Every rep who works for a national brokerage firm should read Wall Street Versus America: The Rampant Greed And Dishonesty That Imperil Your Investments (Portfolio Hardcover, 2006). Come to think of it, anyone who works for a mutual fund company or hedge fund ought to read it, too.
In fact, independent registered investment advisors (RIAs) will want to read this book, if only as ammo to steal business from rivals at Wall Street firms. (RIAs might buy Wall Street Versus America by the load to send to clients, with the inscription: You won't have any of these problems with me — I'm a fiduciary.)
Gary Weiss, the former BusinessWeek reporter who wrote the book, has little positive to say about Wall Street or the investment industry in general.
Summed up, Weiss — who developed a nose for scandal while at BusinessWeek, covering micro-cap fraud and Salomon Brothers' manipulation of Treasury securities — argues in his book that Wall Street is, by design, stacked against the individual investor. (By the way, Weiss says the financial press goes along for the ride, hyping deals and dealmakers alike instead of judiciously examining the facts.) As Weiss sees it, the regulatory bodies don't do a good job of policing the Street, which sells overpriced, mediocre (at best) products to the clueless masses — who sign away their legal right to sue when opening brokerage accounts. Recently, Registered Rep. Editor David A. Geracioti talked with Weiss about the financial-services industry.
Registered Rep.: Gary, your book, Wall Street Versus America, is a pretty stinging indictment of Wall Street. You describe it as a greedy, manipulative marketplace policed by ineffective self-regulatory and governmental bodies. Summarize for us. What's wrong with Wall Street? Does our reader, the retail registered rep, have a problem?
Gary Weiss: I think he has several possible problems. One problem is fundamental. In the book I describe how entire segments of Wall Street really have no justification for existing from the investor's standpoint. Actively managed funds, for example, chronically underperform versus the stock averages. This didn't start happening yesterday. It's something that's been happening for quite a while, and I describe the history of that. So, to the extent that a registered rep is selling actively managed funds, in my view, he has a problem. The same thing with hedge funds, which are also actively marketed to retail investors and which, in my view, are problematic.
Another potential problem the brokerage community faces is all those rotten apples in the barrel — that there's so many scams of various kinds targeting investors. This generally — but not exclusively — involves small- and micro-cap stocks. This is a problem the industry needs to confront.
On top of all that is the growing misinformation that is being fed to investors on the whole issue of short-selling. You know that the reason their stocks are declining is because of some kind of conspiracy involving short-selling, and not because the companies are poorly managed. Retail brokers have to stay on top of that myth, which is increasingly influencing investors.
RR: You say pretty flatly that investors should not own individual stocks.
GW: Yes, that's right. To my way of thinking, and it's been proven to my satisfaction, you're just better off indexing. It's not as much fun. But, over the long term, they are better off. That wasn't, by the way, my thesis when I began researching this book. I initially thought, well, perhaps there are good stockpicking techniques out there that are not available to small investors. Perhaps I was a little bit enthralled with hedge funds when I started researching this book.
But then as I did the research, I found that there is just a great volume of data out there [that shows] that investors are just really better off — for the bulk of them, the bulk of their portfolios, they're better off just going with the index funds or ETFs that replicate the market. You know, it's really greed, a desire to beat the market, where investors get hung up.
RR: I thought your chapter on hedge funds overstated your case. I mean, I think you're arguing that investing legends George Soros and Julian Robertson and Michael Steinhardt aren't as good as they appear, that they, in fact, stink.
GW: It's not that they stink. Obviously Soros didn't stink. Julian Robertson and Steinhardt didn't stink in their overall long-term performance. There's no question that there are certain investors out there who've done quite well. I think the problem is that you can't really predict who they are going to be. You didn't know that Julian Robertson was to become Julian Robertson when he had just left Kidder Peabody and started his fund. You didn't know that George Soros was going to be George Soros when he started his fund. But by the time you know that George Soros is, in fact, George Soros, by the time you knew that Julian Robertson is Julian Robertson, at that point they were reaching their crescendo and guys like me were hyping Julian Robertson and Soros.
RR: Guys like me. By that you mean the press?
GW: Yes, the financial press. I wrote about what a great investor Robertson was back in 1990. Actually, he did fairly well for a certain period of time. But he got tons of money — for example DLJ raised money for this big fund, Ocelot, I think it was. People went into that Ocelot Fund and regretted it when his performance tanked. They couldn't get out and that was about the time, in the late 1990s, that Robertson's assets were peaking. His performance turned sour and he liquidated the funds in 2000. No question that there are managers, Steinhardt is another example, who, over time, if you look at their long-term record, including their bad times, did very well. It's just that those long-term numbers, overall, are pretty meaningless from the investors' standpoint in terms of making investing decisions. There is a problem in the predictability and the consistency of any given fund.
RR: In your book, you say that when something works, Wall Street starts minting it, literally, and rolling it off the truck and selling it by the load. Right?
GW: Sure. That's the way the compensation scheme works. House products, mutual funds and hedge funds sponsored by the brokerages are notorious examples of that. Brokers are expected to pitch what the house manufactures and, hey, if I were running a brokerage, I would probably feel that way, too. But customers are simply better off with products like ETFs and index funds that aren't rolling off the trucks and aren't big sources of income for brokers or their employers.
RR: Let's talk about one thing that really affects our readership: arbitration. Tell us about what the problem with arbitration is.
GW: Well, I think the main problem with arbitration is that investors don't have a choice. They sign a brokerage account form and they give up their right to sue in court. I think that should be voluntary. I think that if investors want to go to arbitration, they should have that ability to do so. Or if they want to agree in advance to arbitration, they can have that ability to agree in advance to go into arbitration. I think it should be up to the investor. I don't think it should be imposed upon the investor. I think that's the first problem.
The second problem that I have with the arbitration system is that it's different from ordinary arbitration. It's different from the American Arbitration Association's version of arbitration. It's different from the type of arbitration that you have, the binding arbitration that you can very frequently use in resolving court cases. There's nothing wrong with that [kind of arbitration]. It's voluntary. You can voluntarily go into it. But the problem is that the securities industry's version of arbitration is different from AAA arbitration. Certainly anecdotally, and in my own research, I found that it does tend to be biased against the investor.
RR: But they win half the time.
GW: Yeah, but you don't know what investors get when the SROs say they “win.” They don't “win” half the time. They get money half the time. Statistics don't show, and they won't release, how much money investors actually get. You can get $1, you can get 30 percent of what you're asking, and that counts as a win.
RR: Do you think brokers like it? Do firms like it?
GW: I assume the industry likes it because the industry fights like the devil whenever efforts are made to change the arbitration system. Individual brokers that I've known for years dislike arbitration when it goes against them. I know some brokers that have told me arbitration is biased against the brokers and that brokers are sometimes scapegoats for their firms and bad investor decisions. In compensation disputes, when it's the broker versus the industry, the broker is stuck.