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HomeBlogThe Investment Industry Today and Tomorrow and What That Means to You

The investment industry is changing and understanding this can be important to you and your financial future. A short history of the investment industry will provide perspective. The formal origins of Wall Street began in 1817 and remained relatively unchanged for 158 years until May of 1975. During that period, brokers executed transactions for clients on a commission basis. As is was termed, “Gentlemen of leisure transacted for gentlemen of commerce.” I never quite thought of myself as a gentleman of leisure, but it does have a nice ring to it.

On May 1, 1975 government regulation took effect that abolished fixed commissions, and this opened the industry to competition. It was analogous to unfixing airline fares, which created airline competition and ushered in lots of complexity and ambiguity, but it inured to the benefit of the traveling public with much lower fares. About the same time, the government broke up Bell Telephone – Ma Bell – and the same thing happened to telecommunications and ushered in the marvelous innovations of the technology age. Thus, unfixing brokerage commission rates acted similarly and was the beginning of discount brokerage and intense competition. But more importantly, it made the industry focus on its value proposition. Trading stocks and bonds wasn’t a reason to exist, it was a means of facilitating something more important. It didn’t come easily, as the large brokerage firms had lots of capital invested in its infrastructure and found revenues from transactions so severely depressed from previous levels that it needed to create additional cash flow streams, so it went into the product creation business. Manufacturing revenue helped fill the gap of downsized transaction commissions.

The emphasis on internally manufactured, proprietary products put the large investment firm broker in the position of selling company and special arrangement products and left consumers to decide what is right for them. That is not illegal or unethical, but it does present ambiguity and confusion for the investing public when they confuse the product salesman for an advisor. That is the source of the contention today with the fiduciary rule proposed by the Department of Labor and another similar ruling upcoming from the Securities and Exchange Commission. That fluidity opened the door to another way to gain financial guidance and that is from independent investment advisors who do not work for the product companies, and instead, represent the investor. That is why we, at Fragasso, went totally independent in 1996, so we could represent you, our clients, without the pressure we experienced toward proprietary product distribution. We weren’t alone. Over the years as many advisors moved to independence.

Now we get to the crux of the issue. Smaller independent firms could be at a disadvantage to larger more capitalized organizations. We needed to grow and add resources so our clients would be served with resources that kept pace with the evolving times. We believed that we did, and our client acquisition and retention levels would seem to attest to that. But not all firms did, and today’s demand for technological and connectivity tools requires that we continually invest in our firm. Many of the smaller firms that sprung up during this period are not positioned to invest thusly and that, combined with the age of the founders who are gravitating toward retirement, suggests they may be left behind. This presents an opportunity for Fragasso to acquire such firms. To date, we have bought two.

We continue to seek acquisition partners and that has significance to our clients. The additional revenues of acquisitions fuel our ability to add more capabilities, and we can extend our geographic reach to better serve clients where they live and work. All of this, we pledge, has and will occur without losing the individuality we bring to each client engagement. In addition to our headquarters downtown, we now have two offices in the south hills corridor, one in Wexford and another recent acquisition in Beaver, PA. I refer to Beaver as the new Oil City, referencing the boom of 100 years ago. We wish to establish additional offices in Allegheny County and contiguous counties so we are closer to our clients, their families and their tax and legal advisors. We believe that will translate to quicker and more comprehensive service for our clients.

If you are aware of advisors who may be approaching retirement and wish to sell their practices, we are seeking these opportunities. Please consider referring them to me. We also seek advisors who are distant from retirement and who may wish to increase the resources they can offer to their clients. We are recruiting them also. This model should provide benefits for all involved and especially our clients and those of the acquired advisors. We feel comfortable comparing our capabilities and client servicing to any firm of any size. We are committed to keeping our value proposition to our clients at the forefront of our industry. Our centralized portfolio management department, uniform application of our client experience and holistic financial planning are testaments to that objective. We thank our clients for their confidence in us and pledge to remain meaningful to their multi-generational investment and financial planning needs.

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