The Death of the Stock Broker
THE DEMISE OF SMALL BROKERAGE FIRMS: When I grew up, 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 3,700. Within this group are a very small group of small broker-dealers and regional firms. (http://www.businessinsider.com/demise-of-the-stockbroker-2012-3) Broker-dealers, not connected to large banks are quickly closing, because they are 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!
BIG BANKS DOMINATE: The industry has been taken over by the BIG banks and FINRA and SEC regulations have intentionally or unintentionally encouraged this. In addition, Dodd/Frank regulation continue to be delayed or weakened. 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 39 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 banks are gone also. For individuals, rather than investing in a portfolio of stocks through your stock broker, investors use investment advisers, that suggest that you diversify your money in a series of no load mutual funds, also owned by the banks. 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 underserved.
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 company start-ups go public. One of those firms was Kentucky Fried Chicken and my first IPO. Yes the Col. in 1963 was there, all dressed in white. There was not a big demand for the stock, as people were unsure as to whether ‘franchising’ would work. (Ha!) New ideas are not instantly popular. Franchising was considered a new concept then and only small regional firms would participate in the offering.. 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 gone and probably forever.
In the 1970’s I started my own brokerage firm, Birkelbach Investment Securities Inc. by turning my dining room table sideways and calling it my desk. By 2010 I had 26 brokers and 5 employees before turning my CEO duties over to a Indian immigrant as President. To build my business I reinvested almost all my earnings and inheritance. Our 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 is tailored for their particular circumstances. They needed a brokers to help them. No such firm exists now!
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. ( 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 anymore 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. And yet 85% of mutual funds underperform the general market.
MARKETS DON’T ALWAYS GO UP: Mutual funds don’t offer many alternatives to protecting your 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.
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 26,000, 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). Small firms can’t afford the legal expenses to defend themselves.
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.
THE DEMISE OF THE MIDDLE CLASS AND THEIR POWER: In America, ‘capitalism’s’ spiritual home, a survey conducted in 2016 found that just 54% had a positive view of the term. This seems to be the case because the benefits of ‘capitalism’ have recently only gone to the top 1%. Everyone else feels insignificant. There seems to be a crisis in confidence as the Supreme Court has a ranking of only 30%, public schools 26%, the criminal justice system 23%, and Congress 7%. In the US all the growth in income is going to the top 1% as some 400 families control 62% of the wealth. It’s actually a little worse worldwide where only 80 families control over 50% of the wealth.
The 2016 election showed just how unsatisfied people are. They voted for change ( a Republican President, House, Senate and Supreme Court), but change is unlikely to come. Republicans promote an ideology of saying they are for business, free markets, less taxes, less regulation and guns. They are against abortion, immigrants, blacks and that they mistrust big government. However, this ideology is really a subterfuge, as it keeps voters attention from the real issues of global competition, automation and a carbon free technology, while the super rich play ‘winner take all. The 2018 election gave the House and many State governments to the Democrats. However, it appears the Democrats are powerless to stop an upcoming financial and moral crisis from progressing.
Between 1980 and 2017, almost all of the income growth has gone to the top 1%. One family, the Walton’s earn more income each year, than the bottom 40%, or 130 million Americans. Pew Research said that this bottom 40% can not even come up with a mere $400 in case of emergencies. (landing many in jail for parking tickets or moving violations). With productivity up, there has been little increase in working wages and yet CEO pay has gone up from 65 times, to 250 to 500 times the average worker’s pay. Small businesses and entrepreneurs, who employ 80% of the nation’s people, are being squeezed out of business by unfair advantages given to ‘Large Corporations’ and ‘Big Banks.’
According to a recent Pew Research report, the United States, as ranked against other nations, is 44th in health care, 44th in math scores, 39th in basic education, 34th in access to clean water, 35th in meeting basic human needs, has the highest first day infant mortality rate and the highest child poverty rate (21%) among industrialized nations. That’s one in every five of our children living in poverty! As great nation, we must be better than that.
THE ILLUSION OF POWER: Since Citizens United, that declared corporations are people (If they are people, they are sociopaths), most changes in government and the SEC are dictated by donors and election contributions. A recent Princeton study has shown that public opinion has no effect on the outcome of an issue in Congress, whether there is 0% approval or 100% approval, the line of accomplishment is flat-lined. ‘Donor power,’ has taken over the rights of ‘We the people’. Most of the tax cuts went to the top 1% and Corporations and very little will trickle down. To believe that investors and voters are being heard, is an illusion in my opinion. There is a big risk that since government agencies are not responding to the public (“We the people”). The public may not bail out the Banks and their high priced executives during the next financial crisis and stock market collapse. The Congress, by its inaction of Dodd/Frank are allowing the banks more lead way with derivatives (3x as much as 2008) and are increasing influenced by large donations, have pursued economic policies, which I believe, are damaging to the common good. Us government and corporate debt and worldwide debt is a dangerous glutinous levels! Can another Bear Market happen? Sure! Read, This Time its Different: Eight Centuries of Financial Folly by Carmen M. Reinhart, Kenneth S. Rogoff.
I believe political stagecraft, through skilled manipulation of facts, has given the public the perception and the illusion of power, rather than participation in real power. Public opinion has been manipulated and nullified. The Middle class is disappearing. We have only ourselves to blame. Like Pogo said “We have seen the enemy and it is us.”
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 cash 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 small brokerage firms out of the business by compliance rules that are either prohibitively expensive or downright impossible to follow. The SEC and FINRA have eliminated the independent competition and have turned over the entire financial industry to the Big banks and large global financial institutions. They allow these companies to break the rules, for the cost of a small fine, as compared to the large profit that they have made in breaking the rules. In this way the large financial institutions feed the SEC and FINRA, which have become a tool of the aristocratic oligarchy, which guards their 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 tool of the oligarchy. In my opinion, the current administration is functioning without restraints and will favor their oligarchy buddies, causing the United States to look more and more like Putin’s Russia’s Kleptocracy is an economy dominated by the privileged oligarchy of the few (top tenth of 1%).
NEED FOR A NEW AWAKENING: In my opinion the current political setbacks are the last vestiges of a backlash against immigration, multiracial and multicultural progress and a reaction to global and automation competition by our workforce. People are frustrated. They do want America to be great again. However, we cannot go back to a time when after World War ll, when we were the only nation with our industry intact. Now we have heavy competition from other nations, many of whom are better educated than the average American. People are frightened, as a new era of globalization, multiculturalism, automation, bio-tecnology, artificial intelligence and a carbon free economy is descending on us. We must address these challenges of the new economy as opportunities! We can’t solve this problem with old oil economy tactics of bringing manufacturing and coal back. We need, better education and training of our citizens and a plan to use new technologies to solve our problems. We need to bring stock brokers back to help investors design a portfolio of stocks that is tailored just for them as individuals. We need to bring small local banks back to our community.
We need to help initiate a new era of opportunity, which will lift the world into a ‘New Awakening’ of wisdom, love, compassion and generosity for the common good of all. (See my Investment Strategy Letters). In my opinion, neither the Republicans nor the Democratic Party are prepared to initiate a new era of opportunity for the future benefit of all Americans.”
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.” (For example Giordano Bruno burnt at the stake in 1600 for saying the earth revolves around the sun or Martin Luther King Jr for his civil rights statements). Times have not changed! There has been a major effort to silence me! 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 10 million homes. However, for me as the CEO of a small brokerage 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 just recently my bank JP Morgan, closed all my checking accounts and all my charge cards. Faced with this tyranny and censorship, it is important for me to still speak out.
For me, it all comes down to this question; Is it human nature for us to be virtuous, kind and fair for the common good by seeking pluralistic solutions through a democratic process OR Is it human nature for us to be emotionally swayed by our greed and prejudices and to deliver our power and trust to an autocratic government of a demagogue? The battle for the hearts, minds and votes of the public continues as I speak.
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! 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 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
THE TIPPING POINT:I believe the world is now at a tipping point of moving toward either destruction (nuclear or autocratic aristocratic oligarchy), or a new era of opportunity and enlightenment for the common good. However, to achieve this harmony, we have to change from emphasizing our differences, to opening up to our connectedness and reclaiming the political power of ‘We the people.‘ Good Luck!
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
PS: 11/5/18–Merrill Lynch just announced it is reducing commissions except for products sponsored by their Bank of America owner. How blatant!
Truth in our Times by David E McCabe The New York Times lawyer says it all with his subtitle: Inside the fight for Press Freedom in the age of Alternative Facts. As the President tries to suppress critical voices of our long established First Amendment rights, this book speaks out. (while it can)
The Threat by Andrew McCabe. Written by the former FBI director after Come. Writes “Trump has shown that he does not know what democracy means. He takes no action to protect it.” The warnings are familiar.
The University of Oxford just predicted that 47% of all US jobs are at risk of being replaced by robots and artificial intelligence in 15 years.
The Robots are Coming by Andres Oppenheimer. sub-titled; The Future of Jobs in the Age of Automation. The last time an Oppenheimer had a message for us, it was as explosive and as devastating as this forecast.
The Globotics Upheaval: by Rus Belt Just kidding! by Richard Baldwin. Sub-titled: Globalization, Robotics and the Future World. Algorithms will also take over white-collar jobs.
Rise of Robots by Martin Ford. subtitled Technology and the Threat of a Jobless Future. He says, when the employment appocaplice comes, it will happen so fast that workers wont have no time to adjust.
Okay! I don’t know what to worry about 1st, the end of democracy, New York under water because of ‘global warming’ or the coming of a dystopia civilization led by the robots. There are some advantages of being 79!
Recent Important Books that I highly recommend:
Fear by Bob Woodward. New Yorker Magazine said about the book, ‘The real crime is already in plain sight” Democracy is getting crushed and the ultimate outcome, unlike Nixon, will not be pretty. Democracy in Chains by Nancy MacLean explains in detail of how the Koch brothers and the Mercers are executing a plan to divide the US through our fear of immigration, multiculturalism and racial differences.The Road to Unfreedom by Robert Snyder which explains how Putin is executing a plan to have us loose faith in our institutions ( the Presidency, the rule of law, NATO, NAFTA, the safety of our identity and our financial information) though cyber attacks. Can Democracy Survive Global Capitalism by Robert Kuttner describes how Fascism is winning throughout the world and how the US oligarchy and corporations have captured the machinery of the government to promote it. Yes we still Can by Dan Pheiffer, tells a story of Russia and Trump influencing the Republican Party for an upcoming constitutional crisis. War vs Peace by Ronan Farrow:that tells how diplomacy of the state department is being replaced by military policy; Us vs Them by Ian Bremmer: tells how we are being distracted from solutions of automation and globalization by political rhetoric. Tailspin by Steven Brill tells how the aristocracy and oligarchy are perpetuating a take it all attitude, that will make our economic system dis-functional. A novel: Ready Player One by Ernest Cline that presents a virtual reality world of the future run by a Google type corporate conglomerate. Evicted:Poverty and Profit in the America City by Matthew Desmond;6,000 people are evicted every day! How Democracies Die by Steven Levitsky; How we are headed for a economic and political disaster.The Common Good by Robert Reich, an attempt to see the value of a progressive political policy to solve inequality.
Three books that I have just read with a positive attitude:Hope in the Dark by Rebecca Solnit;Talks about maintaining a positive mental attitude. Enlightenment Now by Steven Pinker tells about how the macro world is a much better place than ever before and The Soul of America by Jon Meacham; While the American story has not always—or even often—been heroic, we have been sustained by a belief in progress even in the gloomiest of times., “The good news is that we have come through such darkness before”—as, time and again, Lincoln’s better angels have found a way to prevail. I doubt it, but lets pray for solutions.
I believe the world is now at a tipping point and is moving toward destruction (nuclear or autocratic oligarchy) or a new era of opportunity and enlightenment for the common good.
We are at the crossroads!
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
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