Brokerages Pass the Responsibility Buck

I recently attended the Schwab Impact 2004Convention for investment professionals inPhiladelphia. What hit me like a ton of brickswas the degree to which this gathering was a veritablebazaar of competing mutual fund companiespaying Schwab large sums of money to garner theattention of those gathered.

The New Deal

The dramatic changes in the investment managementindustry in recent years were unmistakable at the conference.My idea of an investment conference is meetingwith and analyzing companies, listening for trends, andfinding interesting new investment ideas. This conferencehad nothing to do with that old paradigm.

Today, many people in the investment business don'tknow the first thing about constructing a portfolio, analyzinga security, or knowing that the Enron and MCIbusiness plans didn't make sense. Account executivesare trained by brokerage firms to sell you comfort, theirbrand name, and perhaps a financial plan to make thewhole thing sound convincing. You hope that theyknow more about investing than you do. What theyknow more about is sales, not investments.

The people at the top of these firms don't want tobe sued because a broker bought you a stock that wasnot appropriate for your investment goals, nor dothey want to be sued because a research analyst wrotea glowing report on a stock for retail customers whiletelling their friends in e-mails that the company was adog, which is what Henry Blodgett did.

By design, the new model is to avoid selling you astock or bond unless you specifically ask for one andthey can't convince you otherwise. The new model is tosell you one or more mutual funds or a managedaccount from an investment advisor that might be partof a so-called wrap account program. Fees changehands for the referral of your business by the broker.

When Schwab tells you it has a select group of fundsor investment advisors from whom you can pick, restassured that the referred group of firms is payingSchwab a fee. Those fees must be disclosed to you, butyou might not notice if you don't read the small print.Their key idea is that the investment decision maker issomebody other than your broker. Like any good salesperson,they want to sell you the products that generatethe highest commissions, and nothing pays the broker ahigher commission than selling you an annuity or mutualfund with a big upfront load.

Fund Sorting

There are now thousands of mutual funds offeredfor sale. But there aren't thousands of excellent managersout there. That's why picking one is a difficultchore. An asset gatherer is more likely to select a mutualfund for their client from a company that has winedand dined them or spent a lot of money on advertisingso their customer has heard of it.

Decades ago, the SEC allowed fund companies tocharge a marketing fee to existing clients to promotethe fund to new prospects—accomplished by a majorlobbying effort. Remember that when you read incoming months about the new move to privatizeSocial Security. What would be more of a bonanza forthe big investment houses than that enticing torrent ofnewly investable money?

Pay attention to what and from whom you're buying.Ask about their experience level (eg, credentialsobtained). Understand how they're compensated. Askto speak to other clients. Are they going to invest yourmoney themselves or farm your funds out to others? Dothey really understand investments and care about yourneeds? If you're not comfortable with the answers to allof these questions, look elsewhere.

Joan E. Lappin is the chairman and chief investment

officer of Gramercy Capital Management

Corp, a NYC-based registered investment advisor.

Gramercy develops personally managed

portfolios tailored to your investment goals.

Ms. Lappin has been featured in several prominent

publications including BusinessWeek. She

welcomes questions or comments at 212-935-6909.