Sound Advice: November 26, 2020

 The Customer's Man

. . . working for the customer, not the firm.

Customer’s man was what a stockbroker used to be called. That was a time when registered representatives took pride in working for the customer and brokerage firms were less involved in client relationships. That was then. These days, those who could still be called customers’ men are few and far between. They are a small minority who have learned their trade, built strong relationships, and tailored their efforts to the needs of their clients. They recognize the benefit of putting their clients’ interests first.

And then there is the overwhelming majority of today’s brokers, euphemistically known as financial advisers, whose emphasis is exclusively on the here and now. Those are the folks who took a crash course before taking a Series 7 exam, started off with the title of Assistant Vice President to be sure that folks would be impressed, then cold-called prospects ad nauseam with the hot ideas that had been delivered to them earlier in the day on their squawk boxes. The whole interaction was limited to dialing, smiling, and producing. The hitch was that the interest of the firm almost always came before that of the client.

One of my favorites, though hardly a recommendation, was a perfectly pleasant fellow who had carved out quite a niche for himself as a broker. He ran a relatively tight ship, with a small staff and an elegant suite of offices. He had a short, gray beard, presented well, and surrounded himself with an array of a half dozen large computer monitors displaying all kinds of information, little of which had anything meaningful to do with the kinds of guidance he appeared to be offering to his clients. Although he put forth an image of substance and relevance, the reality was quite the opposite. He was superb at sales, but considerably less competent in matters affecting the pocketbooks of his clients. It turned out that early on, after realizing how successful he was at selling aluminum siding for houses, he decided to focus his attention on financial services. The computer screens ended up being analogous to the curtains surrounding the Wizard of Oz.

A few others were equally hard to forget. I met two of them several years ago at a local luncheon. The attendees were a pair of pin-striped Merrill Lynch brokers and four of us who were on the investment committee of a nearby nonprofit organization. The brokers had set up the meeting to discuss investment opportunities. In the interest of keeping them off guard, I arrived in a tee shirt and jeans, and listened patiently as they made their pitch. After they finished, my colleagues asked a few questions. Since the presentation centered on current investment options, I asked how they took advantage of opportunities in the BRIC countries (Brazil, Russia, India, China). Their response: We don’t go there. That answer told us all we needed to know. We pulled the account shortly thereafter.

Coincidentally, the broker who won first prize for ineptitude was a young lady in one of Merrill’s Boston area offices. She was handling the trades for one of my clients in western Massachusetts. At Merrill Lynch, unlike most of the other broker-dealers I worked with, the trades were funneled through the brokers themselves rather than central trading desks or online as they are today. One afternoon, I called to place several orders and then waited patiently for the trade executions. And waited. And waited. Finally, I called again and spoke with the broker’s assistant, who told me that Marcie did not execute the trades since she had hurt her arm. Professional? Hardly.

Is there a need for brokers? Absolutely, but the role of a broker should be to introduce clients and prospects to products or services that may be of value to them. Those who might today be considered customers’ men would be doing so with a sincere expectation that such introductions would be beneficial to their clients. The rest of the brokers would be making such presentations while focusing on the potential reward they would gain if the offer is accepted. When the client accepts an offer, the broker’s task should be to execute the necessary transactions and follow up to increase the likelihood that the client will receive the expected benefit.

The hitch in the transaction is the fine print. Those acting on behalf of a broker/dealer (the firm) are held to a standard of suitability, a standard that is vague. An offering of an equity-index mutual fund, for example, might be suitable for a broad range of clients. Shares of an initial public offering (IPO), however, would be considered riskier and therefore suitable only for investors aware of the risks and able to sustain significant losses. The list goes on.

In contrast, registered investment advisers and certified financial planners, a far smaller group, are held to a fiduciary standard, which means the client’s interest must come first. To a large extent, the public is in the dark about this, but there is a simple analogy.

When looking to buy a house, one usually meets with a real estate broker. However affable the broker may be, the reality is that the broker represents the interest of the seller. The only exception is a buyer’s broker, who is hired by and works for the buyer. That’s the difference between the typical stockbroker and the minority who may be registered investment advisers, certified financial planners or both. In all cases, the best advice is to know who you are working with.

In addition to knowing about the person, it’s important to know about the product. Some years ago, I was asked to assist an elderly physician in unraveling a lengthy series of clearly inappropriate investments. The gentleman had retired to Florida and was increasingly concerned about his young stockbroker who was hyperactive with investment suggestions, most of which were either unsuitable (IPOs with fat sales commissions) or suitable but costly mutual funds with high front-end sales charges. For whatever reason, the doctor could not bring himself to end the relationship or say no. The net result was massive erosion of the portfolio’s value. Sad to say, this is a common happenstance with well-heeled seniors, but all age groups are vulnerable to this kind of problem.

Although mutual funds account for a sizable share of the product mix, the sale of stocks and bonds remains a critical part of the equation. Until the mid-1970s, there were standard rates for brokerage commissions, many of which could easily be several hundreds of dollars per transaction. Then, commissions started being discounted and most recently a number of brokerage houses have eliminated them completely. 

The flip side for investors is that along with the savings comes an increasing need to  do it yourself and a correspondingly reduced level of comfort. In place of commissions, brokerage houses are moving toward a fee-based approach that includes investment management and other services they offer.

As always, the investor’s task is to learn whether he is dealing with a customer’s man or a snake oil salesman. A few will be fortunate enough to work with one of the good guys. The rest will be best advised to run for the hills since the odds will be stacked against them. The good news is that the roster of registered representatives who will survive the intensifying competition will increasingly be numbered by the good guys. The public is becoming ever more aware of where value truly lies.

Although there will always be a group of investors who are comfortable handling the task themselves, many will still want the assurance of being helped by someone who has experience in the business. No doubt, the process of sorting through a group of prospective advisers to find one with whom there is confidence and chemistry may be tedious, but the benefits of the relationship will linger and perhaps increase while the memory of what it took to find that person will fade quickly. As with any other professional relationship, one needs to survey, check the fit, and move ahead.

N. Russell Wayne, CFP