Margin-of-Safety

The Nature of Wall Street Works Against Investors 34
Street firms have become direct competitors of both their underwriting and brokerage clients,
buying and selling entire companies or large corporate subsidiaries for their own accounts. Instead
of acting as middlemen between issuers and buyers of securities, firms have become issuers and
investors themselves, Nowadays when the phone rings and your broker is on the line, you don't
even know in what capacity or on whose behalf he or she is acting.
Obviously there is nothing wrong with providing a service and collecting a fee. Doctors,
lawyers, accountants, and other professionals are paid this way; their compensation does not
depend on the ultimate outcome of their services. The point I am making is that investors should
be aware of the motivations of the people they transact business with; up-front fees clearly create a
bias toward frequent, and not necessarily profitable, transactions.
Wall Street Favors Underwritings over
Secondary-Market Transactions
By acting as investment bankers as well as brokers, most Wall Street firms create their own
products to sell. A stock or bond underwriting generates high fees for an investment bank. These
are shared with stockbrokers who sell the underwritten securities to clients. The total Wall Street
take from a stock underwriting for example, ranges from 2 to 8 percent of the proceeds raised the
brokers themselves typically receive fifteen to thirty cents of gross commission on a $10 stock.
By contrast, the commissions earned by brokers on secondary-market transactions, which
involve the resale of securities from one investor to another, are much smaller. Large institutions
generally pay as little as five cents per share and sometimes as low as two cents. Small individual
investors are typically charged considerably more. Even so, brokers earn on average several times
more money from selling shares in a new