Early in my finance career, I received some excellent advice: Never buy house product.

At the time, I was on a trading desk, looking for more authority (read more $$) along with the ability to hold open positions longer term. A quid pro quo was offered, where if I purchased more of X, I could obtain more of that sweet, sweet leverage, and a more flexible trading authority.

On the advice of a senior trader, I (painfully) turned down the offer. His advice went something like this:

“Kid, never buy house product. There are a broad variety of financial products in the world of finance. Select the best product, the one with the best performance relative to the risk you assume, lowest fees, and is ideal for your client and/or portfolio REGARDLESS of source. Never buy anything that was created not to serve your specific investment needs, but rather, was designed to capture a greater percentage of the fees charged.”

This turned out to be excellent advice. Regardless of where you are in the finance food chain, doing the right thing never hurt your long term performance or reputation. It may seem obvious, but with the fast money was on the table, there were lots of people who lacked the understanding (or character) to leave it there.

The results were brutal: People who bought house product ran into a number of problems directly related to it. There were regulatory issues caused by shortcuts taken by underwriters. Performance invariably stunk, partly due to excessive fees, but mostly due to the crappy idea underlying the investment. As so many people working on Wall Street discovered to their chagrin, it became nearly impossible to move firms when their clients were buried in house product that was designed to be not particularly portable. It was a painful lesson to many.

I was reminded of this advice while read a WSJ article on the Facebook IPO (you may have missed it during vacation week). FB is now down more than 50% from its offering price of $38. As it turns out, holdings data revealed that “eight of the top nine U.S. mutual funds with Facebook shares as a percentage of total assets are run by Morgan Stanley’s asset-management arm, according to fund tracker Morningstar“. So the biggest holders of Facebook stock are Morgan Stanley Mutual Funds, and — not coincidentally — Morgan Stanley was the lead underwriter of the Facebook IPO.

Go figure:

 


Table courtesy of WSJ

 

There is a broad universe of potential assets any investor can own. The “House” underwritten products — the mutual funds, investment banking deals, private equity/VC offers, SPACs, structured notes, etc. — that are conceived, created and sold in house serve a specific purpose.

I have yet to see a compelling argument as to why anyone –retail stock broker, individual investor, institutional investor — should ever own this dreck, other than pocketing a higher than normal short term fee at the expense of the investor. That, dear reader, is their sole purpose.

There is an obvious lesson here. Why not buy the best you can find instead of the highest fee generating asset? If not for the benefit of the client whom you should be treating with a standard of fiduciary care, than at least for the sake of your own long-term reputation and career prospects?

The people who seem to get into the most trouble on Wall Street are those who are too impatient to get rich slowly . . .

 

 

Previously:
Advice for Rich Uncles and Others . . . (August 2007)

Source:
Morgan Stanley Funds in Big Facebook Bet
AARON LUCCHETTI and TELIS DEMOS
WSJ, August 24, 2012, 11:57 a.m. ET  
http://online.wsj.com/article/SB10000872396390444082904577607731934429936.html

Category: Investing, Really, really bad calls, Regulation, Trading

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.

9 Responses to ““Never Buy House Product…””

  1. BuildingCom says:

    We were hoping you’d open up a thread “Never buy a HOUSE… especially at current inflated asking prices.”

    Maybe next time?

  2. machinehead says:

    Why not buy the best you can find instead of the highest fee generating asset?

    Why not a Son of Glass-Steagall Act, declaring that due to irresolvable conflicts of interest, investment managers must be independent entities, having no common ownership or employment relationship with broker-dealers?

    Those who let a wire house manage their money deserve what they get. It’s a failed business model, which ought to be phased out. Especially when owned by brain-dead TBTF banks.

  3. PeterR says:

    Thanks for posting this again.

    At the risk of being a “stuck record” here (as in “LP” BTW) . . . . . . . .

    [in all caps, large red font, italic, underlined]:

    Fa(r)ceBook !!!

    And yes, what goes up in popularity quickly due to a mass hysteria, can go down just as quickly.

    IMO, we have not seen the bottom for FB yet. Per recent NYT article, the share buyback is only the beginning of Fa(r)ceBook’s death as an investment.

    Its final death throes are likely to be awkward, and will engender discomfort within us all, as the hubris plays out.

  4. Frilton Miedman says:

    Anyone know the ticker for MySpace?

  5. Disinfectant says:

    Yeah, it was dumb for the MS fund managers to get sucked into FB. But no competent investor would buy MS funds anyway. The bigger takeaway is that we should really question what the heck those non-MS funds on that list were doing buying FB at $30+ and whether they deserve to be managing money.

  6. bigvalueguy says:

    Don’t know why I feel compelled to defend MS, but for what it’s worth – I worked at MSIM for several years, and knew the manager/managers listed on 8 of the 9 MS funds in question. Essentially all 8 of them are managed by the same guy (Dennis Lynch). So, its not as if 9 MS managers got forced in to buying FB, it seems to have been really only 1 guy who bought it – and from what I knew of him, he never seemed like the type who would bow to corporate pressure and buy something he didn’t believe in…and he is definitely the type who takes big, long term bets on high growth tech companies (big positions in AMZN, AAPL, GOOG, etc).

    I’m certainly not saying he should (or shouldn’t) own FB, or buy IPOs underwritten by MS, or be managing so many funds, etc, etc….I’m simply saying that what actually happened is probably not nearly as sinister as it would seem at first blush.

  7. Greg0658 says:

    to FM:
    privatized MySpace aka Specific Media LLC via NewsCorp
    http://www.google.com/finance?cid=1879649
    $580M to current $35M
    ~~
    to thread .. how about a cheap factory shell?
    Solyndra Solar Cell Manufacture’g Plant
    http://news.yahoo.com/seagate-offers-90-3-million-solyndra-property-court-185506246–sector.html
    “The high-tech manufacturing facility was built to withstand an earthquake. It is serviced with 22 megawatts of power and backed up by two diesel emergency generators, each with a 2 megawatt capacity. It also is equipped with Solyndra solar panels on the roof that can generate 1.2 megawatts of power.”
    $733M’ish to $90M’ish

    Parceled out because the Chinese beat us on price’g. booyah.
    yeah .. we Americans gotta start working at a dime on the dollar to balance these crazes.

  8. Frilton Miedman says:

    Greg, I was being sardonic.

  9. kaleberg says:

    That is a great piece of advice for anyone naive enough to consider it. You really don’t want to buy anything that makes your broker too happy. Happy is OK, but not too happy. (On the other hand, Safeway’s Peanut Gallery and Halt the Salt house brand peanuts are pretty good. I don’t think supermarkets have the same agency problem.)