“They were asking for it” isn’t a legitimate defense

I have a brimming, bottomless well of disgust inside me. It takes a constant effort to keep this black bile from rising up into my throat, to keep its acidic bite from eating into the lining of my mouth. I choke it down, but it never goes away. So sometimes, no matter how hard I try, I need to spit a little of it up, right here on the site.

What follows is a small pool of it.

Selling hot IPOs to investors isn’t part of how we do wealth management. I don’t really care if “that’s what the clients want.” If they’re coming to us for financial planning help, it’s not about what they want, it’s what they need. And they don’t need to take VC billionaires out of inflated technology IPOs in order to retire. I’m not anti-IPO, it’s fine to play. But it’s also fine to keep walking past the casino on your way to the elevators too.


Unfortunately the Lending Club story is not an isolated case. Time and time again during the current IPO cycle, Wall Street underwriters—egged on by ambitious CEOs, hungry venture capitalists, and favored institutional investors—have hyped one technology IPO after another. The bankers price the offerings for perfection, watch them soar on the first day of trading to deliver the coveted first-day spike, and don’t stick around to offer an explanation after the shares plunge below the first-day price.

If you ever catch yourself thinking your retail brokerage account is going to sway the business interests of an investment bank in your favor and away from serving the underwriting client, you need to change your way of thinking fast.


Good luck getting out (Fortune)

Here’s another game we don’t play – structured products. I watched the sausage get made and I even helped serve it during the 2007 heyday of “reverse convertibles”, the brokerage world’s equivalent of chemical warfare. Ain’t happening ever again. And once more, I don’t care if the client is asking for upside without the possibility of downside – my job is to explain that this doesn’t exist. If they insist on continuing the search, I’m sure they’ll eventually run into someone who is willing to sell them the Holy Grail, but it won’t be as a client of ours.


What’s at stake became clear when the SEC fined UBS last year for allegedly misrepresenting the degree of transparency of products linked to its UBS V10 Currency Index with Volatility Cap. In 2010, UBS sold $125.5 million of the notes.

UBS traders hedging the currency instruments sent transactions from London through a Swiss intermediary to a UBS currency desk for execution, according to the SEC. They added mark-ups and spreads and front-ran the trades,  dragging down the product’s returns, the SEC charged. UBS agreed on Oct. 13 to pay $19.5 million to settle without admitting or denying wrongdoing.

I’m not a holier-than-thou type of guy. I’ve documented my participation in the brokerage industry, chapter and verse, right down to printing the old sales scripts we were drilled on. But in today’s day and age, I believe that one of the critical functions of a fiduciary is to say “no” to our clients’ worst instincts, such as searching for risk-free reward or chasing hot investments right off a cliff. The bouncer function of an advisor is a very underrated part of the value-add, in my opinion.


How Wall Street Finds New Ways to Sell Old, Opaque Products to Retail Investors (Bloomberg)

And for those who sit in Wall Street’s laboratories cooking up new ways to entice clients to buy ever more complex instruments, I wish you luck. You may sell a few of these here or there, but you should know that you’re going to lose. Transparency and common sense are already winning. It’s not going back the other way.

 Read Also:

Bank of America CEO wonders “where did all our retail commissions go?” It’s over, guy. (Advisor HUB)

Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see my Terms & Conditions page for a full disclaimer.

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