- 'Economies of Scale': Intermediaries pay lesser costs(as % of portfolio) on advice, brokerage, fees etc. Also, they have market access which others do not(interbank markets, global markets etc) have, or would find too cumbersome to have
- Get access to best brains:- If you want a Buffet/Watsa to help your investments, you have no choice but to invest in Bekshire Hathway/Fairfax etc. As they say, there are some things which money cannot buy
- To identify solutions:-Good bankers will be able to size up the client's exposure, risk appetite, industry practices etc; and integrate that to propose a solution which the client may not have thought of at all.
- Bundle risk/liquidity/cash flows on demand via OTC contracts:- The flexibility(albeit lesse nowadays but still prevalent) is something which only intermediaries can achieve.
Sunday, April 24, 2011
Why investors STILL need intermediaries in this internet era
Whenever the topic of mutual fund fees, hedge funds carry, trading commissions, banking fees etc(basically financial intermediaries remuneration) is raised, the popular response is to propose that fees be regulated to the bottom, to maximize return. While competition does achieve this result at times, this post argues that fees have several justifications beyond the standard 'economies of scale' arguments. While a whole 'motivational' industry via books, seminars, tapes etc(mainly from retail brokerage side) has sprung up claiming that 'you can do it-do your own value investing', I feel that barring an index fund, using professionals is STILL the best alternative. Lets see some of the reasons of them below.