Why Small And Nimble May Be Right For You

As financial advisors, one of the most common questions we get asked is, “Should I have my money invested with a small firm or a large firm?”  The firm located just down the street, or the one located on Wall Street? The company sponsoring the local high school football team, or the company sponsoring the nearest NFL team?  

It’s an important question.  Jim Rohn, a well-known entrepreneur and speaker, once said, “Part of [our] heritage in this society is the opportunity to become financially independent.”  Achieving that independence, of course, takes hard work and patience. But it also takes making smart financial choices – including who you choose to rely on for advice.  

That’s why the choice between a large multinational institution or a smaller, more local one is so critical.  Both come with certain advantages, but which is right for you?  

Many people feel more comfortable with large, well-known firms like Fidelity, JP Morgan, and TD Ameritrade.  It makes sense – after all, you’ve seen their ads on TV. You know they’ve been around for decades. You also know they’ll probably still be around long after you and I are gone.  In other words, you know they’re legitimate.

But there are two things you should think about before relying on a gigantic institution for help with your financial dreams.  

How big is too big?

Let me ask you a question. What do you think would happen if, say, the CEO of a big Wall Street firm held a press conference and said, “I’m very concerned about where the US economy is heading, and I think you should not be invested right now.”  

Take a moment to imagine the headlines.  Imagine the frantic talking heads on TV. The uproar on social media.  “The CEO of [Insert Institution Here] said what?”  

Now let me ask you another question.  What do you think would happen to the markets?  

It would probably result in a pretty dire situation.  It’s not an exaggeration to say it would cause a panic on Wall Street.  Hundreds of thousands of people would start selling their investments, even if they didn’t do business with that firm.  History books would call it “Black Wednesday” or something like that.       

Sometimes it’s not actually best to be with one of those giant institutions.  Sometimes it’s best to be with a smaller, more local firm that can recommend changes to your investments – including when you should not invest – without jeopardizing the entire financial system our nation is based on.  

Buy-and-hold: Toeing the Company Line

Of course, it’s pretty unlikely that a big Wall Street firm would ever say, “You should NOT be invested right now.”  Case in point, come back with me to the end of 2007.

If you owned a 401(k) – or any investments, really – you probably remember it well.  The stock market was in full retreat. No matter which sector or industry you looked at, stocks kept plunging to new lows.  Even fixed-income investments, like bonds, proved to be no safe harbor. If you were in pretty much any type of investment in 2007-08, you lost money.  

The only safe place to have your money was in cash. 

But were the large Wall Street firms saying this?  For the most part, the answer is NO. Instead, they were saying, “Everything will be fine, everything will be fine, just hold on to your investments.”  Even though the only safe place to put your money was in cash, they were still urging customers to stay invested, no matter what.  

Why would they do this?  Well, the idea of being in cash makes most Wall Street firms twitch.  They believe in being fully invested in the markets at all times – even if it means subjecting you to more risk than you can afford!  It’s a philosophy called buy-and-hold, and generally speaking, the financial advisors and money managers at firms like Fidelity, Vanguard, and TIAA-CREF never deviate from it.  

That’s because they have every incentive to toe the company line.  

Don’t get me wrong – the majority of professionals working at these institutions are honest, smart, hard-working individuals.  But the fact remains: If you are not invested, these firms don’t make money.  And as we’ve already discussed, if the official message of these firms changes to not invest, it can cause panic.  

Locally-based, smaller firms often have more flexibility with the advice they give.  And because these firms depend on the relationships they have with their clients – often people who live just minutes away – they have every incentive to give only advice that’s in your best interest instead of their own, including telling you when you shouldn’t be invested in the markets.  

In the end, there are many reasons you might have for choosing a large firm over a local firm, or a local firm over a large.  Before choosing anyone, however, think about the questions I just asked you. And if you already are working with someone on Wall Street, consider asking them a few questions of your own.  For instance:

  1. Why do you give the kind of advice you do?  What philosophy is it based on?
  2. What’s your strategy for protecting my portfolio from crippling losses in a bear market?
  3. What strategies do you use to manage my risk and keep it at a level I’m comfortable with?

If the answers give you peace of mind, that’s great!  But if not, it may be time to ask yourself whether the corporation with all the ads on TV is truly right for you.

About Jeremy

Jeremy Wallace is founder and chief investment officer at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Jeremy has 20 years of experience in the financial industry and is passionate about helping clients preserve and enhance their wealth so they can pursue their passions. Jeremy graduated from Emory University with a degree in international economics and a certificate in financial planning. Outside of the office, Jeremy spends most of his free time with his wife, Julie, and their three children, Isabel, Lincoln, and Reid. He is an avid Chicago Cubs baseball fan, and  he enjoys golfing with his wife and traveling with his family. Learn more about Jeremy by connecting with him on LinkedIn.