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The Goal of Wall Street: ‘To Wring More Profit From Its Clients’

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“It doesn't matter what people say. Watch what they do.”

-Seth Godin

 Wall_Street.jpeg

In an unsurprising, but refreshingly straightforward article Reuters wrote recently about Morgan Stanley’s latest product push to boost its profit. The article titled “Morgan Stanley Turns To Stodgy Bank Accounts To Boost Profit” is a glimpse inside how the traditional Wall Street sales culture works and how these firms view their clients.

As we’ve written before, Wall Street exists for one reason: to make money. And just so we’re clear, that’s money for them not money for you.

The traditional, big Wall Street advisory firms—the Morgan Stanley’s, UBS’s, Merrill Lynch’s and Wells Fargo’s of the world—like to promise they have your best interests in mind and that they’re positioned to provide you with advice. But, why they exist, where their incentives lie, is in selling 'Product'. As Seth Godin wrote, “It doesn't matter what people say. Watch what they do.”

The Reuters article is simply an example of this Wall Street sales culture in action. It does a good job of laying out the motivation, how Wall Street thinks about its clients and, ultimately, how it acts.

Let’s take a took:

In the first paragraph, we are reminded of the primary incentive of a Wall Street firm (to make more money) and how it views its clients (as a source of more profits). Emphasis is mine:

Morgan Stanley…plans to offer savings accounts and certificates of deposits next year to wring more profit from its wealth management clients, executives told Reuters.

Pretty simple. The plan: increase profits. The method: wring more money out of its clients.

Now the question becomes how to get these products in the hand of clients. Well again, the plan is to use the traditional Wall Street tactic of bribes, uh, I mean incentives. In this case, the ‘Advisors’ at Morgan Stanley are given bonuses for selling the firm’s banking products.

The bank has offered checking accounts and credit cards for years, but it is launching more consumer banking products and giving brokers bonuses if clients use them.

And:

Morgan Stanley has no plans to build retail bank branches, and will instead rely on its 16,000 brokers to sell the new products.

One of the problems with the traditional Wall Street model is that brokers, or, advisors receive incentives to sell clients a product. As William, Cordant’s Founder and President, has written previously on the blog:

Wall Street brokerage firms were built on the idea of giving affluent people an opportunity to invest their money. But it wasn’t long before firms were struck with a novel realization – catering to the companies offering investment products is a lot more profitable than catering to individual wealth management clients.

The incentive to sell with the firm’s (and the broker’s) best interest at heart was too great to ignore. All too quickly, these financial products companies became the “real” clients.

A much better approach for clients is a model that severs this link between selling a product and compensation.

At Cordant, we are compensated for the advice we provide not the product we sell. Our clients don’t need to wonder if our advice, or the funds we recommend, have their best interest in mind.

Our mission at Cordant is to help change our industry for the better—To make it more intentional and deliver better outcomes to clients.

The fact that traditional Wall Street firms view clients as simply a source by which to boost profits highlights the imperative of this change, and why it's so important.

 

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Click here for disclosures regarding information contained in blog postings.
Cordant, Inc. is not affiliated or associated with, or endorsed by, Intel.

Published on January 13, 2016

Isaac Presley, CFA

Isaac Presley, CFA

Isaac Presley is Director of Investments for Cordant, a wealth management firm serving current and former Intel employees. To learn more, you can read Isaac's full bio.

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