The Broker-Dealer Industry Model Is Kaput

Registered Rep, the prominent magazine for US-based Advisors who work for a FINRA-registered (ie, self-regulated) broker-dealer, says that the industry model is “upset”. I say it is broken, smashed, kaput!

Moreover, I say that there will be new securities industry laws, rules and regulations that will soon usher in a new era of financial regulation. Whether that is a positive or negative development remains to be seen.

But, I’ll tell you what I think.

I think there is little hope that Congress, self-regulators and the financial industry movers and shakers will ever get it right because (i) they are bed-mates who are drunk with power over the capital markets, and (ii) they will refuse to yield that power to you, the owners of the capital, who have a need to trade in securities.

As one of the public, I stand opposed to those who would have power over us.

I consider myself a Free Market Patriot. I retired from the self-regulated industry in 4Q2000, totally disgusted by the state of affairs. Did I see 2008 on the horizon? You betcha, and it was Easter Week 2004 that I decided that the situation was getting so horrific I needed to do something about it. I wrote a simple little blog, using a simple little strategy of telling people to stop listening to Wall Street and instead focus on a relatively few high quality companies that you get to know in detail, and trade their shares with a simple little tactic for buying low and selling high, called the relative strength index technical indicator.

What did I receive in return? Barron’s magazine called me the best blogger they had seen, but eccentric, and they questioned why I was doing something so valuable for free. Given that my mission was to show people that the entire financial services system, including its regulators, self-regulators and legislators, was corrupt and that the people needed to take back control, it’s safe to say that I laughed off any criticism.

But in my world, complaining about something is not enough. If something is worthy of analysis, argument and complaint, then it’s important enough to fix, and the only way to fix something is to show others how to do it.

So, I wrote a book - Lessons from the Trader Wizard - a soup to nuts primer of what the owners of capital need to be thinking about when it comes to their money. That book will be rewritten into a trilogy this year that I hope captures the people’s attention and shows them how to manage their own affairs in the capital market.

That is not to say that advisors are not needed. Indeed, I think, in most cases, they are, simply because capital markets are challenging and most people do not have the time or possibly the experience and skills needed to succeed on their own.

The whole notion of an Advisor being a “Registered Rep” is screwed up because it represents the notion that the advisor person must be working for a self-regulated broker-dealer. Moreover, it fails to represent that the “Advisor” is licensed not to advise per se but to sell financial products and services created by broker-dealers.

Tell me, what is a broker-dealer? I have asked that question in formal session of the leading legislators and securities industry regulators. Nobody wants to admit that the word broker-dealer is the embodiment of self-interest and conflict of interest. It is a declaration that the owners of capital, the people, come second, and in response I have declared war against it.

The fact is I am an unusual case to the securities industry. I did rise to the top. I did take over much of the penthouse of the famous Toronto Stock Exchange tower and built a self-contained broker-dealer operation, and was the responsible person for Eastern Canada for the country’s largest non Humungous Bank owned broker-dealer. I did recruit the world’s number one technical analyst as well, hiring him away from one of the world’s biggest banks, and the biggest in Canada.

So, I have a pedigree as they say. I know how things work. And, when I say the financial services model is broke, you can believe that it is broke and not merely “upset”.

The following article has just been published in the very credible Registered Rep magazine. It represents the first pitch in a nine-inning ball game, the first striking of hammer and chisel to the wall known previously as the Iron Curtain. This is America’s ballgame, America’s wall.

Don’t let anybody tell you differently, not any legislator, nor judge, nor self-regulator, nor leading banker or central banker; the owners of capital will not be denied. There will be change, regardless whether the President-elect intends or is able to live up to his word or not. There will be change. Yes there will.

Soon, there will be no broker-dealer.

In its place will be people helping people, like me showing the people how a small group of us can, starting from scratch, with zero help, financial or otherwise from the company or any other source except ourselves, produce a report like we did yesterday on Silver Wheaton (SLW), and will continue to do the same for other companies.

The Independent Financial Advisor and the Independent Electronic Broker and the Owner of Capital, working under tripartite agreement, is, in fact, the only Model that works.

Here is the article I refer to. It’s a simple one, but I have never been one to get caught up in rocket science. It merely points to the start of a process of changing values.

Market Upheaval Upsets Advisor Biz Model
By Halah Touryalai
Registered Rep: The Source for Investment Professionals

After watching the value of her portfolio drop between 25 to 30 percent, one advisor’s client recently asked him why she had to pay him fees when the value of her assets was going down. “From a client’s perspective, it’s a valid question,” says the advisor who has a handful of other clients who have expressed similar sentiments. Another advisor says she received a call recently from a top client who said flat out, “I don’t want to pay you to lose money.” The advisor’s response: “I wish I could make you money all the time. It’s not easy for anyone right now.”

That’s for sure. Market conditions, the credit crisis and the economy are all taking a significant toll on the financial services industry these days, and according to some sources the effects will be long-lasting. A recent report by Celent, a financial services consulting firm, suggests “tectonic shifts” in the way investors think and behave with regards to their wealth. The recent economic turmoil may encourage investors to demand lower fees, divide their assets among a number of different experts and, in some cases, do the investing themselves. “Clients now have a true understanding of risk-and they don’t like it,” says Bob Ellis, senior vice president of wealth management at Celent. Meanwhile, advisors are trying to figure out ways to hold on to client assets-and remain profitable. As assets drop, some are switching from an asset-based fee to an hourly fee or retainer.

The good news is that high-net-worth investors will likely continue to seek financial advice even as their portfolio values sink. The difference is that they probably won’t rely on a single advisor or firm to handle their assets. Ellis says more wealthy investors will probably look to diversify their risk by using multiple sources of expertise for their investments.

ABOUT REGISTERED REP.

Registered Rep. is the most trusted magazine for the retail investment professional, serving more than 125,000 brokers, financial advisors and financial planners with award-winning coverage of industry trends, news about the firms, and the latest products and innovations.

Each month, the editors of Registered Rep. cover all the issues facing this evolving profession-from new products to regulatory changes and practice-management topics. Whether the advisor is at a traditional wirehouse, regional shop or at an independent firm, our print edition provides the critical information financial professionals need to succeed.

I feel sorry for the competent, hard-working people in the industry - I consider many to be friends - but it is an industry that is doomed. The customers, not the protectors of the industry, will make the decision when the change occurs.

Subscribe by RSS Subscribe by Email