James P. Owen is a 35-year veteran of Wall Street and a highly respected investment man-ager and analyst.
He wrote a book, Cowboy Ethics: What Wall Street Can Learn from the Code of the West (Stoecklein
Publishing, Ketchum, ID; 2004). Thinking about the subprime lending debacle and the dubious and damaging
activities of some mega-brokerage and banking firms, the following quote from the flyleaf of Jim Owens’ book is especially timely.
“Having been rocked by one damaging revelation of misbehavior after another, Wall Street is in a state of
crisis. Investors are disgusted by the misdeeds of a few and suspicious of the industry at large. Every firm finds its integrity open to question. Regulators are up in arms. And the industry is facing billions of dollars in costs to comply with a floodtide of new regulations. But imagine what could happen if Wall Street firms looked back to a simpler time when a handshake was enough to seal a deal, and right and wrong were as clear as black and white. What if executives, portfolio managers, analysts, and traders decided that some things aren’t for sale? What if every major investment firm agreed to live by the principle that the client always comes first.”
“What if the client came first?” It is disturbing that such a question must be asked!
Clark Howard and Mike Kavanaugh on WSB Radio have talked about it but the average investor is not aware of the implications of a debate surrounding a March 30, 2007, Washington, DC Court of Appeals decision regarding Secu-
rities and Exchange Commission (SEC) Rule 202. Rule 202 exempted large brokerage firms from aspects of the Investment Advisers Act of 1940 which mandates that to offer financial advice you must be a fiduciary.
Jim Owen will tell you that to be a fiduciary you must live by the creed that the client comes first. Rule 202 exempted stockbrokers if investment advice was “incidental” to what was a sales process, a brokerage function. But when you run splashy ads touting advice and planning, that’s not “incidental.”?
Independent financial planners and advisors were held to a higher standard by the SEC and state regulators , wi th added licensing and compliance mandates. The Financial Planning Association (FPA) decided that the unlevel playing field was unfair to financial planning practitioners and consumers, and they sued the SEC. Lobbied by Wall Street behemoths, the SEC fought the suit to preserve Rule 202 exemptions. The SEC lost. The
DC Court ruled that all who hold themselves out to the public as financial advisors must adhere to fiduciary standards. That it took a court battle to enforce a bedrock principle of mutual trust and good faith in the client-counselor relationship is amazing!
Innocent and well-meaning investors who play by the rules have been hurt by what one observer terms “wirehouse scandals involving sleazy brokerage analyst behavior, front-running mutual fund trades, IPO shares handed out as bribes for new business or marked up trading costs to pay for the sleazy analyst reports.”
Now we have subprime abuses and mortgage scandals to deal with. Talk about “The Bonfire of the Vanities.” Wall Street CEOs get fired and walk out the door with millions of dollars. The guy in the black hat gets the boot while being handed a prize bull, while the good guy investor is left with the droppings. We should be running more CEOs out of town on a rail. Where’s the perp walks?
When a government regulator is handed a challenge as the SEC was relative to fiduciary liability, the first impulse is to buy time by commissioning a study. The RAND Corporation was hired to study the difference between
brokers and advisors and how best to improve the rules that regulate them. The report was just released and its
implications are about as clear as a muddy catfish pond.
The researchers concluded that the terms used by brokerage firms and advisory firms are at best generic. Consumers are confused about the services offered, compensation methods and duties, and the legal obligations and regulatory restraints that govern various service providers. They are uncertain about the most important question: “Who does the broker or advisor really work for?”
Advisors of all stripes will have to live with more rules and regulations as the dust settles on the Gunfight at the Fiduciary Corral. Instead the SEC should adopt what Owens lays out as The Code of the West, ten commandments at the heart of Cowboy Ethics:
1. Live Each Day With Courage
2. Take Pride In Your Work
3. Always Finish What You Start
4. Do What Has To Be Done
5. Be Tough, But Fair
6. When You Make A Promise, Keep It
7. Ride For The Brand
8. Talk Less And Say More
9 Remember That Some Things
Aren’t For Sale
10. Know Where To Draw The Line
Rule 7 is important. In our professional lives, “riding for the brand” means looking out for the client first. Too many forget that idea, putting sales quotas, commissions, profits, and bonuses ahead of principles. In your personal life, “riding for the brand” means putting family and faith first.
The Code of theWest makes more sense than hundreds of pages of mind-numbing rules and regulations. When it comes to Wall Street and financial services at large, we need more true cowboys, and no more gunslingers!
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The Investment Coach 1994, Walker Capital Management Corp. Lewis Walker is President of Walker Capital Management Corp. and Walker Capital Advisory Services, Inc., a Registered Investment Advisor (R.I.A.) Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with the Walker Capital Companies. ?
Posted by hkelly as Financial Planning with Lewis Walker at 4:58 PM EST