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Why You Should Care
Obviously, not all broker-dealers are bad, and not all RIAs are good. Read the disclosure documents and discuss them carefully to know who or what you’re working with, and keep the fiduciary standard in mind as you observe your adviser’s behavior and actions.
83. FINANCIAL ADVISERS
Let’s suppose you need not only investment advice, but also advice on handling your overall finances. You need the right insurance. You need to plan for college and retirement. You need to figure out how much money you need now and in the future, and how to provide for yourself, your family, and the eventual financial legacy you leave to your loved ones.
Unless you’re the strong, silent, do-it-yourself type (and there are a lot of you out there), you need a financial adviser.
What You Should Know
Financial advisers are paid professionals who learn your financial situation, develop financial plans for you and your family, and help you find the tools—investments, savings plans, insurance, legal advice—to execute the plan. A good financial adviser looks at your personal and family goals, translates them to short- and long-term financial needs, and then develops, documents, and reviews a complete plan to meet the goals and needs.
Depending on the adviser, some may implement all or part of the plan—if they are registered investment advisers (see #82 Brokers, Broker Dealers, and Registered Investment Advisers) too, they may buy and sell securities on your behalf. If they are licensed insurance salespeople, they can sell insurance. If they are CPAs, they can do your taxes. If they are attorneys, they can execute trusts and estate plans. You get the idea.
There are two primary types of financial advisers, distinguished by the way they are paid. Fee-based advisers typically charge a mix of flat fees and per-transaction fees. The flat fees are tied to your asset base for general services; the per-transaction fees may be collected from you or from the providers of the securities they sell as commissions. Some criticize fee-based advisers for having an inherent conflict of interest, making money for selling XYZ family of mutual funds while supposedly also acting in your interest. Fee-only advisers don’t collect commissions, which reduces the risk of a conflict of interest between the adviser and the client if the adviser is beholden to another financial institution.
Financial advisers can come with a large assortment of credentials, some of which are more impressive than others. The Certified Financial Pla
Why You Should Care
As with most services, you should shop carefully for a financial adviser. Checking references, getting examples of what they’ve done for others, and checking credentials, experience, attitude, and personality all can play a part. They work for you, and their purpose, as well as their best interest, is to serve your needs.
84. ELECTRONIC AND HIGH-FREQUENCY TRADING
Few industries have been revolutionized as much by technology as the trading of securities—stocks, bonds, futures, and the like. Electronic trading has speeded the function of the markets to the point where trades can be executed on a global basis almost instantaneously. That has in turn speeded up the pace of change and increased the need for quick decision making at all levels of business and government—and has spurred a whole new approach to securities trading, where algorithms and computer models can replace a considerable amount if not all human thinking and decision making. The effects are huge. We got a hint as we witnessed the 2008 market meltdown; there was scarcely any time to react as global markets swooned on even the slightest news. We got another big hint—really, a kick in the side of the head—during the so-called “flash crash” of May 2010, where computerized trading froze up due to a relatively simple set of triggering events, and the market plunged—for a few minutes. So while electronic trading only affects those traders in a given securities markets on the surface, the global impacts can be a lot larger.
What You Should Know
For most of history, stock and other securities markets were physical markets like the NYSE, where people actually met face-to-face and traded stocks and securities (see #78 Stocks, Stock Markets, and Stock Exchanges). Communications like telephones and teletype machines co
Improvements in communications and technology, notably networked computers, made it less important for buyers and sellers to work face-to-face. The NASDAQ automated quote system allowed market participants—dealers—to come together by posting quotes electronically; the entire market was visible to market players with the right level of access. This advance greatly superseded point-to-point communications; the markets could handle the actions of many participants at once. Personal technology allowed individuals to work in markets once restricted to big trading firms with large computer installations. Beyond the actual execution of electronic markets, all market players also had real-time access to information, including quotes, news releases, and company information.
Today’s trading is becoming more electronic, with buyers and sellers coming together on electronic quote boards known as electronic communications networks (ECNs). Some ECNs like Arca have been absorbed as part of the major exchanges (the NYSE in Arca’s case), providing an electronic trading platform within the exchange. The rapidly growing (and combining) BATS, Direct Edge, and other electronic markets noted in #78 have provided another major trading venue. Sophisticated “client” algorithms and triggers automate the entry of orders when certain price conditions have been met, and have enabled one computer to trade with another computer through the electronic network; humans barely need to be involved, except to set the conditions of order entry.
So-called “high-frequency trading,” where orders are triggered by algorithms and executed in milliseconds, even nanoseconds, accounts for some 50 percent of all stock market volume. High-frequency traders are attempting to capture tiny gains, over and over, by getting information “first,” and by capturing small differences in prices among markets, often less than a pe
Why You Should Care