Registered Representative recalls the many people, entities and events that have altered the way brokers do business.

They Moved and the Industry Shook …

Sanford Weill challenged the Glass-Steagall Act of 1933 and won. As the force behind the April 1998 merger between Travelers Group and Citicorp, Weill, then CEO of Travelers, brought together banking, insurance and brokerage capabilities, and ushered in what appears to be the era of financial conglomerates.

Weill operated the combined firm under a special provision in Glass-Steagall until the law that erected barriers between banks, insurers and brokerages was toppled by the passage of the Gramm-Leach-Bliley Act in November 1999.

Prior to his current post as chairman and CEO of Citigroup, Weill led Shearson in the 1970s, selling it to American Express in 1981, then headed Primerica (parent of Smith Barney) in the 1980s, and later became the king of acquisitions as Travelers chief in the 1990s.

Since 1967, when he took the helm of St. Louis-based A.G. Edwards, Ben Edwards has served as the industry's wise uncle. Edwards kept the doors open for disenfranchised wirehouse brokers, as well as Edwards reps who wanted to take their books to competitors. He questioned the technology craze, criticized the fetish with fees and openly attacked T+3 as a disservice to the retail customer. Old-fashioned, perhaps, but Edwards has been a consistent counterbalance to his trendier colleagues back East.

In 1971, Charles Schwab founded a traditional brokerage firm in San Francisco, but by 1974 began converting it to a discount operation in preparation for May Day 1975 when commissions were deregulated. Today the Schwab name is synonymous with the discount industry due to its history of innovation.

The firm introduced the mutual fund supermarket concept in 1984, now copied everywhere. In 1985, Schwab started providing institutional services to independent, fee-based investment advisers. Now serving 6,000 advisers, Schwab Institutional enjoys a dominant market position over many discount competitors and the few full-service firms that also court advisers.

Referred to as “The First Woman of Finance,” Muriel “Mickie” Siebert was the first woman to own a seat on the New York Stock Exchange. She was elected in 1967, but not without a struggle. She was also the first woman to head one of its member firms — Muriel Siebert & Co.

On May 1, 1975, Siebert announced her firm would become a discount brokerage; and her clearing firm promptly dumped her.

In 1977, she became the first woman Superintendent of Banking for the state of New York. Last October, Siebert Financial Corp. purchased two dot-coms for $2 million, Women's Financial Network (www.wfn.com) and Herdollar.com.

Co-founders of Donaldson Lufkin & Jenrette, Richard Jenrette and Bill Donaldson, changed Wall Street when they took DLJ public in 1970 — the first NYSE member to do so. Until DLJ, firms were private partnerships with shareholders approved by the NYSE. Public ownership helped end the clubiness on Wall Street and gave the industry an infusion of badly needed capital. But going public also caused more compliance screw-ups, some say, since managements no longer had their own capital at risk.

They Changed the Face of Investing …

Harry Markowitz is considered the father of modern portfolio theory. In the early 1950s, as a graduate student at the University of Chicago, he ran into a broker who recommended applying statistical models to the stock market. Markowitz took the broker's advice, and in the March 1952 Journal of Finance, published an article that proposed taking into account the risk in a portfolio, not just the expected return. Markowitz found that diversification reduced risk and graphed the efficient frontier. In 1990, he shared the Nobel Prize in Economic Sciences with William Sharpe and Merton Miller.

Today, most reps are taught to focus on asset allocation as the key money management tool. Asset allocation sprang from a 1986 academic study by Gary Brinson, Randolph Hood and Gilbert Beebower (BHB). It was later popularized by Roger Gibson in his reference book, “Asset Allocation: Balancing Financial Risk,” first published in 1989. Gibson, a CFA and CFP, is president of Gibson Capital Management in Pittsburgh.

William Jahnke, chief investment officer of Financial Design Educational Corp. in Larkspur, Calif., wrote an article, “The Asset Allocation Hoax” in the February 1997 issue of the Journal of Financial Planning. Jahnke challenged the conclusions of the BHB study, claiming asset allocation only accounted for about 15% of performance. He faulted BHB for looking solely at quarterly returns over a 10-year period.

In 1993, futurist and demographer Harry Dent published “The Great Boom Ahead,” which questions blind allegiance to asset allocation.

Dent's demographic-driven economic theory predicts that baby boomer spending will drive the market higher for another decade or so — but only in certain sectors.

Dent's bullishness has proven immensely popular with brokers, and his fresh thinking quotable: “Don't be putting clients in some namby-pamby Markowitz portfolio,” he told RR readers in April 2000.

Known as the father of financial planning, Loren Dunton led the first meeting of financial planners on Dec. 12, 1969. Thirteen planners met at O'Hare Airport in Chicago to discuss inadequacies in delivering financial services. By the end of the two-day meeting, the planners had laid the foundation of the financial planning profession. Today, there is no longer any debate on the merits of delivering planning's holistic service.

Dunton founded the International Association of Financial Planners in 1969 and the College for Financial Planning three years later. He was the first editor of the IAFP's Financial Planning magazine. He also established the National Center for Financial Education, a nonprofit group to educate consumers, and served as its president. Dunton passed away in 1997.

Peter Lynch made money management a celebrity profession. As head of Fidelity's Magellan Fund from 1977 to 1990, Lynch's common-sense approach to investing became known to millions. He insisted investors could find good stocks on their own simply by being observant. Since Lynch, other prominent portfolio managers have been closely watched. Their every move is reported and even litigated, as in “who owns the performance record — the fund company or the employee/manager?”

In 1981, Ted Benna, then an employee benefits consultant, took advantage of a loophole in the IRS code and created the 401(k) plan. His tax-law creativity helped create a nation of investors.

When Congress added paragraph (k) to section 401 of the code in 1978, allowing employees to choose deferral amounts from cash bonuses, Benna noticed paragraph (k) did not mention deductions from a regular salary or matching contributions.

Benna's consulting firm, The Johnson Cos., became the 401(k) trailblazer and test case. A few months later, the IRS approved the plan. Assets in 401(k) plans now total nearly $2 trillion, and Benna is still promoting the idea through his 401(k) Association in State College, Pa.

Also contributing to the growth of the investor population was the Employee Retirement Income Security Act of 1974 (ERISA). The act protected employees' pension plan interests, and most notably gave individual participants the right to take their assets in a lump-sum rollover.

Growing use of this option, combined with corporate layoffs in the 1980s, created a stream of new accounts for reps.

James Lockwood created the first wrap-fee account at EF Hutton in 1975 — delivering an institutional-type of managed account to retail investors for a 3% fee. Today, the business he built remains an industry leader under Salomon Smith Barney, which still has the largest market share in separately managed accounts. Lockwood passed away eight years ago.

In 1984, Joe Mansueto launched a firm he later named Morningstar from his one-bedroom apartment located in Chicago.

As technology developed, so did Morningstar, which became the mutual fund information resource for advisers and individual investors under the day-to-day management of Don Phillips, former president and CEO.

Morningstar, however, epitomizes the good and bad of information overload. The firm's independent analysis has been invaluable to investors and reps. But the company's “star” system is often misused. Brokers have a love-hate relationship with the service since clients often can't see past an investment's star rating.

The open-end mutual fund dates from 1924. Its phenomenal success grew into an industry with $7 trillion in assets. Without question the major fund innovation that impacted brokers the most was the money market fund, the first of which was approved in 1972.

Met with both acclaim and trepidation by brokers, the money fund got Wall Street into the banking business — with a kick-start from Merrill Lynch's CMA account introduced in 1977. Money markets gave investors a place to park cash, and brokers a tool to collect assets.

Another innovative structure was born about this time when professor Nils Hakansson published a paper in 1976 that laid the groundwork for a significant new structure — exchange-traded funds (ETFs).

Leland O'Brien Rubinstein Associates (LOR), an investment firm that creates portfolio insurance products, adopted Hakansson's idea and petitioned the SEC to approve ETFs in 1990. The firm's index products proved too complicated, but LOR paved the way for the American Stock Exchange and the Standard & Poor's Depositary Receipt (SPDR) Trust, whose S&P 500 Index-based ETF was approved in 1992.

Since then, a variety of similar products have been launched, including Qubes, sector SPDRs, HOLDRs, iShares and Diamonds.

They Saw Red …

SEC commissioner from 1994 to 1997, Steven Wallman engaged in unheard of practices for commissioners — getting involved in employment issues and launching entrepreneurial start-ups, among other things.

Wallman called for shareholder action to prevent discrimination against gays and lesbians, as well as helped to end mandatory arbitration of industry discrimination cases. He also led a bipartisan effort in Congress for decimalization when the commission hesitated.

In March 2000, Wallman launched Foliofn.com, offering investors the ability to purchase and manage baskets of stocks made up of fractional shares. Foliofn started an institutional service for financial advisers in November 2000.

Wallman's innovations have traditionalists aflutter: The mutual fund industry has asked the SEC to regulate folios as mutual funds.

Serving a record 7½-year term as SEC chairman, Arthur Levitt left a legacy in the form of a perception that the SEC serves the public, rather than the financial industry it regulates. That's debatable, but Levitt did change the regulatory environment.

As Levitt settled into his new job during 1994, the Nasdaq collusion case exploded. Ultimately, SEC reforms forced the Street to take real steps toward a true national market system — just as online trading technology reached investors. An ongoing clash between the NASD and Levitt changed the regulatory atmosphere and precipitated the end of true self-regulation.

Levitt also impacted retail reps, often criticizing broker compensation practices. His 1995 Tully committee helped end differential payouts and sales contests, and lengthened training periods. But Levitt's attempt at nixing upfront bonuses failed, the victim of a bull market and free enterprise.

The Street's biggest scandal involving retail investors unfolded in the early 1990s with both regulators and the firm blaming brokers for failed Prudential-Bache limited partnerships.

It ended with Prudential-Bache admitting wrongdoing, agreeing to a three-year criminal probation period and paying out almost $2 billion in customer restitution. Years later, reps continued to suffer from the fallout.

The case made clear that scandals don't start and end with retail reps. Big firms do behave badly, can mislead reps and then retaliate against those who speak up for clients. This debacle, probably more than any other, chilled the trust between firm and broker.

Registered Representative welcomes your comments on this story. Contact Editor in Chief Dan Jamieson at djamieson@intertec.com or call our editorial department at 800/621-0720.

Timeless Wisdom

February 1985

“Put aside your need to earn a commission, your need to be recognized, your need to pay bills. Those are secondary issues. The person you contact has the greater need, and it's not your product.”
— Ken Germain, Twenty-First Securities Corp., New York

Timeless Wisdom

December 1987

“What the RR should do is step back from the emotional aspects of a market crash, look at underlying values and evaluate what type of investment makes sense. And if a client is hurt in the short term, brokers must provide reassurances that there is still value in the recommendation.”
— Peter Kordell, Kordell Capital Management, Minneapolis

Timeless Wisdom

June 1989

“I rewrote my sales literature to talk about relationships and problem-solving. When people ask me now what I do, I say I'm a financial expert who solves financial problems.”
— Pamela Harrington, Dain Bosworth, Omaha, Neb.

Timeless Wisdom

March 1990

“Brokers who have long-term relationships with clients have been through good and bad markets. Clients don't leave just because the market's gone bad or they've got some bum investments. They leave if they feel they're being abused.”
— Peter Wilkes, Alex. Brown & Sons, Baltimore