If you are outraged by the recent scandals on Wall Street, you have good reason to be. Along with you, many Americans who watched their fortunes rise and fall with the stock market bubble of the late 90�s are dismayed to learn that the major brokerage houses where they entrusted their money contributed significantly to their losses. Ten of the largest Wall Street firms, including Morgan Stanley, Merrill Lynch and Smith Barney, have agreed to pay a record $1.4 billion to settle government charges of fraud. The allegations center on ways these firms took unfair advantage of their retail clients in order to generate fees from their large commercial clients.
Wall Street Deception
The SEC�s litigation release, dated April 28, 2003, has revealed that Morgan Stanley and others were compensating research analysts based on the degree to which they helped win investment banking business for the firm. In addition, when soliciting investment banking business, the firm implicitly suggested that analysts would provide favorable ratings of the prospective client�s stock. These arrangements encouraged the firm�s research analysts to tout the stocks the firm was offering to the public, regardless of the stocks� merits. Internal e-mails revealed that analysts were privately trashing the very stocks for which they were giving strong buy recommendations.
The same SEC release also showed that Morgan Stanley and others paid other brokerage firms to publish positive research reports on stocks Morgan Stanley was issuing to the public. These so-called �research guarantees� helped hype the stocks and drive up the prices retail investors paid for these stocks.
Is Change Coming?
Many retail investors who trusted the buy recommendations coming from these firms are now feeling duped. Will the settlement provide any consolation, and, more importantly, will it cause much needed change in the industry? Likely, no. Phillip Purcell, the CEO of Morgan Stanley, was quoted in the Washington Post on May 1, 2003 as saying �I don�t see anything in the settlement that will concern the retail investor about Morgan Stanley.� This comment prompted William Donaldson, the Chairman of the Securities and Exchange Commission, to accuse Mr. Purcell of displaying �a troubling lack of contrition.�
The reforms, which are intended to reduce conflicts of interest, only go as far as relocating research and investment banking departments in different offices and creating separate legal and administrative staffs. These reforms may have little effect on a firm�s desire to keep a corporate client happy with a favorable analyst recommendation.
An Alternative
Fortunately, as an investor, you do have other options. You can choose to work with an independent, fee-only advisor who is not tied to the conflicts of interest inherent in these large brokerage firms. When you work with a fee-only advisor, neither the advisor nor any related party ever receives compensation contingent on the purchase or sale of a stock or any other financial product. This ensures the advisor has only your best interests in mind.
If you are interested in learning more about fee-only advisors or would like a list of advisors in your area, you can contact the National Association of Personal Financial Advisors (NAPFA) at 1-800-366-2732 or on the Web at www.NAPFA.org. NAPFA does more than any other professional organization to ensure the competency of its members, and to steer consumers to experienced, fee-only financial professionals who can provide the independent financial advice consumers are looking for.