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Michael Martin

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A Backstage Pass to a Show You Wouldn't Believe

Posted: 04/20/2012 9:11 am

If you want an honest and painfully truthful story memoir about what happens inside the branch of a typical stock brokerage firm, you must read the new book by Josh Brown titled, Backstage Wall Street: An Insider's Guide To Knowing Who To Trust, Who To Run From, and How To Maximize Your Investments.

I got my own start on Wall St. in the early 1990s so I found myself nodding along to much of the book in which Josh discusses his journey from rookie to broker to Co-Branch Manager. Our experiences were very much parallel.

Brown is now perched at his current role at FusionIQ, the research and investment advisory firm founded by Kevin Lane and whose CEO is the ubiquitous and insightful Barry Ritholtz.

Josh and I spoke last week about the book and the investing process in general. Here's a sample of how the conversation went:

Michael Martin: The compensation system and the investment selection processes on Wall St. are based upon bullying. The Branch Office Manager bullies the Sales Manager. The Sales Manager bullies the brokers. And the brokers basically bully the unsuspecting investors into shlock they don't need.

Josh Brown: It's disgusting. It's the worst system and it brings out the worst in everyone involved.

Some brokers get there hands on a sort of black market bible in the form of a flipbook known as the Lehman Method, which Josh includes in its entirety in the book. Named after the failed firm of the same name, the flipbook is literally a handy script that brokers use to overcome every possible objection that a potential client can come up with for not taking immediate action.

Objections like "Send me some more information," "Let me talk it over with my wife," and "I'm not liquid right now" were speedbumps that brokers edified on the Lehman Method could race over to get the client to commit.

Repeat these lines enough times, and they become second nature like you had studied a film script.

Imagine an army greater than 10,000 strong reciting this garbage? What does it have to do with making money? Nothing. Now imagine all the asshats quoting movies such as Boiler Room Wall St., thinking they're almost Wall St. players with their headsets on, reeling off these lines to the unsuspecting like they invented them.

The uplifting part for both Josh Brown and myself came from leaving this environment -- pulling ourselves out of the cancer.

Despite a flaccid rule making board at the SEC and CFTC who mostly seem a day late and $1.2 billion short, too many investors are getting ripped off before anything is done or anyone is caught.

Despite the lack of a proactive regulatory environment, investment advisors can deploy a fiduciary standard that I live by, and that is "Treat your clients' money like a newborn child."

Some of these sales practices are the same techniques used to commit financial fraud.

How To Avoid a Ponzi Scheme

The bullying on Wall St. starts with the Branch Office Manager (BOM), who earns the majority of his or her keep from the net income of the branch. The BOM makes sure that the Sales Manager (SM) knows his job is on the line with each passing calendar quarter. The Sales Manager is the troll who demeans people and like to undress them in front of their peers, seemingly to humiliate them. At least that's the way mine treated everyone.

He was probably the worst person I've ever met in business. Some of us had fantasies about what we wanted to do to him if we ever caught up with him, but the result was likely jail time at USP Leavenworth.

Anyway, the Sales Manager's goals is to get the brokers to achieve results in each of three criteria, all based upon one's ability to market. They are the Three Laws of Retail Production:

  • The Amount of New Accounts Opened
  • Net New Assets deposited into the Branch
  • Gross Commissions and Fees


Never once was there a discussion on:

  • Account Profitability
  • Risk Management
  • Minimizing Drawdowns


As Josh delineates in Backstage Wall St, there was some basic training in asset allocation in order to make sure that the accounts were diversified, but asset allocation is about risk reduction, not risk management.

There are thousands of brokers who want to serve the client in a reputable and honest manner, but they end up running into a wall of resistance to do what's best for the client. Since they continually have to deal with the troll Sales Manager, the next person to take it on the chin is the client. The broker is under such a great deal of duress to produce (generate commissions and fees) that it is easy to understand why and how they learn to look the other way or cut corners.

Backstage Wall Street is Brown's memoir/tell-all of what it was like to live this life until his conscious took over and could not take it any longer.

Brokers' Paradox

Everyone whose job it is to win, place and show in The Three Laws of Retail Production has a goal: to get a private office. Do enough fees and commissions and raise enough assets and you'll get your own private office in three to five years. Your self-esteem will sky rocket. Your parents will be proud.

Earn your clients 12 percent per annum with only a 4 percent drawdown over that same period of time, but don't grow your client list or asset base according to the Three Laws above, and you'll be lambasted, ridiculed and left in the boiler room for what could be years.

Who do you serve?

My sales manager did provide me with one great piece of advice after I'd been in the business for about two years and change. "Be the broker you want to be in 10 years, today." I did exactly that. I quit the next year to start my own firm.

Josh also runs a great blog worth following called, no doubt, The Reformed Broker.

He is active on Twitter with the Twitter handle @ReformedBroker.

 
 
 

Follow Michael Martin on Twitter: www.twitter.com/martin_kronicle

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