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How the cinematic fall of a mighty Lehman Bros.-like brokerage is relevant to the RIA movement
November 9, 2011 — 4:49 AM UTC by Dina Hampton
“You have created the ultimate open architecture model. I don’t know if you’ve noticed, but around you an entire industry has been created ... We’re just getting started.” — Schwab’s Bernie Clark at IMPACT 2011
The RIA industry is an unlikely hybrid: a grassroots movement predicated upon a fervent belief in capitalism. In the past few years, a growing number of advisors have boldly broken away from their multibillion-dollar wirehouses, fueled by the idealistic desire to build a new model of financial advice — one without the vested conflicts of interests and layers of bureaucracy that encumbered their former employers.
But as the ancient Greek playwrights knew well, it’s the most idealistic among us, the ones most caught up in the righteousness of their own cause, who are most precariously poised for a fall.
That’s precisely why every RIA might want to take a look at Margin Call, a movie chronicling a day in the life — and perhaps death — of a venerable New York-based brokerage house, one many say is based on the now-defunct Lehman Brothers Holdings Inc.
As the film opens on a September morning in 2008, 80% of the unnamed firm’s employees are in the process of being laid off. Among those terminated is the head of risk management, a longtime company man, played by Stanley Tucci. As he’s being escorted from the building by security, he hands off a top-secret project to his protégée, a brilliant young analyst (Zachary Quinto, retaining many of his Mr. Spock-like mannerisms from the last Star Trek movie), along with this cryptic warning: “Be careful.”
Putting the pieces of the puzzle together that evening, the analyst suddenly realizes the full extent of the calamity that has befallen his firm: The worthless mortgage-backed securities on the company’s books represent a loss greater than the firm’s entire capitalization.
Enter the CEO, played with satanic suavity by Jeremy Irons. Arriving at midnight via helicopter, he delivers his credo to the hastily assembled executives: “Be smarter, be first or cheat.” The CEO’s plan of action is to be first: to hold a fire sale, peddling the MBS (aka “the most odorous bag of excrement in the history of capitalism”) to competing wirehouses (“to dealers, brokers, clients — your mother if she’s buying.”) in the first few hours of the next trading day — before the competition knows what’s hit them.
The head of trading (Kevin Spacey), a 34-year veteran of the firm whose unenviable job it will be to rally the troops to carry out this career-ending mission, is aghast at the prospect.
“You know you’ll kill the market, selling something you know has no value …You’re panicking.”
The CEO replies with chilling cynicism: “If you’re first out of the door, it’s not panicking.”
Long night’s journey
Through the night, the principals prepare for the next day’s bloodbath, and, in the process, begin to appreciate their own culpability in the events about to unfold.
That belated dose of wisdom is what sets Margin Call — a stunning first effort by J.C. Chandor, whose father spent his career at Merrill Lynch — apart from fictional potboilers like Oliver Stone’s Wall Street, snarky screeds such as Michael Moore’s Capitalism: A Love Story and even from well-researched documentaries like Charles Ferguson’s Inside Job. See: DC Current: A damning view of financial services from Inside Job’s director, Charles Ferguson.
The men in this movie (there’s only one woman) are neither villains or buffoons. On the contrary, most are dedicated, brilliant, idealistic and fiercely loyal to their firm (many entered the industry with science or engineering backgrounds, a trend commented upon in a recent interview with MarketCounsel’s Brian Hamburger).
But secure in their virtue and seduced by lavish monetary rewards, these men have, with eyes wide shut, crossed into a dark gray area of ethical behavior. In the years leading up to the debacle, each has sounded alarm bells to his superior, but, when they were pointedly ignored, suppressed their qualms and soldiered on. Now, personally overleveraged in spite of their multimillion-dollar paydays, they feel they have too much to lose to turn back.
“At the time, it didn’t seem like there was much of a choice,” one character says minutes before the sell-off.
“It never does,” the other ruefully replies.
Wall Street’s losses; RIA’s gains
At last week’s Schwab IMPACT conference, RIA leaders and practitioners celebrated, with justifiable pride, the remarkable strides made by the fledgling industry in a few short years. See: Bernie Clark and Tony Blair draw big crowds – but no protestors – at IMPACT.
Indeed, Wall Street’s losses have been the RIA industry’s gains as, with each passing day, it accrues more of Wall Street’s assets, talent, technology and momentum. The resulting swagger in the industry’s step is only natural. As RIAs win when all those around them are losing, it’s easy — and correct — to believe they’re doing something terribly right.
In a recent article, What is the value proposition of a financial advisor — and how is a budding RIA culture upping the ante?, RIABiz editor-in-chief Brooke Southall sought to define the ethos of registered investment advisors and to pinpoint how the culture of this rapidly growing model differs from that of the mammoth broker-dealers.
“I believe that RIAs have a superior culture in which clients can achieve their goals in an atmosphere of human caring. The RIA’s ultimate value proposition, therefore, is your belief that it is your destiny to help clients realize theirs.”
Whom the gods destroy…
It’s a noble goal — one that hundreds of newly independent advisors are achieving at this very moment. But as this new breed of financial advisors inherits the mantle of power so jealously guarded by Merrill Lynch, U.S. Trust, JPMorgan and others, there’s always the danger of becoming — not in one fell swoop, but step by incremental step — the very kind of institution they originally set out to reform.
It’s a heady and exciting time to be in this business, but in order for RIAs to grow and maintain their unique culture — to keep doing well by doing good — it couldn’t hurt to consider Margin Call's cautionary tale of the perils of good people laid low by hubris.
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