Quarterly Reports: Going for Brokers

The way to be very, very wealthy, someone wrote, is to be very, very, very rich. Short of that—far short—there are investment books and the business press and annual reports and investment letters and the Financial News Network. And there is Olumba Olumba Obu. But the first place the novice might turn to get rich is to a pro. A broker. For us, getting rich is merely a desire. For him, it is a calling.

Browsing through the collection of 19th Century advertising posters at the New York Historical Society, with its ads for the bicycle ("an ever-saddled horse that eats nothing") and for Dr. John Wesley Kelley's Diamond Pectoral ("a sure, pleasant and safe remedy for all diseases of the throat and chest" pictured in a sweet family scene titled Mother Is Saved!), one comes to a poster celebrating the nation's centennial. Dominating the poster is a prosperous farmer with his plow and horses. Beneath him, the banner I Feed You All! Framing the farmer are his countrymen, with banners of their own. There are the soldier (I Fight for all), the merchant (I Buy and sell for all), the clergyman (I Preach for all), the doctor (I Physic you all), the lawyer (I Plead for all) and the stockbroker—I Fleece you all.

The artist just couldn't resist.

A lot of barbs have been aimed at stockbrokers since then, but you'll find none of them here. Oh, sure, they smell funny and would sell their moms for a dollar, but I'm not going to get into all that, because almost none of it is true. (The smell comes from handling county sewage bonds.)

The fact is that brokers, particularly since the prolonged shakeout of the Seventies, are for the most part a well-trained, well-intentioned, hard-working and professional crew. The fact also is that on average, there is very little they can do to enrich you that you could not do as well or better yourself (but that's not their fault). And there's always the chance you will find the outstanding, exceptional, far-above-average broker who can.

It is a thin chance, but I'll get to that.

In 1981, there were 56,000 active brokers in the U.S.; by the end of 1982, 64,000—and the great bull market had barely begun. By now, the ranks have surely swelled beyond 70,000, which means that with perhaps 20,000 new brokers all told in the past couple of years, the phone has been ringing off the hook. Twenty thousand brokers starting fresh and looking to sign up 200 or 300 clients (graduates of E. F. Hutton's impressive four-month training program are expected to sign up 20 new accounts a month) may at first make 30 cold calls a day. Some make far more. So you're talking maybe 150,000,000 cold calls a year. Which wouldn't be so bad, except that far from being spread over the entire adult population, one call apiece, most of the calls are made to a relative handful of attractive prospects.

The first thing you want, when you pass the six-hour "Series 7" exam that qualifies you to be a broker, is lists. People to call. Some leads may be provided by your firm, but the freshly matriculated broker will be encouraged to obtain or compile his own lists as well. Hence the classified ads in Registered Representative (the trade magazine that is to brokers approximately what Life Insurance Selling is to life-insurance salesmen) pitching lists of "42,000 casino 'credit-rated' gamblers. All have phone numbers...."

Other available lists include aircraft owners, aircraft pilots, dentists, dentists who are heavy investors, Arabs who gamble and invest, cattle breeders, female investors, gold buyers and seminar attendees, investors who are known art lovers, investment-book buyers, investors concerned about inflation, Jewish investors, people with large deposits in savings accounts, high-value-home owners, Mexican-gold buyers, millionaires, investors in limited partnerships, psychiatrists, teachers who buy loaded mutual funds (i.e., dumb teachers), wealthy ranchers and farmers who invest and ultrawealthy Americans. Given that the average psychiatrist is an ultrawealthy American millionaire concerned about inflation, with a high-value home, large savings deposits and a love of art—not to mention Jewish—one can imagine the volume of cold calls he must fend off in the course of a day.

We like to think of (continued on page 130) Going for Brokers (continued from page 121) brokers as great stock pickers, and a handful are. Most spend very little time picking stocks. They are primarily engaged in selling new accounts and, as their book of business builds, servicing old ones. Listen to Ken Catanella, of E. F. Hutton's Philadelphia office, in a video-taped address viewed by thousands of brokers (not just Hutton's) across the country: "You must firmly believe and you must take the oath," he says, "that none of you are truly financial analysts. I know that I am not an analyst. / am a salesman. I look like a salesman, I dress like a salesman, I talk like a salesman. I am a salesman for the firm."

Catanella signed up an astounding 650 new accounts his first year with Hutton (previously, he had been with Paine Webber, and then with Shearson, in Indiana). In his second year, 1981, he generated $1,100,000 in commissions for the firm, or about six times the average.

Very much a salesman, he exhorts his fellow brokers to "throw away all the negative vibes you had when you walked into this room. And you know exactly what I mean. No more problems with the margin clerk, no more arguing with the office manager—you name it, it has to stay outside. The stock that research gave you at 40 that's now 20—leave it out there. I can't help you with that, and neither can anybody else. Open up now, and let me come in."

The three things that make someone a big producer, Catanella advises, "are, one, he must be hungry—hungry as hell.

"Two, he must be professional. We are not used-car salesmen in this business.

"Three, he absolutely must be dedicated. Dedicated means reading, studying, coming to conferences like these."

Not all brokers think of themselves as salesmen, and even the ones who do would just as soon you didn't think of them that way. As Catanella sees it, the smart salesman today needs a subtler pitch. "Asset allocation, not selling! You sell nothing! You asset allocate. Some real estate, some oil and gas, some utilities under dividend reinvestment, some growth stocks—you asset allocate, and for the first time in your client's life, somebody has shown him a plan."

Contrast that with the old-fashioned approach, still standard, that Catanella calls the influence sale.

"It's the carrot sale—the probing, leasing sale, where the investor really might not understand the product, but you cajoled him and you eased him into saying yes to it—that is not a comfortable sale as far as I'm concerned. I consider the client my equal. I like to educate the client. I feel very comfortable with that not only when I'm right but when I'm wrong."

Catanella thinks most investors consider their portfolios hobbies. "Once you convince them that you do the business not as a hobby but as a war, that it's your life-blood, that your family depends on it, your firm has pride in it, I feel that they will feel that they do need the assistance of a professional." Even if he is just a salesman and does have 649 other accounts to worry about at the same time.

Space precludes touching upon all of Catanella's sales theories: Radio is more effective for brokers than newspaper advertising; cold calls are a waste of time; hire a high school girl to take down names from building directories; do all your mailings on parchment; seminars are great. But what the thousands of brokers who heard his talk didn't know, and what may be the tiniest bit embarrassing, is that—if the current set of plaintiffs in Federal court are to be believed—"defendant Catanella took on more customers than he could possibly handle on a responsible basis; directed that unauthorized transactions be made for [their accounts]...repeatedly churned accounts so as to generate commissions to himself and Hutton; engaged in margin and options trading without disclosing the risks or costs"; and just was not what you'd call a square-shootin' guy. Hungry as hell, to be sure, but not a dedicated professional.

Of course, it's all well and good for a bunch of disgruntled customers to make accusations. Catanella denies them. But what keeps a layman from accepting his denial entirely at face value (and what makes Hutton's decision to hire and promote him telling) is Judge Cale J. Holder's opinion in a previous set of lawsuits (not the current ones, at this writing still pending) back in Indiana. There was more than one plaintiff in the case, and more than one charge, but a few snippets from the opinion are worth quoting:

"The defendants knew that a commodities account was not in Mr. Brown's best interest....

"Mr. Brown in April of 1973 notified Mr. Catanella to sell all securities in his commodities account at [Shearson] and further notified [him to stop trading]. Mr. Catanella and Shearson disregarded Mr. Brown's notification and continued to make unauthorized and excessive purchases of commodities [for another four months]...for the purpose of generating unauthorized and excessive commissions."

Now here's the one I love:

"Mr. Catanella's and Paine Webber's bad judgment visited upon the Browns rose to a crescendo when Paine Webber sent its 'tax-shelter expert' and Mr. Catanella to interest Mr. Brown in investing in 'tax shelters,' even though they knew before they visited Mr. Brown that Mr. Brown was not in a 50 percent tax bracket and his losses in the stock market and in his farm operations gave him no tax to shelter."

But let's return the floor to Catanella and his 1982 video-taped address to brokers: "Credibility. How do you get it? You're gonna have to work extra to gain credibility. I don't care how you get it; I will tell you the areas thai I think you should be involved in to get it. I think you should write a local article, I think you should try and do a talk show, I think you should try and do a market report...."

Credibility. I don't care how you get it. It reminds me of George Burns's wonderful line about honesty. "The main thing about acting," he said, "is honesty." Long pause. "If you can fake that, you've got it made."

•

All brokers are not from one mold—far from it. The other man on the video tape was Leo Shear, a complete contrast to Caianella, not nearly so dapper or self-assured. In 1962, Shear went to Wall Street from Dun & Bradstreet, where he had been a credit and financial reporter. His first full year as a broker, he grossed $12,000 in commissions. "I am not a salesman myself," he says, "or at least I do not consider myself as such." And yet he has become the largest producer on Long Island. (If you are wondering what it is exactly that brokers "produce," you are not seeing things from the firm's perspective. Brokers produce commissions.)

Shear would find one stock he really believed in and push it to anyone who would listen. Some went down; most, especially in the Sixties, went up. And when they did go up, he wouldn't sell them. That might have generated commissions, but it would also have generated taxes for his clients. And as long as a winner was in the account, he looked good. Many of his clients were willing to refer new prospects, whom Shear diligently pursued. "From one lead in Rutland, Vermont," he says, "I now have between 30 and 40 accounts up there. I've lost track of the number. I probably do more business than the local stockbroker."

He was handed a dormant account from a broker who'd quit, an account in Amherst, Massachusetts, that contained—are you ready?—eight shares of stock. He called the client "and got into a little discussion." That account subsequently referred 15 others.

Shear is slow but steady. He says, and you believe him, "You should never recommend a stock because there's a large commission or the firm is pushing it. You should recommend it because you sincerely believe you are doing right for the client. The fact that there's a larger commission credit to a particular item is one that I find obnoxious. You sell a municipal bond not because there's a $30 credit instead of a ten-dollar credit; you sell the bond because you believe that product is right. And I stress that point because when you get through with all of this, you've got to live with yourself."

Most brokers would echo that sentiment wholeheartedly. But it's one thing to echo a sentiment and another always to resist temptation. And the temptation is always there.

There's simply a lot more hucksterism in stockbroking than the big wire houses would have you know. (Even venerable Lehman Bros., whose clientele is largely institutional, has a cadre of high-powered retail telephone salesmen. "Our gorillas," a friend there affectionately calls them.)

Chances are, when your broker calls from Prudential-Bache's Phoenix office to suggest that you invest in the Prudential-Bache Research Fund, he won't tell you that there's a contest on in the office and that he and his fellows stand to win weekends for two at wherever. That is not to say the fund isn't terrific—who knows? It's brand-new and at this writing down only six percent (plus a redemption charge)—or that brokers foisted it upon even a single client to whom it was unsuited. It is merely to note the temptation. Prudential's Phoenix office sold 15,600,000 of the fund in a month.

In 1982, according to a broad survey conducted by the Securities Industry Association, the average broker grossed $164,000 in commissions and got to keep just over 40 percent of it: $67,000. Well, it's a living. Weed out from the survey brokers in training and it's an even slightly better living. In 1983, it was a better living still. Paine Webber's 3800 averaged around $95,000 apiece. For its 5500 brokers, Hutton projects average pay of around $125,000 for 1985.

In addition to pay, there are perks (which tend to be skimpy), sales support and incentives. According to Registered Representative, Hutton spends about $15,000,000 a year on trips and contests.

Robert Hughes, manager of Mosely Hallgarten's New York office, prefers to emphasize new-account generation over sales when he runs a contest. "If you stress gross production," he told Registered Rep, "then you may induce someone to do something he shouldn't."

But most contests are won by selling. And there's more than ever to sell. As banks and brokerage houses and life insurers encroach increasingly upon one another's turfs, "the traditional mandate to sell stocks," in the words of The Wall Street Journal, "has been supplanted by a new rallying cry: Capture assets."

•

Mrs. P. (not her real name) is a 68-year-old widow who had 147,000 in a Merrill Lynch money-market fund. Her broker earned nothing from all those captured assets. (Merrill has since begun paying its brokers a sliver of those balances.) Being an enterprising fellow, and one of the more senior in the office, he called Mrs. P. periodically to suggest that she switch her cash into one of Merrill Lynch's Ginnie Mae funds. Ginnie Maes (short for G.N.M.A., Government National Mortgage Association) are pools of Government-insured mortgages. To understand fully the dynamics of the G.N.M.A. market takes a patient and agile mind, so it is easier to say, simply (if you're trying to sell the fund), that the fund is completely safe—the U.S. Government stands squarely behind these mortgages—and that the yield is about 12 percent instead of the nine percent Mrs. P. was earning. What's more, you can even write checks against the fund, just like a money-market fund! The two things Mrs. P.'s account executive did not tell her in the several calls he had to make before he finally persuaded her to switch were, first, that 3.9 percent of her $47,000 would immediately be syphoned into Merrill Lynch's pocket (the broker would get about $525 of that) and, second, that her remaining $45,167 would fluctuate in value in response to market forces. Over the short term (which is something to consider when you're 68), it could go down.

And did.

A Merrill Lynch broker who refused to sell the G.N.M.A. product says, "These things were made to look just like money-market funds. Very clever from a marketing point of view. You can get paid monthly or, if you really want to complicate your life, reinvest the income from the fund. Then the monthly statements you get become completely incomprehensible. The check-writing feature they threw in to make it look even more like a money-market fund is crazy, because you are, in essence, taking a 3.9 percent bath every time you write a check."

The product is so complicated, the statements so unfathomable and the ranks of unhappy customers so large, this Merrill Lynch vice-president claims, Merrill had to put out a 30-page memo to help brokers understand it. (The memo—marked for internal use only; do not distribute—actually runs 11 pages. It does seem longer.)

In short, there is a big difference between being a successful broker, like Mrs. P.'s, and being a successful client. One broker who earned $500,000 in 1983 buying and selling stocks for his clients has never bought stocks for himself. "I'm no fool," he laughs, only half kidding.

•

There is a strong case to be made—not here—that the overwhelming majority of brokers will do no better investing your money than you would do throwing darts at the stock pages. ("If brokers were as smart as they'd like you to think they are," says a blunt young fellow who trades billions of dollars in Government securities for his brokerage firm's own account, "they wouldn't be brokers.") Therefore, if you trade with any frequency or in any volume, you should avail yourself of the services of a discount broker and save yourself a pile of money on commissions. Or buy shares in a prudently selected no-load mutual fund or two and get professional management of your money without nearly the paperwork and worry of buying and selling stocks yourself.

But if you think discount brokers lack cachet and mutual funds are too tame (they're not! You can lose a bundle in mutual funds, too!), or if it is the buying and selling and paperwork that you like—if, that is, you are looking for a coach and confidant or for someone to blame or complain to, where do you look?

One sensible suggestion (already you know it's not for you) is Yale Hirsch's Directory of Exceptional Stockbrokers. ("How much do you have to produce to get in there?" a fledgling stockbroker asked eagerly before I explained that inclusion was not based on production.) Although somewhat out of date for its $39,95 price tag, it is a manful effort, based on three years' research, to identify 125 solid brokers and to sketch the approaches that have won the approval of their clients and colleagues. The Hirsch Organization (6 Deer Trail, Old Tappan, New Jersey 07675) believes these folks are OK.

But then, so are many mutual funds. The problem with entrusting your funds to either type of stranger is that it robs you of the chance to throw some business your old college roommate's way or to your brother-in-law—not because you really want to do him a favor or because you think he can really make you some money but because it makes you feel good to be able to throw the big bills around like that. (You say I'm projecting? I don't have a brother-in-law and my college roommate went into politics, so how can I be projecting?)

General rule: Brokers are better off not doing business with friends (it can cost them friends) and friends are better off not doing business with brokers (it can cost them money).

•

The man I want for my broker is Olumba Olumba Obu.

"Never in the history of mankind—since the creation of the world, and after the birth and death of our Lord Jesus Christ—has anybody anywhere in the world possessed the tremendous spiritual and supernatural power, universal influence and the over-all authority to determine the fate and the future of people anywhere in the world and at any time, as the Sole Spiritual Head of the Brotherhood of the Cross and Star, Leader Olumba Olumba Obu.

"He has the universal power to determine or change the course of events as they affect individuals or institutions. He has the supreme and unquestionable authority to solve all kinds of problems anywhere in the world—whether such problems are of physical, spiritual or material nature."

And he has the wherewithal to take out a full-page ad in The New York Times saying all that and a great deal more. "Physically based in Calabar, Nigeria," he was able, for example, to conduct a spiritual X ray of a Mrs. Grace Cosmos Tom, who at the time of her difficulty was two and a half years pregnant. By following Olumba Olumba Obu's instructions, the doctors were finally able to deliver Mrs. Tom's baby daughter without incident. (The ad gives no clue as to the weight of the child.)

More to the point—I hope you're paying attention—"the most amazing thing about Leader Olumba Olumba Obu is that the mere mention of His initials, O.O.O., is enough to take anyone out of a grave spiritual, physical or material problem."

You laugh, but there I was short Metromedia, at $212 a share, and there was Metromedia at $560 a share, posing for me a grave material problem. "Oh, oh, oh!" I cried as I looked at Metromedia's price in the paper. "Oh, oh, oh!" I wailed. The stock collapsed in short order, saving the day.

a timely accounting of timeless principles of personal finance

" 'Asset allocation, not selling! You asset allocate. Some real estate, some oil and gas, some utilities....' "