Post of the Day
July 13, 1998

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Subject: Re: CAPM and the Cash-Kings
Author: martelfr

Tom,

I understand your point and, believe it or not, I agree with you 100% on your concerns that investors do not receive the best service from investment professionals (gosh, a full service broker with a conscience :P )

On the positive side, I can say that things ARE changing on our side of the fence. One of the new waves in our business are flat fees for portfolio management. At MSDW and many other brokerages, flat fee accounts can be had beginning for as little as $10,000. One of my company's featured products are "Choice" accounts which let investors make around 60 trades for FREE with only a flat annual fee. Many companies on The Street realize your concerns and are seeking ways to provide some extra value to compensate investors for the increased costs that they incur from doing business with us.

  "As many of the older brokers retire or head to greener pastures, the younger financial advisors like myself ... will dominate the field."

One of the funny trends on Wall Street is the movement away from titles like "broker" and towards titles like "financial consultant" and "financial advisor." Although it may seem aesthetic, there really is an underlying push to it. One of the not so obvious obstacles to this are the older brokers (I like to refer to them as the "dinosaurs"). Many of them don't have the will, desire, or the education to find innovative approaches to their business. Instead of listening to customers and forging relationships, many of the "dinosaurs" prefer to speak to their clients only when necessary and only for orders.

Although I cannot speak for the industry, I feel that change is as inevitable as death and taxes. As many of the older brokers retire or head to greener pastures, the younger financial advisors like myself (I'm only 22 years old. A virtual baby in this business)will dominate the field. Only then will true change happen, and, in my opinion, it most certainly will.

No matter what changes do occur, the "chop-shop" brokers will always be around to harass the public. Unfortunately, their pressure sales and aggressive techniques are reflected on the entire industry. Thus giving a bad name to those who do not churn accounts or encourage buying IPOs.

What many investors don't know is that they can take actions against these unscrupulous individuals. In fact, management is responsible for overseeing account activity and preventing churning from occuring. If churning is the case, the broker and the branch can be reported. It is up to the client to take this proactive stance...

"I think that things must and are changing. Our compensation structure should change to having performance more of a factor than the amount of stocks we sell."  

Despite the encouraging trend toward flat fees, I cannot totally agree with your point on pegging performance to an index. One of the first things that financial advisors are taught is that we must know our customer. As you well know, people have different goals and different risk tolerances. Setting the goal of beating an index, in my opininon, is only half the story. Financial advisors must also look at the risks their clients are willing to take and whether beating the S&P is even realistic under those circumstances. For example, an elderly couple that wants current income will never beat the S&P. Does that mean that the investment advisor has performed poorly?? No, of course not. I think the true measure of our perfomance should be client satisfaction--Are they happy with the return and the risks taken to get it. If they are, then fine. By setting the goal of beating an index, in my opinion, you do two disservices for your client: 1) You may miss satisfying their investment objective. They came to you for a reason, you must satisfy it and not another goal. 2) By pegging our compensation to beating an index, you may actually promote churning! Advisors will be under more pressure to beat the index, and thereby trade in and out of the "hot" stock, instead of satisfying their client's needs.

In conclusion, I think that things must and are changing. Our compensation structure should change to having performance more of a factor than the amount of stocks we sell. Such a change would shake some of the very foundations of Wall Street, but if it helps clients, all investment advisers should be for it. I personally think that your efforts to do this should be commended.

Fool on!!!

Frank Martello


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