The End of Cold Calling

Few business people answer phone calls until they’ve been robotically screened, and personal phone conversations have fallen out of fashion. Small wonder, then, that BofA’s Merrill announced its brokers-in-training will no longer be required to make cold calls.  (Attempt to make, that is – fewer than 2 percent of people who are cold called even answer the phone.)

Merrill instead will encourage young advisers to go prospecting on LinkedIn. Brace yourselves, LinkedIn members!

Full disclosure: The other day your obedient blogger actually did receive a cold call, not from a wirehouse but, surprisingly, from Fisher Investments.

Two Churned Accounts Cost Merrill Lynch Over $64 Million

 After the rise and fall of Cabletron, the company he co-founded, Craig Benson served a term as governor of New Hampshire. Now, as the result of investment misadventure, he’s the recipient of the largest monetary settlement in that state’s history.

In a claim filed with FINRA, Benson asserted that needless, ill-advised trades by his Merrill Lynch brokers had cost him $50 million. The New Hampshire Department of Securities Regulation launched a probe.

“My account was churned in large part for the benefit of generating commissions that benefited Charles Kenahan, Derm Cavanaugh, but mostly Merrill Lynch,” Benson told CNBC. “I certainly didn’t sign a document and say it’s OK to steal from me."

Apparently Merrill served Benson a full diet of upmarket investments, from IPOs to leveraged and inverse products. The results were so unpalatable that the New Hampshire settlement imposes a $2 million fine on Merrill Lynch and requires the BofA unit to pay Benson restitution of $24.25 million. 

These payments also resolve Benson's FINRA claim, making it the second largest FINRA settlement involving an individual over the last decade or so. The largest?  The $40 million Merrill Lynch was required to pay Robert Levine, Benson's friend and co-founder of Cabletron.

Can You Tell the Broker From the RIA?

Meet Tom and Jerry. One's a broker; the other's a Registered Investment Adviser. Both of them have studied the SEC's new Customer Relationship Summary and will describe their proposed relationship with you, the investor, exactly as the SEC prescribes:

Can you tell which is which?

Tom: "When we act as your investment adviser, we have to act in your best interest and not put our interest ahead of yours."

Jerry:  "When we provide you with a recommendation, we have to act in your best interest and not put our interest ahead of yours.”

Yup, Tom's the RIA. Obvious, wasn't it? Can't imagine the slightest risk of investor confusion.

Whatever happened to the fiduciary standard?

Imagine a Thundering Herd of Fiduciaries

When Blair duQuesnay, an investment adviser, wrote a NY Times op-ed in praise of female investment advisers, the headline read: Consider Firing Your Male Broker. Some readers accused her of fudging the distinction between registered representatives of brokerage firms, who traditionally work on commission, and registered investment advisers, who as fiduciaries are pledged to put their clients' interests above their own.

But these days the dividing line between brokers and RIAs is not so clear. Some wear both hats, and more and more "brokers" now work for fees, not commissions. In reality, duQuesnay asserts, "the investing public uses the words broker/advisor/adviser interchangeably. They do not know the difference…."

Maybe the public is on to something. David DeVoe, a San Francisco investment banker, notes the rising competition that wirehouses like Merrill Lynch and Morgan Stanley face from large RIA organizations and offers a provocative thought:

What if one of the wirehouses decided to become a full-blown RIA, to embrace fiduciary and independence? I think that could be a fascinating development.

The wirehouses have done a pretty good job over the years of mimicking the independent model in many regards, but they’ve done it slowly. I’ve said this before: It takes a long time to turn a battleship, but once it does turn, you have a lot of artillery pointed at you.

If it happens, will females be well represented in the crew?

Could “Reverse Churning” be Worth a Fee?

When working on commission, brokers have an incentive to make frequent trades in their customers' accounts. Done to excess, such trading becomes improper "churning." Happily, the trend to fee-based accounts removes this incentive.

But . . .ironically, brokers now may face charges of "reverse churning" – that is, loafing. If they make no trades in their customers' accounts, the SEC and FINRA wonder, why should they earn a fee?  Shouldn't they at least be pushing customers into, say,  inverse ETFs?

Maybe not. History suggests that efforts to time the market cost investors dearly. One study found that over 20 years when the S&P 500 produced an annualized return of 9 percent, the average stock fund investor earned 5 percent.

Might reverse churning actually help investors by producing higher returns?

Caution: Some Investment Products May Be Hazardous to Your Health

John Bogle, from his recent NY Times op-ed on the fiduciary rule:

[Gary] Cohn, most recently the president of Goldman Sachs, called it “a bad rule” and likened it to “putting only healthy food on the menu, because unhealthy food tastes good but you still shouldn’t eat it because you might die younger.” Comparing healthy and unhealthy food to healthy and unhealthy investments is an interesting analogy.

Introduction of the Labor Department's fiduciary rule has been delayed, possibly forever. But the losing battle has had positive results. Investment costs are dropping, and more investors understand the difference between registered investment advisers and financial advisers.

Nevertheless, the terminology is designed to confuse. Michael Piwowar, the acting head of the Securities and Exchange Commission, believes a fiduciary rule is a bad idea . But he suggests it might be time to stop calling brokers "financial advisers." 

Got any ideas for an alternative designation?

Irrational Exuberance and the Dow

From The New Yorker, January 15, 1966

Little did Hayden Stone or the rest of Wall Street know, but the DJIA's mid 1960's high (1,000!) marked the end of the great post-World-War-II investment boom.

Stocks staggered on through the Go-Go Years, but not until 1982 did the market begin its next great advance. Hayden Stone itself did not survive the 1970's.

In the long run, of course, Hayden Stone was right. Families whose founders invested boldly in 1966 and stayed the course now enjoy the fruits of a DJIA that just hit 20,000.

Decline and Fall of the Fiduciary Standard

Efforts to impose a fiduciary standard on brokers handling 401(k) accounts have been losing ground. Proposed regulations have been so watered down that some brokerage firms figure they'll make more money, not less. With Republicans controlling the new Congress, even the emasculated fiduciary standard is likely to be deferred or discarded.

For a reminder of the high hopes motivating the standard's proponents in 2009, see Fiduciary Standards for Broker-Dealers.

Did a JPMorgan Broker Turn Fiduciary?

After losing his job, a JPMorgan broker turned whistle-blower, saying Morgan had pressured him to put clients into the bank's funds when better choices were available. The New York Times has jumped on his story, here and in a James B. Stewart column.

After JPMorgan fired the broker, client complaints concerning his behavior showed up. The complaints were not written by disgruntled clients. That's the sort of fun fact that draws media attention.

Wealth Management, Swiss Style

Finding investment banking profits hard to come by, major Swiss banks are emphasizing the more lucrative business of wealth management, the NY Times reports.

Skill in stock picking is not required, judging from a survey of brokerage accounts at one large Swiss bank. Clients who followed their advisers' advice when buying stocks did worse than those who selected stocks on their own.

U.S. wealth managers who have lost clients to "more sophisticated" Swiss institutions are entitled to smirk.

It's Not Easy Being Fiduciary

The NY Times reports on the plight of two Deutsche Bank private bankers who were forced out because they balked at pushing DB products – notably, a fund of funds. (Funds of funds answer the perceived demand for investment products that carry even higher annual expenses than regular hedge funds.)

According to this petition to the Supreme Court of the State of New York – we don't have DB's side of the story – the two found "staying fiduciary" was a losing battle.

As big banks try to grow bigger, sales tends to overwhelm service. One result: a marketing opportunity for smaller, fiduciary-minded institutions. 

Merrill Lynch Ponders “Sustainable” Wealth

Sustainable farming, sustainable energy sources, sustainable forests…Merrill Lynch goes with the flow and surveys Sustainable Wealth.

The survey – conducted last December among investors with $5-million and up  – deals mostly with the "values" side of family wealth but did include a question on trusts.

Two-thirds of respondents believed assets should be held in trust for the lifetime of their heirs.

Three quarters of respondents under age 56, who presumably have younger children, said lifetime trusts were a good idea.

But…more than half the respondents also said that heirs should be handed full control of their inheritances at a certain age, usually under 35. That's surveys for you.

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In targeting the $5 million and up market for legacy planning, how well does Merrill Lynch Private Bank get along with its BofA sibling, US Trust? Just asking.

Seeking a Fiduciary? Good Luck!

Jill and Joe Investor should look for investment guidance from someone acting as a fiduciary, not a commissioned salesperson. Sound advice? In reality it's becoming harder and harder to act upon.

When advisers work on commission they may pledge to "demonstrate our commitment to putting customers first." But as Reuters notes, it's a commitment with an asterisk. And increasingly, brokers aren't working for commissions alone. Instead they have become "fee-based" advisers. That's not the same as "fee only." But not necessarily so different, either. The WSJ ($) cites an Aite Group study of almost 400 registered representatives (who traditionally work on commission) and registered investment advisers (who traditionally work for fees). The results show that Jill and Joe Investor face a daunting challenge:

Brokers working on commission reported getting, on average, about 20% of their revenue from advisory and consulting fees.

"Fee-based" advisers got almost 60% of their revenue from commissions.

And advisers most closely resembling "fee-only" got over 15% of their revenue from commissions.

In real life, Jill and Joe don't pay much attention to the distinction between fiduciaries and investment salespeople. Can we blame them?

$50,000 Financial Plans

How much is a financial/estate plan from a broker worth? Depends on who you ask.

The New Chase Approach to Nest Eggs

The Sunday New York Times front-pages a Dealbook story on Chase Private Client.

"You are not a money manager, you are an asset gatherer."

 Chase Private Client, a program aimed at those with at least half a million, uses JPMorgan brokers. Fiduciary services and investment management are no longer offered under the Chase brand.

British Brokers Behaving Badly

A popular social networking group on Linkedin, with thousands of expat Brits as members, has been targeted by financial advisers touting their services. 

The Telegraph story suggests the difficulty of finding the right balance for marketing efforts on social networks. In this case a few brokers making helpful, noncommercial comments were probably welcome. Hundreds making sales pitches are a different kettle of fish.

Golfing in the Investment Jungle

The broker was a really nice guy, a golfer who spent much of his time on the course, dispensing tips on hot stocks between holes. Once you signed up as a client, he handled your paperwork right there in the club parking lot. What more could a multimillionaire ask?

Using Philip Horn, rogue broker, as exemplar, Dealbook asserts that Financial Fraud Defies Policing. No Madoff, Horn rigged a system that allowed him to trade with his clients' money and skim off the profits.

Some comments appended to the Dealbook article express little sympathy for Horn's victims. You can see their point. One golfer invested $10 million with Horn but couldn't bother to look at the 50-page statements (implying at least ten or twenty double-sided pages of trades per month?!?) that he received from Wells Fargo. "If I had time to do that, I wouldn't need a broker."

Decamillionaires with that attitude should stay out of the investment jungle – or hire a fiduciary.

Old Money Rap, New Money Rap

Who Says Trust Fund Babies Can't Rap? We raised the question six years ago, answering with a link to Tea Partay. That promotional video for Smirnoff, cheerfully mocking the Trust Fund Preppies of Greenwich and The Vineyard, went viral, attracting millions of hits.

Here's a rap video that's attracting hundreds of millions of hits – a dance-crazy salute to the New Money lifestyle in the land of Hyundai and Samsung.

From Korea,  Psy's Gangnam Style.

Psy, a rapper in his mid-thirties, probably thought he was over the hill. Now he's a phenomenon, a worldwide celebrity. Gangnam, the area whose style he raps about, is a modern, flourishing district south of the river in Seoul. Someone has called it Seoul's Beverly Hills.

Why has Gangnam Style attracted hundreds of millions of viewers? Hard to explain, as Scott Adams acknowledges. This blogger's teenage grandson writes: "No mere mortal could have been this clever. I suggest we find the guy who made this and put him in charge of everything."

Psy in Gangnam Style

Korea's New Money is attracting private bankers and wealth managers galore. Citi has had a presence in Korea since the early 1980's. Now it's beefing up marketing efforts directed at Koreans with $1 million and up. 

Private Banks For Name Droppers

Exclusivity. Social status. Along with quality and "overall client experience," those are the criteria Luxury Institute uses to rank the year's top private bank brands. This year's winner, determined by a survey of investors with at least $5 million: Brown Brothers Harriman, followed by Boston Private Bank. Neuberger Berman Private Asset Management and Bessemer Trust.

A year ago different names possessed the snob appeal: Atlantic Trust, Glen Mede Trust and Rockefeller Wealth Management.

(When I was very young, my father used to stop by the Rockefeller office to drop off a bookbinding job or pick up a check. The notion that a family had an office impressed me immensely. In those days the place must have been truly exclusive  – you probably had to marry into it.)

These days, the exclusivity of Rockefeller, Bessemer and other former family offices resides in the eye of the  beholder. Marketingwise, a little snob appeal probably can't hurt. Or could perceived exclusivity impede growth?

Despite their prestige, fiduciary-style wealth managers aren't exactly cornering the high-net-worth market."Morgan Stanley, Merrill Lynch and Wells Fargo are the top three primary wealth managers to the wealthy," Luxury Institute noted last year. More than one third of the multimillionaires surveyed said a full-service broker was their primary adviser.

When Private Investors Met the Space Age

On May 26 astronauts at the International Space Station unloaded cargo from the Dragon capsule, a privately-owned spaceship. Here's a timely ad from the brokerage firm Francis I. duPont. It appeared in the July 16, 1966, issue of The New Yorker.

"Spaceology is the name of the game today," duPont proclaims. With the onset of commercial space flights, brokers are probably thinking the same way this year, although the term spaceology has not caught on.

In 1966 few realized how communications satellites would transform how people lived and worked. Live television from distant lands was the first electronic marvel. In 1969 a Foreign Affairs article observed

Only seven years [after the first transatlantic television broadcast] nearly half the land mass of the world was interlaced with communications facilities that made it possible for virtually all television viewers everywhere to watch live pictures from the surface of the moon. We have progressed to the point where a worldwide communications system is in full operation….

Foreign Affairs  also foresaw the first seeds of the next marvel: "data transmission, from computer to computer." As this 1961 City (Citi) Bank ad indicates, well-to-do travelers used to be a natural market for trustworthy investment help. Investors needed someone back home to keep an eye on their wealth.

These days, all they need is an iPhone.

Even so, a trustworthy investment adviser is a most desirable luxury. How can substantial investors enjoy traipsing around the Pacific Rim if they also have to worry about restructuring their portfolios to withstand a financial meltdown in Europe?