I always find it interesting how a scandal, even a major one, fades so quickly from the attention of the press and the collective attention of consumers. These scandals are, at heart, a test of character—and what is more important to know about a broker or company you plan to do business with than their character? Shouldn’t a scandal like selling junk mortgages as prime paper to unsuspecting investors, or allowing preferred customers bet against the investments you’ve sold to (presumably) less-important customers? Or allowing hedge funds to trade ahead of your mutual fund customers? Or publishing research reports you know to be falsely puffed up, and then alerting management that the companies in question were, in fact, terrible investment opportunities?
In this case, I’m thinking about the now-infamous Forbes “Top Advisor” rankings, where the organization that the magazine relied on to research and create the list (RJ Shook) made an undisclosed $6 million payment to Forbes editor Randall Lane. The reason for the payment is somewhat murky; Forbes fired Lane, and then circled the wagons instead of fully explaining the reasons why (surely a failed test of character on its part)—but do we even have to ask? Morgan Stanley gave away the game when it ‘pulled out’ of the ratings, as did Wells Fargo.
Gave away the game… how? First, it has always been suspicious that the rankings were dominated by top producing Morgan Stanley brokerage offices (64 out of the 250 in the latest list), and given the various scandals at Wells Fargo, would its offices have been included in a truly impartial search? The easy question is how can Morgan Stanley ‘pull out’ of a truly independent, impartial process for selecting ‘Top’ (whatever that means) advisory offices?
There’s enormous value in having the firm’s offices on lists such as these in a major consumer publication, which means that there’s enormous potential for under-the-table payments to ensure that a firm’s offices get that kind of marketing exposure. Since nobody’s explaining the situation in transparent detail (more failed test of character), we can guess that Morgan Stanley and Wells Fargo were greasing the palms of Shook’s researchers, and this largesse depended on Shook getting the ratings into the pages of Forbes. We can guess—and it’s an educated guess—that the payment to Lane was to ensure this continued access, to keep the money machine going.
And it would have kept going, until the payment came to light. Consumers everywhere would have been led to believe that these ratings were objective, and that calling one of those brokerage offices ensured access to a ‘Top’ (whatever that means) service experience and expertise. We can only guess how many consumers Forbes/Shook/brokerage firms redirected away from fiduciary advisors toward Morgan Stanley, Wells Fargo and (presumably) other Wall Street offices and their sales agendas. We cannot estimate the damage this caused to retirement portfolios, but the add-on profits to the brokerage houses must certainly be many multiples of whatever payments were made under the table to Shook that motivated Shook to pay a small percentage of its revenues to Lane.
And now the story has faded. Nobody ever forced Forbes or Shook to explain exactly what the wrongdoing was, what boundary was crossed, and what the precise revenue arrangements were between Forbes and Shook, and between Shook and the brokerage firms whose offices mysteriously dominated the rankings.
Let’s imagine for a moment that people should retain a memory of this mess, and permanently judge the participants’ character. Where should we start?
Forbes is certainly a candidate. This is the organization that charges advisors and others for the opportunity to be featured on its electronic ‘pages,’ which is basically a pay-to-play way to gain credibility with the public. (“You’re a published author of a Forbes article? Wow!”) The magazine runs best-in-state rankings (2,000 of them went to Morgan Stanley brokerage offices), top wealth management teams (1,400 Morgan Stanley teams out of 6,100 total), top RIA firms, top next-gen advisors and top women wealth advisors (9 out of 50). The list comes to 13,000 advisory teams a year; a reported 52,000 brokerage offices and RIAs proudly tout the recognition on their websites. I would love to see them, or Forbes, define the word ‘top’ in these contexts. Or explain it to the SEC, given the recent revelations.
Shook is a prominent candidate, especially since its methodology has suspiciously favored high-producing brokerage teams over fiduciary advisor offices. I would love to see the firm open its books and show us where its revenues come from, and how much it takes in. If it only receives payment from Forbes, then I’d take it off this list. I wouldn’t bet on that.
Let’s not leave Morgan Stanley off the hook. Right after the revelation of Lane’s $6 million payment, Shook and Forbes immediately released statements saying that none of the individual offices paid a single dime to be included in the rankings. I find it interesting that they didn’t mention whether any of the employers of those offices were greasing palms. If the brokerage firms were making the payments, it’s possible that many of the Morgan Stanley offices didn’t realize that their inclusion on the list was bought and paid for.
The Forbes lists are broker-dominated, and I’m imagining that if somebody were to uncover the Shook finances, it would help explain why JP Morgan Wealth Management, Merrill Private Wealth Management and UBS Private Wealth Management are all prominently featured. It might show that even little Ameriprise was willing to drop in a few dollars when Shook’s hat was passed around.
I’d like to include the SEC on this list as well. Is the regulator going to wake up and take a look at how these ratings were ‘earned,’ and therefore whether the offices that have the Forbes award hanging on the wall are violating its marketing regulations? Is it going to demand from Shook (and Forbes) a clear money trail that has led to widespread (likely purchased, likely bogus) credibility of firms in a ranking methodology with manifest conflicts of interest?
In a rational world, nobody would ever again give credibility to any of these lists, especially the various ones published by Forbes.
We would also be skeptical of whatever we read in Forbes, on the theory that if the magazine accepts money in return for a chance to write articles or have your offices appear in a ‘top’ list, the entire editorial package is fatally tainted.
If I were a publication that insists on compiling stupid lists like these (am I being too harsh?), I wouldn’t touch the Shook organization with a 100-foot pole.
And if I were a consumer who called a Morgan Stanley office because it was on a ‘top advisor’ list, I’d at the very least feel duped.
But of course we don’t live in that rational world. The story came, and it went, and no lingering lessons seem to have been learned.
Again.