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

4 Comments

“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.

'Be careful’

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.

The sell-off

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.

Superior dance

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.

No people referenced



Share your thoughts and opinions with the author or other readers.

Gravatar

Elmer Rich III said:

November 9, 2011 — 4:50 PM UTC

It is best to remember these truisms in pop media, movies, books, etc.

- The status quo is always supported

- Fear is the best attention getter

- Really, really simple ideas sell best — usually inaccurate ones

- Blaming and creating really, really simple demonizing and scapegoating “bad guys” covers all the above.

- Finally, reality is a lot more complex than any pop media can ever portrays and our brains can even comprehend

Like in investing — the pop media is usually wrong and the opposite is true. So Margin Call is pandering to our silliest ideas and beliefs and the opposite is probably true.

Likely most “evil” is done in financial services, and on Wall St. or any other institution or activity, by simple human error and inadvertent mistakes — not by bad actions or bad actors. But that would be a really, really dull movie, book or even article no one would pay any attention to, let alone money to read or see.

Gravatar

Dina Hampton said:

November 9, 2011 — 6:55 PM UTC

Has anyone seen the movie? We’d be interested in hearing your reactions.

Gravatar

Stephen Winks said:

November 9, 2011 — 8:56 PM UTC

I would like to believe the best interests of the consumer is first and foremost in the broker’s mind, and it is for our most accomplished brokers. Yet, it is the things beyond the broker’s ability to manage, controlled by their broker/dealers, that preclude fiduciary standing for brokers.

What influence does the best interest of the consumer and the broker have on the broker/dealer? Apparently none.
> Why is there no accountability for recommendations after the broker is compensated?
> Why is there no ongoing responsibility required of the broker to act in the consumer’s best interest, based on objective, non-negotiable fiduciary criteria of statute, case law and regulatory opinion letters?
> Why are preagreed upon arbitration proceedings in managing client disputes structured to absolve the broker from any responsibility for their investment recommendations?

None of these things are in the client’s best interest and have resulted in the loss of trust and confidernce of the investing public in the industry.

It is terribly unwise for the industry to acknowledge the fiduciary standing of the broker unless it is prepared to make adfvice safe, scalable, easy to execute and manage. The SEC has established it is the broker/dealers responsibility to support the fiduciary standing of the broker not each individual broker. Thus, if the industry does not support the broker to act in a fiduciary capacity—the culpability rests with the industry.

Could it be more clear?

Principled leadership is required, but where do we find it, given the brokerage industry’s push back against brokers acting in the best interest of the consumer?

How could FINRA be remotely considered a good steward of the trust and confidence of the investing public when it has abdicated its responsibility to properly insist the brokerage industry support the fiduciary standing of the broker?

What was so complex about doing the right thing five years ago, that suddenly now seems so clear? The difference is transparency and a very large number of consumers and advisors are not going to go along to get along and will insist that the best interest of the best interest of the investing public prevail.

The best interest of the investing public always prevails in a free market—the investing public is just awakening— opposing clearily delineated fiduciary duties in the consumer’s best interest is a loosing proposition.

If the industry does not respond in a serious manner in support of fiduciary standing, there will be open season on every brokerage account existant.

SCW

Gravatar

Elmer Rich III said:

November 9, 2011 — 9:47 PM UTC

Here’s the tricky part, well there are many tricky parts, how do we determine what is in the best interests of the client, and for what period of time/measurement?

What if what the client wants is not best for them long-term? Of for theiri family and future beneficiaries? What if something is best for the client today but not at retirement? “The road to hell is paved with good intentions.”

Perhaps, even, a professional acting “selfishly” may be best for the client in the long run. We just don’t know. These are questions we may never be able to answer.

We agree with the commentator above that the new “f” word, “fiduciary” is not a magic bullet for anything. Also, applying it to individual and retail accounts is something completely new in legal history and will take many, many years to test and adjust — if ever.

Also “The best interest of the investing public always prevails in a free market…” needs to be proven with data. For example, the stock markets of the so-called “socialist” countries are the most successful in the world.

In fact, if anyone is looking for clarity and simplicity in the vastly complex and accelerating world of global finance, and the US system is now firmly embedded in a global financial system and market, — best look for work in other businesses.


Submit your comments: