A Bonus for a Job Well Done?

Let’s start with the idea of a bonus. It’s meant to be compensation for a job well done. Now, if the idea of losing enough money to ruin a world class company and bring the world financial system to the brink of collapse is our idea of a job well done, then, “ka-ching!” Party on! I’d love to see the contracts that even hinted that a bonus was due under such circumstances.

But, frankly, the bonus issue is a red herring for a more important question. Specifically, why the F$#* do these people still work there? Just what do they need to do to get fired? Losing more money than any group of individuals has ever lost in the history of the planet isn’t enough? Ruining a world class company not enough? Destroying trillions of dollars in wealth around the globe not enough? Just how much money does one need to lose before one gets fired? I don’t need an exact figure here; a ballpark approximation will do. And why in heaven’s name would we not only want to retain these people, but also go to the trouble of referring to the bonuses as retention bonuses?

Now, we’ve all read the reason given (and this is where it gets truly nauseating): “The credit default swaps are so very complicated that only the geniuses that arranged them in the first place are ’smart’ enough to sort them out.”

Several points need to be made here to clear up this utter fallacy.

Are These Guys Really Geniuses?

First, the idea that these geniuses are smart is laughable. I’m sure they all scored well on their entrance exams and did well in school. They probably all have certifiably high IQs. I’m not impressed. I’ve had the privilege of meeting many, many smart Wall Street geniuses in my career. I’m talking rocket scientist, slide-rule-using, smarty-pants-type guys. And the smarter they are, the dumber they tend to act. Why? Because they think they’re smarter than the rest of Wall Street.

Many of these slide rule guys are arrogant enough to let you know that you are not smart enough to understand them. This arrogance completely undermines their intelligence. Not one of the geniuses at the AIG Financial Products Division that financially engineered the demise of AIG will ever, ever create the amount of wealth they destroyed for AIG shareholders. Ever. Whatever any of them do for the rest of their careers, whatever success they earn, they will finish in the red as far as adding value to the system. Oh, they may do fine financially, but their net contribution to the system will be hugely negative.

Second, please do not believe for a second that only these geniuses can sort out the credit default swaps they created. To this the Q sez “Bolshoi!” These deals are not that complicated. What made them dangerous was the lack of transparency, not any inherent complication. Additionally, Wall Street is full of smart guys and any number of them will be more than happy to help out.

Third, and most importantly, why in heck would you allow the jackasses who ruined the company to have a hand in cleaning up the mess? When your surgeon leaves a sponge in your abdomen, do you have him perform the surgery to remove it? Maybe it’s just me, but I’m thinking, “Thanks, but I’ve already seen your handiwork. I’d like to give someone else a chance.”

The populist uprising over the bonuses is entirely justified. The criticism of the outrage arguing that it undermines the recovery and focuses attention in the wrong place may well have merit. But, the situation could not have been handled any worse. If Q had been in charge, every single person in the AIG Financial Products Division above the level of telephone receptionist would have been summarily fired. To the point that the contracts called for mandatory bonuses, I’d let them see me in court. Those very same contracts should contain provisions for a minimum standard of care and job performance. I’d take my chance with the jury.

What’s Really Going on Here?

This all begs the question: Why didn’t these guys get fired in September and why the massive amounts of money (tacitly approved by both the Bush and Obama administrations) in retention bonuses? Is it possible that there’s more here than we care to know? That maybe this mess is bigger or more intertwined than we might guess? That keeping these guys in place kept a lid on the lack of transparency? I’m not normally a conspiracy theorist but I reject out of hand the reasons given for the retention of these losers and the reasons for the bonuses. Draw your own conclusions.

As impressive as Stewart was, he seems misguided on two points.

First, he gives way too much credit to Cramer. Cramer is a TV personality. Period. Cramer actually used the E word (entertainment) in his defense towards the end of the interview. I have no knowledge of Cramer’s true level of success as a hedge fund manager, but it strikes me as odd that a successful hedge fund manager would become a TV personality. I’m not saying it can’t happen, but if it did happen it only happened once.

Second, CNBC is for entertainment purposes only. I’ve had the opportunity to be a guest on the network on more than one occasion, and when you see the process from the other side of the camera you get a real good feel for the level of detail involved.

In advance of your appearance you get a call from the producer. The producer goes over some basic information and some general questions. This is your opportunity to get the facts straight, and generally the producer appreciates the effort. Unfortunately this information tends to leak out of the bucket by the time the interview actually takes place. This shouldn’t be too big of a surprise; the host is on TV for several hours a day and rolls from one interview to another. The prep time spent with the producer may have been upwards of 30 minutes for a three-minute segment. But the host has nowhere near that amount of time to prepare as the host also has to be on TV most of the day. This is a source of frustration for the guest but is a true disservice to the viewer.

Also understand that conflict makes for great TV. Stewart has been rightly critical of CNBC for fawning over “rock star” CEOs and failing to challenge them. In truth, however, many of these hosts DO try and get into it with their guests, but they don’t do it in an effort to get to the truth. They do it to create conflict because conflict and drama make great TV.

One final point. Everyone in the financial business knows most of these TV personalities have a poor understanding of business and finance. Most professionals that have CNBC on during the day have the sound off.

I’m not saying not to watch CNBC or other financial news channels. In fact, they do a great job disseminating market news (here I mean things like statistical releases, earnings reports etc.). Learn to recognize when the news reporting stops and the analysis/entertainment begins.

The delivery of advice and guidance with a transaction based compensation model has some serious flaws, not the least of which being that it provides the broker with an incentive to make transactions. (The industry actually has a term for excessive activity: churn.) There are a number of other conflicts in this business model and the net affect is to frequently place the broker at odds with the client’s best interest. A good broker–and there are many of them–will overcome this conflict, recognizing that their long term best interest is their clients’ wealth and well being.

The development of the fee-only advice model has successfully forced the traditional Wall Street brokers to change their practices, but nowhere is this more evident than in the nomenclature used to describe the Customer’s Man. Over the course of the last 40 years the broker has gone by a number of different monikers, and each of those titles was designed to obfuscate the fact that the broker was a commissioned salesperson.

An Offense by Any Other Name

Customer’s Man, Registered Representative, Associate, Account Executive, Financial Consultant, Investment Consultant, Advisor, and even fancy corporate titles like Vice President are some of the titles used by the brokerage industry over the last 50 years. The title in vogue today is Advisor. Yes, an advisor may have a fancy corporate title as well, but virtually all stock brokers will tell you they are advisors or financial advisors.

This is a bit of a problem for the fee-only financial advisor industry which made an effort to distance themselves from the brokerage industry. They like to be called advisors. And they actually provide advice, and in fact, most fee-only advisors manage client accounts on a fully discretionary basis which means they simply manage client portfolios by making changes in holdings as needed.

What surprises me is how well the brokerage industry tactic has succeeded. Investors use the phrase advisor to describe their personal provider, but frequently do not know if they pay via an asset based fee or via commissions. To be more precise, fee-only clients generally know how their advisor is compensated; the transaction clients generally do not know. They’ve been taken in by the use of the title ruse.

Even financial service professionals often do not understand the distinction between advisors and brokers. Within the industry they are all generally referred to generically as advisors even though these distinctions are critical within the industry. It is no wonder clients are confused.

40 Years Later, Still Dropping the Ball

The fee-only industry lobbied for a clear set of designations that would have preserved the term advisor for fee-based providers. That effort was unsuccessful, as FINRA states on their website: “FINRA does not approve or endorse any professional designation.”

There are reasons many clients prefer the commission model. And a good broker or advisor absolutely deserves to be paid for their services. The point here isn’t that advice and guidance isn’t worth compensation whatever the delivery mechanism. The issue is that Wall Street has decided to obfuscate their compensation model and blur the distinction between their commissioned sales force and fee-only advisors. You can draw your own conclusions as to why.