Here I Stand. I Can Do No Other

August 5, 2009


In recent months, the debate has heated up -- and it is the old one that comes and goes with every recession and market collapse.  Will Wall Street survive?  Will there be a next generation of stockbrokers to service the investing public?  Once again, the debate rages: albeit with new faces and voices but with many of the same old points (just burnished for the current day).

I remain one of the very few advocates--outspoken advocates--for the rights of individual stockbrokers and smaller Financial Industry Regulatory Authority (FINRA) member firms, and, as such, I am frequently asked: "Bill, what do you think?  Is there a future for Wall Street and brokers?" 

Sometimes the reporters get my opinions and answers right.  Sometimes they don't.  Sometimes things are presented out of context.  Sometimes my thoughts appear jumbled because I am struggling with the black and white of an issue and a murky, muddy gray is all that comes forth. So, in response to my supporters and critics, let me try to offer this canvass against which you should view my comments on the future of the securities industry and the various employees who swell its ranks and files.

Amidst the rubble of a once proud Wall Street, is an ongoing battle between Investment Advisers/Financial Planners (who tend to operate under a Fiduciary Standard that requires them to find the "best" investment  for their client) and Stockbrokers (who tend to operate under a Suitability Standard that requires them to find a "suitable" investment, even if that is not the "best" option in terms of cost or performance).  As the competing interests align and jockey for influence with Congress, we need to keep a sharp eye out for whether the Fiduciary Standard will ultimately emerge as the uniform one (if that is the case, as it now seems to be the desire), and whether the legislation that installs a new industry-wide Fiduciary Standard is merely a draftsman's sleight of hand that proffers a watered down definition with little impact.  

Enmeshed in the blood feud between Advisers/Planners and Brokers is whether Broker-Dealers should continue to be allowed to use the commission-compensation model. In plain English: Whether stockbrokers should be paid a percentage of all the buy and sell tickets that they write, rather than a percentage of the profits they achieve or of the client assets under their management. Opponents of the commission model argue that it exerts undue influence over the independence of  employee stockbrokers and injects a corrupting incentive to "churn" accounts through needless trading. 

I believe that this most recent market collapse and recession are not merely cyclical events but game changers. Others, many others, disagree with my view, and I concede that there is no clear cut "right" or "wrong" position; only time will tell which is correct.  Nonetheless, I believe that investors are now so dramatically disgusted with Wall Street that it has seeped into the aquifer and that mistrust has attached to the lowly stockbroker as well as his/her employer Broker-Dealer.  Given what I view as a watershed event with this last recession and its attendant Madoff event and similar high-profile frauds, I do not believe that Wall Street will fully regain the lost confidence of investors.  Further, I believe that many investors will look at their portfolios from a longer-term perspective (five or ten years, say) and realize that the recommendations from their stockbrokers did not do better (or much better) than the S&P 500 index (which hasn't done all that great over that span either).  Accordingly, I suspect that many investors may decide that they get little value from relying upon a stockbroker and may opt to self-invest.  That development should prove a boon for online brokers and for certain products, most notably Exchange Traded Funds (ETFs).

But make sure you understand what I am and am not saying. I am NOT advocating that the average investor may be (or should be) better off investing on his/her own.  Frankly, one's life savings are not best served through the equivalent of amateur hour. However, I am arguing that this likely exodus by disenchanted investors away from using stockbrokers seems a compelled result because of the recent stock market history.  

The challenge for Wall Street is to persuade investors that Wall Street has value-added services.  Which brings us back to my seminal point.  The average stockbroker is little more than a teleservice operator whose job goals (as set by his/her firm) is to open more accounts and make more cold calls.  Wall Street's orientation does not seem to be to produce qualified stock pickers or competent brokers but to ramp up the raw numbers of customers and trades.  One merely needs to visit any number of online industry forums to see what the typical chit chat is about -- there is virtually no reference to how to select stocks or better service customers.  

Wall Street needs to read the writing on its own wall.  It needs to professionalize the career of stockbrokering so that those who pursue it are seen by their clients not as mere commissioned teleservice operators but as financial services professionals---in the same vein as lawyers, doctors, or CPAs.  Similarly, the shackles of conflict that bind stockbrokers to their employer firms must be broken. To reach that goal, Wall Street must abandon compensation solely by commission and reward performance.  Also, all industry registration activities should be reoriented to operate as between the self-regulatory organizations (SROs) and the individual stockbrokers (and not between the SRO and the member firm, as is now the case).  I also urge the institution of a comprehensive policy of rigorous qualification examinations and continuing-education requirements, that we will start to sift out the incompetents who bedevil the investing public and the industry. At their heart, these changes are designed to send a clear message to the public that the new generation stockbroker is here to service your needs, first and foremost.

Here I stand. I can do no other.That is what I believe. That is what I have long advocated. That is as clear an explanation as I can presently offer.