When Shmuel Schwartz discussed financial matters with his accountant, he felt like the accountant was talking Chinese. Things like “Go to Fidelity and open an IRA to save on taxes” and “Investing in stocks can be safe and easy, and mutual funds have historically performed well” left him confused. To add to his confusion, his accountant mentioned the option of using an investment adviser but didn’t explain further.
Where should Shmuel go now? Should he invest in Fidelity, open an IRA, buy stocks, invest in mutual funds, or seek guidance from an investment adviser?
Big-Picture View
Many people struggle to understand the players they need to interact with in the investment world. No one is born knowing about stocks, mutual funds, or IRAs, so there’s no shame in the confusion. It’s crucial, however, to pick up a basic overview of the investment world at some point if you want to build wealth. Even if you decide to hire an investment adviser, having basic big-picture knowledge of the building blocks of financial plans and investments will make you a much more informed and confident client.
The Supermarket
By way of analogy, consider a modern-day supermarket. Someone from the alte heim would be completely overwhelmed by the vast array of options offered by Costco or Gourmet Glatt. But with some guidance, they’d eventually grasp how these superstores provide convenient access to thousands of products from hundreds of companies. Similarly, today’s sprawling virtual investment “supermarkets” can be daunting, but they simply offer access to the many financial “products,” stored in convenient packaging, enabling us to assemble our financial menus and cook our investment meals. Let’s break it down piece by piece.
Supermarkets: Broker Dealers
Brokerage firms like Fidelity, Vanguard, Merrill Lynch, and Robinhood are the supermarkets for finance. For a small cut, these marketplaces resell the array of products and services that thousands of vendors offer to end users. The structures and models of various brokerage firms vary greatly. For example, Vanguard is mainly a self-serve shopping platform selling high-quality investments at rock-bottom prices. Merrill Lynch runs like a bakery boutique, where the cakes are displayed behind the counter, and salespeople help you choose your “products”—prices are therefore higher, and the sale is influenced by the salesperson serving the customer.
Products: Investment Shares
After deciding which grocery store to shop in, you select your desired products. In a grocery, these are raw and processed fruits and vegetables, dairy products, poultry, eggs, flour, oil, spices, etc. and fully prepared, processed items like bread, crackers, deli meats, and ketchup. In the investment world, the fresh, raw “products” equivalents are the thousands of stocks and bonds you can buy shares in. You, or perhaps a personal shopper/broker, put these ingredients together so you can cook your dishes and meals (portfolios) to your liking.
Prepared Foods: Mutual Funds and Insured Products
To add further convenience, financial supermarkets also sell prepackaged investment options such as mutual funds, structured notes, and insured vehicles. This option is the equivalent of picking up a Meal Mart kishke or Reisman’s cake in your grocery store. Mutual fund companies prepackage investments that you can pick up in the brokerage “supermarket.” These “precooked” funds eliminate the need for individual selection of specific stocks and bonds. Prepacked investments allow investors to own diversified, risk-managed portfolios without getting their hands dirty.
Packaging: Financial Account Types
Whether you’re buying stocks directly or through a mutual fund, you need an account to hold your investments. You can think of these accounts as the packaging for your investments. Each type of packaging in the supermarket has a specific purpose. Some items are best stored in glass, others in plastic, while some need to be in cans, netting, or cardboard. If you use the wrong packaging, items degrade and spoil. While fresh fish can go home in plastic, there are important reasons why airtight cans are used for storing tuna for the long term.
Similarly, every investment store provides different types of “bags and boxes” to store investments in. Different types of accounts exist for various legal structures, such as joint accounts, individual accounts, and trust accounts. There are also subcategories of tax-sheltered “packaging” like IRAs, 401(k)s, college savings accounts, health savings accounts, and donor-advised funds, each with its own tax rules. It’s essential to choose the proper storage for each investment to maximize “freshness” and avoid “spoilage” via taxes or legal problems.
Add-on Services: Investment Advisers
The final piece in this puzzle is the add-on service offerings. Large superstores often offer takeout counters, party planning, off-site catering, and even floral services to those who want as little involvement as possible in nitty-gritty details of planning, shopping, cooking, and presenting. Similarly, for an additional fee, most brokerage firms offer investment-advisory services to help clients design financial plans, select account types, and manage investment portfolios. Alternatively, you can bring a “caterer” from the outside to do the work. For those who do not want to shop and cook, hiring an investment adviser on a consulting or permanent basis makes sense.
Deciphering the Code Words
Shmuel’s accountant was advising him to go to a financial supermarket (Fidelity Investments) and place some produce (stocks) or prepackaged items (mutual funds) into a tax-sheltered package (an IRA). If he needs help doing this, he should retain a service provider to do it for him (an investment adviser). Once we lay out the big picture, it becomes much easier to recognize that we are touching on five different but interrelated things.
Branded Items Twist
Here’s one twist, however. Supermarkets offer branded goods, packaging, and services to maximize profits and marketing power. Similarly, Fidelity (as the supermarket) has Fidelity-branded mutual funds (prepackaged goods) to select the produce (stocks and bonds). You can purchase these Fidelity-branded funds in Fidelity-branded accounts (packaging) or at other “supermarkets.” And if you need help navigating all this, a Fidelity-branded investment adviser can, for an added fee, be retained to buy these Fidelity funds or other packaged items from other companies.
Once you boil it down, you will usually find that you are working with the four or five components we describe here.
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