Wall Street, Boiler Room, and Archer Daniels Midland

@TBPInvictus here [with a modest BR annotation]:

I mentioned to BR I felt the need to push back on his recent Washington Post How to avoid being a Wall Street muppet piece on the muppeteering of portfolios. It’s not that said muppeteering is extinct, but the extent to which it occurs in this day and age is greatly diminished from what it was in its glory days. Think Wall Street – the first one (“Greed is good”), which should have been the only one – and Boiler Room. Josh Brown, The Reformed Broker, also chronicles the Street’s most unsavory practices in Backstage Wall Street.

But I’m going to tell you that most of those tactics and sales practices are gone. Firms — at least the big ones — don’t tolerate them and advisers who insist on using them are either bounced or simply fail. None of this is to say that Wall St. doesn’t still churn out some crappy retail product – it does. But it always has, and likely always will. Caveat emptor should always be front and center in any consumer’s mind – regardless of the product or service being bought. [BR: True for consumers who have Brokers, and their “Suitability” standard. RIAs have the much more stringent legal obligation of “Fiduciary”].

Why any investor would by a closed-end fund (CEF) on the offering is, frankly, beyond me. I could count on a leper’s fingers the number that stay above the initial premium and don’t soon trade to – or below – net asset value (NAV). But folks don’t do their homework or ask simple questions. If an adviser offers you a CEF on the offering, please find another adviser. Anyway, I digress. [BR: They invariably trade down to NAV which is ex-the brokers vig].

The point I made to BR – and I’m not breaking new ground here – is that the financial services industry is (and has been for some time) taking a much more holistic approach toward managing its clients’ financial affairs. And this is, of course, a good thing. It’s not to say there aren’t and won’t continue to be some bad actors, but that’s the case in every facet of our lives, and financial services is no different. I’ll expound on this more soon – gotta get to the punchline.

As I talked with BR over lunch about how I feel the industry has evolved, I shared with him a story from the bad old days, that he immediately asked me to post:

Some 25 or so years ago the newbies sat in the “rookie room” or “bullpen.” Smile and dial. Desk, phone, Quotron. Outgoing calls, and lots of ’em. Sell a stock, a bond, a mutual fund, whatever. There were “story stocks” back then – companies with sexy narratives that would capture an investor’s interest. The extreme of this type of culture was perfectly captured by Giovanni Ribisi and Vin Diesel in Boiler Room. The pressure was not nearly as intense at the wirehouses as it was at the boiler rooms (aka bucket shops) – and there was no (deliberate) illegality in the big shops – but the methodology was quite similar.

Back in that era, Archer Daniels Midland (ADM) had developed a plastic replacement. It used a cornstarch additive that was creating, among other things, a biodegradable grocery-type bag. The hope was these would ultimately become a universally used standard as a replacement for plastic ones, which sit in landfills for centuries.

The manager of one major wirehouse called ADM, who sent cartons of the sample bags to be shipped to clients and prospects. Who wouldn’t want to own a piece of a company that was going to replace plastic bags with an environmentally friendly, biodegradable plastic substitute? Home run!

Here’s how that conversation would go:

ROOKIE: Mr. Jones, ADM has developed a cornstarch additive that it is going to use in countless applications to replace plastic, which is environmentally unfriendly and sits in landfills forever. The company is already making grocery-type bags out of this product, and I’d like to send you one so you can see exactly what I’m talking about. When you get it, if you agree with me that this biodegradable product and technology is revolutionary, I’d like us to take a position in ADM.

MR. JONES: Well, that sounds very interesting. Please send me one of the bags and we’ll talk again when I get it.

ROOKIE: Will do, Mr. Jones. We’ll talk again soon.

At which point the rookie addresses and seals a 9″ x 12″ manila envelope and off it goes to the prospect. The twist is the envelope is mailed empty! The follow-up call made a few days later is absolutely riotous — See? Its already degraded!” — invariably resulting in a new account opening.

[BR: This is a cleverly disarming and witty type of sales manipulation; most cold called prospects love to get off the phone as soon as possible. “Sure send it to me, thanks, good bye”]

Post script, via the Chicago Trib, 1993: