Thanks to Lehman Bros., Bernie Madoff, Ivan Boesky, Dennis Kozlowski, Henry Blodget and many others, most investors have had enough. They simply don't trust Wall Street and are convinced that the investing business is rigged for the benefit of those who know how to circumvent the rules.
That's the only conclusion you can draw after reading up on the latest survey jointly conducted by The University of Chicago and Northwestern University. They recently discovered that just 16% of Americans trust the stock market.
The fact that the survey's results come AFTER the stock market has doubled in value during the past three years is truly sobering. You can only imagine what investor sentiment would look like if the market fell 10% or 20% this year, or another financial executive was caught with his hands in the honey pot.
Frankly, it's a shame. I'd be a fan of much more regulation of Wall Street (which explains why I no longer have the stomach to work for Wall Street firms), but I still think investors shouldn't be shunning stocks. With the right amount of homework and the proper amount of risk aversion, investors can still make major gains as they build up retirement nest eggs. In fact, that's basically the entire philosophy behind my $100,000 Real-Money Portfolio.
The fact that 84% of Americans shun stocks is unpleasant news for online brokerage firms such as E*Trade (Nasdaq: ETFC) and TD Ameritrade (Nasdaq: AMTD). These firms must hope for investor trust to return if they are ever to see a robust rebound in sales and profits.
Even many Wall Street employees have had enough. Wave after wave of stockbrokers have left the big firms to set up shop on their own, realizing that acting as an independent financial advisor looks a lot better to most clients.
But there is a clear investable beneficiary of this trend: Charles Schwab (Nasdaq: SCHW), which has been a virtual magnet for newly-independent financial advisors. In the past decade, Schwab has seen a huge buildup of new clients, with some impressive numbers to show for it, as I'll detail in a moment.
Unfortunately, you wouldn't spot this change by looking at Schwab's share price. The company has historically made solid profits by managing un-invested client funds in interest-bearing money-market funds. And while the Federal Reserve has kept rates at rock-bottom lows, Schwab's profits have barely budged.
As rates start to normalize during the next few years, the stage is set for Schwab to become a profit powerhouse.