Is it Time to Trust Brokers?

The big Wall Street brokerage firms/banks seem to run in a cycle of abusing their customers until there’s a crisis or crash and then facing additional regulation aimed at putting a stop to their less than ethical activities.  The more recent examples followed the dot com crash in 2000-02 when the NASDAQ stock index fell about 75%.  The brokerage firm analysts readily gave strong buy recommendations to many tech stocks to their clients while privately admitting that the stock’s prospects were awful.  Further regulations and fines followed in an effort to make sure that didn’t happen again.  And after the 2008-09 crash, Congress passed the Dodd Frank legislation that created another attempt to rein in the reckless and abusive behavior of the Wall Street firms.  It’s now 8 years since the latest crash and more than 6 years since Dodd Frank passed so maybe the abuses have been cleaned up and the firms are being more responsible now?  No.

Bloomberg published an article the other day regarding Goldman Sachs and their stock recommendation changes on Tesla this year.  On May 18th they upgraded the stock to a buy, which coincidentally was the same day their brokers helped Tesla raise more money by selling additional shares.  Goldman clearly is conflicted in selling shares and reaping huge fees on one side and on the other, convincing their clients to buy these freshly upgraded shares as a great investment.  The research analysts are supposed to be separate from the salespeople brokers but Goldman insists the timing was a coincidence.


Also during the second quarter, Goldman’s fund managers, one of the top 20 holders of Tesla stock, apparently ignored their own analyst’s ratings and cut their huge holdings of Tesla stock in half!  That was clearly the better call, since Tesla has underperformed the S&P 500 by 10% from the May 18 upgrade until October 6 when Goldman decided to downgrade the stock, cutting their target price of the shares by 23%.

And Goldman isn’t the only one to pull this kind of stunt.  The Bloomberg article says “In August of last year, the company hired Morgan Stanley as one of the lead managers of the $783 million offering, priced at $242 a share. Three days after the announcement, Morgan Stanley analyst Adam Jonas raised his estimated future price for the stock to $465 from $280.”  Now, 14 months later, the stock is around $200 per share and it never even hit his $280 target.

Meanwhile, Investment News reports that Morgan Stanley is in trouble with Massachusetts regulators.  “Massachusetts charged the wirehouse with conducting an unethical, high-pressure sales contest among its financial advisers to encourage clients to borrow money against their brokerage accounts. The contest was run despite an internal Morgan Stanley prohibition on such initiatives.”

And, last week, Wells Fargo’s Chairman and CEO, John Stumpf, resigned over the sales scandal at the firm.  The bank agreed in early September to pay a $185 million settlement for opening as many as 2 million accounts without customers’ knowledge.  While Stumpf is out over his incident, neither Goldman nor Morgan Stanley seem to have seen any repercussions for their Tesla stock abuses.  Apparently there is so much wrongdoing on Wall Street that FINRA and the SEC can’t keep up.

These brokerage firms that represent sellers and buyers and have their own proprietary products have so many conflicts that they can’t possibly provide objective advice to their investor clients.  Fortunately, most investors have a choice and can work with advisors that work exclusively for them.  Seek out a fee only Registered Investment Advisory firm and stay away from the FINRA licensed salespeople.  For more on how to choose a financial advisor see our complimentary checklist on our website.

Share This Post

Share on facebook
Share on twitter
Share on linkedin
Share on facebook
Share on twitter
Share on linkedin


This field is for validation purposes and should be left unchanged.