Mother MERrill's Research

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Nov 24, 2006 7:32 pm

story in this week's issue of Wall Street Letter. Good read for MERrill brokers who actually do a little stock trading for their clients once in a while.

Nov 25, 2006 12:53 am

There was another story about it in Bloomberg mag.  No good if you're doing academic account management.  They're trying to make short term bucks.  But what does a 33~ish % track record mean?  Does it mean they're making money 33% of the time or they're not losing money 33% of the time?  Doesn't seem like a track record to brag about.


Ace

Nov 25, 2006 2:13 am

I missed that one, thanks, will check it out.


Most wirehouse brokers don't care about on the money research since they're into peddling mutual funds and/or variable annuities anyway. I just thought I would point that article out to the 10% or so that actually do a little portfolio management on their own or have clients who yearn for the good old days when stock brokers were just that---stock brokers instead of mutual fund and/or variable annuities peddlers.


Nov 25, 2006 9:17 am
ymh_ymh_ymh:

Most wirehouse brokers don't care about on the money research since they're into peddling mutual funds and/or variable annuities anyway.



Got any supporting evidence for this claim?

Nov 25, 2006 9:25 am

Yes, the lack of "conversation" on this thread with respect to specific sectors, securities, and/or other "investments" which may or may not be good ones to recommend to clients.


90% of the posts on this thread are ones like this:


1. I am going to leave firm ABC. Who pays more, DEF or GHI?


2. If I leave, do I have to pay back my upfront loan?


3. I just left brokerage firm ABC and now I am being sued. Should I get an attorney?


4. How do I get more clients?


5. What's firm ABC's payout structure like compared to XYZ's?



Nov 25, 2006 11:42 am

Here's why no-one's doing transaction based business for active management:  too expensive.  If you charge 1-2% for transactions (which could be even as big as 100k) you do two trades in a year, that's 2-4%, and so on.  Not too expensive to a capitalist, but too expensive for regulators who will be quick to shout "Churning!" and then proceed to burn you at the stake even if the client is better off!


That's why everyone is using the "buy and hold" strategy and charging a percent to manage.  And if you're doing that, you might as well let someone else do it and hey, if an insurance wrapper and CDSC makes the business stickier...


Besides, is 33% on the money, and what do you lose if it isn't?


Ace

Nov 25, 2006 11:53 am

There are still some firms who do a good job (without churning) with transactional only accounts. They're not for every one, however.


They're much too expensive for medium net worth clients. I consider them to be "okay" for sophisticated HNW clients who want better than S&P 500 returns each and every year.


33% on the money is not good at all. Why one must be selective with whose SELL side research one follows. All firms have good, mediocre, and bad SELL side analysts. Carson happens to be a pretty good one.


Nov 25, 2006 12:45 pm

I have a prospective client whose broker`charged him 30K in commissions in a 300K account in a 6 month time frame. He justified it because he made 40K on top of the 30 he charged. Seems excessive to me and simply lucky he was in the black thoughts?

Nov 25, 2006 1:24 pm

Too much in commish revenues. Hedge fund clients typically pay 1-2% plus 20% off the top of gross gains.

Nov 25, 2006 1:25 pm
bankrep1:

I have a prospective client whose broker`charged him 30K in commissions in a 300K account in a 6 month time frame. He justified it because he made 40K on top of the 30 he charged. Seems excessive to me and simply lucky he was in the black thoughts?




The client made 13.3% in 6 months (before taxes.)  Most clients would love returns like that.  My guess is that the client signed something upfront stating that he wanted and expected his account to have active management and a lot of turnover.

Why do you assume that the broker was lucky?  Do you think the only way to make money in the stock market is by being lucky?

Nov 25, 2006 1:27 pm

Don't you think charging $30K for a gross before taxes gain of $40K is too much?


I do.


If your clients are interested in 15% plus per year gross gains, you should have had them smoke a little POT this year.

Nov 25, 2006 1:47 pm

Not necessarily lucky.  What do you know about the reasons behind the transactions?  13% in 6 months is ~26% annualized.  Sounds like he's doing a good job.  If he makes the client unhappy and the client contacts the regulators, he's probably screwed though.

Nov 25, 2006 1:50 pm

Most clients don't mind giving a broker 20% or so off the top of their gross gains if what's left pre-tax beats the S&P 500.


The NASD doesn't go looking for problems so if the client's happy, then the broker is doing a good job and probably has nothing to worry about.



Nov 25, 2006 5:18 pm

He was lucky because of the time period happened to be a time where the market had strong returns, had the market been flat he would of been in the negative.



I am not a stock jockey, but the large lots he is trading could go either way. To much risk, there is no strategy, trade in trade out = how is he managing risk? He's not, he is creating unneeded risk I guarantee he is going to blow this account up soon.

Nov 25, 2006 5:54 pm
bankrep1:

He was lucky because of the time period happened to be a time where the market had strong returns, had the market been flat he would of been in the negative.



I am not a stock jockey, but the large lots he is trading could go either way. To much risk, there is no strategy, trade in trade out = how is he managing risk? He's not, he is creating unneeded risk I guarantee he is going to blow this account up soon.




You assume that his trading strategies would have been the same no matter what the market was doing.  Smart traders first analyze the overall market before deciding what strategy to employ in any particular stock.  In a flat market, smart traders write options and collect premiums.

The size that the guy trades is only relevant to the size of the account.  I doubt the guy was trading much size at all, because you said the account was only $300k.  That's not even a blip on the radar screen.  In addition, there are lots of ways that traders manage risk.  Using stops, writing covered calls, and buying puts, are only a few strategies that can be employed.  By the way, there is just as much risk in buying and holding as there is in buying and selling.  In fact, once you sell and get out of a position, then you have eliminated all of the risk of that position.

Nov 25, 2006 6:03 pm
ymh_ymh_ymh:

Don't you think charging $30K for a gross before taxes gain of $40K is too much?


I do.


If your clients are interested in 15% plus per year gross gains, you should have had them smoke a little POT this year.



Personally, I don't look at what the broker made.  I look at what the client made.  In this case, the broker was required to make a lot of trades in order to achieve the gains for the client.  The client came out way ahead in the deal.

On the other hand, the broker could have chosen to hold the stocks that had gains in them, and then watched all of the gains disappear.  The broker fees would have been nothing, and the client's gains would have been nothing.

Having said that, though, I believe that all discretionary accounts, and/or actively traded accounts should be fee based only.


Nov 25, 2006 8:15 pm

No diversification, no strategy, no protective option strategies, I completely disagree that a well diversified portfolio contains the same level of risk as the above "strategy" I mentioned

Nov 25, 2006 10:15 pm
bankrep1:

No diversification, no strategy, no protective option strategies, I completely disagree that a well diversified portfolio contains the same level of risk as the above "strategy" I mentioned



Have you ever read "How to make money in Stocks" by William O'Neil?  He's the  publisher of Investor's Business Daily. His track record as a stock trader takes a back seat to no one, and he has always argued against diversification as a risk management technique.  I remember listening to him 20 years ago explain how diversification insures mediocrity.

When you say that there was no strategy employed in the account, are you saying that the broker picked stocks to buy and sell by throwing darts, or picking names out of a hat?

Nov 26, 2006 3:20 am

Well how do you think your explanation would stand up against an arbitration panel?   Kind of like a doc that prescribes herbs.... maybe it is the right thing but not in america.... Is this guy an idiot?

Nov 26, 2006 8:10 am
bankrep1:

Well how do you think your explanation would stand up against an arbitration panel?   Kind of like a doc that prescribes herbs.... maybe it is the right thing but not in america.... Is this guy an idiot?




There is a lot you haven't explained in regards to the account.  For example, did the broker have full discretion, or did the client call in the orders to the broker, or did the broker call the client prior to each trading  decision?  What investment/trading objectives did the client give to the broker when he opened the account?  How old is the client?  How much experience does the client have in trading the market?  etc., etc.