Wall Street candor really is not some brand-new idea; it's at least 60 years old

By DAVID MOON, Moon Capital Management
June 2, 2002

In response to a rash of Wall Street scandals, a brokerage firm issued a policy statement declaring some pretty radical ideas and business practices. The company said that to win business, it must put the public's interest first. (Well, that's not so radical.) They acknowledged that many investors had been mislead by Wall Street and had a right to be skeptical. (That's a bit more radical.) The firm promised to keep its brokerage and underwriting businesses separate and eliminate the conflicts between brokers and clients. The statement said brokers would "assist their customers in getting all desired factual data; they will offer no advice as to the purchase or sale of securities or commodities' in other words, we are going to provide facts, untarnished with advice."

Sound familiar? The plan was issued by Merrill Lynch ' in 1940. It sounded eerily similar to a series of ads and policy statements issued this week by Charles Schwab. In 60 years we've returned to the point that these client-centered concepts are radical again.

Charles Schwab is buying significant advertising space, promoting Schwab as the place to go for unbiased information and no conflicts of interest. Given Wall Street's aversion to 'sell' recommendations, Schwab's plan to issue an equal number of "buy" and 'sell" recommendations is pretty radical.

The firm boasts that it has no investment banking operation to influence its investment ratings and that its brokers' compensation is not tied to trading or commissions. Schwab is promising unbiased factual information ' not hot tips. Much like the Merrill Lynch statement in 1940, Charles Schwab appears to view our current confidence crisis as an opportunity, rather than a threat.

Notice that it wasn't a government regulator that forced either firm to adopt these "radical" service ideas. The companies did what is/was in their best interests, by clearly doing what is/was in its customers' best interests.

Compared to the 1930s and 1940s, today is hardly a time of distrust. It is difficult to imagine the lack of individual trust afforded Wall Street in the 1930s and 1940s. The distrust was duly earned by both small and large Wall Street operators. The president of the New York Stock Exchange in 1929 actually went to prison for securities fraud. Even the first commissioner of the Securities and Exchange Commission (Joe Kennedy) amassed his wealth as a result of bootlegging during Prohibition and stock market shenanigans. (When criticized about Kennedy's appointment as the first market overseer, President Roosevelt explained - apparently with a straight face - that Kennedy had already made his fortune and didn't need to cheat to make money. Kennedy had also promised to stay out of the market. Besides, Kennedy knew all of the tricks of the trade and would be able to protect consumers from those tricks. Sort of like hiring a burglar to run a security system company.)

Our current "faith crisis" on Wall Street is just the latest in a long history of cyclical vacillations between unbridled greed and extreme pessimism in our investment community. And as has been the case in previous crises, the marketplace will provide the solution to the problem.

Is Charles Schwab some sort of maverick, placing the interests of its clients above that of its own? No more so than Merrill Lynch was 60 years ago. And it was precisely this sort of proaction that eventually gave the individual investor the confidence and trust to return to Wall Street. My guess is that this type of market action will solve this problem again.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

Add me to your commentary distribution list.

MCM website