they get, not necessarily on the quality of their advice. That leads them to keep their videos oversimplified, under a minute and visually appealing. There’s a lot of material that’s skipped over when a video has to come in under a minute and a blog post is limited to a three minute read. I’ll also note that YouTube content creators aren’t always regulated by securities laws that well. There’s plenty of bad, even dangerous, investing advice available for free.
With the race to zero out commissions, one would think that brokerage firms would be out of business. Not so; they just needed to find new revenue streams. Brokerage firms are intensely regulated, so they have to be a bit more subtle than finfluencers in their pursuit of profit. Their goals appear to be upselling to more profitable products than stock trades and encouraging trading. Some of the more profitable products include proprietary funds, robo-portfolios, and alternative investments, among others. Brokers also offer premium services such as premium tiers, data stream fees, and they often pay below-market rates on idle cash in your account instead of sweeping it to a higher yielding money market fund.
They also like trading volume–even at zero commission–because stock exchanges and other trading venues pay for trading volume. It’s called payment for order flow and, though it might only be a fraction of a penny per share, it adds up when you’re processing thousands of orders a day. Some firms do refuse payment for order flow, calling it a conflict with their obligation to get the best trade executions for their customers, and hooray for them.
Investment advisors–who are not brokers–are legally obligated to act in their clients’ best interests at all times, even before their own. That’s what I do for my clients. An investment professional who charges a fee instead of a commission is likely to be an investment advisor, but be sure to ask if there’s any doubt.
Though it’s terrific that beginning investors can get started with less money and at lower cost than ever before, they also need to be aware that caveat emptor (“buyer beware”) will always apply, especially when the advice is “free.”
Evan R. Guido is the Founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or eguido@aksalawealth.com. Read more of his insights at https://finance.heraldtribune.com/category/ask-guido/. Securities offered through Avantax Investment ServicesSM, Member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM, Insurance services offered through an Avantax affiliated insurance agency. 6260 Lake Osprey Dr. Lakewood Ranch, FL 34240. The views and opinions presented in this article are those of Evan R. Guido and not of Avantax Wealth Management® or its subsidiaries. These opinions are based on Evan R. Guido observations and research and are not intended to predict or depict performance of any investment. These views are as of the close of business on 11/29/2024 and are subject to change based on subsequent developments. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. These views should not be construed as a recommendation to buy or sell any securities. Past performance does not guarantee future results. The S&P 500 is an index of 500 major, large-cap U.S. corporations. Standard & Poor's is a corporation that rates stocks and corporate and municipal bonds according to risk profiles. You cannot invest directly in an index. An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Fund. CDs are FDIC insured and offer a fixed rate of return. They do not necessarily protect against a rising cost of living. The FDIC insurance on CDs applies in case of insolvency of the bank, but does not protect market value. Other investments are not insured, and their principal and yield may fluctuate with market conditions. Investments are subject to market risks including the potential loss of principal invested. Neither diversification nor asset allocation assure or guarantee better performance and cannot eliminate the risk of investment losses. This information is intended to be educational and does not reflect any particular investment or investment needs of any specific investor.