winnie-the-pooh

Wall Street 2.0: Trust Me.

For the last year or so, I’ve been specifically working on a few projects addressing some of the issues I see on Wall Street. Don’t worry, this post isn’t an ad for my efforts– this is about Wall Street 2.0.

I think the timing of this post ties in nicely with everyone freaking out about Facebook & their personal data being sold. And how the lords of Facebook have betrayed everything we’ve come to know & love about their site. A wholesome place to raise pigs in Farmville, buy virtual rounds of drinks for your friends, & find a 1,000,000 people to join your crusade to bring back Jolt Cola.

Personally I can’t believe people didn’t see it coming. I mean, did you really think that “liking” TGIFridays was not going to be monetized somewhere down the road? I also can’t believe Zuckerberg and Co. didn’t see the backlash coming. Really bad management or really bad core values.  Surely we will see an exit of people from Facebook. Good for MySpace, I suppose. But most will stay because it’s still the easiest, best way to share basic things like photos & stay in touch. A place for us to remain relevant. It’s a meeting place, a town square, and until something replaces it, it’s all we’ve got.

The same could be said for Wall Street. Surely as it is now, we are all fully aware that we are absolutely being sold down the river.

“Sold down the river?” Please, explain my good man.

Well, looking at it from the eyes of “us”, the taxpayer & the individual investor, the model is almost completely skewed to the institutional interests.

And if you look at the charts from my earlier post, you’ll know investment banking is the honey for our Wall Street firms. Individual households are just the busy bees. We are mere insects buzzing around the vampire squid that is Wall Street.

And why does Wall Street keep doing business with us bees? Us mere insects?

Why?

Because we keep buying everything they are selling us, the whole stinking lot. Investment banking deals going into the funds we buy, that they trade, dole out like candy, and then give you advice about those deals. But that’s crazy.

It’s just the way it’s done.

And like Facebook, it’s just the easiest thing to do; maintain the status quo. It’s the only game in town. Until one day it’s not.

Now hopefully, both in the case of Facebook & Wall Street, the marketplace creates answers, because I think we all know legislation goes to the highest bidder anymore. A notion we may see played out with a thoroughly watered down financial reform bill. {update: your watered down reform bill}

So what are the marketplace solutions? In the case of Facebook, a transparent, safe place to share that is sensitive to an individual’s privacy. (Update: See Google +)

In the case of Wall Street? A place you can trust, that is held to a fiduciary standard with their advice. Even better, make it user friendly, intuitive, but robust.

The Moat

Now, as an entrepreneur & investor I am constantly looking at businesses for their moat, a barrier to entry or proprietary technology; something that protects their business. And with Wall Street I’m confounded a bit.

Why?

Because truly if you look at the business model, it’s really not that expensive to create a bank or wealth management firm per se. Especially today with cloud computing, open source coding, and an entire planet of people who can type that code. That’s pretty robust.

Now, there’s something to be said for being small & nimble, especially these days. At the heart of every firm is still the proverbial two guys in a garage. And companies with the best feedback loops and have the will, can adapt to the needs of their users quickly, sincerely, and openly.

So, if it’s not a capital intensive business, and technology is ubiquitous enough for even the little guys to compete; what’s the moat? The people?

What makes one firm wholly more successful than another?

In the case of Wall Street, maybe there isn’t a moat. Think about it– Do you really think Goldman Sachs is any different than Morgan Stanley or UBS or Bank of America? Forget the commercials & sponsorships. The golf balls from your advisor. Do you really think the investments are better at JP Morgan than Merrill Lynch? That your Morgan Broker is better than Goldman?

Or that you have more choice at one firm vs. another?

You haven’t noticed? The menus look almost exactly the same at all of the firms. Why?… Investment banking interests, plain & simple. They are all fishing from the same boat in the same moat. They want your money, in products they create, so they can trade those products and your money, simultaneously with, giving you recommendations (as a broker) based on research they generate.

Who thinks this is a good idea? Someone smugly in control.

Now brush all of that aside and ask yourself this: do you think the advice from one firm is better than another? I mean from the firm, not your Advisor. That is why you’re there, right? …Because they are at TBTF Goliath Bank.

And how could you tell? The Firm’s track record. Does your Advisor have a firm composite to show? Huh? They don’t have a track record? What?

I mean they’re big. Everyone goes there.

But what’s the firms’ track record? They can’t give you one. They won’t give you one.

But how many bailouts has each & every one of our banks been given from us, and more than once. But we keep doing it, because there’s nothing new.

That’s because the banks architected the legislation. The repealing of Glass-Steagall. It was wise legislation in a rough time. Banks, Insurance Companies, and Brokers should be separate. Advisors should be independent and held to a fiduciary standard. Asset Management should be separate from investment banks, traders thrive on competition and freedom. Frankly, I think could be good for the market. It will make it even more robust. We’re already there. Money is leaving the wirehouses. They know it, I know it, and now you know it. Cut your loses, let it go. We don’t want your advice any more.

And…

If we execute the incision carefully and patiently, we should get out in better shape than when we went in.

I mean come on people, aren’t you bored? It’s always the same.

Haven’t you noticed that all the firms have equally-weighted benches of talking heads?

Perma-bear or perma-bull, that they can parade in front of the TV camera come good times & bad. Never do the two meet. I’d love to see Barton Biggs vs. Stephen Roach. But there they are, consistently enough to remain reassuring (or not). One of them is on the camera, or in your ear.

And tell me, does your Advisor build your portfolio? Or does the firm?

You’re at this prestigious firm, for all of their mind-power and access, right?

So, you ‘re investing in the same things as the firm’s CEO?

What does the firm recommend?

What does the firm’s portfolio look like?

But, you’ll never see anything like that from the big firms. Oh, sure you’ll get a recommended stock list or Strong Buy Portfolio, but we all know those are really kind of a joke. Don’t we?

Don’t you think that’s weird?

I mean, don’t you think it’s weird that Goldman Sachs, the firm, hasn’t had a trading loss this entire quarter (along with 4 other banks, simultaneously) but 7 of the last 9 recommendations from Goldman to clients were horrible trades?

How does this happen?

Yet most of us buy into the notion that being at one of these big firms is good for us. Why?

Because the biggest moat in the industry of Wall Street is Trust, with a capital T. And they’ve all colluded wonderfully at marketing you trust with fancy charts, graphs, exclusive research reports, Ivy League MBAs, really smart sound bites & talking heads. Even better, Jack Bauer doing voiceovers about homespun values. They’ve done it by pushing your greed & fear buttons. By showing you how many stars a mutual fund has in a constant stream of bait & switch, all spewing from the bottom of Wall Street’s ocean.

But it’s getting harder to hide now. The digital ticker tape of truth. And I think people are starting to realize the biggest commodity on the street isn’t being valued enough. I think trust is up for grabs; rightfully so. I think the market’s spiral is, in part, a reflection of that lost faith.

Don’t you think it’s telling that recently bloggers were considered a better authority than Financial Advisors (most of which are working in a major Wall Street firm)?

So, until Wall Street (and Washington) is ready to fundamentally look at how they do business with the individual & change their practices (you too Facebook), people will be ready for the next best place to fulfill their need.

A place they can trust, that’s easy to use.

And frankly I don’t think the current banking regimes can do it. Their too bloated, too comfortable & stuck in their ways. Too busy figuring out a way to fsck us.

And how do you get an thundering army of 15,000 advisors on the same page? You can’t. You won’t. They’re too big to sail. It’s just a matter of time.

Wall Street 2.0: Trust me.

Relevant: 

Advisor or Adviser? – I heart Wall Street