How Wall Street Started Selling You Financial Products

various financial products. So today, in honor of Joe, since he can't be here with us, uh, I thought we might take a moment to revisit the first ever financial advertisement. And it actually came later then a lot of people might think. It was written by a guy called a Angle who was working at Meryl, and it was published in nine in the New York Times, and it was really the first such financial advertisement that we've seen in

the sense that it was aimed at everyday investors. And I encourage everyone, after they listen to this podcast please to go and google the ad. It's called What Everybody Ought to Know About the Stock and Bond Business, and it's basically seven thousand words of pure text explaining what stocks and bonds are to everyday investors. But this was the thing that kicked off all the ads that we

see nowadays in places like Barns. And again, the reason why people like Joe find the ads really interesting is that they tell you something about where Wall Street is heading. They tell you about where Wall Street is trying to make money from every day investors like you and me. So we're gonna dive into not just that ad, but also the trajectory of Wall Street. How we got to the place today where a lot of the business is aimed at marketing products like e t f s, like

mutual funds to everyday investors. And we really have the perfect person who's going to be our guest for this episode. His name is Eric Weiner. He's on my team at Bloomberg. He heads up are very, very excellent E t F coverage and he is also the author of an entire book on the history of Wall Street. It's sort of an oral history. It's called What Goes Up? The Uncensored History of Modern Wall Street as told by the bankers, brokers, c e o s, and scoundrels who made it happen. Eric,

thanks so much for joining us. Thanks for having me Tracy or me um. So some of my favorite episodes that we do on All Thoughts are where we find people at Bloomberg who have interesting backgrounds, interesting backstories, and interesting accomplishments. So I was actually very pleasantly surprised to see that you had not just written one book, which we're going to talk about today, but actually two books. Uh,

how did that come about? And maybe you can give us a little bit of background on your role as a financial journalist. Well, it's this book was sort of a labor of love and a product of all of the work that I had done in the ninety nineties as a journalist when I was at dow Jones UM. The idea came from really bizarrely reading a book called Please Kill Me, which is about punk rock, which is

another one of my interests. But it was done in this exact style, and what I noticed was that it took something that wasn't necessarily a singular thing, singular place, a singular time, and put it in a narrative structure that made it all makes sense as if it had happened in a preordained way in the same At the same time I was watching those Ken Burns documentaries that we're all coming out, and he was doing very interesting things by using primary sourced information as well as interviews

in order to tell a story. Uh, and working with a friend of mine in publishing, I came up with the idea to do this for the history of Wall Street, which I had sort of been chronicling by talking to all of these people at various different investment banks as I was reporting, and I just naturally had an interest in history, so I had asked them how things came about, and different firms had really lent the histories. Lehman Brothers had basically every document it had going back to the

eighteen hundreds. H. Merrill Lynch had a library, a literal I mean the literal museum of all stuff, including the the famous Low Angle ad. So I found sort of, you know, mutual kinship, and people were remarkably open to talking to me. It took me a while to nail down. I did about three hundred interviews with some of the richest people in the world, so nailing them all down wasn't easy, but a lot of them were very willing to talk and very candid about what happened. Three hundred

interviews is a pretty lofty sum. So you mentioned um the Loo angle ad uh and again for people who have never seen it before, it's definitely worth taking a

look at. But your book, it's in oral history, as we've discussed, and you have a couple of people who describe the first time that they read that ad in walk us through why it was so important and what that moment of time was like for Wall Street where it was exactly Well, so, what what had happened was Charlie Meryll Merrill Lynch was one of the bigger what they called wire houses at the time. It was one

of the bigger brokerage firms at the time. Charlie Meryll had built it up through the nineteen twenties and then comes along he actually really advised advises all of his investors to get out of the market. He gets out of the market and walks away from Merrill Lynch. Merrill Lynch stays as a firm, but Charlie Merrill goes off to California to his other venture Safe Way, which is, you know, the grocery store chain. After ten years, his

partners are the firm is falling apart. The stock market has gone through the Great Depression, you have the new deal coming in and the partner's approach Charlie Merrill. When one partner, in particular, when Smith, who ended up running the firm himself, approaches Charlie, Marrilyn says, we need you to come back, and he says, in order to come back, we have to change our ways. We have to change the way Wall Street does things, and we need to adopt many of the ideas that are common to retailing,

particularly retailing groceries. So he talked about the need that people don't want to buy loose coffee. They want to buy packages of coffee, and either they wanted in eight ounces or twelve ounces or sixteen ounces, and we want to be there to sell them those different packages of coffee. But what but what they don't want to do is just buy stuff. They wanted to sort of be set up for them. And so they started thinking about Wall

Street in those terms. They started piecing together put putting UH their financial advisors on salary instead of commissions so that they would do more work in terms of putting together a portfolio for people. UH. They incentivized their staff to work directly with individuals to start marketing their services in their local towns to hold educational meetings with groups and different things, and advertising was a natural outgrowth of this. Now, the thing was that at that time Wall Street was

a really closed society, and advertising, quite frankly, was considered ghosh. Uh, it just wasn't something that was done that was, you know, for grocery stores, not for you know, finance firms. So Charlie Merrill said, no, we actually need to do this. And what he proposed was what you described, which is seven thousand words explaining how stock trading, stocks and bonds works. And it's essentially you would never run it today. You would run it as a pamphlet or something. It's just

a block of words. And the people at Meryl were dumbfounded by it. They didn't think it would work. Uh, they were willing to do it because Charlie at that point had developed sort of the cult of personality where

he just did what he wanted. So everybody said brilliant, Mr Meryl, and then behind their backs were saying, I don't know about this, um, but it worked dramatically because nobody had ever spoken to people about how this stuff worked, and suddenly you had people reading this and then saying, hey, did you see this on the You know, I was reading this on the subway. Did you see this? They

started calling up Merrill Lynch asking for copies. Merrilynn started giving away copies, printing and printing it up as sort of a flyer. Uh. And it really became kind of a touchstone for what can be done with reaching out to the general public, which is something that Wall Street was really reluctant to do, largely because after twenty nine it got blamed for everything, so it just didn't really Its just the organization, the institution as a whole, decided

we're safer if we just don't deal with those people. Uh. And Merrilllynch said, actually, in order for us to survive, we need to deal with those people. We need to deal with them fairly, and we need for them to understand what it is that we do. Uh. And that that was Its seemingly logical today, beyond any sort of comprehension, but at that time it was this radical idea that made Charlie Meryl seemed like a complete outsider. It was

Wall Street brethren, right. So I mentioned the date on that ad, which is and I don't know about anyone else, but I was kind of surprised that it was that late, because, as you mentioned, you think about the Great Depression and you think about the number of people who supposedly got burned by the stock market crash, and it feels like a retail investor event. So are you saying that retail investors were burned like en masks, they were burried or

was it they were burned? Um? Although, uh, the degree to which is debated because the records are kind of sketchy. What really happened, what really got blamed was mutual funds which were sold through Goldman saxonby enough, so Goldman really took it on the chin coming out of the depression. But a lot of this, you have to realize, is an effect of the way the media understood things at the time and what they were being told. So it's

really easy to run, you know, dust bowl stories. And then what happens is, you know, you go from the from the crash to to the Great Depression, which isn't necessarily linear, but one gets blamed for the other, and people be in to say that Wall Street is evil, these greedy bankers. That whole thing sort of starts cropping up as a narrative, and for Wall Street, the idea was, let's just retrench. We have a great business. Because all commissions were fixed, they basically had a license to print

money if they just were left alone. So they really wanted to be left alone. It was Charlie Merrill who saw that reaching out, reaching back out to the wider world, which was what happened in the in the twenties, where you had a lot of ordinary people investing, uh, that reaching out back out to the wider world was really the only way that they were going to grow and thrive. So it's now the late nineteen forties and Mr Meryl is exporting his brand of let's say, standardized grocery store

like financial products. Although as you mentioned, mutual funds had existed for some time at that point. How quickly did this take off amongst retail investors? How quickly did Wall Street regain trust after the Great Depression? And what sort of products were being Well, it's the nineteen fifties, you kind of start having a bull market, and so it was just kind of great timing on his part that people wanted to hear about this as stocks were starting to kick back up. I mean, if you figure it.

There was a very long uh depression and recession in stocks, So suddenly you had all of these value stocks, all these stocks that were value that you could just simply flat out and make money on because they were trading for below their book value, so they had to come back up. Basically, individuals were buying stocks. Um. The big miss on Charlie Merrill's part was that he believed that mutual funds had caused the twenty nine crash and put an edict in at Merrill Lynch that they would never

do mutual funds. So that basically creates the business for Fidelity because up in Boston they had a whole different way of managing money. They've been managing money for a lot of old wealthy families for a long time, and they put their money in portfolios that they called funds and they eventually sold them as mutual funds. Fidelity was

one of these firms. So if Charlie Merrill had the idea of a mutual fund, of putting together a portfolio of stocks that would do would behave a certain way, would make would have made a lot of sense to people at that time. They just weren't really readily available until the nineteen sixties when Fidelity grew. But if Merrill had decided to sell them, they probably would have taken off. But the other thing that takes off is Buffet style of investing. Buffett goes back to Uh, he'd been in

New York. He goes back to Nebraska and starts his firm, and it's like the greatest rocket ride in the history of Wall Street, where there were just so many stocks that were beaten down. He called them scar butts that he could just make money by picking off stocks that we're going to have to revert to the mean. And you have this style of investing called value investing that

comes along. And Fidelity then in turn creates momentum investing through its mutual funds and through a guy named Jerry Say, who basically started following all the hot stocks of the day, which from the fifties to the sixties are oddly enough, the technology stocks of the day, which are usually the hot things that are growing, and we see it today even Uh. This is what people focus on is the future. It's this technology. So at that time it was Xerox.

He rode Xerox to the moon and everybody was He's showing up on Time magazine, and all of a sudden, people are following momentum and the idea of factors that we think of today, the idea of investing styles that we think of today, really originates from this nineteen late nineteen forties to nineteen sixties period where investors themselves, uh,

professional investors themselves are figuring it out. So you're talking about the beginnings of passive investing essentially, you know, the idea that you can have active managers sort of taken out of the equation and people can just ride whatever is moving up. Hence the name momentum. How much tension was there on Wall Street at the time that this was invented, because nowadays you see a lot of handwringing

about it. You know, we've had Alliance Bernstein talking about how e T f s and passive investing are destroying capitalism. People worry that passive investing is of course eating into active managers fees. Was that kind of conflict evident when these things were first on the rise, Not not really, because costs were kind of assumed on Wall Street. It

was assumed to be an expensive business. And the other thing was the way that people kind of understood the business was through people and the individual money managers, whether it was Jerry Side to Peter Lynch. Uh, they captured much more of the attention than the products did, so you wanted to invest with. It was kind of the idea of that that best in the bright which, although it's an ironic statement, applies here, uh, where you really wanted to invest with who the market considered to be

the best and the brightest guy. Along the way, Jack Bobil figures out, you know, we don't really need to do all of that stuff, and we can just put together indexes of this. And there had been indexes for a very long time, you know that the Dow Johns Industrial Index that had been there for a while, but there weren't a lot of them, and they were followed kind of just as benchmarks that you would beat as a as a mutual fund manager, but or as a

asset manager or any kind of financial advisor. But as the research started to show that most of these guys don't really beat the market, the idea of tracking and index became more important. In n there was a thing called may Day where New York Stock Exchange, or actually all stock exchange commissions were fixed and it was a very complicated formula, but the point was that if you sold ten shares, one hundred shares, a thousand shares, you paid a percentage of flat percentage of that amount, of

that fe of that amount as a feat. Wall Street was basically ranking raking your money hand over fist, and it was kind of behaving as a cartel, and they were forced to unfixed commissions. Now within this there was a big push on Wall Street to do this because some firms, Merrill Lynch among them, could sort of see that this would increase volume and they could pick up in volume what they would lose in commissions. But it's this moment in n where you lose commissions, you lose

fixed commissions on Wall Streets. Suddenly you can have block trading. A lot of different discounting goes on, and these index funds become really cheap to operate because suddenly moving a whole bunch of stock doesn't cost nearly as much as it used to, moving a whole bunch of bond doesn't cost as much as it used to. At the same time, you're having technology catch up, so there's more automation coming on. These were kind of products that we're waiting for a moment.

So at the time when they first came out, people looked at it and we're like, this is great, fine, but this isn't really solving my problem. Ten years later, fifteen years later, it suddenly starts solving a problem. And when we look at it today, and you know, E t F is what I'm what the team that I'm leading, uh, and we look at what E t F s are doing, it is exactly what the conversation is. This is an entire evolution that basically starts in the early nineteen seventies

and brings us to today. We're the only thing people are talking about is cost m hm um. So it's really interesting to think that, you know, it took a while for the market infrastructure basically to catch up to the concept of these low cost funds. They used to take days off, a day off of the trading day just to catch up on paperwork. They had a whole paper crunch thing because people, I'm not not joking, Tracy. They would have be carrying cards because those computer cards.

You've ever seen those, the IBM dot. Yeah, so they'd be carrying stacks of those around on the exchange in order to trade shares. You literally had runners running around with certificates, stock certificates saying, you know, I bought fifty a T and T and they would give you a certificate for fifty a T and T And you had to wait for the little guy to show up with with that pile to know that your deal had gone through.

And it was a completely different world from let alone you know e trade to today where it's just you know, boom you you know, on our terminal, you can do every single thing chat uh trade it no matter what, it can all be done in one little electronic ecosystem in seconds. That took hours days. You didn't know what was exactly going on. You didn't know the final price. Um. You know, automation has changed everything in a very very

short period of time for Wall Street. Right, so you point out that at one point it was sort of about the people managing funds and investments, but now it's most definitely about the product. And if you open a publication like Barons and look at the ads like Joe likes to do so, very often you'll just see pages and pages of ads for things like you know, mutual funds ETFs uh certain portfolios, and they tend to change along with the time. So when people are searching for yield,

you'll see yield enhanced investment offerings. When people are worried about rising rates, you'll see see bond e t f s that are protected from duration risk, all that sort of stuff. What's next in the evolution of that market? What's next in terms of the provision of let's say, standardized grocery like financial products. Yes, well we're still we're still packaging coffee. Um. You know, this whole thing is

about the sophistication of the investor. So if Joe were here, I would challenge him to go look back at old Barrens and try to find the moment when Peter Lynch stopped appearing in fidelity ads. It used to be that every mutual fund AD had a person and it would have like their star manager John Neff whoever you know, says, you know this brilliant quote, and then here are the mutual funds that you want to invest in. Now we're

talking about products, we're talking about strategies. Um, the individuals behind it don't matter. You're talking about the firms people trust. Uh, certain firms of Vanguard was Bogel. Now Vanguard is Vanguard U Bogel. You know clearly is is a face, but people trust Vanguard as the firm. So when you look at what's coming next, it is treating increasingly treating individuals

like institutions and assuming that individuals have that knowledge. And that's the stication to understand beyond simply what momentum and what UH value is too various different strategies, And here's a way to hedge, you know, your the risk that the Fed is going to raise interest rates. I mean, people just didn't pay attention to things like the Federal

Reserve much before Alan Greenspan came along. So the idea that like people are watching interest rates, are watching what the FED says, are looking at financial news, the idea that they're all these financial news channels and all these different ways to get financial news. There was none of that before. So you can kind of assume that it's basically the increasing sophistication of the investor will or the perceived increasing sophistication of the investor will be reflected in

these ads as they get more and more complex. Perceived of course being the key word that we have had. We've had controversies crop up. Even this year, when we had a bunch of volatility related exchange traded notes and products blow up, there was a huge question mark over whether the investors that had bought them actually understood the risks. Um. Eric, I'm so sorry we're going to have to leave it there.

But my entire aim at um having you on this week was really to make Joe jealous by just talking about portions of financial product advertising. So I think we've succeeded in that for sure. This is a lot of phone, Tracy, Thanks for having me, all right, So, Eric Weiner, once again, the book is What goes up, the uncensored history of modern Wall Street, as told by the banker's ceo s and scoundrels who made it happen. You can also follow Eric on Twitter. He is at Eric J Weener one.

And if you're interested in learning more about passive investing or exchange traded funds, we have an entire podcast dedicated to that at Bloomberg and it's called Trillions and it is hosted by the very talented Joel Weber and Eric val Quness. This has been another edition of the All Thoughts podcast. I'm Tracy Alloway, and you can follow me on Twitter at Tracy Alloway. Thanks for listening.