Eyes on Brokers
A look inside the industry

by Tom Gardner (TomG@fool.com)

Captiva Island, FL (Dec. 3, 1998) -- Tonight kicks off the final segment of our Eyes on the Wise theme this week, as we bring to the stage a three-year veteran of the full-service brokerage industry, who will share with you the tricks of that trade tonight and tomorrow night.

Before jumping in, though, I wanted to share some of your e-mails from last night's report on Merrill Lynch's Tom Kurlak and the world of the Financial Analyst. Once again, I was overwhelmed with e-mail and I thank you for the responses. Here are a few of them before turning it over to our Eyes on Brokers (Part 1) feature tonight.

Of the Kurlak piece, Fool Leo T. writes:

"Yesterday's and today's articles are driving me nuts! I can't believe that the Wise have been getting away with this type of stuff all of these years. It smells of a class system. They retire extremely early and very rich while their clients retire later and less rich."

Fool Dieter W. writes:

"I think your Conflicted Research Analyst (CRA) title and acronym should be changed to Conflicted Research Analyst Professional (CRAP). That would be more appropriate."

Fool Brooke S. writes:

"Thank you ever so much for publicly exposing what really is an injustice, one carried off by the so-called seers of Wall Street. It's one of the many little flasks of snake oil that small investors are asked to sip from."

Fool Jon W. writes:

"What you represent is what the very best of the Internet can be: honest, open dialogue and analysis. This is the promise that television never fulfilled. I feel privileged to live in this age."

Fool Ward H. writes:

"I'm not sure if you've read David Dreman's Contrarian Investment Strategies: The Next Generation, but he goes into great detail about analysts and their motivations. On page 104 he writes:

'After surveying the major brokerage houses, we were provided a list of what determines an analyst's bonus, normally a substantial part of his or her salary. Investors might be surprised by what doesn't go into calculating analysts' bonuses.

'Accuracy of profit estimates? That's almost never a direct factor. Performance of stocks that the analyst likes or hates? It is rarely given major weight.

'In fact, in the ranking of seven factors determining an analyst's compensation places, "accuracy of forecasts" is dead last. What is most important is how the analyst is rated by the brokerage firm's sales force.' "

Fascinating, isn't it?

And finally, long-time Fool Steven W., a broker at a regional firm on the East Coast, writes:

"Amazing stuff on Tom Kurlak. This guy has been SO wrong and makes a ton of money because he rings the register at Merrill.

"A comment, if you will permit me. I have no problem with the bashing of brokers who are a detriment to the business. Amen. But an occasional reminder that not ALL brokers work that way would go a long way to proving the impartiality of the Fools. As you know, I work on a fee basis, taking 1% of assets on average, regardless of the # of trades I make. Clearly, I provide added value in regard to taxes, estate planning, etc. and I beat the S&P more often than an index fund! Some of us do it right. Like a Fool :-) Best wishes for the Holidays!"

Indeed, Steven is right. I must make it very clear that The Motley Fool has no problem with many of the people that work on Wall Street. Probably you, dear reader, also have friends and family members that have or do work on Wall Street. There are some great people and some great financial minds providing valuable services.

Instead, our public complaint is with a system that we think continues to methodically take advantage of the ignorance of the average American Fool out there, and one which we think does not punish the many brokers and investment products that are bad news for the individual. That system should be undermined. And I'm pleased that Steven, a number of other brokers and money managers, and our guest columnist tonight agree.

Without further adieu, I bring you "V.," a former broker of three years, who tonight and tomorrow night will tell the story of...

A Life in the Day of a Stockbroker

My Background

Hello, I'm V. Thanks for having me into the Cash-King Portfolio column tonight and tomorrow night. Fool Headquarters recently asked me to share my three-year experience as a stockbroker with a large, national firm. My background, to begin, includes a BS degree in Business, along with an MBA degree.

After my graduate degree in business, I set out to land a job as a stockbroker, having always been intrigued with investing. I love the subject of finance, was excited about becoming a professional investor, and was thrilled when I landed a job as a broker in a mid-sized city at one of the largest, national investment firms. I worked there for three years, prior to moving on to a local bank to start an investment subsidiary. In tonight's and tomorrow's reports, I'll share a few of my findings after my three-year stay at The Firm.

To be honest, the job hunt for that brokering position was actually quite difficult, as it became increasingly clear to me that my educational background and training were far less important than the fact that I had no prior sales experience. One brokerage firm even suggested that I sell copiers for two years and then reapply. Eventually though, my persistence paid off, and I got a job with one of the majors.

My Training for The Job

The training began with a three-day crash course to prepare for the Series Seven Exam, which tests prospective brokers on the basics of investing (i.e., common, preferred and convertible stocks, bonds and options, along with the rules and regulations of the Securities & Exchange Commission).

I sat for the exam, with three-days worth of knowledge packed into my head. Two weeks later the results came: I had passed! The intensive three days of study had paid off, and I was now ready to share my newfound knowledge, helping others with their financial futures. I was a Stockbroker - Registered Representative - Financial Consultant (the title kept changing).

But wait, the training wasn't over yet.

Next up was the appropriately named (no joke) Gorilla Cold Calling Course, so named because, we were told by our manager, that even a gorilla could be successful if he just made enough telephone calls. Hmmm, I guess my college and graduate business degrees really were not important. The cold-calling course involved learning how to dial-up as many people in an allotted time frame as possible. It didn't matter whether you were selling stocks, bonds, timeshares, or aluminum siding. The key was to reach out and touch prospects.

My manager shared with me the rule of thumb on cold-calling: Out of 100 actual telephone conversations per day, 10% would listen to my pitch. Of these 10 gullible souls, 20%, or 2, should be a sell. That adds up to two new clients out of only a hundred calls! So I was told that I simply had to telephone 500 people per week; just 2,000 per month; only 24,000 per year and I'd be on my way to success as a broker.

Wait, my city's population is only 80,000. And half of them are children!

My Daily Routine at The Firm

Now it was time to put my comprehensive training to use and begin helping out those Americans less knowledgeable about their money. I started with the stockbroker's guide to success: The Yellow Pages.

My list of doctors, lawyers and any other prospective candidates was ready each morning for the office manager to inspect. I then spent most of the day smiling and dialing. And dialing. And dialing, and dialing. Now, most successful professionals get called by a lot of salespeople, and as you might guess, few are really receptive to the calls. The 2 out of 100 Rule is pretty accurate (Fool, I hope you're in the Group of 98).

But from the industry's side of the table, the prospecting for transaction profits was well worth it. (You just have to love the investment focus at these firms, don't you?) Each day at 3 p.m., the closing bell rang, at which point the manager cruised by to review the commissions generated that day. Sell, sell, sell (that is, whether you're buying or selling!).

In between all this mindless prospecting, there were other activities, such as the Morning Squawk Box Call, when upgrades and downgrades were announced from New York over a scratchy 4" speaker. These new recommendations generated buying and selling opportunities for the brokers. To win as a broker, you were there every morning for the Squawk Box Call. It meant commissions.

And each week, the firm held a company-wide technical analysis conference call with a chart guru at the home office, supplying important support and resistance levels for those interested in short-term trading and options. One of the more popular option strategies was The Cadillac Spread, which involved selling a call option on a stock, while simultaneously buying a put option. This generated two commissions and then two more when the positions were subsequently closed. The term Cadillac Spread was coined because it helped make the broker's car payment, by generating a total of four commissions on a single stock.

Pretty neat, that one.

Finally, each week a sales meeting was held to tout the current focus investment. There was one of these pretty much every two months, with concentrations on oil and gas, real estate, and new movie limited partnerships, as well as the announcement of new mutual funds with a twist, and variable life and annuities. Packaged investments were great vehicles for brokers, because they typically had high and somewhat obscure commissions built into them. And many of the limited partnerships were structured as tax shelters, making them easy to sell.

I recall one prominent CPA at the firm that almost always recommended against such investments, on the basis that the client immediately lost 15% - 20% on the fees and commissions. This CPA was labeled a troublemaker at the firm and any outside investor that asked to review an investment with him was written off as a lost sale.

Think about that one for a second, Fools.

I'll be back tomorrow with Part 2 of Eyes on Brokers, which will include an eye-opening look at brokerage sales contests, margin accounts, no-commission stocks, and the dreaded Senior Vice President role at brokerage firms.

Fool on until then!


Order your copy of David and Tom Gardner's new book, Rule Breakers, Rule Makers, in advance. This Simon & Schuster beauty doesn't arrive until January, but you can reserve your copy today! The first half of the epic book, on Rule Breakers, elucidates the Fool Port's investment style; the second half, on Rule Makers, further explains Cash-King investing.

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FoolWatch -- It's what's going on at the Fool today.

12/03/98 Close

Stock  Change    Bid
AXP   -4 1/16  96.69
CHV   -  9/16  80.00
CSCO  -2 1/16  76.19
KO    -1 7/16  68.13
GPS   +  15/16 51.63
EK    -  1/8   73.06
XON   -  3/4   70.50
GM    -2 3/8   68.00
INTC  -4 1/16  109.50
MSFT  -4 5/8   122.13
PFE   -2 9/16  110.50
SGP   -3 7/16  53.25
TROW  -  5/8   37.75
                 Day     Month   Year    History
        C-K      -2.35%   0.00%  21.75%  21.75%
        S&P:     -1.80%  -1.16%  14.33%  14.33%
        NASDAQ:  -2.05%   0.25%  17.28%  17.28%

Cash-King Stocks

    Rec'd    #  Security     In At       Now    Change
    2/3/98   24 Microsoft     78.27    122.13    56.03%
    5/1/98 55.5 Gap Inc.      34.06     51.63    51.57%
    2/3/98   22 Pfizer        82.30    110.50    34.27%
   6/23/98   34 Cisco Syst    58.41     76.19    30.44%
   2/13/98   22 Intel         84.67    109.50    29.32%
    2/6/98   56 T. Rowe Pr    33.67     37.75    12.11%
   8/21/98   44 Schering-P    47.99     53.25    10.95%
   2/27/98   27 Coca-Cola     69.11     68.13    -1.42%
   5/26/98   18 AmExpress    104.07     96.69    -7.09%

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Eastman Ko    63.15     73.06    15.70%
   3/12/98   20 Exxon         64.34     70.50     9.58%
   3/12/98   15 Chevron       83.34     80.00    -4.01%
   3/12/98   17 General Mo    72.41     68.00    -6.08%

Cash-King Stocks

    Rec'd    #  Security     In At     Value    Change
    2/3/98   24 Microsoft   1878.45   2931.00  $1052.55
    5/1/98 55.5 Gap Inc.    1890.33   2865.19   $974.86
    2/3/98   22 Pfizer      1810.58   2431.00   $620.42
   6/23/98   34 Cisco Syst  1985.95   2590.38   $604.43
   2/13/98   22 Intel       1862.83   2409.00   $546.17
   8/21/98   44 Schering-P   2111.7   2343.00   $231.30
    2/6/98   56 T. Rowe Pr  1885.70   2114.00   $228.30
   2/27/98   27 Coca-Cola   1865.89   1839.38   -$26.52
   5/26/98   18 AmExpress   1873.20   1740.38  -$132.83

Foolish Four Stocks

    Rec'd    #  Security     In At     Value    Change
   3/12/98   20 Eastman Ko  1262.95   1461.25   $198.30
   3/12/98   20 Exxon       1286.70   1410.00   $123.30
   3/12/98   15 Chevron     1250.14   1200.00   -$50.14
   3/12/98   17 General Mo  1230.89   1156.00   -$74.89

                              CASH    $120.62
                             TOTAL  $26611.18

*Please note: On 8/4/98 $2,000 cash was added to the
portfolio. $2,000 will be added every six months.

*The year for the S&P and Nasdaq is as of 02/03/98