There is a financial services industry facade that has been built on the premise of precision, an artifice that's been decades in the making and billions of dollars in the marketing. The implication of this perpetual campaign is that "there's a right way to invest and only we are privy to its mechanics, we'll take it from here."
~ Joshua Brown
Backstage Wall Street is a new book by Josh Brown. Released earlier this year, it chronicles the evolution or more appropriately, the devolution of the financial services industry over the past few decades as well as his own journey from the brokerage world to his current gig as a reformed broker and investment advisor for Fusion Analytics.
As he pulls back the curtain on Wall Street's back rooms, you get the feeling you've won VIP passes to a pro locker room. The testosterone is as palpable as the author's disdain for the traditional sell-side analyst/brokerage culture.
Time for Wall Street 2.0?
Backstage Wall Street is at once eloquent and irreverent. Josh pulls no punches, laying waste to many of the most-cherished pillars (clichés?) of the investment industry. He unapologetically explains:
brokers "are not engaged in any kind of money management; nothing they do is helpful to anyone"
"investing precision itself is a fallacy, and those who make forecasts with certainty are doomed."
"brokers have no business making investment decisions for anyone"
"a victory justifies all manner of fees and a loss is the market's fault"
"There are many vestigial organs and appendages on Wall Street, but the most hilarious ones are the massive sell-side research departments of the brokerage firms."
"as history has shown time and again, Wall Street getting creative is almost never a good thing."
"We are over a decade into a bear market during which stock prices have fluctuated greatly, with little forward progress, and investors are now asking the tough questions."
Brown's Law of Brokerage Product Compensation: "The higher the commission or selling concession a broker is paid to sell a product, the worse that product will be for his or her clients."
"10 Best Days" brochures (you know - the ones that tell you that you must remain fully invested at all times or you'll miss out on untold wealth) are designed to keep you invested in order to maintain their assets under management - and the flow of fees from those assets.
Josh thinks the jig is up for the financial services industry as we know it, and the declining number of traditional brokerage firms bears that out. With the advent of low-cost investment vehicles like ETFs and ultra-low trading fees offered by online brokerages, it seems the writing is on the wall for Old Wall Street.
The Devolution of Finance
But how did we get here? Backstage Wall Street traces the path to our current malaise from the repeal of Glass-Steagall to the rise (and subsequent fall) of the mutual fund industry to the current infatuation with exchange traded funds. There are certainly benefits of offering low-cost vehicles to the average investor that mirror the major indices, especially in light of "the growing realization that active management is a farce anyway." But Josh is more than a little suspect of the proliferation of exchange traded funds as it seems we now have "a pill for every ill" and "we are, without question, over-ETF'd."
But as long as we keep buying these products... you can rest assured that people will keep making them. Why? The fund companies get paid on the level of assets under management. If the product can make it through the first 36 months, it finally get the all-important three-year track record, which could ultimately lead to real inflows.
After 2000, "the financial services sector began growing purely for the sake of growing" and it became increasingly difficult, even for sophisticated investors to understand what and how they are being charged for investments. More engineered financial products were introduced as interest rates fell and investors began to look for ways to boost their returns.
It's worth pointing out that, although Josh makes no effort to mask his distaste for the sales-driven brokerage culture, he also notes that the American investor shares some of the blame for the current state of disarray in the financial services sector. The "uniquely American" combination of "overconfidence and middling numerical savvy do not exactly align well with successful investing."
Behind the Curtain
Woven throughout the book are various conversation snippets through which the author paints a vivid picture of the sleazy scenes that play out on any given day in the life of an investment broker. If you're anything like me, you probably suspected that the underbelly of Wall Street might be kind of ugly, but sort of hoped it was an exaggeration. This book will dash those hopes.
From Josh's accounts of sell-or-else meetings, to his rather hilarious (yet sad) investment brochure translation, to his exposé on the "Straight Line Pitch," Backstage Wall Street lays bare the often-shady methods the investment industry employs to part the average investor from his money. If you've ever worked with a commission-based investment advisor, you'll recognize a lot of these lines - and it will probably make you squirm a little.
I used the masculine to refer to the average investor with intent. As Josh points out more than once, most brokers are male - as are their clients. It seems most women are impervious to the hard-sell brokerage model. "It's nearly impossible to impulse-sell securities to women, as they tend to invest more for financial security than for bragging rights, big fish tales, or naked greed like wealthy men do."
I'd be lying if I didn't tell you that reading this book made me a little uncomfortable. I found some of the attitudes and practices outlined here to be reprehensible. While Josh emphatically notes that there are some great people working in the financial services industry - those who really are interested in helping their clients' bottom line as much as their own - it's clear that some sweeping changes are needed. If the events of the past decade haven't yet convinced you of that fact, Backstage Wall Street will.
Do you think it's time for Wall Street 2.0?