INSIDE THE ASYLUM
Morgan Stanley under their new Czar John Mack announced that it will be slashing 10% of its lowest producing brokers from its force of about 10,000. Morgan Stanley stated that it has been struggling to increase the size and productivity of its brokerage force and has decided to enforce the less is more principle and start chopping heads. I understand the importance and need to run an efficient business and completely comprehend the concept of cutting the fat; however the professional services field is not retail. Managing money for the public is a trust, advisors should not be evaluated in the same manner one would evaluate a salesperson from Macys. Unfortunately for many advisors completing one’s fiduciary duty is not always the most cost efficient and profitable. Wall Street evaluates its employees in terms of their own bottom line, not by the satisfaction of their clients.
Large publicly traded brokerage firms’ work with an internal hierarchy and politics that are similar to most other public companies. Within the walls of every firm there are sales managers whose purpose is whip the troops (brokers) into shape. These managers are not compensated based on how well the firms’ clients do, but by how much in commission dollars are generated by their troops and how much proprietary product (in house funds, annuities, IPO’s) are sold. A sales manager has many tools of persuasion at his disposal, i.e. free vacations, autos, even cash. Their most effective tool however is, of course, job security. If you are not churning enough commissions from your clients, they WILL be taken from you and given to a true shark that will be more than happy to do the firms bidding. In fact many of the “big brokers” work in cahoots with the sales managers to get the honest advisors fired so they can take their clients. Morgan Stanley fired all of their brokers on a Thursday so the sharks could contact the clients and bad-mouth the fired brokers on Friday. In countless cases throughout the industry, clients are contacted and told that their broker was fired due to drug abuse, domestic violence charges, churning and other fraudulent claims.
The criteria for firing brokers at Morgan Stanley is no different than any other mass layoff at any other large brokerage firm, no consideration on how well their clients faired. Diametrically opposed, it is exceptionally rare to see a brokerage firm fire a high commission broker based upon a poorly performing client base. If you are a top producer at any firm it doesn’t matter as to whether or not your clients ever make a dime, as long as those commission dollars keep flowing in.
I have had many confrontations with unscrupulous sales managers in my career. Sales manager Jeff was one of the most memorable, I remember him like it was yesterday.
“Markowski Brothers, please report to Jeff’s office and bring you book” roared over the loudspeaker in a room the size of a football field in midtown Manhattan.
In the old days an advisor’s book was essentially binders filled with all information regarding transactions and holdings for your entire client base, which was updated and logged manually as trades were conducted. After hearing this dubious announcement Michael and I simultaneously looked at each other rolled our eyes grabbed our two binders and headed to sales manager Jeff’s office.
Sales manager Jeff was about six foot two, 240 pounds and built like a middle linebacker. He always had white crusted spit at the corners of his mouth and if you happened to venture to close during one of his nonsensical sermons, make sure you brought an umbrella. Jeff used his size to intimidate other advisors in the office with great success. Jeff’s intelligence however, in my
opinion, could only be accurately measured using an electron microscope or possibly that new nanotechnology.
When we walked into his office, Jeff motioned to the chairs in front of his desk as he finished up a phone call. Jeff was talking to one of his buddies on the phone about partying and drinking “ripple.” (Sales manager Jeff used to give stupid motivational speeches to the entire firm where he always finished using the phrase “Buy stocks, do business, Champaign…ripple”). Jeff hung up the phone and stared at us with this creepy Hannibal Lector-like grin on his face. He then employed his tired old schmooze approach on us, in an effort to seduce us over to the dark side. His pitch entailed showering us with praise (and saliva) regarding how well our clients have done, and how our assets had grown, and how he thought we could be partners, flying us out to Vegas for the
Tyson fight, blah, blah, blah. After kissing up to us for about five minutes and explaining the details of his exploits at the area strip joint Score’s the previous evening, Jeff cut to the chase and told us he wanted to take us under his wing and make us rich beyond our wildest dreams. We were told that even though we had more money under management and more clients than our peers, we didn’t do nearly as much commission as many of the brokers in our office. Jeff then picked up our client books and started flipping pages. After what seemed like an eternity he looked up and told us that we were leaving hundreds of thousands of dollars in commission on the table and if we listened to him, did the trades he would personally take us down to the Ferrari dealership that coming weekend.
I then started to argue with Jeff telling him that the trades he wanted us to do weren’t in the best interests of our clients and was nothing more than legal churning (legal churning is a term I use to describe when a broker moves positions around for no other apparent reason than enriching his or herself. When positions are profitable this practice flies under the radar of regulators). I should have known better than to reason with a dumb as a box of rocks sociopath would be an exercise in futility. Jeff and I went back and forth with him progressively making less and less sense as more and more saliva flew out of his mouth and veins started popping on his forehead. After enduring a lengthy tirade Michael and I got out of our seats and turned to walk out the door when Jeff told us…
“You guys will never make it. You don’t understand that it’s not your clients’ money it’s your money and you need to take as much as you can.”
That statement is a perfect example of Wall Street’s true feeling toward investors, the modus operandi for the big brokerage firms. Michael and I began plotting our escape that very day.
It is important to understand the motivation of who you are doing business with. Publicly traded companies are wonderful inventions of capitalism that create work and wealth for our country and the world. However, one must understand that corporations are much like sharks. A shark spends its entire life eating and reproducing. That’s what a shark does. A corporation spends its life making money. Both the shark and the corporation are necessary and important entities. Corporations provide for greater efficiency, ingenuity, jobs, economic growth to name a few. Sharks keep the seas in balance being tops on the food chain. Most Wall Street brokerage firms are publicly traded entities; they have various different businesses from oil trading to managing your 401k, all in effort to increase their bottom line. Wall Street needs to divest from managing individuals money. There is an inherent conflict of interest between the modus operandi of a corporation and the fiduciary duty of a true professional. Just like oil and water they just don’t mix. In fact the cocktail is downright dangerous. Andy Kessler author of the book How We Got Here: A Slightly Irreverent History of Technology and Markets and former Morgan Stanley Executive wrote in a June 15, 2005 Wall Street Journal editorial piece…
“Why did Morgan Stanley bother merging with Dean Witter in 1997 when electronic and Web trading were already so visible? Because it needed to compete for deals against Merrill Lynch, so why not, the thinking went, add a retail channel that it could dump its, er, crappy deals on. And dump they did. Remember Drugstore.com? Ariba? Avanex?
Homestore? Brokers have now morphed into asset managers—kind of like personal shoppers at Nordstrom’s moving high-priced merchandise.”
When it comes to personal services, whether it be medical, legal, or financial advisory they should not be centered on making profits. Would you take your child to a pediatrician that had to answer to a sales manager or shareholders? Would you go to a cardiologist who had to hustle to beat analysts’ quarterly estimates? Don’t misunderstand me, ALL of these service professionals deserve to make money, ourselves included. However, it is our belief that it is in the best interest of everyone that professions like ours need not have the shark-like qualities of corporations.
Note: Sales manager Jeff is currently serving 3-9 years after pleading guilty to conspiracy and enterprise corruption charges regarding his conduct on Wall Street.
“Sorry Jeff, no ripple in the big house.”
