Brokers are good guys, bad guys Gains win praise

losses stir up anger

September 23, 1990|By David Conn

You could call this story, "When bad things happen to good brokers." Listen to this:

John Slaughter, branch manager of the Chapman Co.'s headquarters office in Baltimore, bought some shares of MNC Financial Inc., parent of Maryland National Bank, for a client who works at the bank.

He purchased the stock when it traded at about $20 a share, and it began to slide, a victim of an earnings decline, a weak stock market and an even weaker real estate market.

Mr. Slaughter called the client after the stock had fallen 10 percent, just as he had promised he would, and she said, "Don't sell it. I work there, and I'm in it for the long term."

Two weeks ago, after the stock had fallen to $9 a share, he saw her on a downtown corner, called to her and waved. She was at Light and Baltimore streets -- middle of the day, busiest street corner in the financial district -- and she shouted back, "You are the worst investment broker in the land!"

What's the moral? "As a broker, no matter what, you're a hero when the stock goes up and you're the bad guy when it goes down," Mr. Slaughter says.

MNC since has fallen even further, to $6.625 a share, within a point of its one-year low. But Mr. Slaughter isn't the only bad guy in town: The Dow Jones industrial average, which closed at 2512.38 on Friday, has lost 16.2 percent since its all-time high of 2999.75 a month ago.

The declining stock market is the main reason brokers are taking more abuse -- verbal, emotional and sometimes physical -- than during most of the 1980s.

Mostly, though, brokers are learning to deal with hard feelings. A broker in the Pikesville office of a regional firm has to buy Ben-Gay in bulk these days: Whenever IBM Corp. loses a couple of points, a client shows up in the broker's office and punches him in the chest. Hard.

Most clients, unlike the woman on the street corner, understand that the broker is not responsible for the stock market, Mr. Slaughter says. "Our job foremost is reporters: reporting on the financial news and bringing it to a level where they can understand it," he says.

The weak stock market is "going to separate the individuals who think this is a business for the quick buck" and those who are devoted to the long term and to serving their clients, Mr. Slaughter says.

Older brokers say their younger colleagues, lacking the experience of a bear market, haven't properly prepared clients for the worst.

"Ninety percent of the brokers in the business today have come in since 1980," says Louis Akers, vice president and Baltimore branch manager of Ferris, Baker Watts Inc. "I call them bull market babies. . . . I think people have lost sight of the fact that you can lose a lot of money in the stock market. You have to teach people to teach clients to be risk-averse."

Another natural source of friction during a bear market is the discretionary account, where the broker has legal authority to conduct trades without the client's knowledge.

"Discretionary accounts are invitations to trouble, in my opinion," says Charles W. "Pete" Schaeffer Jr., senior vice president for investments at Wheat First Securities in Baltimore. "A discretionary account lends itself to abuse by the broker. And even though a lot of documents are signed giving the broker discretion, this is a litigious society."

There are dishonest brokers, those who churn accounts -- trade excessively to generate large commissions -- or out and out steal from clients.

But customer complaints have declined in the last year, partly because of a crackdown on penny stock firms. The penny stock industry is the source of more than its share of customer complaints -- 40 percent of all complaints last year,according to the National Association of Securities Dealers.

As the securities industry has gotten tougher on penny stock brokers, their share of complaints to the NASD has fallen: In the last quarter of 1988, 51 percent of all complaints to the NASD were about penny stock firms; by the fourth quarter of last year, that figure had dropped to 31 percent. At the same time, the number of overall complaints has declined (see chart).

There are no corresponding figures tracking fraud against brokers -- firms tend to keep that sort of thing quiet. But Baltimore-area stockbrokers outlined some of the reasons for and results of client fraud.

George King, a broker, recalls the man who walked into his office at Advest Inc. looking to trade some IBM stock. He showed about $60,000 in municipal bonds as collateral, and Mr. King opened the account. Before he made any trades, however, Mr. King learned from a friend at another brokerage that the client had pulled this scam on other firms:

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