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The World According to Grove

09/05/2009 05:12 am ET | Updated May 25, 2011

My name is Grove O'Rourke, and I'm a stockbroker with Sachs, Kidder, and Carnegie. You can learn more about me in Norb Vonnegut's novel, Top Producer, which is available September 2009. Today, I'm blogging for Acrimoney and standing in for Norb. He just finished the first draft of his second novel and is taking a break.

Okay, enough with the commercial. Let's get down to business. Norb knows plenty about wealth management. But as a fictional character, I'm close to perfect. I take care of my clients, and things work out for us -- even when there are white knuckles along the way. So let's discuss something that bugs me:

Why do members of the Supreme Court command more respect than stockbrokers?

I know the numbers. There are nine Supreme Court justices. There are over 300 stockbrokers at Sachs, Kidder, and Stanley. And at firms like Morgan Stanley or Bank of America -- forget about it. There are over 10,000 financial advisers in each of those organizations. Supreme Court justices, by comparison, are a rare and unique species.

But we manage your money.

I don't care if there are over one million financial advisers worldwide. You can't spend a Supreme Court decision prohibiting four-letter words on the radio. Know what I mean? Investors, it seems to me, should revere their financial advisers.

Yeah, right.

If I introduce myself as a "stockbroker" at a cocktail party, people look at their watches and say, "I'm late for a drive-through root canal." Call it angst or fear of the sales pitch. Financial advisers--my band of merry brothers and sisters--rank lower on the food chain than snails. Our lowly social standing was sealed long before the market meltdown of 2008.

But we manage your money.

The problem, I think, lies with compensation. Nobody has figured out the perfect way to charge for wealth management. Our system is rife with conflicts of interest. And I'll be the first to admit, there are some who abuse the system and give financial advisers a bad name.

Take commissions. They create incentives to buy and sell, even when trading is not in the best interest of clients. That's why I eliminated commissions from my practice. Clients pay me an annual fee for investment advice. There are no conflicts of interest.

Not so fast.

Fees have their own conflicts. I charge more for managing stocks than bonds. And I charge more for managing bonds than "cash" or money market funds. Equities, the holy grail of long-term investors, are far more profitable for Wall Street than bonds or cash.

Let's return to January 2008, when as a fictional character with perfect market timing, I advised clients to sell stocks and put everything in cash. I'm a hero. We missed the big crash of 2008. Everybody's happy.

Not.

Sachs, Kidder, and Carnegie is livid. Equities carry annual fees of about 1 percent. Cash management fees vary widely, but let's use .25 percent as our average. When I advised clients to go all cash, my firm took a 75 percent pay cut. By comparison, the Dow fell about 40 percent during 2008.

See the conflict?

Balanced accounts attempt to fix the problem. They charge the same fee on all asset classes. These accounts are a good solution. But they're not perfect.

Nothing ever is, except in fiction.

Balanced accounts can be expensive. Assume I charged .60 percent for managing a blend of stocks, bonds, and cash. And then in January 2008, I sold all stocks and bonds. I would be managing cash for .60 percent, which is too much. Earlier, we agreed that .25 percent is a reasonable rate for managing cash.

Most likely, clients would thank me for avoiding last year's carnage. But they'd also note that .60 percent is too high a fee for managing cash. And they'd be right. We'd renegotiate the fee schedule even though we missed last year's disaster..

There are no gold medals for avoiding train wrecks.

Nor is there a "killer app" for money management fees. Nobody has cracked the code and solved the conflict-of-interest problem. Compensation creates "acrimoney" between advisers and clients, which relegates my brethren to a social rung well below the Supreme Court.

What kind of name is Learned Hand anyway?

Maybe I've missed something. I'd like to hear from financial advisers. Have you found a way to charge for your services that is unique? Have you found a way that minimizes conflicts of interest? Tell us about it.

Grove O'Rourke

August 4, 2009

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