From the March 2012 issue of Research Magazine • Subscribe!

A Reformer’s Rebuke

Joshua Brown, the blogger known as the Reformed Broker, has a wide following among financial advisors, who start their day reading his leads on industry news, markets and actionable ideas. But for those advisors unfamiliar with Brown’s views on financial advisor business models, the publication this month of his new book, Backstage Wall Street, makes amply clear they are not flattering to wirehouse financial advisors. As he puts it in our interview in this month’s cover story, “I’ll starve on the street before I’ll ever be a retail stockbroker again.”

While Brown’s book is likely to make the investing public more suspicious of readers of this magazine, it would be unwise to view him as an enemy. Rather, it is a sign of emotional maturity to give a respectful hearing to critics in order to assess the validity of the criticism and to seek self-improvement where warranted.

Brown criticizes “people making decisions that have more to do with brokers’ compensation than what is best for the client.” He thinks wirehouses and mutual funds will disappear, and specifically advocates a fiduciary standard for advisors rather than the broker’s lesser suitability standard. He also derides the garbage-in, garbage-out of brokerage firms’ computer-generated portfolios.

While there is nothing new in this criticism — I wrote about many of these issues in my Ethical Advisor series of columns in 2003-2005 — the question is whether there is something true in it. And the fact is that the brokerage system does not require putting client interests first even if individual brokers do so of their own accord.

Brown’s argument that wirehouses are doomed is far less convincing. I’ve been around long enough to have heard that one before many times. (Remember when the advent of online brokerages was thought to sound wirehouses’ death knell?) But these firms have the branding power to bring in new customers and the financial staying power to survive an ever-changing marketplace.

Though the firms are almost indestructible, their advisors are not. Ethicists may decry brokers churning client accounts, but advisors would do well to notice that they too are being churned. If an advisor is not meeting ever-rising production targets, he is rapidly shown the door these days.

Most people have difficulty accepting criticism, and particularly so in the sensitive area of how they earn a living. The feeling is that if we sell a product or service to a willing customer, it is inherently moral — we are both realizing our Declaration of Independence-blessed pursuit of happiness. But that is no more acceptable than a doctor treating a patient with only the medicines or services approved by their hospital’s finance directors when better alternatives exist.

Wall Street will not reform until it must to survive, but we need not cling to our firms’ minimum standards if that means shortchanging our clients. Indeed, we should be thankful if Brown’s book increases the supply of reformed brokers.

 

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