January 22, 2009 / 6:19 AM / 10 years ago

Small investors shun big brokers to do it themselves

NEW YORK (Reuters) - As Wall Street imploded, Mark Posnick took his retirement fund out of Lehman Brothers and invested it with an online broker.

Now he’s his own money manager, joining a new wave of investors who have lost confidence in traditional brokers whose fees and commission became all the more glaring during the bear market of 2008.

“The (Lehman) bankruptcy was quite an ordeal to say the least,” said Posnick, 69, a retired mortgage banker who now trades with optionsXpress. He said his confidence was shaken “not only in them but also in the entire concept of entrusting others to be fiduciaries on your behalf and giving you advice.”

Customers are choosing alternatives to Wall Street banks that charge for financial advice and executing trades, sometimes with opaque pricing on fees and commissions.

Many former wire house bankers have left their Wall Street jobs since the turbulence of last fall and have taken clients with them, creating investment advisory boutiques that direct new trades to online and discount brokers such as Charles Schwab, TD Ameritrade, E*Trade and the privately held Scottrade.

“There’s a massive trend toward self-directed investing. We’ve grown 300 percent month on month and January isn’t even over yet,” said Keith McCullough, CEO of Research Edge, a six-month-old firm that says it wants to democratize market research services. “I think it’s a function of the trust lost on Wall Street.”

Retail investors are culling information from many sources and making the trades themselves, eliminating fears about wobbly banks or potential swindlers as typified by Bernard Madoff, accused of engineering a $50 billion Ponzi scheme.

TD Ameritrade on Tuesday reported a 23 percent fall in quarterly profit, largely a result of the bear market, but in the crucial area of net new assets it added $7.8 billion, triple the amount in the previous quarter.

Schwab, the biggest U.S. online brokerage, attracted $9.2 billion of net new assets in December alone.


Some discount brokers say they expect further growth from younger investors who never used the services of a traditional investment bank and are comfortable dealing online.

Growth funds typically charge around 2 percent of the value of investment versus 0.25 or less for a fund tied to an existing index or an Exchange-Traded Fund (ETF), which are popular for do-it-yourself investors.

A recent survey by Cogent Research found about one-third of high net worth investors were ignorant about how they paid their fees, which at 2 percent would amount to $2,000 each year for every $100,000 under management.

Posnick first chose Merrill Lynch and later Lehman when he was looking for more growth in his portfolio and felt he needed a good stock-picker.

Now he says he’s content with market returns in exchange for low fees, so he turned to optionsXpress, which specializes in options trading.

“I certainly don’t want to invest in exotic products anymore,” Posnick said. “I don’t want illiquid investments. I’m still in a fund of funds that has a lockup. I’d like to put my hands on that money and have a little more safety.”

David Fisher, the CEO of optionsXpress, said he noticed an uptick in business starting in October — the height of the financial crisis — with customers transferring money directly from the big wire house brokers.

“Customers are very comfortable that they feel like they can do better than the industry average,” said Chris Moloney, chief marketing of Scottrade. “We have seen a lot of new customers in the last six moths and a lot of them have come from full service brokers.”

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