BofA will cut Merrill Comp
81 RepliesJump to last post
[quote=Provocative Put]
Good decision. There is, and will always be, a reason why the big hitters are always with the wirehouses. The Indy channel is not a long term solution. Within a matter of years there will be a few major firms, owned by banks, and they will have close to 100% of the business. The Indy channel will be put down with massive advertising asking investors where they feel more comfortable when it comes to financial advice--a bank or Bob's Carpet Cleaning and Finiancial Advisors? The entire industry is ripe for reorganizing. If you're at a premier firm now---STAY THERE and be glad you've already arrived at what will most likely be the only place in five years.[/quote]Oh Putsy, please share more stories with us about the good old 70s days, and how you have magically gained special insight into the future of the industry now that you are out of the business. Let's see if I have this right - biggest firm possible, good! Clients crave old reliable brand names. They don't care if they are all going out of business or being swallowed up or bailed out. They don't care about their advisor, just the brand name. Very exciting stuff!! I can't write this down fast enough!
Could you also lend me your 8 track player?! My records all have scratches in them, and my old 78 Victrolla is on the fritz. Do you think I should spring for a color TV too?
Please write more soon. Your current pace of 25 posts an hour is just not enough for me!!
[quote=Morphius]
Please write more soon. Your current pace of 25 posts an hour is just not enough for me!!
[/quote]
Well, as much as I’d like to write a long meaningful piece I’ll have to
cut this short. It’s 11:15 in the East and my beast knows we’re
supposed to go for a walk between 11 and 11:30.
What I said, child, is that in a time of crisis it is human nature to look for strength.
They are not going to find it with Morphius Brake Repair and Financial Advisory in Bumphuck.
They’re going to be drawn to the household names.
Put yourself in the mind of a client. Would you trust you more than a real advisor at a real firm?
We’re talking about Bank of America–who already has a relationship
with 50% of the familiies in the country. We’re talking about
Wells Fargo–a mega bank holding company, not the stagecoach
company. We’re talking about Citibank.
You’re a fool if you think your clients are not wondering if they’ve
made a mistake by dealing with you. The good news is that some
other guy’s clients are wondering if they made a mistake with him so
you may be able to pick off some of his business–but people are funny
about their money and the days of taking a flyer with some unknown name
instead of a major player are over.
Guys with your refusal to acknowlege reality are dead men
walking. I suspect the industry will be better when you’re
gone.
Now I’m off with the beast. I’ll give him your best.
[quote=Provocative Put]
There is an assumption–erroneous, but there–that a firm like Merrill would not hire a dumb ass.
[/quote]
And then there are folks such as yourself who prove that assumption to be wrong every time they open their mouths…
That may play in the big city, but it's a long way from reality in my little version of "Bumphuck". This week, I picked up two accounts approaching a million dollars...one from Merrill and one from Edward Jones. Both were shared clients who felt like they weren't getting adequate service and response from brand X and decided that they liked how their independent advisor did business with them. Your analysis of why we'll all be bank brokers is flawed to say the least. What you fail to realize is that independent B/D's don't hold nearly the control over their advisors that traditional captive B/D's do. Sure, it's possible that banks may purchase independent B/D's, they still will not possess that critical employer-employee relationship that they like to use to exert control and cut costs. If they try to act like an employer with a group of independents, they'll end up with a whole lot of nothing. Independent brokers will simply move to another more independent B/D or even form an alliance and start a new independent B/D. It hasn't been that long ago that someone similarly supposed that bank mergers would continue until there were only a few megabanks. This is continually proven false as small de novo community banks are springing up all around me in response to mega-mergers, higher fees and reduced service. I'll submit that there will always be a place for the independent advisor and boutique firms that are long on service and reputation. I've lost exactly one client over the last two years...three if you count death and distribution. I've gained many more than that just at the expense of other large firm advisors and I haven't solicited the first transfer. You can choose to believe that or not. I certainly don't see it as the least bit implausible as I've been living the experience. More than the firm, people in my neighborhood are looking for an advisor with experience. As long as the firm has adequate SIPC coverage and execute, the Bumphuckians couldn't care less about who I choose to work for and a few are even glad I'm not associated with a large Wall Street firm.Well, as much as I’d like to write a long meaningful piece I’ll have to cut this short. It’s 11:15 in the East and my beast knows we’re supposed to go for a walk between 11 and 11:30.
What I said, child, is that in a time of crisis it is human nature to look for strength.
They are not going to find it with Morphius Brake Repair and Financial Advisory in Bumphuck.
They’re going to be drawn to the household names.
Put yourself in the mind of a client. Would you trust you more than a real advisor at a real firm?
We’re talking about Bank of America–who already has a relationship with 50% of the familiies in the country. We’re talking about Wells Fargo–a mega bank holding company, not the stagecoach company. We’re talking about Citibank.
You’re a fool if you think your clients are not wondering if they’ve made a mistake by dealing with you. The good news is that some other guy’s clients are wondering if they made a mistake with him so you may be able to pick off some of his business–but people are funny about their money and the days of taking a flyer with some unknown name instead of a major player are over.
Guys with your refusal to acknowlege reality are dead men walking. I suspect the industry will be better when you’re gone.
Now I’m off with the beast. I’ll give him your best.
Nothing but bank brokers?? He was kidding right? I pick up more clients from “BIG NAME POLE IN THE SKY” Banks than I do from other sources. Mainly because the broker at the bank switches every 6 months to a year. Last client brought in some statements, different advisor name every statement.
The problem with banks is that they want to do everthing: Mortgages, Credit Cards, Accounts, Brokerage, Investment Banking… but they always fall short in just about everything. The reason is once they find people who can do their job, they promote them and bring in some more people who can’t. It ends up being a cycle that repeats itself.
Putsy,
Your ramblings about household names and everyone wanting to work with megabanks is so far out of touch with reality that it is amazing. If you think now of all times that people want to put their trust in the big megabanks - the same ones that they wake up every morning wondering if today might be the day their so-called strong, safe megabank is gobbled up, closed down or bailed out - then you are the one who doesn’t recognize reality.
But I guess it’s hard to stay in touch with reality in an industry you don’t even work in any more.
I work at a firm owned by “one of the megabanks”. Believe me when i tell you that i and the other FA;s in my branch are always being asked questions by our clients about the bank and how their accounts are protected - Insurance, SIPC, Lloyds, etc. They are all worried. To the point where we need to have branch meetings to discuss how to answer the questions.
There is a whole site on our intranet on “answering client concerns” and "how clients accounts are protected"
There is no doubt in my mind, that if i were to make a move (which i am not planning to do at this time) to RIA, and told clients their accounts would be held at Schwab, or if i went Indie, and explained that LPL has no bad loans on their books, or subprime or derivatives, or investment banking, or any other skeletons in their closet, they wouldnt think for one second about leaving the “cozy warm and fuzzy” big ass bank daddy.
Putsy, all due respect to your years of experience, but you are off on this one, Morphius hit it on the head.
[quote=Provocative Put]
[quote=Gordon Gekko]
I must be naive but I thought clients did business with individuals via referrals. Silly me!
[/quote]During a roarinig bull market. When investors lose 40% of their
equity they are nobody’s friend and tend to seek shelter in the big
names.
There is an assumption–erroneous, but there–that a firm like Merrill would not hire a dumb ass.
[/quote]
Actually, they do and will. Do you really think all 16,000+ brokers are smart guys? Not a chance. Merrill does a great job of snowballing their employees, doing the old carrot-on-a-stick routine and generally brainwashing everyone they can. You can’t do those things to intelligent guys.
Just my opinion, but I talk to these guys everyday and from my vantage point it appears that the majority of them are clueless.
[quote=Indyone]
That may play in the big city, but it's a long way from reality in my little version of "Bumphuck". This week, I picked up two accounts approaching a million dollars...one from Merrill and one from Edward Jones. Both were shared clients who felt like they weren't getting adequate service and response from brand X and decided that they liked how their independent advisor did business with them. Your analysis of why we'll all be bank brokers is flawed to say the least. What you fail to realize is that independent B/D's don't hold nearly the control over their advisors that traditional captive B/D's do. Sure, it's possible that banks may purchase independent B/D's, they still will not possess that critical employer-employee relationship that they like to use to exert control and cut costs. If they try to act like an employer with a group of independents, they'll end up with a whole lot of nothing. Independent brokers will simply move to another more independent B/D or even form an alliance and start a new independent B/D. It hasn't been that long ago that someone similarly supposed that bank mergers would continue until there were only a few megabanks. This is continually proven false as small de novo community banks are springing up all around me in response to mega-mergers, higher fees and reduced service. I'll submit that there will always be a place for the independent advisor and boutique firms that are long on service and reputation. I've lost exactly one client over the last two years...three if you count death and distribution. I've gained many more than that just at the expense of other large firm advisors and I haven't solicited the first transfer. You can choose to believe that or not. I certainly don't see it as the least bit implausible as I've been living the experience. More than the firm, people in my neighborhood are looking for an advisor with experience. As long as the firm has adequate SIPC coverage and execute, the Bumphuckians couldn't care less about who I choose to work for and a few are even glad I'm not associated with a large Wall Street firm.[/quote]How about this scenario. Bank of America buys LPL for no reason other than to buy the competitiion--a classic way of dealing with competition.
The venture capitalists who own LPL are, no doubt, disappointed with their timing and it's crazy to think venture capitalist types won't cut their losses short in a heartbeat.
It doesn't have to be B of A--it could be Wells Fargo, Citi, JP Morgan/Chase or perhaps it will be UBS--who knows.
Anyway, one day you boys and girls who clear through LPL wake up to hear that LPL is now a another division of a bank.
That bank will also own a branch network with registered people who are paid base salaries and bonuses--earned by the bank in the form of sales charges, trails and management fees on proprietary products.
If you were the senior management of the bank what would you do about the marginally trained, poorly supervised, over paid "advisors" who are clearing through your new LPL division?
First bombard the LPL clients with statement stuffers that explain what the bank is going to do for them. Explain that their local representative is sticking his fist into their account and extracting fees for advice that may or may not be worth a bucket of spit. Add that that won't be happening if they call an 800 number and ask the bank to transfer their account to one of the bank's team of registered reps with years worth of experience at places such as Merrill Lynch, AG Edwards, Smith Barney.
It will be seamless--a two minute phone call.
Next offer the LPL reps with an attractive book, compliance history and education an opportunity to join the bank alongside of the reps who were acquired when the bank bought other firms. Or leave.
Remember, the bank will have your complete client list, and what they hold. They will know the client's cost basis, how they have been doing position by position and so forth.
Are you really so cock sure of your relatiionship that you'd be willing to turn your records over to a seasoned broker at Merrill and challenge that broker to steal your accounts?
The deal is that the whole landscape has changed. A year ago there was not a client out there who didn't think that their "acvisor" was doing a very good job--the Dow as at 14,000 and everything seemed rosey.
When the Dow collapses to 8,000 in a year there is not a client alive who isn't questioning all of their decisions. High on the list--perhaps highest--is their choice of voices to listen to.
I've been around a long time. I've done what virtually everybody reading this does--it's not rocket science.
It's also exceptionally easy to pick off investors when they're running scared.
The Indy model has always been suspect. This is a very cash intensive business and firms that are being operated on a shoestring fracture at the oddest places. Heavy volume can cause horrendous back office problems. Falling markets invite fails to occur at an extraordinary clip.
Falling markets also invite causes of action at an alarming rate--if one of your clients decides that he's going to recoup his losses with the help of an attorney that attorney will name not only you but also your clearing firm in the action. That means that there are going to be exceptional legal costs simply to defend--much less to settle.
What you need to do is sit with a pad of paper and think of somthing that might happen. Draw a circle around it then think of what might happen as a result of that event , write it down and draw a circle around the first circle and the new event that might happen. Then looking at those two events try to envision a third, a fourth, a fifth event.
I have spent the bulk of my career charged with keeping track of what is happening, what motivates the various players--both the reps and the clients.
Trust me, there's a hell of a lot more to what's happening than "Well, my firm has excess SIPC coverage to 25 million so I'm not worried and neither are my clients."
If you've never been through a SIPC liquidation you don't know Jack about what you should be concerned about.
"I know my clients are happy because they don't tell me they're not." If your spouse is fooling around on you you're probably the only person who might know who doesn't.
If an attorney tells your mother, "Mrs. Jones, I know that Tom is your son--but your best chance of being made whole is to sue his firm. He will have to be sued too, but it's only a business decision you're making" she damn well may call you some evening and tell you, "Honey, you know I love you dearly---but when so much of my money was lost it ruined the rest of my life. I know you feel terrible about it, and I don't blame you. However, I have hired an attorney................"
Trust me, this schidt happens. It hasn't happened since the 1970s because a monkey with a pencil could make money since 1982.
[quote=Squash]Nothing but bank brokers?? He was kidding right? I pick
up more clients from “BIG NAME POLE IN THE SKY” Banks than I do from
other sources. Mainly because the broker at the bank switches every 6
months to a year. Last client brought in some statements, different
advisor name every statement.
The problem with banks is that they want to do everthing:
Mortgages, Credit Cards, Accounts, Brokerage, Investment Banking… but
they always fall short in just about everything. The reason is once
they find people who can do their job, they promote them and bring in
some more people who can’t. It ends up being a cycle that repeats
itself. [/quote]
I do agree with the idea that they promote people who master a
task–they also tend to promote somebody who was a good bank branch
manager to be a brokerage branch manager.
But that was BEFORE. That was when banks were trying to build
their own branches when they were allowed to. Bank of America
bought somebody–I’m thinking Quick and Reilly, but it might have been
one of the others.
It was not a good experience for them for several reasons. One of
which was the fact that Quick and Reilly was really a NYSE floor
specialist and a clearing firm that decided to open branches so that a
third son could have a division to run too.
Those branches were more penny stock boiler room than silk stocking
retail brokerage. In an attempt to make it work better the bank
started to throw bank people into the brokerage environment. Not
good, bankers are notoriously conservative, brokers are notoriously
entrepreneurial. Different cultures.
The first real effort for banks to own traditional brokerage firms was
when First Union Bank bought Bache from Prudential, Prescott Ball and
Turben from their partners and Richmond based Wheat First
Securities–a very respected name in the mid Atlantic with an
oustanding management team.
First Union executives had the sense to let brokerage professionals run
the shop. Mostly the senior people were from Wheat First and it
continued to flourish–their clearing operation became a real
competitor for Pershing and National Financial.
The retail brokerage prospered too–of course it was the bull market as
much as anything. Nothing makes a financial advisor seem smart
like a bull market.
Somewhere along the way First Union bought Wachovia and for reasons
known only to those who were making the decision First Union abandoned
its name in favor of Wachovia. I heard that the First Union name
was not good in Florida so it was decided to call the combined
operation Wachovia.
The bank was headquarted in Charlotte and the broker/dealer–running
the third largest wirehouse–was in Wheat First’s longtime offices in
Richmond.
A bit more than a year ago Wachovia grew even larger when they bought
AG Edwards–intending to move the headquarters from Richmond to St.
Louis to take advantage of all the expertise at AGE.
Then the bank–not the brokerage division–blew up.
There is no reason to think that PaineWebber is weak because it’s owned
by a bank. There is no reason to think that Smith Barney is weak
because it’s owned by a bank. There is no reason to think that Wachovia
Securities/AG Edwards is weak because it’s owned by a bank.
[quote=Morphius]Putsy,
Your ramblings about household names
and everyone wanting to work with megabanks is so far out of touch with
reality that it is amazing. If you think now of all times that
people want to put their trust in the big megabanks - the same
ones that they wake up every morning wondering if today might be the
day their so-called strong, safe megabank is gobbled up, closed down or
bailed out - then you are the one who doesn’t recognize reality.
But I guess it’s hard to stay in touch with reality in an industry you don’t even work in any more.
[/quote]
Where did I say that ANYBODY wants to work at a bank?
What my advice is is this. Within a matter of years the banks will dominate what we know as retail brokerage.
Within a matter of weeks huge numbers of clients will be filing
lawsuits and part of those suits will be advice from their attorney to
transfer their account to a bank.
It’s part of the patter when you’re an independent broker to talk about the impersonal service at a bank, blah, blah, blah.
In a bull market that resonates–but in times of stress the strength of the bank is exactly what the nervous client wants.
It’s like the Verizon ad–that goofy looking guy with the glasses is backed up by an entire team.
The Indy version is the goofy looking guy surrounded by empty space.
Talk to people who you know who are not your cients, but know what you
do. Ask them to tell you all the reasons they can think of that a
person would rather do business with you instead of Bank of
America. Don’t prime the pump–just ask them cold.
You’ll be surprised, amazed, and I dare say scared to death.
Putsy, I think that you are the king of projection. You feel a certain way, so you think that everyone else feels the same way. Your right that the banks will dominate the retail brokerage market. The question is whether the retail brokerage market will dominate the financial advice industry.
Holy crap Putsy! I couldn’t even read all your posts.
Here's one to try on for size....a few years down the road when valuations have re-energized, I think Merrill and AGE/WS/WF will take themselves independant again. I think if BOA and WF can extract enough value out, they will sell them, especially if they find out that they are not good cultural fits. One other thing to consider on the indy vs. wirehouse debate....msot indies don't need to have that many clients to make a good living. Most only need a few hundred (or less) and they are set for life. So it's hard to imagine that any indy broker could not find a few hundred people willing to do business with them over the course of time. Then it's a whole different issue with larger "wealth management" firms. I think these firms are becoming a better alternative to banks/wirehouses. It's been my experience that most people are comfortable with their cash/checking/CD's at their bank, but are not as comfortable with them handling investments. I pick up clients from banks quite often. However, I don't think clients (in general) will view Merrill Lynch or Smith Barney as "banks", even thought they are owned by them. I think AGE/WS/WF clients might be a different story, depending on how they finally decide to brand themselves.Putsy-
Are you the same guy who was singing the praises of working at premier firms like MER, C, WB…a while back? Do $24 billion losses boost the prestige of a firm according to your B/D hierarchy?
As stated by others on the board your track record and views on the state of the industry are way out there and really laughable. Your scenario of LPL being bought by a bank highlights this. These banks, wirehouses, quasi government entities have their hands full right now without bailing out venture capitalists who invested in indy broker dealers.
Putsy,
With your zeal to try and predict the future you should consider becoming a meteorologist or maybe an economist. Although they would actually expect you to base your predictions on something beyond your gut impression, so that probably wouldn’t work either.
Fortune telling maybe?
[quote=anonymous]Putsy, I think that you are the king of
projection. You feel a certain way, so you think that everyone
else feels the same way. Your right that the banks will
dominate the retail brokerage market. The question is whether the
retail brokerage market will dominate the financial advice
industry. [/quote]
Do you envision some sort of Mom and Pop franchises with store fronts
were people can stop in for some financial advice and a shoe shine?
Willie Sutton is said to have commented, "The reason I rob banks is because that’s where the money is."
Glass Steagal established the wall between commercial banking and
investment banking. That wall has been taken down. The
citizens have had a flirtatious relationship with non bank custodians
for their money. The ones that financial advisor types are
interested in have lost at least 25% of their money in the last ninety
days–many have lost much more.
Bond Guy used a great phrase…“getting them off the tracks before
they were run over by the bear train.” Briliiant imagry and damn
near everybody who is reading this failed at it.
It is not an excuse to suggest that you’re not guilty of malpractice simply because everybody else is too.
The banks have been patient watching the brokerage firms offer checking accounts and other forms of competition.
Survey the landscape. The players are gone–overnight they simply
disappeared. In their place we find Bank of America, Wells Fargo,
Citigroup, Union Bank of Switzerland, Bank of NY/Mellon–there maybe
others that I have forgotten.
Those players will want to consolidate even more–and a classic way of
eliminating the competition is to buy them and shut them down.
What would be the downside to Bank of America if they bought Raymond
James, merged the accounts into their existing network of bank owned
broker/dealers and shuttered the offices?
Why would the shareholders of RJFS care as long as they were paid a fair price?
Why would the venture capitalists who own LPL care as long as they were paid a fair price?
Why would the shareholders of SCHW care as long as they were paid a fair price?
It’s tough to hear somebody saying that what you’ve built your entire
dream on may be about to crumble–but screaming at the messenger
doesn’t change the validity of the message.
In a word...yes. Over and over and over, I'm hearing, "We trust you. That's why we're here." While most folks are not happy with the direction the market has gone over the past year, they understand that these things can and do happen. Most of my retirees, at least the ones who need to draw an income, had safeguards in place before this mess started and are thus not pushing the panic button. The last thing they'd want to do right now is leave an advisor they've trusted for years to go to a complete unknown. If LPL sold to a party that I didn't want to affiliate with, my contract says that my clients are mine and I'd simply move them to another B/D. Without hesitation, at least 98% of my clients would move. It's all about relationships in my practice and these clients value that relationship, even above better than average returns. The scenario you painted is possible despite the ethical lapses and contractual violations, but I'm very confident that my relationships would almost all survive such an onslaught. If you knew more about my actual situation, you might be inclined to agree. If you're just slinging stocks, bonds and funds, sure, you are vulnerable. My service goes well beyond the basics and that has made for a very loyal client base.Are you really so cock sure of your relatiionship that you’d be willing to turn your records over to a seasoned broker at Merrill and challenge that broker to steal your accounts?
I'm just asking a question. I don't know what the future will bring. There sure seems to be a lot of assets going the direction of RIAs. This can be either teams leaving b/d's and taking hundreds of millions of assets with them or RIAs taking in lots of assets like Adam Bold's Mutual Fund Store with $1Billion plus of assets. Forgive me if I'm misstating your opinion on this, but I believe that you believe that advisors get much in the way of assets based upon their employer or B/D. I don't buy this for one second. Our clients work with us. By and large they don't care about the B/D. They aren't leaving us to go to a bank or anywhere else. (This is doubly true in this environment when they aren't sure that they can trust the bank.) The proof of this is that when a good advisor leaves his firm, he can usually succeed in taking most of the assets with him.[quote=anonymous]Putsy, I think that you are the king of projection. You feel a certain way, so you think that everyone else feels the same way. Your right that the banks will dominate the retail brokerage market. The question is whether the retail brokerage market will dominate the financial advice industry. [/quote]
Do you envision some sort of Mom and Pop franchises with store fronts were people can stop in for some financial advice and a shoe shine?
Willie Sutton is said to have commented, “The reason I rob banks is because that’s where the money is.”
Glass Steagal established the wall between commercial banking and investment banking. That wall has been taken down. The citizens have had a flirtatious relationship with non bank custodians for their money. The ones that financial advisor types are interested in have lost at least 25% of their money in the last ninety days–many have lost much more.
Bond Guy used a great phrase…“getting them off the tracks before they were run over by the bear train.” Briliiant imagry and damn near everybody who is reading this failed at it.
It is not an excuse to suggest that you’re not guilty of malpractice simply because everybody else is too.
The banks have been patient watching the brokerage firms offer checking accounts and other forms of competition.
Survey the landscape. The players are gone–overnight they simply disappeared. In their place we find Bank of America, Wells Fargo, Citigroup, Union Bank of Switzerland, Bank of NY/Mellon–there maybe others that I have forgotten.
Those players will want to consolidate even more–and a classic way of eliminating the competition is to buy them and shut them down.
What would be the downside to Bank of America if they bought Raymond James, merged the accounts into their existing network of bank owned broker/dealers and shuttered the offices?
Why would the shareholders of RJFS care as long as they were paid a fair price?
Why would the venture capitalists who own LPL care as long as they were paid a fair price?
Why would the shareholders of SCHW care as long as they were paid a fair price?
It’s tough to hear somebody saying that what you’ve built your entire dream on may be about to crumble–but screaming at the messenger doesn’t change the validity of the message.
In a word...yes. Over and over and over, I'm hearing, "We trust you. That's why we're here." While most folks are not happy with the direction the market has gone over the past year, they understand that these things can and do happen. Most of my retirees, at least the ones who need to draw an income, had safeguards in place before this mess started and are thus not pushing the panic button. The last thing they'd want to do right now is leave an advisor they've trusted for years to go to a complete unknown. If LPL sold to a party that I didn't want to affiliate with, my contract says that my clients are mine and I'd simply move them to another B/D. Without hesitation, at least 98% of my clients would move. It's all about relationships in my practice and these clients value that relationship, even above better than average returns. The scenario you painted is possible despite the ethical lapses and contractual violations, but I'm very confident that my relationships would almost all survive such an onslaught. If you knew more about my actual situation, you might be inclined to agree. If you're just slinging stocks, bonds and funds, sure, you are vulnerable. My service goes well beyond the basics and that has made for a very loyal client base.[/quote] You've earned the right to have CPA after your name, and that takes your credibility to a whole other level. Those of us who have the 7 and 66 are a dime a dozen. I'd do business with you, Indyone, but most independents wouldn't have a chance at my business. I could drop by one day to see my independent advisor and find a deserted office. At least with Merrill, Morgan and Smith Barney I can be farily certain that they'll be bought by someone else if they run into problems.[quote=Provocative Put] Are you really so cock sure of your relatiionship that you’d be willing to turn your records over to a seasoned broker at Merrill and challenge that broker to steal your accounts?
[quote=Indyone]
[/quote]
I've been making my presence known on this forum for a couple of years, and during that time I've had exchanges with precious few guys and gals who I conclude might actually be professional enough to deserve my respect.
Indyone is one of them.
What I have not said very clearly is this.
As the industry consolidates there are going to be fewer and fewer firms that provide executions, custodial, compliance, clearing and so forth.
Y'all seem to think that if LPL disappears into a bank all you'll have to do is switch to another firm that does what you need to be done.
What I am saying is that within a couple of years the pressure caused by client arbitration demands could be so great that only bank owned firms can fund them.
Clients have the right to bring a cause of action against you. Even if it's frivilous, even if you can't understand how it could possibly be won---it can still be brought. When it is the individual rep will be named as a defendant but so will their broker dealer be named and their clearing firm will also be named if the clearing firm is separate. Attorneys may experiment and name third party research vendors as well.
Suppose half of a firm's clients bring an action--an extraordinarily high ratio but there is no prescedence for a meltdown quite like we've seen. It could start as a trickle--some truly pathetic cases are filed. In so doing the attorneys will get a taste for how the industry is going to defend itself and how the panels are reacting.
What I am suggesting is that the fee based on AUM model is so outrageous that it could result, early on, in extraordinary awards--which will have the effect of chumming the waters.
I don't mean to cite experiences from the 1970s but the saying, "Those who do not learn the mistakes of history are going to repeat them" is true--and the last time we had anything even remotely similar was the malaise of the 1970s.
My firm had branches who were sued so often that it appeared that the Marshall who served the papers simply waited in the hall for a courier to bring another set. All of those claims were filed for no other reason than people were not making money and attorneys were accusing our brokers of not upholding their fiduciary responsibility.
In other words cases were being filed, not because money was lost, but because money was not made.
People are funny about their money.
When you're whisting past the grave yard you convince yourself that you cannot lose an action. That's not really true--even if the panel does not award damages to the plaintiff the defendants lose time and time is money.
Consider how much time you would lose if only half of your clients called one day and told you, "Indy, I like you a lot and I trust you to be honest. But I was at a cocktail party last week and met an attorney who told me that he could get my money back, plus a 10% rate of return retroactive to when I opened my account with you so I am going to go that way. I hope this won't ruin our friendship, and I certainly do not blame you--but if I don't do this I won't be able to retire."
The bright side is that these cases are rarely heard by juries any longer. Juries are morons, there was once a jury that found a guy who cut his ex-wife's head off not guilty. That jury would have given a client who didn't make a profit in five years a sum equal to what they invested just to teach you a lesson.
Theoretically arbitration panels will not be driven by emotion and will use the full measure of their intellect to make a rational decision. But what will that mean?
Suppose Mr. and Mrs. Jones rolled, say, $2 million from a pension plan into a self directed IRA and engaged a financial advisor to "manage" the money for them.
Further suppose that it is now worth $1.2 million--down $800,000 so they contact and attorney and it's the day of the hearing.
You're a panelist--sworn to be as impartial as you can be. You've been trained by FINRA or some other arbitration organization so you, sort of, know the law and (intellectually) you accept that the registered rep who oversaw the loss of the $800,000 is not a bad person.
Then the procedings begin--remember you're a panelist.
The plaintiff is first. Mr and Mrs Jones are led by their attorney and they discuss how they worked for their entire life and that when they became millionaires on paper they were very proud. It was quite an accomplishment for a school teacher and an engineer at Lockheed.
They talk about what they had planned to do before the money was lost--the condo in Florida and the vacations and trips to see their grandchildren.
They also talk about their relationship with their "advisor." They recall the day they met him at his office. They saw the University of Iowa memorabelia on the walls--but didn't notice that there was no diploma being displayed. They assumed that the advisor was a graduate of Iowa, which spoke volumes in their part of the country.
They talk about how the rep would stop by the house once a year with a computer print out that had a lot of numbers. The rep explained that the result was a gain of 12% for the year, which was good since the averages were only up 10%. Anyway, they mention the fact that the rep stopped by once a year with a report. It was in a nice binder that made it seem very professional.
They also mention that they both got a birthday card and a "Happy Holidays" card in December. Finally they talk about meeting other clients at a pot luck supper that the rep and his wife held on a spring night at a pavillion in the park.
The defense attorney will then ask a few questons--designed to show that the client was kept aware of what was happening, and to solicit an admission that the client never indicated that the client was not pleased.
Perhaps the defense attorney will attempt to suggest that the client was intellectually very capable of understanding the risks.
Next comes the Rep.
His attorney will lead him through a series of statements designed to show that he had frequent contact with the client. You notice out of the corner of your eye that the plaintiff wife shakes her head in a negative fashion but she doesn't say anything.
There's not a lot the defense attorney can do with his client so very quickly the rep will encounter the plaintiff's attorney.
This guy is not going to be pleasant. He is going to ask very difficult questions to answer--things like "How much training did you receive for your position as a registered rep?" We all know that training is somewhere between none and not really very much. Regardless of what he rep says the attorney will be able to minimize it.
The attorney will ask about formal education. This is where those without degrees are on ice so thin it is virtually impossible not to end up tongue tied and looking like a fool.
Then the conversation will turn to compensation. The rep may explain that he is paid 125 basis points per year. The attorney will ask what that means and get the rep to admit that it means $25,000 on the Jone's account. The attorney will express amazement and ask, "Are you saying that you earn a fee like that every year, regardless of the quality of your advice?"
I challenge you to put a happy face on that question.
Anyway, within a remarkably short period of time the die will be cast. Remember, you're an arbitrator.
Are you so cold blooded that you tell Mr. and Mrs. Jones to take a hike--to suck it up and forget about the $800,000 that simply evaporated from their account?
Or do you decide to split the sheets and award the client $400,000?
Perhaps you recall the testimony that the rep has his office decorated with University of Iowa stuff, but didn't graduate from there. You conclude that he was trying to con the clients so you award the Jones the full $800,000 they lost plus $200,000 for their attorney.
This scene could play out with EVERY client on your books. Nobody knows for sure, but only an idiot thinks it won't happen a lot.
Back to Bond Guy's line, why did you not get your clients off the tracks before the bear train ran them down? Isn't that precisely what an advisor should have done?