Lars,
First of all, thank you for the kind words.
As I have said before, you and I are in agreement that the sharks Brinker speaks of do exist. And believe me, there are probably more of them out there than the industry would care to admit. You'd think that the sharks primarily work at the bucket shops, but I'd say a bigger proportion of them actually work at the wirehouses. And that's scary, because when Ma and Pa are out looking for investment advice, they typically go with a well-known wirehouse, because they feel comfortable in knowing that the wirehouse has been around for over a hundred years...the horrifying thing is that these are the same undereducated new investors who turn over their IRA rollovers, 401k plans and retirement savings to Joe Wirehouse, who promptly slams it into some limited partnership or proprietary fund, forgetting all about the customer's needs and only looking for the big commish ticket and the quota he will make. I think I told you about the guy I worked with who, upon learning that a mutual fund family was paying enhanced commissions for sales into their muni funds, put all of his customers' IRAs into this tax free fund, and then tried to justify it to the customers by telling them that their IRA would now be "double tax free."
Abuses by rogue brokers is an issue that really gets me on my soapbox. Its bad enough that it happens, but what makes it even worse is the regulators' lax effort to go after these guys. The regulators, based on pressures from the SEC and Congress telling them to clean up their act, are trying to portray themselves as "getting tough" in policing brokers. What most people don't know is, that the SRO is primarily subsidized by the big brokerage firms. So the SRO goes out and shuts down a few bucket shops, and then sticks its chest out proudly to the SEC saying, "See, we're cleaning up the business." Yet, try to get them to police the wirehouses in their sales practices in limited partnerships, proprietary funds, etc., and you have to practically drag them in, kicking and screaming all the way. Why is this? Probably because the guys who sit on the Boards of the SRO are all wirehouse execs. The SRO, being that they are subsidized and governed by the wirehouses, doesn't really want to do anything that would upset the wirehouse people--if they really got tough with sales practices dealing with proprietary funds and limited partnerships, it would cost the wirehouses a good deal of their income.
Basically, the industry has come down to this, as far as the regulators are concerned (in my opinion): if you get a knowledgeable investor, with a net worth of, lets say $2,000,000, to invest in a stock that goes from $20 to $10, and the guy loses, say $50,000--- you're (the broker) out of the business if he talks to the SRO. However, if you work for a wirehouse, slam some 70 year old widow's life savings into a heavily-loaded proprietary mutual fund. Get her to agree to this by portraying the fund as "a safe, CD alternative," using a pre-packaged sales pitch scripted by the home office in NYC. The market dives and the widow is suddenly living off of her social security payments. Chances are, the guy that sold her the fund will emerge unscathed, and, if per chance, he is disciplined and thrown out of the business (not likely, since the widow is working against the SRO AND the wirehouse's legal cadre), you can bet your bottom dollar that there will be no meaningful punishment for the wirehouse--perhaps a slap on the wrist, but nothing when you consider the fact that it was the firm who scripted the marketing plan that actually targeted retirees and widows. The broker was just following orders from the home office.
With that, the SRO has to go after someone (since Congress and the SEC are on their backs to clean up the industry), and since it isn't going to be the wirehouses, they look for an easy target. They just nailed one of my best friends, who was a broker in Arkansas. This guy ran a clean business, and worked for a small firm. There was a wirehouse in the town he worked, and there was a lot of friction, because my buddy had the lion's share of the business in this town (it was a pretty small town) and the wirehouse didn't like it that some guy working for a small firm was kicking their butts. The wirehouse had the SRO call all of my buddy's customers, asking them if they had EVER lost money in ANYTHING they had ever bought from my buddy. Well, everyone, including myself, has clients who bought a stock or two that didn't work out. It's just part of the business--no one bats 1,000%. A couple of clients acknowledged they had a few loser stocks. The SRO then told the clients, "Look, you know that if you file a complaint with us, that we can probably get your losses refunded to you..." not bothering to inform them that if they did file a complaint, that the broker would be out of the biz. The four people who filed complaints didn't really have a problem with this broker, all in all, their portfolios were making money. They were just told, "Hey, its really easy, just file a complaint with us, and we'll get your money back," not bothering to tell them that their real reason for asking the customers to file the complaints was that they were going to use the complaints to throw the broker out of the business. This guy had probably 600 clients--four of which admitted they had lost money. The SRO took the four complaints and used them to throw the guy out of the business. The SRO then uses this as an example, to the SEC, etc., "see, we're getting rid of all the rogue brokers..." which was a joke, because this guy was anything but a rogue--he was making money for his customers and they liked him. The irony is, now that he's out of the business, the wirehouse is the only brokerage in that town, and they are taking his clients' money and shoving it into their proprietary stuff--which is more harmful to the clients' financial health than anything my buddy ever put them in.
That being said, I don't forsee rogue sales practices being curbed in the future, so there is a place for someone like Brinker, as well as the Dolans, Bruce Williams, and the Don McDonalds of the world. Someone needs to tell people who are inexperienced, "Look, be careful, if you're going to turn over a lot of money to someone you don't know, do your homework and make sure you know and understand what's going on." Just don't tell them to disregard ALL brokers :).
Take care,
Gary |
