Financial Products Shopping CartOliver Stone’s 1987 drama Wall Street was definitive for a generation of aspiring financiers. Future traders loved the movie for the action in fictitious securities (“Blue Horse Shoe loves Anacot Steel.”), and prospective investment bankers enjoyed the strategy behind the deals it showcased. For would be stockbrokers, the movie stoked hopes of landing a “whale” with little more than hard work and charm. Watching the movie now is still entertaining, but mainly as a curiosity: ubiquitous suspenders, giant mobile phones, etc.

There’s another, less obvious aspect which dates the movie. Stockbrokers today no longer sell stocks, and they now usually go by the titles “financial advisor,” or “financial planner,” which reflects the change. Over the last 30 years, the business of retail investment sales has moved away from recommending individual securities to gathering assets and selling financial products. “Financial products” is a broad category that describes co-mingled investments. Variable annuities, structured notes, unit investment trusts are examples of financial products, but by far the largest sub-group is mutual funds.

Mutual funds are everywhere, and they’re big business. The 2015 Investment Company Factbook lists the total number of mutual funds at 7,923 as of the end of 2014. That’s a 243% increase from 2,312 funds in 1987, and most of that new supply is an answer to financial advisor demand. Even more incredible is the number assets invested in mutual funds: in 1987, the total of all mutual fund assets was $769 billion, and by 2014 that number had grown to $15.85 trillion – an increase of 1,961%. Much of that increase has to do with the prevalence of mutual funds in company retirement plans like 401(k)s and 403(b)s.

Peloton does not utilize mutual funds in our clients’ accounts. Over our 30 years in business, we’ve instead remained committed to using individual securities in client portfolios. There are three broad reasons for this commitment: complexity, control, and cost. But we’re also not naïve: like it or not, mutual funds are here to stay, and they will continue to impact our clients – through retirement plans, college savings plans, and other vehicles that often prohibit the use of individual securities.

This weekly series through November is essentially a primer on mutual fund investing, using the three “Cs” referenced above. We want to emphasize that this is really intended as a practical guide to smart mutual fund investing. It is not just an excuse to write about why funds are bad. In next week’s article, we’ll look at some of the main problems with complexity as it relates to selecting and managing a portfolio. We’ll then examine the control – or lack thereof – associated with funds, and why that becomes an important consideration. Finally, we’ll look at some of the costs associated with mutual funds and examine how to get quality professional management for a reasonable fee.

Next: Mutual Fund Investing: Complexity

Mutual Fund Investing: Control

Mutual Fund Investing: Cost