Understanding the investment sales process
There is a saying that nobody appreciates a good story more than a good storyteller. This is particularly true in investment sales, which I suppose is a reason there are so many copycats. If it works, they say, why change it.
Maybe you have not thought about it, but there are three components to investment sales of say stocks or funds. These are (1) the storyteller (2) the incentive of the storyteller, and (3) the stories being told to attain the incentive. I could have added a fourth, which would be the consumer, but honestly, stocks are not bought; they are sold. I wish it were not true.
In fact, securities regulators, in seeking to have the consumer become a more active participant in the investment sales process, have implemented the Know Your Client rule. Sadly, this law has as much effect as the cancer warnings on a cigarette package. Tobacco companies for example, like most sell-side financial services companies, are truly more interested in the consumer’s money than their health and welfare. Profit is the incentive and the reason for their behavior.
When I first blogged like this, I was called a cynic. Gradually truth prevailed.
Let’s discuss the investment sales process.
(1) The storyteller is a person, a human being like you and me. By nature, we may be honest or something less. We may be competent or something less. It is always a matter of degree.
In my career, I have met the full range from guardians of truth to sociopaths, many hundreds of all types. I found it pays to know with whom you are doing business.
Once, when checking the background of a super-friendly group of promoters with my contact in the police, I was told, “Unfortunately these people do not walk around with the word “crook” on their foreheads”. Although human personality cannot be preordained or regulated in the securities industry, that was an interesting concept nonetheless.
Storytellers in the securities industry are called producers aka Dream Merchants. I was one for many years. My industry respected me for being straight up, but I admit to their being a heavy cost and after several years, I was happy to switch to the buy-side.
(2) The incentive to the storyteller determines that person’s state of mind. The higher the incentive, the higher the degree of conviction and motive. Securities law and regulations require full, true and plain disclosure of an incentive.
Regrettably, this aspect of investment sales is ineffective because too often, there are the occurrences of widespread investment mania caused by inappropriate incentives in the industry, rather than hidden incentives. The sell-side, of course, wrongly places the blame on the consumer.
That such boom-bust cycles are highlighted by increasing fraud up to the point of the eventual market crash is proof that regulators ought to be more concerned with incentives oversight and less focused on the storyteller.
(3) Because stocks are sold, and not ought, the story must have an inducement or cause for the transaction with the consumer to occur. The hook in the story could be fear or it could be greed. In doing so, the storyteller overlooks facts in favor of implication. If the appeal is to greed, for instance, we call the process one of painting lipstick on pigs. Such a story always sells better than would a reference text on pigs.
I refer to the teller of a story; however, you should understand that the responsible officers of a sell-side firm are the people who generate and approve the stories in the market and they set the incentives. The sell-side firm labels each successful story as production, i.e., the ones that end in transactions, and the officers of the sell-side firm share the profits of production between themselves and the producer.
Why is it that, in the case of fraudulent production, the regulators fine the producers, i.e., the storyteller, and seldom fine the responsible officers? If in fact they fine the company, the company pleads no contest and leaves their shareholders, creditors, and junior staff to be the ones that pay.
The investment sales process is dysfunctional simply because the securities industry is structured by and for the benefit of the sell-side of the industry. It may work today, and many people think so; but, will it work tomorrow? Ultimately, the industry will fail because the sell-side, which is the service side, is dictating to and failing to meet the needs of the client-side, i.e., the owners of capital.
In the end, it is the master, not the servant, who will prevail. That is the law of nature.
END
Disclaimer
This website / report are to be used for informational purposes only and are not intended as a solicitation, recommendation or offering of any security. This website / report are not intended to provide investment, tax or legal advice. Greenfield / Cara Media acknowledges that each person has individual needs that may not be met on this website / report and that all investors are not suited for the services, products or securities discussed herein.
Market analysis on this website / report may not be correct, so each investor must make their own independent decisions or obtain professional advice prior to taking investment actions. We make reasonable efforts to be accurate but there may be inaccuracies due to incorrect assumptions, calculations or bad data from another source that create errors in content. This website / report contains information regarding investments that are subject to many risks beyond our control including, but not limited to; economic, currency, geopolitical, business and technological risks.
This website / report contains investment opinions and information that should not be considered a recommendation to buy, sell or hold any security or follow any investment strategy discussed herein. There may be conflicts of interest with respect to investments discussed on this site due to our principals and/or our clients holding positions or contrary positions in securities mentioned on this website / report.
This website / report are not intended to be used by any person or entity in any jurisdiction or country where such use is illegal or against securities regulations. This site is not intended for use in any jurisdiction or country that requires Greenfield / Cara Media to obtain registration that it does not currently hold.
All content on this website / report is the property of the owners and must not be used, copied or distributed without seeking prior consent of Greenfield / Cara Media.
By using this site, you agree that Greenfield / Cara Media, its principals and affiliated companies are not liable for any content related investment decisions that you may make. This website / report do not provide investment, tax or legal advice. The opinions and work on this website / report are subject to change without notice.