Spitzer, where is the happy median?

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Dec 12, 2006 7:42 pm

First we get sued for churning, now we're getting sued for reverse churning. I especially love to hear about the "91 year-old" client who is be taken by a broker.

I remember getting written up for low turnover in my InsightOne accounts. I balked because we were in the midst of bear market decline and clients preferred holding higher-than-normal levels of cash.

I don't think Spitzer has that strong a case. Thoughts?

Dec 12, 2006 7:47 pm

Got Link?


Mr. A

Dec 12, 2006 8:06 pm

Spitzer going out with a bang....UBS is "puzzled"....


http://biz.yahoo.com/ap/061212/investmentfraud.html?.v=4


This site says 1,000s "raped by wraps"....


http://registeredrep.com/news/NYAG-sues-UBS/

Dec 12, 2006 8:24 pm

You might be surprised how well Spitzer does on this.  Don't forget that the Insight One accounts are "fee in lieu of commsissions".  Clients weren't paying for ADVICE they were paying for EXECUTION OF TRADES.  And there were plenty of advisors who buried their clients in I-One and didn't do a darn thing for 'em after that.

Dec 12, 2006 9:15 pm

I did the fee based idea at SB (Asset One) for active traders and guess what? They became much less active traders! And guess what else? Their acounts underperformed actively traded accounts, by a lot!


That's why I decided to eliminate all of those accounts soon thereafter. Even though for the vast majority, they were still saving money versus commissions.


He may win. But what I would like for people to see is that the wirehouse is a car factory the wirehorse is a car salesman. If it weren't for the fact that the car companies keep coming out with new cars, and salesmen weren't servicing the desires of their customers, nobody would buy a new car until the old one died. Wirehouses reinvent the ways for you (clients) to be parted with your money. Fee based accounts, Asset Backed Securities, Scores and Primes, Managed Futures, Limited Partnerships, Closed End Funds, UITs, Rolling UITs... the list is endless, current favs include Managed Money and its unsavory cousin Hedge Fund. (Be sure that the fees will be cut on Managed Money by the end of next year! The max you'll be allowed to charge will be 1% for Equity and .75% for FI.) The factory puts out the product. The car company puts out the new model. The consumer ought to know by now not to by the first few model years of a car (except if you are a collector) it'll take a few years to work out the bugs. Same with Wirestreet, but by the time they work out the fleas, it may turn out there is no dog left!


Brokers are supposed to know this too, and no matter how many times the branch manager gets up in the meeting and says "FMA's Asset One and Online Access!" you are supposed to know what is worst for your clients, and not do it! (you cannot know what is best)


Mr. A 



Dec 13, 2006 4:45 am

http://www.nypost.com (business)---more on the Spitzer suit to include rumors of new probes at other wirehouses.


Also, see John Churchill's piece posted after the close:


http://www.registeredrep.com



Dec 13, 2006 7:57 am
mranonymous2u:

I did the fee based idea at SB (Asset One) for active traders and guess what? They became much less active traders! And guess what else? Their acounts underperformed actively traded accounts, by a lot!


Why/how would trading acounts become less active once the commissions were gone? Was it because, since there were no commissions to be had, you stopped calling?

Dec 13, 2006 10:26 am

Dont you realize that you are supposed to tell your clients they can get it cheaper trades  at ameritrade or if you recommend a fund you must first tell them that the vangaurd  fund are a cheaper alternative or maybe an ETF at ameritrade. I have an account here that has been in a fee based account  for years that is now a discretionary account and they are telling me i did not trade enough. the performace report shows I was equal with the market and much more tax efficient than a fund would gave been. This world is crazy


Why doesnt spitzer go after life insurance or the mortage business. Or better yet...the lawyers.

Dec 13, 2006 10:44 am

Or better yet (dare I say it?) politicians!



The root problem, as I see it, is that leeches like Spitzer wanted to make

political hay out of something for their own aggrandizement, so they made

fees and costs more important than profit, at least in the mind of the public.

The result? A trade is a bad idea if there's a commission involved. Paying a

fee is a bad idea if there's no trading going on, even if the prudent course at

the moment is accumulating cash for a correction. Clients are not

responsible for their own follies.



Imagine how much fun Spitzer will be when he starts his run for the White

House.

Dec 13, 2006 10:51 am
aldo63:

Dont you realize that you are supposed to tell your clients they can get it cheaper trades  at ameritrade or if you recommend a fund you must first tell them that the vangaurd  fund are a cheaper alternative or maybe an ETF at ameritrade. I have an account here that has been in a fee based account  for years that is now a discretionary account and they are telling me i did not trade enough. the performace report shows I was equal with the market and much more tax efficient than a fund would gave been. This world is crazy


Why doesnt spitzer go after life insurance or the mortage business. Or better yet...the lawyers.



He won't dare go after lawyers...that's his own kind...

Dec 13, 2006 11:39 am

Politicians are like some of our cilents, they ask about the fees because that is all they know to ask about.  They think (like some compliance departments) that cheaper fees MUST mean a better investment. 


I have a client who lives in Arkansas who wanted me to open a 529 for their new child.  After looking into it, I found Arkansas has NO advisor-sold 529! (Please correct me if I'm wrong)  So, I told her that she could open another state's 529, but would miss out on the tax deduction. So, I showed her the website to open it herself.  I haven't talked with her since then, but I would bet $10 she has not opened it yet.


That begs the question, did the Arkansas government save her an upfront load, or cost her kid money for college?  I believe it's the latter.

Dec 13, 2006 12:01 pm

Mike,


Interestingly enough, in most cases I spoke with the clients just as often as before (keep in mind that these were my favored clients that I had put into these accounts, I remember one client asking me "What? Are you crazy? Why would you opt to charge me less for the work that you do?"), but I opted to hold positions longer (which turned out to be a bad idea in that the market was swooning). When I discovered this flaw in the system I closed out the fee based accounts.


We all make mistakes, it's what we do when the mistake is made that makes a difference. I saw the problem and I didn't "Stay the course."


From this point on I invoke my 5th amendment right not to incriminate myself.


Mr. A


Dec 13, 2006 12:07 pm
mranonymous2u:

.....but I opted to hold positions longer (which turned out to be a bad idea in that the market was swooning). When I discovered this flaw in the system I closed out the fee based accounts.


I'm still trying to understand how how you're paid (commissions or a flat fee) changed what you were doing in the accounts and how they could have possibly underperformed commission accounts if you were doing the same things in all of them.

Dec 13, 2006 3:07 pm

Where did I say that I was doing the same thing in both accounts? Indeed, you cited the very passage that states that I opted to hold positions.


Further, I could make more money on a position by holding it and getting some percentage (I forget how much I was charging) than I could have if I had sold it in a non fee account (say the position was worth $25,000 and I was charging 2% management fee = $500/year to hold, vs. a $400 commission if I sold it in a regular account). As such I had a vested interest in holding the position, just as I had a vested interest in selling the security outside the fee based account.


One must do what one thinks is best for the client, but one must always be suspicious of one's own motives too. I was suspicious of my motivations as a commissioned salesperson. What I found through this experience was that, even given my motivation to buy and sell with an eye towards the income such activity generated, my clients were net net better off as compared to when I operated inside the fee based paradigm. When this became clear, I discontinued the fee based paradigm. If I had found that the fee based paradigm had out performed the commission, I'd have moved in that direction.


It might well work for others, it didn't work for me.


Mr. A (and now you know why)

Dec 13, 2006 3:10 pm

What ever happend to all that money Spitzer collected from Wall Street firms from fines?  Hmm, I didn't get anything back and I owned mutual funds including Putnam in my 401k.  Did they just forget about me?  This guy is as bad in my opinion as the crooks he is going after.  Nothing but a future political hack looking to build his credentials.  I don't think he cares a lick about mom and pop investor.   I'm sure he will be getting plenty of contributions to his future campaign from good ol' Sandy Weil.  Why didn't he go after him?   


Dec 13, 2006 3:37 pm
mranonymous2u:

Where did I say that I was doing the same thing in both accounts? Indeed, you cited the very passage that states that I opted to hold positions.


Then why were you doing different things in commission versus flat fee accounts, and then comparing performance of the two?


mranonymous2u:

Further, I could make more money on a position by holding it and getting some percentage (I forget how much I was charging) than I could have if I had sold it in a non fee account (say the position was worth $25,000 and I was charging 2% management fee = $500/year to hold, vs. a $400 commission if I sold it in a regular account). As such I had a vested interest in holding the position, just as I had a vested interest in selling the security outside the fee based account.


Perhaps it's just me, but the above doesn't make any sense. In the case of a flat-fee account you're going to make that $500 if you hold (although your compliance dept will eventually make you close a flat-fee account where there aren't any tranactions) or if you turn it over at 300%. There's no "vested interest to hold" in a flat-fee account.


It sounds like you're saying your clients did better in the commission account by accident because your trades motivated only by commission creation worked out better somehow...


mranonymous2u:

One must do what one thinks is best for the client, but one must always be suspicious of one's own motives too. I was suspicious of my motivations as a commissioned salesperson. What I found through this experience was that, even given my motivation to buy and sell with an eye towards the income such activity generated, my clients were net net better off as compared to when I operated inside the fee based paradigm. When this became clear, I discontinued the fee based paradigm. If I had found that the fee based paradigm had out performed the commission, I'd have moved in that direction.


It just seems to me you should have been making buy/sell recommendations the same whether the account is flat-fee or commission. I just can't see a reason why the performance would differ, unless you didn't conduct some tranactions you otherwise would have in a commission account because there was no possible income to be created for you, since the flat-fee account paid you the same regardles..

Dec 13, 2006 3:39 pm

I thought he whacked Sandy pretty hard. Did I miss something?


Mr. A

Dec 13, 2006 3:53 pm

Mike,


What's it to you?


I don't really give a flying fandango what it seems to you as. I told you how it went.


You are reading what you want it to say, I don't agree with your interpretation but I don't see any reason for me to explain myself any  better.


You assume that because I held a stock means that I did nothing in the account. You assume that because I admit that I am motivated by a desire to make money that this is my only motivation. Neither of these assumptions are valid.


You're assuming that the compliance dept was going to force me do do something... what Spitzer is saying is that compliance departments didn't do (indeed, by the time compliance was saying "boo" about these accounts, I was already on the downward slope in their regard).


"...since the flat-fee account paid you the same regardles.." Not true, it's not a flat fee, it's a percentage fee. Perhaps that's why you don't know/can't see.


Mr. A

Dec 13, 2006 4:39 pm

mranonymous2u:

<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />


Mike,


What's it to you?


I don't really give a flying fandango what it seems to you as. I told you how it went.


Just pointing out your story made little sense and asking for clarification.


 

mranonymous2u:

 You assume that because I held a stock means that I did nothing in the account.



I don’t recall saying that.



mranonymous2u:

You're assuming that the compliance dept was going to force me do do something...



Good point, my mistake. I assumed your compliance department would do what mine would/does.



mranonymous2u:

"...since the flat-fee account paid you the same regardles.." Not true, it's not a flat fee, it's a percentage fee. Perhaps that's why you don't know/can't see.


 


That too is a good point, it’s percentage fee based on the account size.


 


They’re often referred to as a “flat-fee” account versus commission account. The point still stands, however, the fee account paid you the same whether you traded in it or not, thus there’s no “vested interest in holding a position” as you said there was.


Dec 13, 2006 6:14 pm
Starka:

The root problem, as I see it, is that leeches like Spitzer wanted to make
political hay out of something for their own aggrandizement, so they made
fees and costs more important than profit, at least in the mind of the public.

The result? A trade is a bad idea if there's a commission involved. Paying a
fee is a bad idea if there's no trading going on, even if the prudent course at
the moment is accumulating cash for a correction. Clients are not
responsible for their own follies.



My sentiments exactly. Spitzer's only motivation is self-promotion. In January he'll be sworn in as NY's Governor and won't see this lawsuit through. Frankly, I don't see a strong case. Here's why:

UBS has a strong internal review process in place to flag inactivity, high cash positions, big losses or excessive day trading. In my experience noted earlier, a letter was automatically mailed to clients of flagged accounts from HQ with copies to me and my BOM.

In my opinion, I should have been able to address the issue with management as to client suitability, preference or supporting  documentation.  I felt it was wrong to send a mixed message to clients: one day we recommend a fee-based account and the next day its not the best program we offer.

Like someone else said, Spitzer has never put any money into my pocket or my clients after all the multi-million suits and settlements, on the contrary.