In today’s WSJ, we learn of the proposed shift in standards for retail stock brokers — from “Suitability” to “Fiduciary:”

“Buried in President Obama’s proposed regulatory overhaul is a change that could upend Wall Street: Brokers would be held to a higher “fiduciary” standard that would compel them to place their client’s interests ahead of their own.

Currently, brokers are only required to offer investments that are “suitable,” which means they can’t put clients in inappropriate investments, such as a highly risky stock for an 80-year-old grandmother. The move could change the way products are sold and marketed and even how brokers are compensated.”

While this is important, the entire structure of the brokerage industry — incentivized to be long only and fully invested at all times — is what destroyed so many investors in 2008.

As we have noted in the past, this manifests itself in many ways — but most egregiously, in the Penalty Box. It is a very misaligned incentive system, one that penalizes brokers who did the right thing. Back in March ’09, I noted two Merrill Brokers who had put 75% of their asset base is in money market funds early in 2008. This pays essentially nothing to the broker — but preserves the clients capital. When 2009 rolls around, their manager calls them into his office, and says: “Bad news, boys. Your revenues dropped so much last year you are in the Penalty Box. As per your contract, your payout for this year is down to 25-30%.”

That is a horrific misalignment of incentives. And while a fiduciary obligation on retail brokers is an okay idea, if it is going to be remotely effective, IT MUST ALSO BE APPLIED TO THE BROKERAGE FIRMS ALSO.

The Penalty Box is “Exhibit A” as to why.




Big Firm Conflict of Interest: The Penalty Box (March 3rd, 2009)

Big Change in Store for Brokers in Obama’s Oversight Overhaul
WSJ, JUNE 19, 2009

Category: Finance, Investing, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

67 Responses to “Regulating Big Firm Bad Behavior”

  1. Michael M says:

    Great short video: Michael Lewis: Where Obama Went Wrong – 18 June 2009

    About the Fed he says “It shocked me that I was teaching them anything…I now know how little they know….”

  2. danm says:

    Is it the rules or the bad policing?

    For example, why don’t we ever see cops handing out tickets for gridlock generators? I can’t tell you how many times I’ve seen cops on the spot doing nothing about it.

    And this attitude is prevalent in everything we do.

  3. rob says:

    No member of a firm will ever put their own personal benefits as second… sorry human nature. Being a member of the firm provides a shield to personal loss. The whole fudiciary concept falls in the same bucket as the ethics contract, pretty much forgotten before the ink drys when substaintial personal gains awaits.

  4. ben22 says:


    In order for this to work FINRA will need to start looking out for the best interest of retail clients. I don’t think that they really do. A few days ago the took away my ability to rec. a short etf for clients, even without leverage, the main reason being that they aren’t for buy and hold. I will post the link from FINRA later today.

    Also, is this going to apply to people like Dick Bove, he just made a BUY rec for C on CNBC. Or since that is “free advice on the tv” it doesn’t need to count?

  5. Transor Z says:

    “Fiduciary” means safe, CYA. It means higher insurance premiums passed to the client. IMO it will reinforce two destructive behaviors in the industry: lack of responsibility of investors for investment choices and herding behavior among brokers to chase consensus positions. I say let the free market do its thing on this one.

  6. dead hobo says:

    Pardon my skepticism. Where there’s a rule, there’s a work around.

    If this rule were taken to an extreme, you would see financial TV replaced by educational TV that is finance oriented. No more pumping and green shoots as a matter or regular programming.

    It sounds good but the implementation would be nearly impossible. You would see financial hucksters, pundits, talking heads, and fraudsters replaced by CD sales people. You can’t sell stocks as a suitable investment if the market is controlled by computers and Fed funny money. Oil index funds …. sorry, risk based on balloon economics. Real estate … maybe once it bottoms until the next real estate bubble.

    This one is only window dressing. It implies risk is going to be eliminated by expert financial pros who see all and know all. It is probably the distraction meant to push through and otherwise terrible bill.

  7. Greg0658 says:

    isn’t this whole trading on existing corporations .. because of capital needs to startup a competitor and the real world consequences of that startup operation . a ponzie scheme at this point
    to big to fail = to big to fight .. capitalism is all about the bigger winner eats the smaller unable to compete … unless we have rules to keep competition healthy
    going back to my 1st statement and then think .. what happens when there is one big player in each business discipline .. I’m primarily worried with manufacturing / mining … ok game over you win .. now what .. lets start over
    watching proposals being added to the healthcare reforms committee on cspan last night .. and the discussion on tort reform and cover your butt testing that is a large cost in capitalism healthcare
    .. during Sen Hatch I was rambling over the tv of what would it be like under another system of providing for humans .. under the utopian system .. would you give a family that lost a loved one time off from work for grieving or a yacht (for those of you that don’t know my utopian system there is no money anymore)(sluffin off and waste of resources is another discussion)

    do you common folk ever step back and see what is happening to the advanced society that we continue building day after day …. to big to fix hazardous waste sites . to big to repair deteriorating cities/states with the infrastructure . a TBTF financial scheme in absolute turmoil to the small players . pirates on the high seas again . and moon missions more important than all that
    …. the graven image society we live in has us trained to a way of life … Squeeky Wheels and Old can’t afford to replace broken Cars

  8. Alex says:

    I agree that while we may need some new rules, what we really need is enforcement of existing ones. For instance, even though FINRA has suitability as its number one rule, practically no one really does a thing to enforce this basic concept. Why bother to have more empty rules, when the existing ones are basically unenforced?

    And second in things that need to be done is to change incentives. As it stands brokers are salesmen, and that is all they are. If anyone thinks they work towards long term performance of a client’s portfolio, I am sorry but they really need to understand how the brokers get paid. Change to management fees of assets under management, and reduce incentives to sell whatever crap inventory the investment banker can’t sell to anyone else, and this situation will probably improve considerably.

  9. Marcus Aurelius says:

    Make all of the rules you want — we have no law enforcement to back them up.

    Violation of the public trust should be a felony of the first degree.

    We are corrupt.

  10. CNBC Sucks says:

    Ritholtz the Libertarian, I am happy to read you are not suggesting that a fiduciary obligation on retail brokers should be applied to brokerage firms also. Because you have, after all, “Libertarian leanings”.

    And so begins my 49th retirement.


    BR: I am not a Democrat, I am not a Republican — the closest thing to my Independent beliefs are pragmatic realists. But there is no party that espouses that, and I find myself agreeing with more of what the Libertarians preach then the Dems or the GOPs.

    But I am not a joiner, and I do not endorse everything they believe in.

  11. call me ahab says:

    BR Says-

    “pragmatic realists”

    I’m with you on that Barry- we should all be so inclined- it’s easy to follow a political party 100%- no thinking required

  12. call me ahab says:

    this was actually posted by onlooker last night- thought it worth repeating-


    “Goldman’s Blankfein issues apology as bank prepares to repay $10bn”


    “We know that we have an explicit contract with our shareholders to be responsible stewards of their capital . . . we regret that we participated in the market euphoria and failed to raise a responsible voice.”

  13. Marcus Aurelius says:


    Thanks for the link. So, I guess from now on, a bank robber will forgo jail if they confess, apologize, and offer to return a portion of the loot.

  14. Mike in Nola says:

    Shows my ignorance of the real world. Being a lawyer with a fiduciary duty, I just assumed everyone who advised clients about their money or had custody of OPM was held to the same standard. I just thought that the duty was not being enforced. I guess that’s why I make a lot less than stock salesmen.

    While we’re at it, how about an impartial gubment agency to replace FINRA? We’ve all seen the utter failure of self regulatio by businesses. They only regulate themselves when passage of a regulations is threatend. But, as soon as the threat is gone, it’s back to the good ole boy system.

    I suppose we will have to wait for the real meltdown and some real, lasting populist rage like that in the 1930′s before we get some real reform.

  15. Greg0658 says:

    “Make all of the rules you want — we have no law enforcement to back them up”

    why? heres 1 – even out here in backwoods downstate Illinois – lawyers get $300 an hour when doing city/state business … whats the going rate in the Financial Capital of the World?

    heard another tv sound bite .. won’t embarass (or high5) the anchor … “healthcare is not a given right – you have to work for it” …. yaaaa .. and we need 80+ channels of regurgitated poop

    waiting for the enough is enough day when the cushy power jobs lose their down in the muck consumers / laborers / soldiers

  16. call me ahab says:

    greg0658 says-

    “healthcare is not a given right – you have to work for it”

    mind numbingly stupid- I guess when you’re down on your luck and sick as a dog- well – go die somewhere- because you have to earn your health care in this country-

    sounds like Glen Beck if I was to wager a guess

  17. phb says:

    Hello??? Really? Isn’t this how Chuckie Schwab and others have successfully created an institutional RIA marketplace so that clients/investors could stop buying products and rely on real advice? I do not feel sorry for the poor schmuck Merrill boys who got screwed on comp. They knew full well what their comp plan said and they chose to work there, period.

    Their have been options for years to leave the brokers of the world and hire a RIA with fiduciary responsibility rather than continually get screwed by the “optimization/fully invested” crowd.

  18. call me ahab says:

    Marcus Says-

    “Thanks for the link. So, I guess from now on, a bank robber will forgo jail if they confess, apologize, and offer to return a portion of the loot.’

    but Marcus- he’s really, really, really sorry- shouldn’t that be enough?

  19. phb says:

    He who edits himself has a fool for a client…

  20. constantnormal says:

    I also note that hedge funds and other managed accounts are moved closer to retail brokerage accounts in how they are treated in the Obama white paper manifesto. A reasonable extension would be to expect similar rules regarding client positions to be applied to those sorts of funds as well, with the end point being an investment inductry that is managed by what the government deems to be “safe and reliable” investments.

    Step right this way folks! Line up to buy today’s crop of Treasury debt, yessirree!

    I suppose that’s one way to finance the massive borrowing …

  21. bruerr says:

    @Mike in Nola, agreed: …”Being a lawyer with a fiduciary duty, I just assumed everyone who advised clients about their money … was held to the same standard.” …

    Big firm bad behavior?

    Bad behavior of big firm, big-big firm, is about debt evading in practice. Debt evading, creates an advantage for specially selected firms, and does not allow for failure or welcoming of new leadership in the banking industry (something people might long for by now.)

    The enterprise seeks a course to stay in business, by evading debt obligations and pushing debt, onto those who did not sign for it. In violation of Interstate Commerce laws, and contract law.

    This is a lot different than talk of ‘higher “fiduciary” standard of putting client’s interests ahead of their own.’ (I cant believe they are trying to say or imply that was not already a given.)

    Here the agencies claiming to rewrite the law are bending over backward to what seems like, split a hair. Pull a marble out from under 20 mattresses. (That we should all be in awe of this important work product.) Whereas the real “BIG FIRM” bad behavior is evading debt, in a practice that is socially and corporately irresponsible.
    _ _ _

    I read this part of the plan, and I visualize “the team” practicing their moon walk, step. Like they’re are going to do a Thriller video, as part of the marketing campaign.

    Re-marketing the cracker jack box with a “New and Improved” label on it. … …You can almost see Mr. Geithner, smiling and holding up the box. But its the same cracker jacks inside.

  22. constantnormal says:

    Are there any remaining conduits for an individual to place trades wherein the broker acts as an order taker, and nothing more?

  23. phb says:

    The direction this “plan” is taking us is into a vacuum where investors (not speculators) have little or no confidence in our current capital market structure. Trust is key, and this will not be restored through regulation – never has, never will (say what you want about ’33, ’34, ’40 & Glass Steagall).

    My guess is that real investors (again, not speculators) will go dark and only invest in private deals that they can actually see and touch (hence the appeal of real estate post March 2000).

    The “Invisible Hand” is at work here despite what our leaders in Washington DC attempt to unveil.

  24. phb says:

    @constantnormal – for $7 any number of online folks will take your trade…a la May 1st 1975.

  25. Mike in Nola says:


    I think you are holding retail investors to too high a standard. They are bombarded every day with commercials and ads leading them to believe that these brokers have some sort of superior knowledge and will do right by them. e.g. “Talk to Chuck”.

    I’m a professional skeptic by training and experience. Most people are not. They think (thought?) a lot less of lawyers than of brokers because of the intense advertising when lawyers are actually sworn to a fiduciary duty and actually do get disciplined while their brokers are not.

    I went to a continuing education recently and the ethics speaker said that at lest one good thing had come out of the financial debacle: no one is blaming it on the lawyers.

  26. Mannwich says:

    What we have here is perhaps mostly a cultural problem. This house of cards has been built over years, decades even, of dishonesty in the dogged pursuit of getting rich at all costs (“just doing my job, it’s not my responsibility to look out for the customer…..just business….”), even throwing one’s neighbor under the bus in the process. Fewer and fewer people feel accountable to each other anymore as citizens and human beings. Therein lies our biggest problem. It’s one of culture. They can pass all the rules they want, but if We the People don’t change our ways (and aren’t asked to do so, wink, wink), nothing will change for the better.

  27. ben22 says:


    re: 10:08, you can set accounts up almost anywhere like that. Good luck trying to get a broker to agree to it though.

    @ Alex,

    Are you trying to imply that performance would be better if most assets were managed via wrap account charging a % of AUM? Right, that will stop advisors and brokers from herding and really improve performance. lol.

    If you don’t think there are major issues with wrap accounts at companies like the ones listed in the thread you don’t have a clue. Most brokers are already using accounts like that anyway, not charging per trade anymore. If you go too heavy to cash at these places you get a call from compliance, if you do it again you are accused of market timing. If the broker did it last year he/she saved their client, but they went out of biz as they got paid 0. What ends up happening as a result in most wrap accounts is that the client still gets jammed into mutual funds so the advisor always gets paid plus they get a trail and wholesaler support from the fund companies they use the most. They place a trade in the account every so often to be compliant so that they don’t get nailed for charging a wrap fee while doing no active account mgmt. People that aren’t in the biz should do a little research before they start making suggestions on how to fix the incentives on Wall St. Statements like yours don’t even think about where the real comp issues are, like how much reps get paid to jam money into annuities or private REIT’s or Variable Universal Life insurance contracts.

    phb already said it correct above, the RIA model is the way to go.

  28. call me ahab says:

    From the PIMCO thread- I thought I would share this

    from Paul McCulley of PIMCO- July 2001

    “And while most of those homes are levered, there is room to lever them even more, from both a balance sheet and an income statement perspective . . .There is room for the Fed to create a bubble in housing prices, if necessary, to sustain American hedonism. And I think the Fed has the will to do so, even though political correctness would demand that Mr. Greenspan deny any such thing”

    appears that inflating of the housing stock was a planned event-

    makes me proud to be an American

  29. Mannwich says:

    @ahab: There you go. Pretty instructive quote. What’s amazing is Krugman suggested they do the SAME thing in a column in 2002 but then backtracked on this later on. Looks like these folks knew exactly what they were doing – - create another gold rush and kick the can down the road. Meanwhile, the smarties and their friends can pocket some more dough at the expense of J6P and the rest of the country. Who cares about the wider ramifications if we all have the chance to get rich, right? Isn’t that what life’s all about?

  30. Onlooker from Troy says:

    Those quotes about the intentionality of the housing bubble are stunning. I guess I’m too naive but really…wow.

    As to the thread topic, I realize that many here are of the opinion of let the buyer beware, etc. And it’s certainly a difficult nut to crack, but doesn’t anybody have a mother, uncle, aunt, or someone they know who is never going to be financially sophisticated but they’re just good, hard working, caring people. Don’t we want to protect and help those folks as best we can rather than just leave them to the wolves and say, “they ought to know better”, or “if they’re that stupid or naive they deserve it.” Can’t we strive to be better than that and not just say, “every man/woman for themselves.”?

  31. [...] “Buried in Obama’s financial reform plan is a requirement to make stockbrokers act in the best interests of their clients (”fiduciary responsibility”).”  (Clusterstock also Big Picture) [...]

  32. Mike in Nola says:

    Had a Eureka! moment whent I read this:

    Wish I had access to the main article, but can’t even get at it through google like I usually do. (Hint, Hint to Barry)

    It reminded me of a passage from Once in Goldconda during the big crash Hoover calls in someone from Wall Street and asks if he needs to do anything. He is told “no” and is relieved.

    Real financial reform may depend on Obama’s cynicism. If things get as bad as most of us think, he and Axelrod may have to sacrifice Summers, Geithner and Wall Street for the re-election campaign. Wall Street has lots of money, but it didn’t help them after we fell into the Great Depression. I suppose it’s an impossible dream.

  33. phb says:

    @Onlooker – In kindergarten, yes, clear simple rules for everyone. In the real world, a fool and his money is soon parted. Strive all you want, but at the end of the day, don’t be a fool.

  34. Mannwich says:

    @Mike: I think there’s no doubt that if these policies don’t actually help bring us out of the recession, one or more of that trio will be the ones to take the fall. This may happen by next year if things aren’t materially improving in the run up to the midterm elections.

  35. Mike in Nola says:


    The attitude you describe is what I once encountered in an automotive engineer in the 1980′s in discussing the need for airbags because so many people didn’t use seat belts. Very bright guy who went to Cornell. His attitude, although he was not one to use such language: If they’re too stupid to wear belts, fuck ‘em.

  36. Mike in Nola says:

    A modest proposal:

    BTW, the site is a good aggregator.

  37. karen says:

    A must read for the group:

    You’ll all love the language as well.

  38. Mannwich says:

    Speaking of fiduciary responsibility, David Faber openly ridiculus Dick Bove’s “buy” call of C this morning. Bravo Mr. Faber. All is not lost at CNBC….

  39. Transor Z says:


    Thanks for the link — really enjoyed it. Especially the language. ;)

  40. Mannwich says:

    Great find, karen.

  41. manhattanguy says:

    Looks like H&S pattern might be forming on indices. As I predicted we put in a top today around 925-930 on S&P. I shorted both RIMM and Capital One.

  42. Onlooker from Troy says:


    Look, I’m not being a fool. I just think that if we totally give up on trying to protect people then we’ve just sold out to the devil. You can throw everybody else under that bus and sit back smugly saying, “what a bunch of idiots those nice people are”, and preen as you count your money.

    I realize that you can’t protect everybody, and that if you give the impression that you are that people will just lower their guard and be hurt. And as with everything in this world there is no perfect solution. But if we totally give in to the cynical side then we lessen ourselves as moral beings.

    I’m as skeptical and cynical as anybody, and more inclined to libertarian leanings, but I’m also of the opinion that we should try to protect people who just can’t match up to the predators out there. There’s a real elitist attitude that comes through from those who just think that those folks are too stupid to live, so to speak.

  43. Onlooker from Troy says:

    David Faber is one who shows promise on CNBC. I don’t watch anymore but he seemed to be somewhat constraining himself at times, knowing that the producers were ready to snatch him bald if he went too far from the script.

  44. Thor says:

    Manwich – They can pass all the rules they want, but if We the People don’t change our ways (and aren’t asked to do so, wink, wink), nothing will change for the better.

    Absolutely! I, for one, am an equal opportunity blamer. When we assign blame to the debacle we find ourselves in right now we need to include ourselves and our culture. So far I have hope that our culture CAN change. As I’ve said before we’ve gone through massive social change in this country many times in the last 100 years, hopefully we can do it again. The only thing I see getting in the way of a positive outcome for that change though is a quick resolution to this mess. For any kind of real social change I think the stressors that cause it need to be prolonged (ala The Depression)

  45. Thor says:

    Karen – been a big fan of Epicurean Dealmaker since the beginning of the year. He’s a must read!

  46. Onlooker from Troy says:

    M in NOLA

    That guy (the auto engineer) is exhibit A for what I speak of. He’s a smart guy who thinks that all those stupid people would just as well perish. You take that attitude a little further down the spectrum and you know where you end up (I won’t invoke the Fuhrer here, but you know what I mean :) )

    Believe me, I fight against that kind of thinking in myself, and I’m a bit of a fan of the Darwin awards. Some people deserve what they get. But I also think that we need to protect our sweet aunt Sally, or the 30 year old widowed mother of four, etc. from the predators of society without them having to find out the hardest way by being fleeced. And I don’t mean to be sexist here, there are examples you can come up with for the other gender.

    No doubt that the best lessons are those learned the hard way, and I’m inclined to let my son (or daughter if I had one) fall once or twice to learn vs. pad every surface.

  47. call me ahab says:

    onlooker says-

    “but I’m also of the opinion that we should try to protect people who just can’t match up to the predators out there.”

    i’m with you- people look up to a broker and money managers as experts- and are relying on them to help them with investing what they have managed to save- much in the same way when you go to a lawyer and rely on their legal expertise to help you-you don’t expect the lawyer to give you bad advice-

    however- brokers have proven themselves to be unworthy of trust- so a person best be skeptical of any investment advice and use many sources to come to a decision as to how to invest-

    you cannot just hand your money over and hope that the broker will protect your assets- because their bias is to be long at all times- and that may not be how best protect your principle

  48. Thor says:

    Onlooker – spot on!

  49. Thor says:

    Ahab – Agree with you on this one. Take what I do for a living. I occasionally do IT work on the side. The people who hire me out expect that I am going to take care of their networking issues in an honest and professional manner and that I won’t go in and copy all of their porn and financial information. Working with computers is not something everyone has a talent for, especially anyone over the age of 50. The same could be said for doctors, auto mechanics, electricians, etc. Why not money managers?

  50. ben22 says:

    Alright guys, I know why people are upset with brokers in general but making blanket statements like brokers are unstrustworthy is wrong. There are good brokers and bad brokers just like there are good doctors and bad ones, good teachers and bad ones, and good bus drivers and bad ones.

  51. Mike in Nola says:

    ben: Noticed that you didn’t say anything about the existence of good lawyers :)

  52. Mannwich says:

    Totally agree, ben22. I don’t think most of us are making blanket statements about brokers per se, at least I’m not. I was just commenting on the wider cultural shift that we’ve seen over the past few decades.

  53. call me ahab says:


    not directed at you Ben- I guess my point was misunderstood- the broker’s cannot be trusted to protect your principle because they are trained to keep their clients invested- not parked in cash or cash equivalents- and the best they can say is – well- I beat the index- even though that could mean the account lost 40-50% of its value-

    true- no?

  54. ben22 says:


    haha, yeah, I could have included lawyers too. I don’t have any hate towards lawyers, I certainly think mine is good. Then again, I meet a lot of lawyers that will charge people 3k for a revocable trust that they won’t use and will accomplish the same thing as setting up a TOD for a person with a small estate. It’s like this in every job, some good and some bad


    That wasn’t directed at anyone in particular, just sayin. Obviously I get frustrated b/c of what I do when I hear stuff like all brokers can’t be trusted and you are a fool if you give them your money because they won’t take care of it.

    Another thought occured to me, whenever this topic of broker compensation is brought up it seems to me to bring about some serious outrage by people that are not in the business (again, I get it). I hear terms like Wall Street “fat cats” and then they apply it to a broker as if the average broker makes the type of money a Ken Lewis does. If only we had that kind of outrage towards politicians that did wrong, we’d probably all be a lot better off.

  55. ben22 says:


    No, you are right. I can’t disagree with that at all. The whole beating the index thing is an even bigger scam than buy and hold imho. I think the whole point of this post though was that there are brokers out there that really did the right thing for their clients last year and instead of being rewarded for it, they have been punished via a lower payout, or put in the penalty box as BR said.

    Apply that to any other job where you make less money when you do the right thing for the customer and what do you think would happen?

    The bottom line is, at the big wirehouses, the compensation structure isn’t for the client, or even for the advisor, it’s only for the house. Can’t we say something similar about Washington? Are the actions of the last admin and the current admin to deal with this crisis so far for the good of the country, the good of the people, or was it good for politicians?

  56. Mike in Nola says:

    Completely off topic:

    Just saw why SRS continues to perform horribly despite the CRE bust. Credit Suisse is doing a squees on IYR. Hope they don’t bankrups SRS.

  57. Thor says:

    Ben22: If only we had that kind of outrage towards politicians that did wrong,

    Well, see the difference is that everyone loved the brokers when they were making lots of money for them, now that they’ve finally had to take a big loss, they want to blame someone for it. Look at it this way – people haven’t held politicians in high regard since the 60′s. From Vietnam, to Watergate, to Iran Contra, Monica Lewinski, etc. You’d think people would wise up and make a change but as I mentioned yesterday I think it’s the “all politicians are crooked except the one in my district” mentality. That and and entrenched Democratic/Republican system that fights actively against the formation of any viable alternative party.

  58. Onlooker from Troy says:


    No doubt. As usual sweeping generalizations aren’t helpful and take out a lot of innocents. And it will also hurt those same people we worry about by keeping them away from good folks like you.

    And I also appreciate your comments about those not in a field of expertise being so wrong and coming to inaccurate conclusions as they pontificate. We’re all vulnerable to falling into that trap. I’m sure everyone here sees the often terribly inaccurate media stories about their own area of expertise. I certainly see that with regard to aviation and the military, my former occupations. Everybody’s an expert – NOT.

  59. Alex says:


    Obviously, there are issues with practically every form of compensation of one kind or another. So…given this is basically obvious, why do you assume an RIA model will be any better…cannot be used against the client? I actually have a reasonably sound connection with the business of money management, and do know exactly how “Chuck” behaves (for instance), and they are churners in their own little way. And they have no problem offering investment advice without in any way establishing suitability. So…I really don’t think they are the WAY to GO. Given enforcement of current FINRA rules at least.

    The concept I was focusing on most of all is that if you have people purporting themselves to be “money managers” when they are nothing but salesmen takes enforcement of certain standards, and changes in the incentives. What’s more, if we don’t enforce whatever we have for standards, no one can be expected to behave properly in the long run.

    Can you at least agree that incenting someone to actually successfully manage a clients money, versus just churn the crap out of the account? Can you at least see that if we don’t enforce what we already have, we will have problems with practically any money manager in time?

    Try to actually read what I am writing, and not go off about one clause of one sentence.

    Alternately, they have an opening on CNBC. Maybe you should apply!

  60. call me ahab says:

    b22 @ 1:03-

    that is why someone should check many avenues re investing- and to have an idea of what they want- and to make sure the broker is instructed as often as necessary to protect principle and to switch into cash when appropriate-

    as far as compensation- I’m with you- needs to be corrected- how- no idea- however- the investor must protect themselves in any event- especially since it is currently in the interest of the broker to keep his client’s invested at all times

  61. Onlooker from Troy says:

    Too many people fall into the trap of having a very hard time believing that sooo many other people can just lie their asses off while looking you straight in the face. Naive, no doubt. But it’s a common human failing to want to see people in authoritative positions as being honest, if sometimes wrong. So they continue to give them the benefit of the doubt. As it ever was, it shall ever be. History is full of examples.

    My wife is a wonderful, kind, loving and caring person. But she was (as a result I believe) also somewhat naive and has just finally come around to seeing the world for what it is and adopted my skepticism. It’s actually wonderful to see. And about time!

    My sons have been inculcated with a healthy skepticism and a bit of cynicism as well. The challenge is to not go overboard on the cynical side, as that can be detrimental as well.

  62. phb says:

    Girls, remember the Greenspan Put? Wearing the Pollyanna hat is how this mess began…

    As opposed to issues of real safety (read auto engineer), money is one thing that must be managed and personal responsibility must rule. Otherwise, we receive EXACTLY what we deserve. When we live and operate believing the SEC/FINRA/etc. are taking care of the bad guys, we invest poorly and enjoy bad results. Carfax did not arrise because the government suggested it, it happened because most used car (or stockbrokers) guys are crooks…

  63. Thor says:

    Onlooker – The challenge is to not go overboard on the cynical side, as that can be detrimental as well.

    I agree, and I notice this especially in my own generation (X). I don’t know if it was the times we grew up in, the fact that we came right after the boomers and all their grand ideas, of that the .com and 9/11 bust derailed so many of our careers. I don’t know if I said it on this blog or not but I’ve often thought my generation should be renamed to the “We just don’t give a shit anymore” generation.

  64. ben22 says:

    First, I did read what you wrote, you called all brokers salesman and then said wrap fees based on AUM would considerably help. What did I not get?

    Regarding your buddies at Schwab, new FINRA rules require that suitability is now proven and required on a per account basis, it is impossible now to open an account with a client without discussing this. Following account set up the client is mailed information on the time horizon, risk tolerance, and objectives of each account. They are provided with more than enough information. If you make an investment that does not match up with the profile you are immediately flagged by compliance. If your “reasonably sound connection” didn’t tell you this then they are being unethical. Bringing more checks and balances down to the advisor level without going after the bigger structural problems solves nothing. It’s easier for me to get a passport than it is to open a few ira accounts and a taxable account with options ability for a client.

    Second, I don’t think I’d fit in very well at CNBC thanks, though you might as a guest.

    Sorry if I came across a little harsh b/c I’m not saying that changes don’t need to be made, they do, but your statement seemed way off to me.

    The RIA model is better because it doesn’t put the rep in a total conflict, the RIA rep would create that conflict by their own actions, not based on the RIA structure which is completely different than the companies above in this thread. For example, having to keep the client invested in order to get paid, they can still charge when parking you in cash on the RIA platform.

    Further, RIA’s can do a much better job showing client performance to a prospect than an advisor at the wirehouses above due to the way they can develop custom portfolio’s. This should create the long term incentive, if your performance sucks over time you aren’t going to get any new clients and your existing clients will leave. Cleary as you say above you can still screw people as an RIA, corruption is always and everywhere. Good luck writing some new regulation to get rid of that. I still think the worst asset mistakes when it comes to compensation are the ones I listed above, people getting jammed into annuities, front end load mutual funds that get flipped every 18 months, Variable Life policies that then has a load on a fund inside of it. Wrap accounts, imho, while not perfect, do prevent some of this but I think the focus should be more on the above. Those are the worst things I come across on a regular basis.

    You are going to have to also more clearly define this sort of thing:

    What’s more, if we don’t enforce whatever we have for standards, no one can be expected to behave properly in the long run.

    What are the standards for money management success exactly? Is that the “beat the index” meme? What is the “right” rate of return? If a client loses some money one year but has a 10% 5 year average return is that good or bad?

    Like I said, I wasn’t trying to be a jerk.

  65. Mike in Nola says:

    You know things are bad when you don’t think this guy is completely crazy:

  66. GregP says:

    The chart/box is mislabled.

    MS has 18500 brokers, not 18500 investment advisers. Same for the other IBs.