Though the bear market that began last year will be remembered as one of the most severe in history, financial crises ultimately come and go. The financial services industry on the other hand, has been permanently altered. The bear market of 2008 will come to be regarded as a watershed year that triggered an investor exodus from Wall Street “full service” brokers and actively managed funds.

Unfortunately an unprecedented global financial crisis was required, ultimately, to convince a critical mass of investors that Wall Street “household names” and expensive marketing afford not one whit of protection and in fact only serve to disguise high fees and conflicts of interest. Nonetheless, the financial crisis has laid bare the deficiencies of the old model. We are hopeful that accountability and transparency will become the new mantra. In coming years traditional brokerage firms, actively managed mutual funds and other over-priced investment vehicles will be further pressured by creative alternatives such as discount brokers, fee-only advisors, exchange-traded funds and other innovations yet to materialize.

It is notable that this sea-change can hardly be credited to regulators. If their purpose is to protect investors, regulators failed miserably. Instead investors are choosing freely to abandon a business model that has collapsed under the burden of misaligned incentives. Far too many entrusted their net worth to brokerage firms whose solvency was inextricably linked to securities underwriting, proprietary trading and excessive use of leverage. We are reminded of Joseph Schumpeter’s timeless observations:

        “The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel            illustrate the same process of industrial mutation–if I may use that biological term–that incessantly revolutionizes the economic structure from within,              incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what              capitalism consists in and what every capitalist concern has got to live in. . . .”

In this issue we examine “cutting edge” research that has emerged amidst these creative forces. Though the bear market may continue, recent data reinforces previous findings that during severe downturns it is more important than ever for investors to focus their attention on discipline and diversification. We have no illusions that excessive fees or clever sales tactics will disappear (for example, we note with dismay the recent emergence of actively managed exchange-traded funds). Investors must remain vigilant. The SEC or other regulatory bodies will never serve as a substitute for diligent oversight of your own assets and your personal scrutiny of investment professionals.

Also In This Issue

Active Management, Bear Markets, And Investor Anxiety
Lessons From The Crisis: Structure In The Equity And Bond Markets
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow Jones Industrials Ranked By Yield
Recommended Investment Vehicles