The Death of the Stock Broker

THE DEMISE OF SMALL BROKERAGE FIRMS: When I was young in the 1950s & 60’s, small brokerage firms where as common as Starbuck franchises are today. What ever happened to E F Hutton, Paine Webber, Bache, AG Edwards, Shearson and  the hundred of other names that were well known to us? Registered Broker Dealers have gone from 10,000 to some 3,500.  (See http://www.businessinsider.com/demise-of-the-stockbroker-2012-3) Broker-dealers, not connected to large banks have  closed,  because they were unable to cope with the massive regulations and keeping up with the expense of compliance. As I found out, being a compliance officer or supervisor at a small brokerage firm, is analogous to committing financial suicide. It is dangerous! (See my Page: “Anyone who challenges the prevailing authority, can find himself suddenly silenced.”)

BIG BANKS and WALL STREET DOMINATE: The industry has been taken over by the BIG banks and Wall Street and FINRA and SEC regulations have intentionally or unintentionally encouraged this. . A recent Barron’s Magazine released its list of 1200 state-by-state rankings of the top Investment Advisers shows that of the 1200 investment advisers listed, most are serviced by large firms such as Merrill Lynch owned by J.P. Morgan, Morgan Stanley, Wells Fargo and UBS (all banks). Only 29 are local independent firms.

In the recent past, small regional brokerage firms were helping small businesses that wanted to go public. This option is no longer available for small businesses and they no longer have access to the capital markets. Now, the only option for small businesses is to go to the banks for a loan, that are servicing mostly  large global conglomerates, as local small banks are also gone.  For individuals, rather than investing in a portfolio of stocks through your stock broker,Middle Class investors use Investment Advisers, that  suggest that you diversify your money in a series of no load mutual funds, that are owned by the Big Banks and Big Wall Street institutions.  Without the old fashioned stockbrokers, individual investors are either investing in no load mutual funds (84% of which underperform the market) through their Investment Advisers (who charge about 1%), or try trading stocks on the internet, which I believe is like feeding anchovies to the sharks. Without stockbrokers, regional banks and small broker dealers, I believe small businesses and investors are being undeserved.

THE WAY IT WAS; In 1963, and 23 years old, I was following my dream and became a stockbroker with a small local Chicago firm, called McCormick and Company. We made markets in local stocks that normally traded below three dollars a share, in what was called the ‘pink sheets’. These stocks are now barred from ‘solicited trading’ under the guise that the SEC and FINRA are protecting the public from ‘speculative securities’, rather than helping small local business get access to the capital markets. McCormick and Co. also helped regional Midwest companies start-ups  and helped them to go public (IPO). One of those firms in 1963 was Kentucky Fried Chicken and my first IPO. Yes the Col.  all dressed in white was there and I remember shaking his hand. There was not a big demand for the stock (KFC), as people were unsure as to whether ‘franchising’ would work. (Ha!) New ideas are not instantly popular. Franchising was considered a  new concept and only small regional firms would participate in the offering such a speculation. My Dad bought 1000 shares and doubled his money. My Uncle bought 1000 shares and kept it until his death. It was his largest asset. Those times and stock brokers are now gone and probably forever.

In the 1970’s I followed my dream and started my own brokerage firm, Birkelbach Investment Securities Inc.(BIS) by turning my dining room table sideways and calling it my desk. Using all my saving, I moved into a downtown office space within 5 years. By 2010 I had 26 brokers and 8 employees before turning my CEO duties over to a Indian immigrant as President. To build my business, I invested almost all my personal earnings and inheritance. Our BIS special nitch was that many of our clients liked to use market timing techniques to trade stocks or liked to build a portfolio of individual stocks that were tailored for their particular circumstances. They needed a brokers to help them. No such firm now exists, just app’s like Robinhood where traders are armatures playing with the big boys. It is like feeding anchovies to the sharks!

THE WAY IT IS NOW; I don’t believe the regulators FINRA and the SEC understand what they ruined. In my opinion, they certainly are not serving the best interests of the public. They knowingly or unknowingly represent only the Big Banks and Big Wall Street firms. ( It make good business sense, as the Big Banks and Investment Banks can afford to pay the billions of dollars in fines the SEC and FINRA have leveled against them). Hot deals now go to the professionals and hedge funds. A local small business is pretty much cut off from bank loans, unless they don’t need the money. Brokerage firms don’t help local firms go public anymore, because the local firms are all gone and the current brokerage firms are now global and owned by the Big Banks, as are the mutual funds. Also, most people don’t invest in a portfolio of stocks through their stockbrokers, because there aren’t any stockbrokers around anymore. Most invest in no-load mutual funds controlled by the Big Banks, through their domesticated well-trained Investment Planners. IP’s play by the unwritten rule  and dirrect their customers to mutual funds controlled by Big Banks and Wall Street. And yet 85% of mutual funds underperform the general market. That’s before the IA’s 1% charge.

STAY FULLY INVESTED??? The financial industry approves of the Efficient Market Hypothesis Theory (EMHT), which proposes that it is impossible to beat the market by trading in and out and that investors should at all times be fully invested in the market in the aggregate, by owning an allocation of mutual funds, because in the long run the market will go up. The dangerous beauty of this theory is that accordingly, your goals will always be achieved sometime in the future. If you just ‘hang in there’ long enough you will make your money back. This gives investors a false sense of contentment.

MARKETS DON’T ALWAYS GO UP:   Mutual funds don’t offer many alternatives to protecting  investors portfolio in a Bear Market. Professional investors can easily go short or long with ease. For instance, while Goldman Sachs was selling worthless mortgage-backed securities to Iceland and Ireland, they were shorting the same securities in their own portfolios. This should not be legal, but it is since the demise of the Glass Steagall Act!

It is human nature for most investors to be positive and patriotic and therefore want to be bullish. We want the market to go up because it is in our general best interests that the economy prospers, so that our careers and our families can prosper.However, markets don’t always go up. During a very long period between 1997 and 2012, the US markets were up 50% of the time and down 50% of the time. Also during that period there were two stock market collapses of 50% each, one between 2000 and 2003 and the other between 2008 and 2009. The Dow in 1998 was 9,000 and was still at 9,000 in 2009, eleven years later. Not everyone is positioned to ‘buy and hold’.

ARBITRATION ENCOURAGED: The financial industry would have you believe that trying a methodology that uses ‘market timing’ is an ‘heretical tactic.’ Lately, with the Dow above 35,000, the EMHT methodology, has investors drinking euphorically from the common spiked Kool-Aid trough and believing that the market will just continue to go up and that Bear Markets are a thing of the past.  Besides, for those who have a fiduciary responsibility, ‘market timing,’ is frowned upon by regulators. For any small brokerage firm that doesn’t drink from the common spiked Kool-Aid, the SEC and FINRA  encourages investor arbitration claims for ‘trading’ ‘(churning’ is defined as four turnovers per year). THE CLIENTS OF BIS LIKED TO TRADE. THAT WAS OUR NITCH. Small firms can’t afford the legal expenses to defend themselves against this so called ‘churning’ rule.

LIKE PUTIN’S RUSSIA? Economist Magazine recently describes Putin’s  domestic policy to reduce competition to favor his oligarchs. They describe a system, which Kirll Rogov, a Russian political economist describes as “soft legal constraints.” To quote from the Economist Magazine, “It involves writing the rules in such a way that to observe them is either prohibitively expensive or downright impossible to follow, then handing out licenses for  payments, to break those rules.” Doesn’t this sound exactly like what has happened in our financial industry? The SEC and FINRA have made the rules (compliance) to run an independent financial firm as either prohibitively expensive or downright impossible to follow. My small brokerage firm suffered from annual audits from the SEC, FINRA, the State of Illinois and my own required audit so often, that it infringed on my ability to do business.  In this way, the SEC and FINRA have eliminated independent competition and has turned over the entire financial industry over to the Big Banks and large Wall Street financial institutions. In my opinion they allow Big Wall Street firms to break the rules for the cost of a small fine, as compared to the large profit that they made in breaking the rules. In this way the the SEC and FINRA, have become knowingly or unknowingly, a tool of the aristocratic oligarchy, which guards Big Banks and Wall Street’s financial industry monopoly. In my opinion, my firm, Birkelbach Investments Securities Inc., was just one of the firms taken out of the way, using SEC and FINRA “soft legal constraints.” As a result of the over regulations of the Regulators, today there are very few small banks and no small brokerage firms allowed to stay in business. 

THE IMPORTANCE OF AN INDEPENDENT VIEW

It was George Orwell’s book of  ‘1984′ fame who said: “Anyone who challenges the prevailing authority, can find himself suddenly silenced.” (Examples: Giordano Bruno burnt at the stake in 1600 for saying the earth revolves around the sun and more recently speaking out today in every tyrannical country such as Russia, Hungry, Turkey, Saudi Arabia, China and  now Hong Kong etc.) Times have not changed!

There has been a major effort to silence me and my negative opinion about the Financial Industry. Of course, as a lone individual facing such a huge power structure, I got crushed!  In 2011, I got ‘barred’ by the SEC after ‘appealing’ a minor $25,000 fine and 90 day suspension for my administrative role as as option compliance officer in a case in which FINRA ‘solicited’ the complaint from one of the firm’s customers. (We settled all claims of the client). It is interesting to note that none of the big bank executive got punished for causing the 2008 crisis, resulting in the foreclosure of 12 million homes.  However, for me as the CEO of a small brokerage ‘Corporation S’ firm, and as a result of the SEC and FINRA prosecution (persecution), I lost my business, which was my largest asset, my retirement from 12b1 fees and my reputation. I also lost my access to being quoted  by such media as Reuters International News service (once a month),The Wall Street Journal and Barron’s Magazine. I found out a little too late, speaking out against the SEC and FINRA  is not tolerated. And I got sued by the SEC for fees, my bank JP Morgan closed all my checking accounts and all cancelled my charge cards. Like Goldman Sachs does, I was suppose to pay the fine and move on.  As I ‘appealed’ their fine and sanction, I was ‘not’ on the ‘team’ and had to be tossed off. Faced with this tyranny and censorship, it is important for me to still speak out.

I feel that there is a need of an independent voice outside of the massive and powerful US Financial Industry, to warn investors of a view that the Regulators (FINRA & SEC) and the Financial Industry would rather have silenced.

In full disclosure, I believe the Financial Industry should tell investors that investing in the stock market is dangerous and that most people should  treat stock market investing only as a speculation and not as a form of savings  Further, this problem could be solved by requiring a stockbroker’s professional independent advice!

As Bob Dillon sang, “The battle outside is raging! It’ll rattle your windows.  And shake down your walls. For the times they are a changing! And maybe this time, because of populism, things may not be a changing for the better! (January 6, 2021) To quote from Nietzsche “The love of power is the demon of men. Let them have everything – yet the demon waits and waits and will be satisfied.” Or as the Pogo cartoon says; “We have seen the enemy and it is us!”

MY FEAR is that  Big Corporations and the top 1% (the aristocratic oligarchy), will continue to dominate  the financial industry (Wall Street) and our economic environment.  This has left individuals, the Middle Class, small businesses and the investing public very vulnerable. The general public, in my opinion, has become so weakened, that it is powerless to stop  an upcoming financial and moral crisis from progressing. As Tom Freeman  said in a 7/30/2020 PBS interview on Amanpour  “if ‘rule of law’ continues to be in jeopardy in the United States, we will not only loose our freedom, but also our prosperity.”

God Bless America!

First they came for the communists,
and I didn’t speak out because I wasn’t a communist.

Then they came for the socialists,
and I didn’t speak out because I wasn’t a socialist.

Then they came for the trade unionists,
and I didn’t speak out because I wasn’t a trade unionist.

Then they came for the Jews,
and I didn’t speak out because I wasn’t Jewish

Then they came for me,
and there was no one left to speak for me.

CARL M. BIRKELBACH

We are at the crossroads!

Carl

Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com