Jim Jubak

Jubak's Journal11/9/2007 12:01 AM ET

Wall Street doesn't want you

After an era of innovation in financial services that benefited the middle class, The Street has abandoned individual investors in favor of big institutions and wealthy private traders. It's time for big changes.

By Jim Jubak

Wall Street doesn't care about the individual investor anymore. We're not profitable enough.

Look at the billions the financial industry has made in recent years from trading, buying and packaging mortgages and credit cards, financing buyouts and selling ways to reduce risk. That kind of business drove operating income at Goldman Sachs (GS, news, msgs) to $14.6 billion in 2006 from just $3.3 billion in 2002, a 340% increase, and at Merrill Lynch (MER, news, msgs) to $10.4 billion in 2006 from $2.3 billion in 2002, a 350% increase. Until they blew up, that is.

It's not just that Wall Street's newest inventions -- collateralized debt obligations and asset-backed commercial paper and the like -- are irrelevant to the stuff we care about, like having enough for retirement. Wall Street's actions seem positively dangerous to our goals.

Innovation attracts a crowd

It wasn't always this way. For 20 years, beginning in 1975, Wall Street produced a wave of innovation for middle-class investors that brought more and more people into the financial markets.

The revolution began in 1975 with the invention of cash-management accounts at Merrill Lynch. From our position in time, it's hard to remember that there once was a day when all we had were savings and checking accounts, and that the two were so rigidly separated that you couldn't write a check from an account that paid interest.

In the years after that, everyone on and off Wall Street rolled out money-market accounts and then, in relatively quick succession, came money-market mutual funds with higher interest (and check writing), no-commission mutual funds, low-commission stock trades, individual retirement accounts, 401(k)s and Keoghs, index funds and exchange-traded funds, telephone banking and telephone stock trading, Internet banking and investing, and more.

Era of the financial supermarket

That wave of innovation captured a huge asset base for Wall Street. For example, money-market funds started 1980 with $80 billion in assets and finished 1981 with $183 billion, a gain of more than 125%. That total was up to $2.95 trillion by the end of October.

It created financial powers such as Charles Schwab (SCHW, news, msgs) and transformed others -- privately held Fidelity Investments, for one -- from niche players into financial supermarkets. Banks such as Citigroup (C, news, msgs) became brokers and insurance companies and investment banks. Merrill Lynch and other brokerage firms became, in effect, banks and investment banks. The financial supermarket became a common business model.

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The revolution changed our behavior, too. We learned to shop for yields, jumping from institution to institution to get better returns. Now we shop for financial services the way we shop for refrigerators and cars. As best as I can figure out, my mom and dad used the same bank from the 1940s until they died a few years ago. That kind of institutional loyalty is a remnant of another era.

The do-it-yourself formula

And, finally, we learned to do without much hand-holding. When I bought my first stock at 13 (my parents thought it would be educational), I started with an introduction from my car-dealer uncle to a stockbroker who met me in his office, took me back to his desk and walked me through a couple of potential stock picks using those yellow Standard & Poor's tear sheets. He charged me 6% on the purchase.

Now we do our own research online (or over the backyard grill while charring burgers), buy and sell using human, automated or online order takers, manage our retirement funds in a 401(k) and get our advice from some guy on TV or on the Internet.

Continued: The party's over for the middle class

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