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