IN WALL STREET WE TRUST.(customer loyalty to securities firms)

the financial page

Last year, Merrill Lynch was accused of defrauding its clients by giving them corrupt advice about which stocks to buy. Internal e-mails demonstrated that its research analysts had publicly recommended stocks that they'd privately derided. The company wound up having to make a payment of a hundred million dollars, as part of a settlement with the New York Attorney General's office. And how did Merrill's retail clients react to all this? They gave the company eighteen billion more dollars to manage. It was a tough year for Citigroup, too, what with the revelations about chicanery at its Salomon Smith Barney division, whose customers lost vast sums of money on tainted stock tips from the likes of Jack Grubman. So what did the customers do? They gave Citigroup another thirty-five billion dollars to manage.

If Circuit City sold televisions that blew up after three months, people would probably stop shopping there. Why is Wall Street different? For one thing, Wall Street is selling a service, not a product, and customers demonstrate much greater loyalty to services than to products, because services usually involve personal relationships. An investor who has his money with Merrill Lynch forms a bond with his broker, not the firm. Just as voters will say both that Congress should be turned out on its ear and that their own congressmen should be re?lected, investors can simultaneously belittle Wall Street and maintain that their brokers are really good guys. In a way, the Street is benefitting, perversely, from the bursting of the stock-market bubble; shellshocked investors are inclined to entrust their money to professionals, even if those same professionals had as much responsibility as anyone else for the mess.

Then, there's what's known as "the status-quo bias."Most people are cautious about their money and are reluctant to make changes--even sensible ones. A survey of Vanguard investors, for instance, found that in 2001 only fourteen per cent of them made any change in their investment choices. And a study the same year by the economists Brigitte Madrian and Dennis Shea found that the rate of participation in a 401(k) plan was determined, in large part, by whether people were enrolled automatically or had to choose to sign up. Apparently, when it comes to money, inertia rules.

Such conservatism is understandable, but its consequences are grave. Yes, the recent $1.4-billion settlement between Wall Street and state and federal regulators will make it harder for the world's Jack Grubmans to prosper (and to go on golf outings, as a Lehman Brothers analyst discovered last week, when he was barred from an investment-banking trip to Scotland). But the troubling conflicts of interest remain in place. And only if firms feel that those conflicts are costing them customers and profits will that change.

The overriding conflict is that most major firms--including Merrill Lynch, Citigroup, Morgan Stanley, and ...