Brokers Arent Responsible for Bad Bets

By Charles R. Schwab To take the risk out of investing youll have to take Americans out of the market. charles-r-schwabA blizzard of new proposed regulation and overzealous litigation is poised to jeopardize the low-cost investing model that tens of millions of investors have enjoyed for decades. In the last 30 years individual investors have benefitted from huge innovations including low commissions online investing mutual fund supermarkets and the advent of exchange traded funds. Individuals now have broad access to domestic and global markets at costs lower than institutions enjoyed only a few years ago. This has provided needed capital to our economy and enabled the creation of personal wealth for average Americans. But todays extraordinary regulatory and political environment is putting all of this at risk. My company Charles Schwab was founded 35 years ago as a reaction to the high cost and inherent exclusivity of traditional Wall Street investing. Today we serve almost 10 million accounts. The majority are what we refer to as selfdirected: They make their own decisions about what to buy sell or hold. We provide them with an efficient platform tools assistance education and of course low costs. We are not alone. Our direct competitors serve millions of other American investors who are looking for essentially the same thing: the freedom to inexpensively invest on their own. We have never guaranteed individual success. Our investors understand that along with investing comes risk as well as potential reward. Unfortunately we are now seeing a conscious effort to limitif not eliminateall risks for the individual investor whether through consumer protection fiduciary liability for brokers or the threat of litigation that attempts to make our firm and others like us more like an insurance company than a broker. As an example Schwab is currently being sued by New York Attorney General Andrew Cuomo who alleges that we should have known beforehand that the Auction Rate Securities market would freeze. Auction Rate Securities are generally high-quality long-term bonds that can be bought and sold on a weekly or monthly basis through an auction process. The interest rate paid on the bonds was reset at each auction according to investor demand. The auction process has largely been frozen since February 2008 leaving investors holding quality long-term but illiquid bonds. Though this market operated smoothly and reliably for over 20 years it is a market that we had no direct involvement in establishing or maintaining. Its a market where roughly 90 of the clients who invested in these securities came to Schwab asking us to locate and make available these investments for them. We did not create the products actively market them and had no involvement in the events that led to the collapse of the Auction Rate Securities market. The implication of this lawsuit is that firms like ours should have known that the market would fail. Should we also have known that Lehman Brothers or Bear Stearns were going to go under and compensate clients who bought their equity or debt? Should we have been able to predict which financial institutions would be the beneficiaries of government bailouts and which would not? I think its fair to say we have all been surprised by many events this past year. The issue at stake here is whether independent investors should be allowed the freedom to choose what they are allowed to buy sell or hold. Or should the government try to enforce a guarantee against market risk through regulation or lawsuits like the attorney general has brought against us? If Schwab is going to be held responsible for guaranteeing every decision an investor makes wed need to severely limit what they purchase. Would we tell them they couldnt buy Google or IBM stock because regulators or politicians dont think they are smart enough to assess the risks and could hold us accountable for any losses? The logical outcome would be that individual investors would be constrained to a small set of plain vanilla investmentsTreasurys for allor would be forced to pay us a fee to manage their account. To be sure we are happy to manage money for our clients. But millions of investors have decided that their needs are best served when they direct their own finances. Forcing them to pay an advisory fee would be a significant new cost to them and the fees would likely shut many small investors out of the capital markets altogether. Ive always believed in the power of the market to drive innovation and drive down cost. I also believe in the individual and his or her ability to make reasoned decisions. I dont think our clients or our competitors clients are looking for regulators or politicians to protect them from risk by constraining their choices. Today Schwab clients can open an account with as little as $1000. If they invest their $1000 in an S&P 500 Index fund they would pay no commission and their total cost of management would be 90 cents per annum. For 90 cents a year they can access everything Schwab has to offer including education tools our Web site 24/7 live phone service as well as support from one of our approximately 300 branches across the country. This is an incredibly powerful model that Im proud of and a model that I think is good for this country and the market. Dont let litigators and politicians jeopardize it. If they succeed the individual investor will pay a heavy price. Mr. Schwab is founder and chairman of the Charles Schwab Corporation.
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