The topic of Business Week Online's Feb. 12 conference was the same as the Cover Story in the Feb. 20 issue: Can You Trust Your Broker? The guest speakers were the authors of the story, Leah Nathans Spiro, investment banking editor, and Michael W. Schroeder, correspondent in the Washington bureau.
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OnlineHost: Good evening and welcome to Business Week Online's weekly conference. We're talking tonight about the Cover Story in the latest issue, Can You Trust Your Broker? Even the bluest-chip brokerage houses are feeling the heat as criticism of questionable sales practices mounts. The authors of this story are with us tonight.
Leah Nathans Spiro is investment banking editor of Business Week. A Barnard graduate, she started at the magazine in 1988, covering corporate finance, and she has been in her present post for three years.
With Leah onstage is Michael W. Schroeder, a Washington correspondent covering finance and the Securities & Exchange Commission for BW. He graduated from Western Michigan University (BA) and Columbia (MS) and joined the magazine in the Pittsburgh bureau in 1987. He was Pittsburgh bureau manager for two years before moving to Washington.
The moderator of tonight's conference is Jack Dierdorff (JackBW), consulting editor of Business Week Online. And now on to your questions and comments about the brokerage business.
Leah Nathans Spiro's screen name is Lnspirobw, Mike Schroeder's MikeSBW.
JackBW: Good evening, Leah and Mike, and all of you on AOL from Business Week Online.
MikeSBW: Good evening. Happy to be here.
Lnspirobw: Greetings.
JackBW: The first question tonight is a basic one.
Question: Is there any way to get information about a broker?
MikeSBW: Yes, you can call the National Assn. of Securities Dealers in Rockville, Md., or your state securities division to get employment and disciplinary history. The NASD's number is 301-590-6500.
JackBW: Walmarc sent us a question in advance of the event. Thanks, Walmarc.
Question: I understand brokers can take advantage of investors through the big spread on stocks on NASDAQ [which can increase brokers' potential profits]. What is being done about this in terms of reforms? Does this spread practice also occur on the American Stock Exchange? Mike, want to tackle this one, too?
MikeSBW: The regulators, including the Justice Dept. and the SEC, are looking into this and other problems in NASDAQ. NASDAQ also formed a committee to study this, and spreads on some of the big-cap stocks have narrowed. But there are still complaints that spreads are too wide on many NASDAQ stocks. Spreads aren't as big a problem on AMEX because it's an auction market that uses specialists. Same with the New York Stock Exchange.
JackBW: Gil mac wonders about an early-warning system for investors. Leah, any thoughts?
Question: What are the signs your broker isn't being above-board?
Lnspirobw: It's hard to tell. But one sign may be if you keep getting put into house products that don't perform very well.
MikeSBW: I would also watch out for heavy pressure from cold-calling brokers who have a hot stock that allegedly is only available now. These tend to be the penny stocks.
Lnspirobw: One good sign is if the broker can calculate what your rate of return is. Some brokers do this for customers, others don't.
JackBW: Here's a question from Messineo about enforcement.
Question: How many SEC violations does it take to lose your broker's license?
MikeSBW: I'm not aware that there is a three-strike rule, although one is being discussed.
Lnspirobw: I have done research on brokers who have a list of arbitrations against them a mile long, dozens of actions. So be sure to check their records with the NASD.
MikeSBW: It's more a matter of the seriousness of the violation. Some only merit a wrist slap. Others yield a 30- or 60-day suspension. Needless to say, the SEC is coming down a lot harder on so-called rogue brokers who are frequent violators. They are being barred from the business.
JackBW: Bumpergar brings up the current commission studying broker abuses.
Question: Any guesses what Professor Sam Hayes's committee will recommend re compensation?
Lnspirobw: They are being very close-mouthed until the report comes out in early March. But I think what they will recommend, by praising the firms that already have these practices in place, is doing away with up-front payments, stopping paying higher commissions on in-house products, and stopping single-product sales contests.
JackBW: Here's a related question from DANO42.
Question: Why doesn't the SEC take a harder look at the proprietary junk firms dump on their brokers?
Lnspirobw: There is nothing illegal about selling a mutual fund that performs badly. It is up to consumers to shop around. It is like saying, why don't regulators do something about the crummy dishwasher I bought? Customers have to take responsibility.
JackBW: PAGarbis has read the cover story and has a question about one of the sidebars [on an investor whose $800,000 shrank to $370,000].
Question: I wonder what the market's activity was during the period that the woman from Las Vegas lost her money in the market. Maybe the turns of the market were as much to blame as her brokers?
MikeSBW: The Las Vegas investor appears to have been abused. She had asked brokers to buy stock and hold. But they were more interested in buying and selling. One example was Motorola. The investor told me that if her broker had held, she would have made $20,000. Instead, she made less than $5,000. Hers was a case where the market trend wasn't really a factor.
JackBW: Davidcond has a fundamental question about market structure.
Question: How do we put an end to a commission-based fee system?
JackBW: To which I would add, should we?
Lnspirobw: The big Wall Street firms are moving away from commission sales, slowly. They are doing this by selling more and more wrap accounts:
They find outside money managers for investors and charge a flat finder's fee and a money-management fee. But this is still a fairly small percentage of many brokers' compensation. It is really going to be a function of the marketplace. The fact is, customers can sign up for no-load mutual funds and not pay commissions.
JackBW: Jjonsson has a question that's more like an observation. Comments?
Question: Are brokerage stock recommendations really worth anything? It has always seemed to me that by the time you're being told to buy from the broker, the "big boys" who bought months ago are unloading it onto you (the sap)!
MikeSBW: I would agree. Remember that brokerage firm research departments often are pushing stocks that the firm has underwritten. They also push stock the firm has in inventory. Small investors always seem to be the last to know about a really good buy.
JackBW: The next question comes from Howie K, about broker training.
Question: Is there any reason continuing education requirements for brokers are not enacted? It seems that practitioners of every other profession (CPA, real estate brokers, doctors, etc.) are required to continually further their education.
MikeSBW: Actually, the SEC and firms just announced last week that they've agreed on a new mandatory continuing education program for all brokers, beginning this summer.
Lnspirobw: I hear from a senior official that there is a move afoot to create a program for continuting education that would give credentials of some higher sort to brokers who completed it, as accountants can do, over and above this newly proposed SEC program.
JackBW: SColaluca is next to pitch to you, Leah and Mike.
Question: Does the Certified Financial Planner designation help to insure broker integrity?
MikeSBW: I don't think it does. The certification has more to do with proven general knowledge in several business and finance areas. It's a rigorous program, but doesn't guarantee a broker will be straight.
JackBW: Without giving away trade secrets, can you comment briefly on this from Howie K?
Question: Did you have much resistance from brokers at firms when you researched the fine article?
Lnspirobw: We had to work hard to get brokers to talk to us. On several occasions, we were referred to a broker because he was an expert on this or that, and the firm would not give us permission to talk to him. We relied on brokers independent enough to talk despite their firm's rules and brokers who had switched firms or left the business. Mike?
MikeSBW: We were disappointed that firms resisted our efforts to talk with their brokers at all. That suggests they might have something to hide.
JackBW: JeanieD wants to test her own theory about how to play safe.
Question: Shouldn't a naive investor just buy market-average funds from the lowest-cost source?
Lnspirobw: Cost is one thing to consider. But investors must also consider performance, which means studying total return.
JackBW: SKPSHEAN suggests a strategy for selecting a broker.
Question: I've got to believe that the best way to get a good, reputable broker is by a referral from someone you trust who has worked with the broker or adviser for a period of time.
MikeSBW: That's an interesting strategy that will often work. But I should warn you that the Las Vegas investor got her four brokers through recommendations. Be sure you check out the record on anyone you hire.
Lnspirobw: I will tell you the good brokers I talked to who had lots of assets under management only took new customers by referral. These are the super brokers who have minimums, like $250,000 or even $1 million before they talk to you. I got the feeling you had to be loaded to get a referral to a good broker.
MikeSBW: It's also a good idea to hire a broker with a proven track record.
JackBW: Catkatt wants us to peer really far into the future, by Wall Street's standards.
Question: What does the future, if any, look like in 20 years for today's investment broker?
Lnspirobw: We concluded in our story that unless the industry faces these issues and earns some more trust with the customer, there is the possibility of going into a slow decline. However, I think the firms understand the problems and are trying to solve them. But there is no question, the competitive pressure is on. Now we see accountants getting into the investment biz. The industry has to avoid becoming a dinosaur.
JackBW: Here's a suggestion from Jjonsson on broker compensation.
Comment: What are the odds we'll see a situation where the broker only gets a commission from you if their selections produce a profit? That would mean elimination of the current commission system and going to a system based on straight performance metrics.
Lnspirobw: That's an interesting idea, but I don't think it will work. Remember, the customer has a discretionary account and tells the broker what to do. Again, the broker can't be expected to give a customer money back if a stock the customer wanted to buy went down.
JackBW: Now for a historical view, via Robert A86.
Question: To put things in perspective, are brokers more honest, on average, now than they used to be--or not?
MikeSBW: I'm not sure brokers are necessarily more honest now. Remember that this is a sales business. They have to do transactions to make money. That's why we suggest you hire brokers with a track record and a lot of clients.
Lnspirobw: The problem is the practices of the firms. Some of these compensation practices came in during the 1980s with limited partnerships-sales contests to move merchandise, higher commissions to move merchandise. It is these practices that have tempted brokers in recent years perhaps to push mediocre products.
JackBW: Leah, a comment for you from NYSEmember.
Comment: Lnspirobw, they only take referrals because they're making enough money they don't have to cold-call anymore! That's the reason.
Lnspirobw: Good point. It's the same as anything else on Wall Street. It works by the golden rule. Those with the gold, rule.
JackBW: We're almost out of time, and this comment from AGE Broke may be apt.
Comment: The SEC has an 800 number people can call to check to see if a broker has any legal problems.
MikeSBW: Here's the number: 1-800-SEC-0330, for general information and SEC rule-making. [SEC Chairman] Arthur Levitt has beefed up the consumer office. They should be more helpful now.
JackBW: On that note, it's a wrap. Thanks, Mike and Leah, and all of you in the audience. You can be sure BW will be covering this ongoing story.
MikeSBW: It was a pleasure.
OnlineHost: Thanks to Leah Nathans Spiro, Mike Schroeder, and the Business Week team for this conference on this week's BW Cover Story. If you'd like to keep talking, we invite you to move over to the BW Online Chat Room. Or you can post your comments or questions in the BW Online Message Boards (try the Economics & Finance board).
Transcripts of all BW Online conferences are available soon after the event (look under Special Events, Talk, or Search BW). While you're at it, explore all the features of BW Online (keyword: BW). And mark your calendars for a conference with BW editors or newsmakers every Sunday at 9pm ET. Thanks again and good night!
Copyright 1995 McGraw-Hill, Inc. All rights reserved.
