Do you have the same reaction as I when you read this New York Times article? Excerpts:
Some of the brokerage firms that helped pique Americans' interest in stocks are now luring them into something much riskier: stock options.
As the stock market soars to new heights, E*Trade, Ameritrade and Charles Schwab are advertising the potential rewards of options, which give buyers the right to buy or sell stocks at predetermined prices in the future. Options, like their cousins, futures, have traditionally been the domain of Wall Street traders. But the brokerage firms say futures and options can be profitable for ordinary investors, too — a claim that, while true, does not square with many investors’ actual experience.
Options? Come on. Most individual investors don't even know how to pick individual stocks, much less try to determine potential future valuations that would justify options. The chance of financial disaster is high. The article continues:
Analysis done for The New York Times by SigFig, a company that tracks 200,000 retail investors, showed that people who traded options last year received only about one-fifth the returns of people who did not trade options: 1.1 percent compared to 5.1 percent.
All this is driven by greed, of course.
The growth has been a big help for the online brokers at a time when stock trading has fallen. The commission on the average options trade is more than twice that on the average stock trade.
When a friend saw the Times article, she wrote me, "Aha! You have just explained why my assigned Ameritrade 'advisor' keeps bugging me and specifically suggested options a while ago. I know enough to know that's not for me."
But others are not so wary. How can this be happening in an era of greater consumer protection in financial markets? Well, that protection has not been forthcoming. CNBC explains:
Dodd-Frank authorized the SEC to impose a fiduciary standard on brokers. But the agency, swamped with other rule-making related to the act, has so far done little.
Under such a standard, hundreds of thousands of brokers would be legally obligated to act in their clients' best interests when recommending investment products. The most important change for consumers is that they would have greater legal standing to sue in cases where they had evidence they had been wronged.
At the moment, brokers (including people working for big Wall Street firms), small locally owned brokerages and insurers are obliged only to recommend "suitable" products.
The new SEC chairperson wants to fix this, but look who is lining up against her:
Various interest groups are hardening their stands. The most powerful player is the Securities Industry and Financial Markets Association (SIFMA), which represents broker-dealers, including the big financial firms, such as Bank of America, Merrill Lynch and Charles Schwab. The stakes in an industry upheaval are big: According to Boston-based Aite Group, about 450,000 people give consumers financial advice; 45,000 to 50,000 of them work as registered investment advisors (RIAs) , and the rest operate under the aegis of broker-dealers.
Until and unless the government acts, caveat emptor--and the seller, too, when it comes to options.
Some of the brokerage firms that helped pique Americans' interest in stocks are now luring them into something much riskier: stock options.
As the stock market soars to new heights, E*Trade, Ameritrade and Charles Schwab are advertising the potential rewards of options, which give buyers the right to buy or sell stocks at predetermined prices in the future. Options, like their cousins, futures, have traditionally been the domain of Wall Street traders. But the brokerage firms say futures and options can be profitable for ordinary investors, too — a claim that, while true, does not square with many investors’ actual experience.
Options? Come on. Most individual investors don't even know how to pick individual stocks, much less try to determine potential future valuations that would justify options. The chance of financial disaster is high. The article continues:
Analysis done for The New York Times by SigFig, a company that tracks 200,000 retail investors, showed that people who traded options last year received only about one-fifth the returns of people who did not trade options: 1.1 percent compared to 5.1 percent.
All this is driven by greed, of course.
[E]xpansion of this business . . . has clearly been an area of growth. An analysis of scattered data from company filings and presentations indicates that derivatives trading, which includes options, has risen at all the major firms since the financial crisis of 2008, which left many Americans with big losses in their investment portfolios.
At Ameritrade, which has been the most aggressive, derivatives trades accounted for about 40 percent of all customer trades last year — more than double what it was just five years ago. A vast majority of those trades were in options.
When a friend saw the Times article, she wrote me, "Aha! You have just explained why my assigned Ameritrade 'advisor' keeps bugging me and specifically suggested options a while ago. I know enough to know that's not for me."
But others are not so wary. How can this be happening in an era of greater consumer protection in financial markets? Well, that protection has not been forthcoming. CNBC explains:
Dodd-Frank authorized the SEC to impose a fiduciary standard on brokers. But the agency, swamped with other rule-making related to the act, has so far done little.
Under such a standard, hundreds of thousands of brokers would be legally obligated to act in their clients' best interests when recommending investment products. The most important change for consumers is that they would have greater legal standing to sue in cases where they had evidence they had been wronged.
At the moment, brokers (including people working for big Wall Street firms), small locally owned brokerages and insurers are obliged only to recommend "suitable" products.
The new SEC chairperson wants to fix this, but look who is lining up against her:
Various interest groups are hardening their stands. The most powerful player is the Securities Industry and Financial Markets Association (SIFMA), which represents broker-dealers, including the big financial firms, such as Bank of America, Merrill Lynch and Charles Schwab. The stakes in an industry upheaval are big: According to Boston-based Aite Group, about 450,000 people give consumers financial advice; 45,000 to 50,000 of them work as registered investment advisors (RIAs) , and the rest operate under the aegis of broker-dealers.
Until and unless the government acts, caveat emptor--and the seller, too, when it comes to options.