2012 - A Surprising Year

“Life can only be understood backwards, but must be lived forwards.”

Danish philosopher Soren Kierkegaard

This bit of wisdom was particularly true in 2012 if we look at three events whose significance is obvious now, but not for the reasons they seemed at the time.

Facebook's IPO 

Facebook’s IPO in May was one of the most hyped public offerings ever. It was also a bust. In retrospect, many red flags were ignored.

The first indication of trouble was the pre-IPO bubble in Facebook shares. Retail investors confused their affinity for Facebook and social media with unbiased investment analysis.  For example, many euphoric traders loaded up on Facebook shares before the IPO through SharesPost and SecondMarket hoping to outsmart the "established" IPO marketing process and purchase shares below the assumed IPO price.  They thought Facebook was a sure thing.  Many are still hurting; Facebook’s stock remains well below its IPO price.

Another warning sign was the abnormally high allocation of Facebook shares to retail brokers and their clients. For a hot IPO, retail brokers typically get nothing. Or, if they do, their percentage is in the low single digits. For the Facebook IPO, many retail brokers got 50% or more of their indicated interest. There was much more stock available to retail investors than usual because institutional investors were reducing their orders. Many were scared off by the downward revenue revisions, only shared with institutional investors just before the IPO. Last week Morgan Stanley was fined for this preferential treatment.

Morgan Stanley’s acquisition of Smith Barney 

Morgan Stanley’s purchase of the remaining part of Smith Barney's wealth management group had significant unintended consequences. (See our September blog, Mexican Standoff.)

The combination of a higher capital outlay for Smith Barney and tepid 2012 financial results from investment banking forced Morgan Stanley to tighten its belt. That came at the expense of needed technology investments to bring both firms together.  The botched integration angered brokers and clients, and it lead to defections of both.  The disaffection with Morgan Stanley may continue in 2013 because the firm’s technology problems are still not resolved.

Three years from now, this transaction may be viewed as genius. For now, it’s anything but.

Luminous transaction

The Luminous sale to First Republic was the defining wealth management deal in recent memory. 

The transaction validated the potential for former Wall Street financial advisors committed to unconflicted, independent wealth management to experience spectacular growth and value creation.  (See our November blog, Same As It Ever Was?)

After breaking away from Merrill in 2008, Luminous grew assets under management from $1.7 billion to $5.5 billion. In November, it agreed to be acquired by First Republic for $200 million.  If elite advisors ignored the advantages of breaking away before, they aren’t now. Everyone in a corner office is talking about Luminous.

In our view, these three events should be viewed as a call-to-action to advisors and clients still working with a Wall Street firm.  As 2012 demonstrated, there’s clearly a better way.