The Rap Sheet Attraction

Sometimes I engage in precisely the behavior I tell you to avoid.  This is one of those times.

Seeking patterns

It’s been said that humans are pattern seeking.  We try to find order where there’s only chaos and unpredictability.

The securities industry profits handsomely by perpetuating the myth that it can discern patterns in the stock market.  It claims the ability to help you reach your retirement goals by exploiting these patterns to your benefit.

The majority of investors fall for this pitch, notwithstanding the mountain of evidence contradicting it.

It’s possible to understand this behavior because it appeals to basic human instincts, like fear, anxiety and (most of all) greed.

Here’s what I don’t understand and can’t explain.

The rap sheet attraction

Help me understand this.  Why do you trust brokerage firms with a long history of ripping off their clients with money you’re saving for retirement?

This headline, dated June 19, 2018, in InvestmentNews caught my attention:  Merrill Lynch fined $42 million for misleading customers.  I’ll spare you the sordid details.  It’s enough to know that Merrill mislead institutional clients about how it handled their trading orders and went to great lengths to cover-up its conduct.

The fact that Merrill treated its best customers – institutional clients – in this cavalier manner should be very concerning to retail clients – like you.

This is not Merrill’s first brush with regulatory authorities, and it likely won’t be it’s last.

Jeff Maxfield at The Motley Fool published a list of regulatory actions against Merrill’s parent company, Bank of America, as of July, 2014.  In a subsequent article, dated October 1, 2014, he updated the list, noting:  All together, Bank of America has faced $91.2 billion in legal fines and settlements since the beginning of the financial crisis.

That’s “billion”, with a “b”.

Merrill’s errant conduct continues.  In a press release dated June 23, 2016, the Securities and Exchange Commission announced that Merrill Lynch has agreed to pay $415 million and admit wrongdoing to settle charges that it misused customer cash to generate profits for the firm and failed to safeguard customer securities from the claims of its creditors.

Just last month, in another press release dated June 12, 2018, the Securities and Exchange Commission announced,  Merrill Lynch, Pierce, Fenner & Smith Inc. will pay more than $15 million to settle charges that its employees misled customers into overpaying for Residential Mortgage Backed Securities (RMBS).  Merrill Lynch agreed to repay more than $10.5 million to its customers and to pay penalties of approximately $5.2 million.

You get the point.

I’m not suggesting that Merrill is any worse than some other brokerage firms, but that’s little comfort to its clients.

Big profits

Here’s the anomaly. According to this article published April 16, 2018, Merrill posted record quarterly revenue of $4 billion, boosted by higher asset management fees and net interest income.

I have never seen a regulatory fine against any evidence-based advisor for conduct harmful to investors.

Given a choice between brokers with an extensive rap sheet and advisors whose ethical conduct is unblemished, what’s the appeal of the rap sheet?

Maybe I’m just trying to find a pattern where none exists.


Resource of the week

You can see the complete list of Bank of America’s regulatory fines and settlements from 2008-2014 in this article.

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