Why Wall Street is and Always Will be a Sales Organization - Part 1
Wall Street is and always will be a sales organization.
I always like to get back to basics when a New Year begins. It's a good way to refocus your attention and energy. And if you're investing money, one of the basics you must understand is that Wall Street is a sales organization.
Years ago I learned that Wall Street is a sales organization. This means, simply, that Wall Street firms' primary focus is to sell something - anything.
If you didn't know that, or if you're not sure what I mean, just read that sentence again, pause and think, and take it at face value. It's not complicated. I mean exactly what I say.
So whatever else Wall Street firms claim they do - providing investment and general financial advice for example, is subordinated to the sales function. Let's look at a recent trend in how Wall Street makes money to understand this better.
Starting about 15 years ago, Wall Street firms - specifically the "wire houses" - began to promote the idea that, instead of charging commissions, clients should pay fees based upon the amount of assets that the firm "managed." (Examples of "wire houses": Merrill Lynch, Morgan Stanley, UBS, etc.) This idea seemed more fair to the clients.
Instead of the "old" model of brokers hawking stocks and earning commissions, they would promote a new model. A breed of "financial professionals" - now known as "financial advisers" - would gather client assets and provide "professional" investment and other types of financial advice to their clients. Their compensation would not be based upon the number of transactions they executed. Under this new model of providing "advice" they would be compensated based upon a percentage of the assets the clients committed to the wire house.
Remember that these individuals working for wire houses are employees of those firms. Specifically, their role is the role of salesman. As sales employees they are evaluated on how much revenue they generate for the firm. So now, under the new model, instead of generating lots of transactions to generate revenue, their primary focus would shift to "gathering assets." Since fees would be levied under these "assets under management," the more assets you gather, the more revenue you generate not only for yourself, but for the firm. (As you might imagine, these sales employees share the revenue with their employer.)
At first, there was resistance to the new model. This resistance was based primarily on the simple fact that many brokers knew one way of doing business - trading to generate commissions. It took time to educate the older brokers in the new model. The firms "sold" this new model to their brokers by explaining that they would be part of a new breed of "advisers." This new breed would be "on the client's side," whereas many of the old-style brokers were perceived to be looking out for themselves and not holding the clients' interests above their own. Meanwhile, the wire houses trained new employees in the new way of doing business. Some of the oldsters who couldn't adjust left the wire houses, or were pushed out. The new employees were expected to toe the line and "gather assets."
Does this new model puts the advisor on the client's side? Well, if you provide investment advice that results in the client's account increasing in value, not only the client, but the adviser would make more money. If they provided advice that resulted in the client's account losing money, the adviser would make less money. So their interests were aligned.
Somehow it sounded pretty reasonable to most people. Wall Street had convinced the investing public that they were on their side - at least much of the investing public. Today, many people believe that their advisor has their best interests at heart simply because the advisor charges a fee based on a percentage of assets under management.
But while the model itself appeared to put the advisor - and the firm - on the client's side, appearance isn't always the best way to judge reality. Next time we'll look at how the model really works and to whose advantage.
I always like to get back to basics when a New Year begins. It's a good way to refocus your attention and energy. And if you're investing money, one of the basics you must understand is that Wall Street is a sales organization.
Years ago I learned that Wall Street is a sales organization. This means, simply, that Wall Street firms' primary focus is to sell something - anything.
If you didn't know that, or if you're not sure what I mean, just read that sentence again, pause and think, and take it at face value. It's not complicated. I mean exactly what I say.
So whatever else Wall Street firms claim they do - providing investment and general financial advice for example, is subordinated to the sales function. Let's look at a recent trend in how Wall Street makes money to understand this better.
Starting about 15 years ago, Wall Street firms - specifically the "wire houses" - began to promote the idea that, instead of charging commissions, clients should pay fees based upon the amount of assets that the firm "managed." (Examples of "wire houses": Merrill Lynch, Morgan Stanley, UBS, etc.) This idea seemed more fair to the clients.
Instead of the "old" model of brokers hawking stocks and earning commissions, they would promote a new model. A breed of "financial professionals" - now known as "financial advisers" - would gather client assets and provide "professional" investment and other types of financial advice to their clients. Their compensation would not be based upon the number of transactions they executed. Under this new model of providing "advice" they would be compensated based upon a percentage of the assets the clients committed to the wire house.
Remember that these individuals working for wire houses are employees of those firms. Specifically, their role is the role of salesman. As sales employees they are evaluated on how much revenue they generate for the firm. So now, under the new model, instead of generating lots of transactions to generate revenue, their primary focus would shift to "gathering assets." Since fees would be levied under these "assets under management," the more assets you gather, the more revenue you generate not only for yourself, but for the firm. (As you might imagine, these sales employees share the revenue with their employer.)
At first, there was resistance to the new model. This resistance was based primarily on the simple fact that many brokers knew one way of doing business - trading to generate commissions. It took time to educate the older brokers in the new model. The firms "sold" this new model to their brokers by explaining that they would be part of a new breed of "advisers." This new breed would be "on the client's side," whereas many of the old-style brokers were perceived to be looking out for themselves and not holding the clients' interests above their own. Meanwhile, the wire houses trained new employees in the new way of doing business. Some of the oldsters who couldn't adjust left the wire houses, or were pushed out. The new employees were expected to toe the line and "gather assets."
Does this new model puts the advisor on the client's side? Well, if you provide investment advice that results in the client's account increasing in value, not only the client, but the adviser would make more money. If they provided advice that resulted in the client's account losing money, the adviser would make less money. So their interests were aligned.
Somehow it sounded pretty reasonable to most people. Wall Street had convinced the investing public that they were on their side - at least much of the investing public. Today, many people believe that their advisor has their best interests at heart simply because the advisor charges a fee based on a percentage of assets under management.
But while the model itself appeared to put the advisor - and the firm - on the client's side, appearance isn't always the best way to judge reality. Next time we'll look at how the model really works and to whose advantage.
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