The financial services timeline, 1977 to present, and what it means to you

As we survey the past three decades or so from an investor's perspective, it occurs to us that the Baby Boom generation has had to endure one financial innovation after another. It also occurs to us that their patience must be starting to wear thin.

As the chart below illustrates, the peak year for births in the United States during the Baby Boom was in 1957, when there were 4.3 million babies born (this figure would be finally topped in 2007, when 4.32 million babies were born, although to a population that was much larger and hence the rate of births per 1,000 women was much lower, as illustrated by the second line in the chart).

As members of that population entered their peak earning years, the financial industry began a series of major innovations and transformations, ostensibly improvements to previous ways of investing, but which we believe were of dubious value at best.

Prior to the arrival of the 1970s, investment in stocks and bonds was seen as the exclusive province of the ultra-wealthy, as we illustrated using the popular TV series Gilligan's Island in "Invest Like Mr. Howell" (May 18, 2009). The vast majority of investments were directly into individual stocks and bonds. Brokers still called themselves "brokers" -- the terms "financial advisor" or "financial consultant" would come later.

Towards the end of the 1970s, however, some significant rumblings of change began to take place. Brokerage firms began introducing accounts which could hold stocks but also sweep idle cash into money market mutual funds -- a seemingly small innovation but one which heralded the future blurring of the lines between brokerage firms and banks (and later, insurance companies as well).

This innovation, which quickly spread throughout the financial services industry, pointed towards the shift that would see the traditional concept of the "broker" fade away, to be replaced by a new concept, that of the "financial consultant" or "financial advisor."

As depicted in the chart at the top, this transformation was accompanied by the introduction of major new product categories, from the limited partnership craze of the late 1970s and early 1980s, to the exponential growth in mutual fund assets, followed by the idea of the "fee-only account" or the "wrap account" (in which clients would pay an annual fee rather than individual trading commissions), and finally to the rapid introduction of a host of new investment products that took off in the late 1990s and especially 2000s, from ETFs to "alternative investments" of every variety.

For the most part, investors have gone along with each of these foundational shifts they have been asked to make in the way they invest their money (the steep growth in total assets in each new category of investment vehicle attests to that).

However, there are signs that the financial panic of 2008-2009 -- during which many who were counseled to commit capital to exotic international funds, foreign exchange bets, commodity tracking vehicles, and other "alternative" strategies saw their asset values drop even more precipitously than the broad US market indexes -- was the "last straw" for many who had been going from one innovation to another for the past years and decades. We have previously pointed to articles indicating that investors -- and their "financial advisors" or "consultants" -- realize that something was seriously wrong (see here and here).

We have often stated our strong conviction that the most important ingredient for long-term investment success is consistent adherence to the same investment philosophy for many decades. The modern history of the financial services industry described above has, unfortunately, worked against such consistency for a large number of investors.

The moral of this story is that, in the aftermath of the recent meltdown, investors who are approached with yet another "new way" that will "be better than the old way" should ask how long this new way has been in effect, and how long it will be before it is discarded for yet another idea.

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