Fool.com: <I>Boiler Room</I> Marks the Demise of the Broker (Fool on the Hill) February 23, 2000

FOOL ON THE HILL
An Investment Opinion

Boiler Room Marks the Demise of the Broker

By Yi-Hsin Chang (TMF Puck)
February 23, 2000

Boiler Room is a fast-paced, entertaining movie about a shady brokerage firm and the young, money-hungry stockbrokers who work there. It's Wall Street for a new generation. But while this film is fun and well worth watching, it's much more than your typical movie. In fact, it's a sign of the times, marking the demise of the stockbroker, the beginning of the end for the "full-service" (read: full-priced) brokerage industry.

In the movie, we see these scruffy twenty-something-year-olds learning to pitch stocks to unsuspecting, average Joes. The wannabe stockbrokers -- including the movie's protagonist, Seth Davis, a college dropout -- work for a brokerage firm called J.T. Marlin based in an office on Long Island.

The movie reveals the unscrupulous phone selling tactics practiced at J.T. Marlin: badgering, intimidation, deception, and outright lying. The young brokers commonly praise stocks of companies they know nothing about and say that so-and-so company is close to getting FDA approval for some new drug. In an effort to bond with their clients, the young brokers pretend to be 20 years older with a wife and family.

As it turns out, Seth and his cohorts are actually unknowingly pitching stocks of nonexistent companies -- that is, completely worthless stocks. This makes for dramatic flair for the movie but it also serves as a warning for those who use brokers who may push stocks they either know nothing about or know should not be bought. Driven by commissions, they drive clients to churn their positions as often as possible.

Several scenes in Boiler Room actually reminded me of the book License to Steal: The Secret World of Wall Street Brokers and the Systematic Plundering of the American Investor, which I reviewed back in December. Specifically, we see Seth go through the same "training" from cold caller to full-fledged stockbroker. In both the movie and the book, we learn the dirty truth of how brokers can mislead their clients and abuse their trust.

The message you should take away from Boiler Room is that many stockbrokers are out to make as much money as possible by whatever means necessary, not for you, their client, but for themselves. With the flashy cars and the thuggish mentality of many of the young brokers in Boiler Room, these goons come off as no better than drug dealers. Of course, not all real-life brokers have the morals of trolls, but investors need to beware of the inherent conflict of interest within the industry. Since most stockbrokers make their money through commissions, it comes at the expense of their clients. That's why at the Fool we encourage individuals to make their own investment decisions.

Foolish messages aside, Boiler Room is a great flick. I caught the midnight showing Friday night here in Manhattan, and it was sold out. It was a young crowd, and the hip-hop soundtrack to the movie seemed highly appropriate.

The star of the movie, Giovanni Ribisi, is fantastic. I remember him from an episode of The X-Files where he played a kid who can conduct electricity with a crush on his teacher. Others might recall his role as the medic in Saving Private Ryan. Ribisi makes Seth surprisingly likable despite the character's wavering sense of morality. We like Seth in part because of his conflicted relationship with his father, who's a judge. In part, it's because we know he's a smart kid and different from the other young brokers -- I mean, he started his own 24-hour casino in his apartment.

Ben Affleck plays a minor but memorable role as J.T. Marlin's head recruiter. The movie came in eighth this past weekend, grossing $7.1 million over four days. Not bad considering it was in only about 1,300 theaters -- less than half the number for each of the top-three grossing films.

I don't know if Boiler Room will win any awards, but it offers lessons about the brokerage industry, especially its darker elements, to a mass audience. The upshot is that the movie marks a turning point in individual investing: Investors have become so disillusioned with "full-service" brokers that Hollywood feels comfortable outing the more seamy tactics some legitimate brokers may practice, while offering an all-out warning against crooked brokerage operations. After watching this movie, you'll be thankful there's online do-it-yourself trading and no need to use "full-service" brokers ever again.

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