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Take My Cash, Please!

The big brokerage houses don't want your money unless you've got more than $10 million, so where does that leave the average working stiff -- the guy with only, say, half a million or so?

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When I first bounded out of the training program at Goldman Sachs, I was jazzed to talk with anyone about stocks. The great eighties bull market had just begun, and big-cap stocks like Merck and Coca-Cola were selling for what looked like -- and turned out to be -- peanuts. I couldn't wait to advise all those people out there who needed a good young broker.

There was only one problem: The firm didn't want me to speak to just anybody. In fact, they didn't want me to help anyone except the extremely rich. We were, after all, Goldman Sachs, and we wanted clients who, in the parlance of the moment, were "elephants," clients who would give us $10 million or more.

It made sense. You had to do just as much work for a small client as you did for a big one, and in the end, all you had was your time, so if you cluttered your book with small fry, you couldn't tend to the big fish. Let the pikers, those with $500,000 in their 401(k) plans or $2 million in stocks, go to E.F. Hutton, Merrill Lynch, Shearson Lehman, Morgan Stanley, or Dean Witter . . . or all the other firms back then that lived for those kinds of clients.

Now, of course, the ones that are left have all adopted Goldman's attitude. Every day, I receive calls from people on my WBBR radio show who can't find a broker at a major firm who's willing to handle their measly $300,000 or $400,000. They are flabbergasted that they aren't considered rich-enough clients.

But they don't understand the economics of the business. A full-service broker provides an individual with a vast array of individual services. Opening an account at one of these firms entitles you to have a human being hold your hand through all sorts of horrid markets like this one, a process that includes receiving any amount of research on topics ranging from real estate to estate planning to insider selling to data and opinions on stocks. Those services are all presented gratis. There are no hourly fees. To get all of this, you don't even have to put money into the account. You just get it for the asking.

In the old days, as your broker, I could execute buy and sell orders for you and charge you a rate per share that could amount to as much as 25 cents on small dollar shares and as much as $1 or even $2 per share on larger amounts. If I courted you on, say, Kimberly-Clark and provided you with research and guidance about why I thought it was an appropriate time to buy the stock, and I enticed you to buy 5,000 shares at $65, I might be able to charge as much as $2,500 or $5,000 in commission.

But that game's dead now, slaughtered by the Net and all of those folks who charge $6 a trade! Not a share, but a trade! If the full-service folks were to charge what the Web folks charge, they would lose money on every single trade. Of course, the full-service people used to be able to make it all up in rich underwritings. But these days, the "calendar" is bare. Almost every company that could come public already did so in the late nineties.

Invariably, some outfits are going to see the opportunity here to start you off and grow with you as you amass wealth. Charles Schwab, for example, has begun an appealing campaign to get potential small clients to see one of its representatives by emphasizing that it won't push research or investment-banking clients. That's easy for Schwab to say, since they have no investment-banking clients to begin with. But given the brouhaha surrounding Eliot Spitzer's recent revelations about Merrill Lynch, the Schwab pitch has a terrific ring to it, and I'm sure it's making the folks at the full-service firms nuts.

So what should mortal investors do? Who can the working rich, the ones with several hundred thousand -- even a cool million -- entrust their savings to? Should you just accept the fact that you aren't going to be served properly by an industry that used to cater to people your size?

In fact, there are still plenty of possibilities out there. First, you can go the Schwab route. You can deal with the company's professionals, who will make common-sense suggestions, although their inability to be critical -- their lack of "research" -- will be a problem if you are at all skeptical about the various mutual funds they will suggest to you.

Second, you can go the Vanguard route, a low-fee outfit out of Valley Forge, Pennsylvania, that can suggest an array of low-fee index funds, ones that have historically outperformed most mutual funds. I know that this alternative seems the most boring, but as John Bogle, the father of the index fund and former chairman of Vanguard, has shown again and again, index funds are the smartest and most economical way to get exposure to the best-performing asset class over the long term: stocks.

Third, you can do it yourself, using many of the low-cost advisory services available on the Web. (I provide one, called Action Alerts Plus, where I send you e-mails about what I am buying and selling for my personal account.) This strategy depends on your doing all your own homework and keeping on top of your buying and selling, and if you don't have the time or inclination for that kind of thing, then stick with professional help.

Fourth, you can give your money to one of the more respected money managers in town that handles accounts your size, such as Sanford C. Bernstein, Neuberger Berman, or CIBC Oppenheimer. They're money managers, and they're conservative. These firms have a record of producing decent returns with lower risk.

But if you can't live without the outsize gains (and risks) that a top broker or hedge fund offers, there's a fifth alternative. You can sign up to work with a growing number of personal-service managers who are adept at placing your money with top-quality managers that you would otherwise not have access to. Normally, high-risk, high-yield hedge funds are out of reach to all but the richest investors. But one of the services I like, Peyser & Alexander, is terrific at putting people into great hedge funds as part of partnerships that it sets up for its clients. The fees are stiff, but you get to put money with people -- including my old hedge-fund firm, Cramer Berkowitz -- you would otherwise never be able to afford.

Finally, you can always try to find a good broker at an existing firm, someone who is the real deal and who is willing to take you on, with or without that giant nest egg. These are hard to come by. And the only way you can do it in this city is by word of mouth: You have to find a friend who will hook you up with a broker he or she trusts. It's like a secret, underground economy, and until the big full-service brokerage houses again figure out how to make money off ordinary investors -- and stop being strictly luxuries of the superrich -- it's going to stay that way.

TheStreet.com
Get all of James J. Cramer's stock picks via e-mail before he makes the trades, by subscribing to Action Alerts Plus. A free two-week trial subscription is available at thestreet.com/aaplus.

James J. Cramer is co-founder of TheStreet. com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time.

E-Mail: jjcletters@thestreet.com


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