October 13, 2000
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The Inherent Conflict
There is an inherent conflict that commissioned brokers and analysts have always had as employees of financial institutions.
Most Stock Brokers that are compensated with commissions clearly do not have any interest encouraging clients to be long term investors. Their living depends on activity ("churning"). As an example, I went with a friend several months ago to a small brokerage office, and while he took care of his business I read some of their "informative literature". While I am reading I can hear a telephone conversation between a broker and a client that was a churning conversation. The broker told the client that I think the stock will run here from 65 to 72. When it does,we will sell and buy something else. That is investing? In addition, I went for an interview with Merrill Lynch for a broker position. Just out of curiosity. Merrill asked me to use the Cowles(spelling) directory of local addresses and phone numbers and call people trying to sell a mutual fund that had a good rating from Morningstar. The fund just happened to have a 4% load. A little conflict there?
I never took the job because they told me that I would be a salesman. In addition they said that while I had a good financial background and a good knowledge of the markets, they did not know if I could sell and did not want to incur the expense to find that out. I went on the interview with the intention of not taking the position no matter how lucrative the offer might be, because of the conflict between commissioned broker and client. I concluded my second session with the office manager, before leaving for a final time, by saying that perhaps you should hire former vacuum cleaner salesmen instead of financial people. After all they have the sales experience that you are seeking. That evoked a big belly laugh and I went on my way. At a picnic I attended many years ago, I suggested to a broker that he invest some of his clients money in Berkshire Hathaway for the long term. He agreed that this would be a good idea but said that long term investing does not put food on the table for his family. "I need my clients to constantly be buying and selling." Any conflict?
In addition, the analysts, as we all know, are generally paid to be bullish all of the time. This is of course particularly true if their firm does underwriting. The underwritten issues are always talked up so that the investment banking firms will have a good relationship with the company for future underwriting. My favorite story involves economist Gary Schilling. He was an economist with Merrill Lynch about roughly 25 years ago. He wrote a very negative forecast for the stock market. Merrill Lynch fired him because his comments were not good for their retail commission business. Pardon my cynicism, but Merrill is concerned with their finances only. They really could not care less about their clients financial health. Right, Henry Blodget? Gary Schilling subsequently took an economist position for a company named White, Welding (spelling) and company, after being fired by Merrill. Susequently White Welding was acquired by Merrill. Guess what happened to Schilling. He was fired by Merrill. The excuse being that Merrill already had an economist. Merrill Lynch once again showed its objectivity and integrity.
I just hope that in this market rout, investors, particularly small ones, are not crippled financially. I want to be upbeat and hope that people do well with there investments. Every new generation is humbled by the financial markets, and this one will not be an exception.
Good Luck To All !!!!
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