The Evolution of a Stockbroker

The other day I was meeting with a client, discussing his business, specifically how his business had changed over the past year. He is an online retailer and was struggling with the two 800 pound gorillas in the room, Amazon and Google.  Amazon is competing with him on the price he sells his merchandise and Google is making it more expensive and challenging to advertise. His business is in a vice being squeezed on both ends.

The conversation shifted to my business and how things have changed. My mind wandered down memory lane, realizing how much things have transformed over 25 years. When I first entered the business, it was known as the securities business back then, you were a stock broker and you sold securities (stocks and bonds). I was in the EF Hutton training program and it was not much different than the movie, The Wolf of Wall Street. It is sad and scary that this is how they trained young advisors. You were taught to dial the phone until your index finger was numb and that you didn’t get off the phone until the person on the other end of the line had bought something. To call this advisor training would be a gross misrepresentation; you were being trained to be a salesperson. Like Alec Baldwin’s character in Glengarry Glen Ross you were taught, ABC, Always Be Closing. Disgraceful, nothing about asset allocation, risk management, retirement planning or passive investing. You were taught to sell, have the client buy something and sell it, and then buy something new, rinse and repeat.

 

It was during my time with Smith Barney in the late 90’s that the business moved a bit upstream. The business model shifted from commission based to fee based. We were no longer charging to buy and sell a stock or bond. We were charging a percentage fee of assets under management. This puts you and the client on the “same side of the table,” and removed any conflict of interest to motivate a client to sell something so they would buy something else, thus generating revenue. We were still picking stocks, though, and crafting stories why one company was better than the next.

All of this came to a crashing halt when a series of large, household name companies crashed and burned. There was the dot com bust and then Lucent, MCI, Enron, and Tyco. Then our nation’s largest financial institutions crumbled, Bear Stearns, Lehman Brothers, Citibank and AIG. Wall Street could no longer be trusted. Analysts were recommending stocks of companies that had investment banking relationships with their firm. Rating agencies were not doing their jobs. Banks were assembling pools of toxic mortgages; packaging and selling them to their clients knowing they were a time bomb.

Boom, I knew then that Wall Street didn’t have clients’ best interests at heart. Heart, I should retract that, I don’t think Wall Street ever had a heart for their clients. I shifted my business from constructing portfolios with individual securities to using index funds, ETFs, and passive investments. The academic research is crystal clear that stock picking does not work. No one can consistently pick stocks that will outperform the market.

So here we are today, thinking about how the business has changed for me, and the change is unquestionably better. Today I am truly a non-conflicted advisor. My interests are aligned with my client. I can be compensated either as a percentage of assets or for a fee. I am not selling a product or recommending an investment that my firm manufactures. I am independent; I don’t work for a bank or brokerage firm that even has a product. I meet with clients and we talk about goals and how to best achieve them. We are not talking about whether GE is better than Siemens or if Asian bird flu will affect airline stocks. That is irrelevant to where you want to be. We are talking about real plans: how much money you can live on each month if you stop working at 65; how much you will need to save each month so your child can attend college; and how you reduce taxes and support your philanthropic ideas.

The evolution of the financial services industry has been godsend for clients and the right advisors. We have gone from salesperson to trusted confidant. There are challenges like my client the online retailer faces, margins continue to fall, technology has made investing more approachable but at the end of the day, you cannot replace sitting down, human-to-human, looking into the eyes of your client and understanding the importance of truly meaning, “how can I help?”