So goes the latest effort in the brokerage business’s perennial mission: reforming an image that’s less than wholesome. The spin this time: your broker wants a “relationship” with you. He’ll get to know you, from your dad’s nursing-home bills and your kid’s dreams of Vassar to the repair record on the Volvo. Then he’ll give custom-fit advice.
It sounds tempting, especially in these days of bearish sentiment and increasingly complex investments. But you know how relationships are. And when you get intimate with a broker, money isn’t a minor theme; it’s the whole story. The dangers are obvious, as proven most recently by the $800 million-plus Prudential Securities is coughing up in settlements, fees and fines for steering unsophisticated investors into risky real-estate and oil investments in the 1980s. The Pru scandal, among others, is prompting a harder look by regulators (page 43). And the industry seems to be putting some teeth in its own reform movement. But until brokers are all models of integrity and wisdom, it’s a good idea to turn the tables: get to know him.
Study the habits and habitat of this wit" American species. If you know how a broker collects his pay, for example, you’ll know why he may have recommended that little stock that tanked. If you know the culture of the firm he works for, you’ll know whether his boss knows why he recommended it.
First, a little sympathy. The lot of the broker is not always a happy one. Sure, he (or, 10 percent of the time, she) can pull in those six-figure salaries you hear of, but the median salary in 1992 was a more modest $78,000. The hours are long. Beginners may have to log as many as 750 “dials” (cold calls) a week. The professional with 1,200 accounts arrives by 7 a.m. to suss out the market and leaves 12 hours later for a working dinner. (If you haven’t heard from him lately, it’s probably because 700 other clients have bigger accounts, or send him referrals.) In between, he barely budges from his computer screen, while the intercom, or “squawk box,” keeps him abreast (and harassed) with the latest market info.
Whether you end up grateful for the broker’s hard work depends most on three things: his personality, his employer and how he gets paid. Clients must match their style to the broker’s; some thrive on the market roller coaster, while others are, by nature, cautious. “If you want to make 50 percent in 20 minutes, I’m not the right person,” says Billy Eskind, an A.G. Edwards broker in Nashville. Tenn.
Firms. too, have personalities, and can temper or encourage the broker’s natural instincts. At one end of the spectrum are small firms such as F.N. Wolf or Hibbard Brown that specialize in speculative, over-the-counter stock. The typical broker for such a firm has no time for relationships. Take “Mike,” a former football player who dropped out of college a year shy of graduation. He bought a 22-chapter textbook on finance, crammed for the Series 7 licensing exam (six hours; 250 multiple-choice questions) and was working for the firm two weeks after he passed the test on a second try. With clients. of course, he doesn’t broadcast his beginner’s status. “What am I going to say?” he jokes. “‘It’s my second day on the job. Would you like to give me your money?”’ At the other end of the spectrum is a firm such as St. Louis-based Edward D. Jones, which quietly caters to conservative clients, often in one-broker offices where you can walk in and look him in the eye.
The size of a firm can make a difference, particularly in the resources for research and computer power. Giant Merrill Lynch, for example, with 13,100 brokers, has an automated order system that allows a broker to enter your order the instant you ask for it; seconds later, he can tell you, “I just bought you 500 Snapple at 27.” Less well-heeled firms still take your order on paper, run it to a wire operator and ship it to a trader, increasing the odds of a mistake or delay that could slice into your profit.
Whatever the resources, training and supervision will have a huge impact on your broker’s behavior. Most bigger firms are training brokers to handle all of a client’s assets-and liabilities-from the mutual funds in the IRA to the mortgage on the house. Five years ago, says Robert Silver, PaineWebber’s marketing chief, training “revolved totally around selling skills and product[s],” such as a stock or a fund. Now instruction centers on a client case study, pushing brokers to consider only products that match a customer’s needs. At the same time, firms are using sophisticated software to keep a closer eye on brokers. Merrill Lynch will soon roll out a program that tracks not just a client’s monthly balance but a real rate of return on the account. A PaineWebber system flags branch managers to trades that look inappropriate, sue as a risky casino stock in the account of a retired teacher.
But pay is probably the best measure of the industry’s commitment to change. In the bad old days (a few years ago), brokers chased commissions [like] a utility chasing kilowatt-hours," says Grano. The more trades, the more commissions. With every dollar resting on a buy or sell order, the broker’s priorities were obvious. The voting former football player is paid entirely on commission; he didn’t make a penny the first two months, and with $300,000 of assets to manage, he’s still living at home with Mom and Dad. But many firms are changing the mix. Although the bulk of pay is still based on commissions, a growing share is pegged on the size of the assets a broker manages. The idea: if a broker treats you well, you’re more likely to trust him with more of your assets. To further inspire trust, some brokerages are even eliminating that little something extra the broker used to get for selling a “proprietary” product. At Dean Witter, for example. brokers make more if they sell a Dean Witter mutual fund rather than, say, a Franklin mutual fund. Many firms push the stock in companies they help underwrite. A Dean Witter spokesman says that the differential is small; “There’s no major incentive there.” And though PaineWebber’s Silver insists that there is no conflict of interest in such policies, the firm has bowed to “perception” and eliminated the extra pay on all but its insurance products.
Whether perceptions of broker probity will really change depends on how fast and deep the reforms are. Meanwhile, the industry is trying hard to rewrite the script. Last month Prudential rolled out a $20 million ad campaign that features real-life brokers saying comforting things like “I’m a broker, not a crapshooter,” and “Life has taught me to listen more and talk less.” So check it out. If you find one who listens well, there’s hope for us all.
