Why Savvy Investors Still Relish Advice

Keith Walker is the spitting image of a do-it-yourself investor.

The married 39-year-old father of two has three online brokerage accounts, trades stocks about 400 times a year and spends an average of two hours a day overseeing his investments.

It would follow, then, that such a hands-on investor would scoff at getting advice from a broker or another outside source.

Quite the contrary. Walker has had a Merrill Lynch & Co. broker--to whom he refers proudly as “my business partner”--since he was 16. He regularly digests analyst research reports. And he always pays attention to such oft-quoted investment strategists as Abby Joseph Cohen and Byron Wien.

“I consider myself a pretty savvy, street-smart investor, and I get ahead of the curve on certain issues,” said Walker, who has a background in software engineering and works for Eastman Kodak in Rochester, N.Y. “But I’m not so arrogant or pompous to think my opinion’s the only one out there.”

The image of the do-it-yourself investor in the Internet era has become as deeply seared into the American psyche as that of the frontiersman of the old Wild West.

Just as the pioneer of yesteryear was an individualist charting his own course, today’s small investors are typically pictured as confident loners who rebuff “expert” advice in favor of making their own decisions on which stocks, bonds and mutual funds to buy. Online brokers love to burnish that notion with ads that portray “empowered” investors “booting their brokers.”

The truth, however, is that the image is often little more than that.

For all the hype about the soaring ranks of do-it-yourself investors, relatively few Americans want to go it totally alone when it comes to their finances, surveys suggest.

To be sure, Americans cherish the Internet for giving them a dramatic new degree of control over their investments. The ability to summon an array of financial data and to trade stocks at bare-bones commissions has made investors feel more confident and has permanently erased the sense of being beholden to some all-knowing outsider.

But as people’s nest eggs grow, so too does their desire to have someone else reviewing their finances and/or helping them decide what to buy and sell.

A survey by consulting firm Dalbar Inc. found that, of investors with financial assets of more than $100,000, fully 89% think they need professional help.

And despite the growing competition posed by independent financial planners, online brokerages and other sources, more people buying individual stocks--the hottest investment of the late 1990s--use a full-service broker than any other intermediary.

A joint study by the Investment Company Institute and the Securities Industry Assn. this year found that, of investors who buy individual stocks outside of employer-sponsored retirement plans, 44% used full-service brokers. By contrast, 20% used discount brokers and just 9% used online brokers.

Of course, the full-service firms’ market share is, arguably, theirs to lose. But analysts note that the ease with which investors can execute trades doesn’t solve many people’s chief problem: what to buy, and sell, in the first place.

“It’s kind of funny to talk about this whole online revolution,” said Greg Smith, online brokerage analyst at Hambrecht & Quist in San Francisco. “But really the demand for financial advice is going to increase dramatically.”

Although Merrill Lynch on Wednesday will begin offering customers the ability to trade online by themselves for just $29.95 a trade--a revolutionary step for the big broker--perhaps more telling about the direction of the brokerage industry is discount-brokerage pioneer Charles Schwab Corp.’s increasing push to offer advice to its clients.

“We want to be the great general practitioners of advice in the financial services industry,” said Edward Rodden, Schwab’s senior vice president of retail marketing.

Schwab’s thrust toward direct advisory services is driven by the fact that the majority of customers leaving the firm head not for competing discounters but for full-service companies.

“That is directly why Schwab wants to provide more advice and services,” Smith said.

Demographics are fueling the demand for advice: The independent-minded baby boomers who first embraced discount brokerages are getting older and busier. And thanks to the heady bull market, many are also wealthier than they expected to be and are anxious to protect their gains.

“The attitudes they’ve had so far in life have been ‘I want to be independent, I want to make my own decisions and I want to have a lot of control,’ ” said Daniel Leemon, Schwab chief strategy officer. “[But] as they come into more and more money, they need help. The baby boomer hits 50 and says: ‘I never expected to be this old [and] never expected to have this much money. I need help.’ ”

John L. “Launny” Steffens, a Merrill vice chairman who oversees the firm’s brokerage business, believes that worsening time constraints are forcing people to seek advice.

“This time-famine problem is a real one for everybody, and so the issue is whether you’re going to spend your time on your career or whether you’re going to spend your time playing [with investments],” Steffens said.

The move to offer more specific advice also is sweeping through the mutual fund industry.

A number of no-load fund companies, the mutual fund equivalent of discount brokers that formerly offered funds directly to consumers at no charge, have rolled out products that are sold through brokers. Invesco, American Century and Stein Roe are among the firms going this route.

Kansas City, Mo.-based American Century also has created a new unit, named Acumation Inc., that plans an Internet-based service that will recommend specific mutual funds for investors.

The Web site, which will be launched early next year, doesn’t just screen for funds suitable for an investor but also considers the investor’s current stocks and funds in suggesting new funds from a variety of companies.

“We think advice is the driver for the mutual fund industry in the next decade,” said Randall Merk, Acumation president.

But how good is the quality of advice available to individual investors? The full-service brokerage industry insists that, especially when it comes to securities advice, it has no peers.

“Merrill Lynch spends almost a half-a-billion dollars [a year] on research, and right now Schwab spends nothing. If Schwab is going to look more like Merrill Lynch, they’ve got a long way to go,” said Merrill’s Steffens.

Schwab counters that its model is superior: advice from investment representatives who aren’t compensated by commission and who don’t have incentive to sell certain investments.

Yet many investors don’t dwell much on fees, if the ICI/SIA survey is accurate: 78% of investors in the survey rated their brokers “good” or “excellent” on the question of “reasonable fees and commissions.”

For many advice-seeking investors, the most important issue may be less the cost of advice than the chemistry they have with the advice giver. Though he makes the final call, investor Keith Walker likes bouncing ideas off his Merrill broker, who he signed on with as a boy growing up in New Jersey.

“Over time, what I’ve found out is it really pays to have your broker there as a second opinion and a voice on the decisions you might make,” Walker said. “He is my coach. . . . He’s never going to tell me exactly what to do, and I appreciate that. But he’s certainly going to give me the hints that are going to say, ‘OK, think about this.’ ”

Walker said he tends to use his separate online trading accounts to trade stocks he finds on his own. When he likes a stock that his broker recommends, that trade goes through Merrill.

Karen Smith, a 49-year-old from Springfield, Ore., gets stock ideas from a variety of sources.

She cruises stock chat rooms on the Internet, such as Silicon Investor and Raging Bull, subscribes to about seven free e-mail services that recommend stocks and scans a popular Web site known as Tokyo Joe’s Cafe.

“I get my tips from stock boards,” Smith said. Silicon Investor people provide “so much backup information and so much evidence that says, ‘This stock is a good pick.’ ”

Yet for all the Web-surfing she does, Smith runs every idea past her broker at Morgan Stanley Dean Witter.

“It is very nice to be able to talk face-to-face to her and to get her input and have her affirm my ideas,” Smith said.

Times staff writer Walter Hamilton can be reached by e-mail at walter.hamilton@latimes.com.