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.