Wall Street Hates You

I have a saying, “Don’t buy what someone wants to sell you. Buy what you have researched.”

And so I would tell everyone: don’t give brokers discretion over you accounts, and don’t let them convince you to buy unusual bonds, or obscure securities of any sort.  By unusual bonds, I mean structured notes, and eminent men like Joshua Brown and Larry Swedroe encourage the same thing: Don’t buy them.

To the extent that it can, Wall street tries to sell retail investors the exposures that they don’t want.  They offer a higher yield, but take it away and then some if the things that they want to hedge go wrong.  They sell you their problems, and if things go well you are unharmed, but woe betide your capital if things go wrong.

Trust is not owed to financial advisers or brokers.  You need to treat them skeptically; if possible, you need to understand  how they are compensated.  They tend to earn more from securities that are less in the interest of buyers.  (It is not much different from insurance salesmen.)

Wall Street exists to sell promises.  That can take several forms, two of which are:

1) Buy an ownership interest in this promising company.  It’s the wave of the future.

2) Buy a promise to pay from this company under these conditions, and we will pay you an above average yield.

Wall Street knows more than you.  They may make occasional mistakes, some of them big, but compared to retail investors, they know far more.  They profit off of retail investors.  You are the natural resources that they mine.

So why play with them?  If you are using a broker, it is time to end your relationship there, and work with someone who has to put your interests first.  Look for someone who is required to put your interests first.

It’s not as if investment advisors like me always succeed; we don’t.  But the best of us do avoid greed and fear, and so protect investors from their worst instincts — selling low, and buying high.

Take control of your investing, and if you can’t do it yourself, find a talented person with self control who can.

6 Comments

  • Conscience of a Conservative says:

    Groucho had a quote, something about not wanting to join any club that would have him as a member. I’ve evolved that to wouldn’t want to invest with any hedge fund or broker that would have me as a client.

    Totally agree on taking responsibility and control of one’s own finances, with one extra caveat, “keep it simple”

  • stevewright says:

    Really sorry you feel the way you do about brokers. I have been a financial advisor for 30 years. I love working with clients on financial planning as well as their investments. I have never sold structured notes, alternative investments, leveraged etfs, penny stocks and rarely a variable annuity. I am a CFP with an roa of 50 basis points which is very low compared to most advisors. I do recommend mutual funds, managers like yourself, plain vanilla stocks and bonds and certificates of deposit depending on the individual. Many of my investment recommendations I research myself and are often held in my own account. There are people in our business who well deserve your harsh criticism. I have seen them and dislike them too. Please consider that there are some in our business who are very thoughtful about our reationships and how we treat our clients. I read your column regularly for your intellect and source of good information. Thank you for listening.

  • Greg says:

    David – this sort of post seems a little beneath you.

    If you go to your Chevy (car) dealer, and ask them what kind of car you should buy, you are a fool if you think their answer will not be “A Chevy of course!” It is highly improbable a Chevy salesman will tell you to go buy a Honda (or whatever other brand) instead.

    Remember that scene in Breakfast at Tiffany’s where the saleswomen sends the customer over to Harry Winston instead? Perhaps because it didn’t happen.

    Ask a state governor if a new factory / major employer should be located in their state or some other state. Guess how many will say the other state?

    The Chevy dealer, Tiffany saleslady and Governor XYZ do not hate you just because they favor their own “product”. I can’t imagine why you would say such a thing.

    Are there some bad apples in the securities business? Are there some slimey used car dealers in the country? Are there people who will sell you a nasty cut 1/4 carrot diamond and claim it is a full carrot? Of course. Yes, to all the above.

    There are slimey salespeople in every industry — I have yet to find an industry that doesn’t have a few underhanded members.

    But claiming the entire industry hates customers, based on the well publicized behavior of a few? Come on, you are better than that.

    I understand you are a CFA charter holder. Are you saying that every single CFA member hates their customers? Do you have any evidence to back such a claim?

    There is no doubt that some brokers, and (unfortunately) many bank CEOs are used car salesman of the slimey type. These people have gotten away with terrible financial crimes, often because of their political connections. The media has tended to focus 110% on these slime-balls, often making the false claim that they are representative of all brokers.

    But buying into the media hype, and extending the hysteria with a crazy claim that every single person on Wall Street HATES everyone?

    How about dialing back the irresponsible hysteria? How about we focus our efforts on helping clients identify the good brokers from the not so good? How about focusing on educating clients on what to look for and what to avoid in a broker?

    That is the David Merkel that usually writes on this blog. Lets hope he comes back for the next post

    • oscarwildedog@mac.com says:

      Greg, I agree with what you are proffering here, but let me come to David’s defense here a bit. I too worked on Wall Street and I can attest to what David is trying to say. While I was not a salesman, I traded for a living and know first hand that companies like mine were encouraged to – to be kind – sell crap to investors. At the very least, the decision makers in our company did not have a high regard for their customers. The ironic thing was that the customers themselves actually KNEW this and iterated it to me on more than a few occasions. Just like that Goldman Sachs thing a few years ago when Blankfein testified at a senate committee hearing and was called to task for selling crappy things to investors and then taking the opposite side for GS…This happens every day.

      To David’s point – and I would suggest that if David differentiated between retail investors on a “sophistication” or credibility scale somewhat it would have been more understandable – Wall Street DOES try to get “dumb money” into play as much as they can, for the sake of liquidity. And many of these WS A-holes prey on the retail customer – too many to ignore. And hence David’s point.

  • Greg says:

    OscarWilde… Most businesses have “smart” customers (lets call them “more discerning”?) and customers who are less discerning (lets call them “not so smart”).

    When a fashion retailer sells an ugly item to a customer with poor taste, it does not mean the retailer (much less the whole industry) thinks all customers are idiots. It means that one retailer believes that one customer has no fashion sense.

    If you don’t like orange shirts (or whatever color) — the sales lady might think you are a typical man with no fashion sense. But extending that to the claim that fashion companies think customers are color blind idiots is absurd.

    All the retailers in the country sell their products for more than they are worth — that is how they pay the bills.

    Lets remember here that many of the “smart” banks managed to go bankrupt alongside their customers. Some banks got immoral taxpayer bailouts, thanks to corrupt politicians — while most customers did not.

    Did Wall Street sell a lot of stuff for more than it was worth? Just like any retailer? Of course. Profit is not illegal except if you work for a newspaper.

    Did some “smart” bank traders think they were pulling one over on customers? Do some retailers smirk when the color blind customer buys the ugly orange shirt at full price? Yes to both.

    Maybe the shirt comes into “style”, maybe the customer really is color blind. But you don’t hear commentators claiming that retail HATES their customers. The statement is absurd.

    David has told stories of calling up brokers and asking for a specific type of security / price — and the broker mocked him for considering such trash. What an idiot this Merkel guy is! Fast forward a few months and those very same brokers are hanging on his every word, wondering how David saw something before everyone else. Suddenly the idiot is a genius, even though its the same customer evaluated by the same broker.

    Can the media hype this story up? Can they quote the first part (the idiot part), while conveniently omitting the follow up part? Does that help sell newspapers or get a crook elected to Congress? Yes. Is the quote out of context? Yes.

    Many brokers are hopelessly insecure — and the industry doesn’t exactly help. Insulting “the other guy” (a fellow broker or a customer) is how many people outside the brokerage industry cope; and not to shocking that this happens inside the brokerage industry as well.

    Putting down the other guy is a backhanded way of elevating yourself (at least in a relative sense). That is why “the other guy” is always an idiot — the implication is that the speaker is oh so much smarter. Its a great coping mechanism if you are really insecure.

    The facts are these: if Wall Street was so smart, SOME OF US would not have needed a taxpayer bailout. If customers were as dumb as Wall Street salesman claim, David (and many of his blog readers) would not have jobs.

    Mindlessly parroting the talking heads on CNBC (or worse, CNN) with this hate nonsense is beneath David and beneath his readers.

    CNN (and media in general) are scared because their readership/viewership keeps falling every year. Advertising rates quickly follow reader numbers. That has the media scared.

    Sensationalizing stories, especially populist opinions, is a great way to temporarily boost readership (and/or get yourself elected). But it doesn’t even qualify as journalism.

    Wall Street (the industry) doesn’t hate customers (nor love them). There is no such thing as Wall Street. It is a huge collection of firms, made up of a huge group of people.

    A few might hate their customers (and get all the media focus). A few might love their customers. The overwhelming bulk are somewhere in the middle — and it varies day to day.

    Instead of pandering to the stupidity of media nonsense, we should focus on… same stuff I wrote last comment. No one will bother reading this anyway — its so much more fun to sensationalize one email from a trial and claim that all brokers everywhere are evil. Sells newspapers and blogs.

  • Greg says:

    PS — I would further argue that, as a generalization, most financial sales persons do not understand the products they are selling. Maybe that is my trading desk bias, but it is also based on my asking nuts-and-bolts questions of sales people, and getting replies that were 100% smiles and 0% substance.

    There is no way your broker can be an expert in 3000 Russel stocks, and 1000 bond issuers, and a Treasury curve expert and an options vol expert and know all the sports scores from last night, and also know the best restaurants in every city in the world. Of course they need to B.S. their way through most conversations.

    When Cramer gets phone calls on random stock tickers, his producer has already screened the calls (and the tickers) to the ones that most viewers and Cramer will know. That is how he appears to be an expert in all things.

    Your broker is expected to be able to take every caller, asking about the most obscure security you never heard of. The better ones will say “I will get you some info on that”, the not so good ones will attempt to sound knowledgeable anyway. Neither one will develop any true expertise in the next day or two — so you (and your broker) will be at the mercy of whatever strategist / analyst that looked into the company weeks or months before…. no guarantee that that strategist knew anything either.

    If the brokerage has some weird security on their books, the salesman’s job is to go sell it — first finding out what price someone (anyone) is willing to buy this strange object. Maybe the customer knows something, maybe not. Either way, we get price discovery.

    The broker doesn’t hate you, he just found the price someone (anyone) was willing to pay.

    Non financial markets call it haggling or negotiating. One party often has an information advantage — although in the case of many wall street salesman, they don’t know much more about the product than the customer… even if the salesman puts on quite a show and pretends to be a subordinated mezzanine inverse floater expert.

    By the way, the salesperson at your car dealership probably has no idea how to diagnose the injection system in your V6 either. No idea how the anti-lock brakes distribute load under emergency braking conditions. No idea how the transmission and differentials distribute power while cornering. Doesn’t mean he/she hates you.

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