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Boiler Room, now playing in a multiplex near you, does a great job of exposing the greed and the callous attitude toward clients that often prevails in brokerages. It's not a pretty picture.
The movie paints a vivid portrait of the kind of pressure and rewards that go with a career as a stock broker in a boiler room, a brokerage that operates on the fringes of the law. A lot of it rang true. In some ways, though it wasn't true enough. In the end, the bad guys are busted because they are selling stock for companies that don't exist. But that's not the only way that stockbrokers can get rich at their client's expense. Boiler Room does an excellent job of portraying the attitudes of the brokers and the emotional devastation they can wreak, but by making the situation so extreme, it might leave the impression that big time brokerages on "Wall Street" are immune to conflicts of interest.
(One amusing thing about the movie is that it makes a big point of how far the brokerage actually is from Wall Street -- it's a whole hour east of Manhattan, way out on Long Island. Brokers in San Francisco must be the devil incarnate.)
A new book, License to Steal, by Anonymous with Timothy Harper, tells a very similar story, but this time it is supposedly based on the real life experience of a broker. Unfortunately, but for understandable reasons, the author has remained anonymous. This time the story takes place in a major brokerage as well as in a small "boutique" brokerage. While the small rogue brokerage eventually comes to SEC grief, the practices at the respectable one are hardly reassuring.
In many ways, Boiler Room bears a striking resemblance to License to Steal. The central truth in both of them is not that there are crooked brokerages. That's too easy, too comfortable. What we need to take home as the moral of the stories is that there is a basic problem in the structure of the brokerage/broker/client relationship.
Anytime the interests of a broker is different from the interest of his clients, you have a strong potential for problems. And anytime you have a bunch of adrenaline-charged young males in competition, you will get excesses. Hey, I have nothing against young males. I have one at home of whom I am inordinately fond, and I work with and know many who are highly ethical. And my own personal experience with a pump and dump broker was with a middle-aged woman. But let's not kid ourselves. You get a bunch of young guys fired up with lust (for money, or whatever), set into competition with each other and primal drives can take over. Recruiters know this and make the most of it. Just how far a company is willing to let those primal drives go is where the rub lies. Many sales organizations are willing to let it go just as far as they think they can -- without getting caught.
In the classic Liar's Poker, Michael Lewis tells the same story, only this time it's the bond market. The name of the game is to sell, sell, sell. It hasn't changed. In fact, you can go back to the early days of Wall Street and see exactly the same mentality. For a humorous look at Wall Street in the '20s and '30s, see Where are the Customer's Yachts? by posthumous Fool, Fred Schwed.
OK, enough Broker Bashing. I want to be clear here. It would be totally unfair to tar all brokers with the same brush. Most are honest, some are even honorable. The problem is, I don't know how you tell which is which. The very best sales persons are honest, sincere, caring, and competent... or seem to be.
A good broker counts on repeat business from his customers and that is a powerful motivation. If you've found one that operates that way, wonderful. But that isn't enough when the pressure is on to sell, sell, sell. A sales person doesn't have to lie to make a sale that isn't in his client's best interest. He doesn't have to break the law. He just has to convince you that another stock is a better deal than what you already have -- and be wrong about that. Most sales persons convince themselves that they are acting in their client's best interests. In fact, most sales organizations spend a lot of time selling their own people on the value that they are providing for their clients. And some brokers do provide very valuable services. There's no doubt in my mind about that. But the fact remains that investors are more likely to make money buy buying good stocks and holding them for a long time -- and brokers can only make money when stocks are bought and sold.
A number of brokers read this column. I know because I hear from them every time this subject comes up. Guys (or gals), it's simple. If the shoe doesn't fit, don't wear it. Some of you are great. If you are unhappy because your profession is being attacked, then work to clean up the profession or work to change the regulations that support this sorry state of affairs.
Fool on and prosper!