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Jim Langston, 37, spent six years of his life as a broker.
"I started at Merrill Lynch, then worked over on the banking side for a while with BankOne in New Orleans until I was heavily recruited to work for Smith Barney."
Six months after going to Smith Barney, Langston had an epiphany: "I was no longer willing to do what was necessary to justify the money they were paying me," a reference to Langston's associates, just working their way through their books every month. "I had been successful, but I basically just walked away from the business," he says.
The question was what to do with all that water-cooler knowledge he'd gathered over the years about how the brokerage industry works.
Langston's idea was to meet with individual investor clients, study their individual holdings, and help them understand what they had and the present and future costs of maintaining those investments.
"I thought that there's a market for serving investors who aren't sure what they own or what's going on with their investments, and may be concerned there's been some churning in their accounts," Langston says. "I advertised on radio and in print, and the phone rang off the hook."
His intuition was correct. Clients didn't understand what they had or what they were paying or what they would pay going forward. "I thought maybe I could charge a flat fee to analyze the costs of their investments and their obligations, so I've spent the last one and a half years figuring out a business model" for this consulting. he says.
As I interviewed Langston, I sensed not only passion, but some anger, too.
"By the time I got to Smith Barney, I was feeling angry about how poorly the brokerage system treats the average investor. I wanted to create something positive from my experience. Investors, with all the money they had in the whole world tied up in brokerage account investments, didn't understand what they had or why they were losing money. They had no clue. I would ask them what their broker had told them. They'd often answer, 'He said he would take care of me.' One broker took care of his client by falsifying the client's personal information, so he could justify putting the client's money in penny stocks. The client lost almost all he had. Of course, I'm angry."
Isn't there a means for investors to rectify these incidents?
"Sure," says Langston, "These mostly small investors who can't afford to hire attorneys can go through an arbitration system the brokerage industry has already stacked against them. The industry knows what's wrong with itself. The NASD puts out alerts, for example, saying investors should ask their brokers why they think B shares are more appropriate than some other type of shares. But inappropriate investments shouldn't be explained; they should be banned. Those alerts, issued to investors who mostly don't understand them, are simply designed to absolve the NASD from any responsibility."
Pretty strong words. It makes one wonder whether Langston still has friends in the industry.
"I figure the more exposure I can generate, the more of a deterrent to these kinds of practices I can become. My old broker friends have turned their backs on me. They ask me, 'Why would you want to do that?' My answer is that I walked away from the industry at significant personal expense to myself and my wife to do the right thing."
Langston founded what he calls the Investors Advocacy Group in Frisco, Texas. For a very reasonable flat fee, Langston will go through a clients' portfolios--back through all of their brokerage transactions--and tell them what they have paid to date and what they are obligated to pay in the future. For example, if a broker sold a client B shares of a mutual fund, the client may not understand she'll incur a fee if she unloads the shares prior to a certain future date.
"I guarantee my work, too," says Langston. "If I can't find undisclosed fees throughout my client's account that are at least equal to my fee, then I'll reduce or eliminate my fee."
Langston's goal isn't to dissuade investors from working with brokers, which may come as a surprise. Rather, he wants them to be armed with the information needed to purchase the right investments, something he believes brokers can't be counted upon to guide their clients toward because they're distracted by commission considerations.
"Let's say I meet with a 30-year-old who's just purchased C shares. He's a buy-and-hold investor, so he's going to pay 1% into perpetuity. That's fine if the broker is going to give him service in return for that 1%, but that's not often the case."
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