Facebook Status Update: Silence Is Not Golden
June 1, 2012
To advertising executive Ellis Verdi, a clear strong message is everything. That is why he finds Wall Street's silence over the Facebook IPO so frustrating.
Silence about the fear this latest technical and pricing failure of securities markets has engendered among mainstream investors. The ones who have already pulled half a trillion dollars out of U.S. stock mutual funds the past five years.
He watches television talking heads deconstruct the debacle. He reads newspaper and website pontifications. He is barraged by arguments he says are well-constructed, even highly-intellectual, but fail completely at addressing human fears.
"All of the voices that I encounter on this problem, they all sound institutional, they don't resonate. I just turn off-I being the general public. The general public doesn't listen anymore," says Verdi, co-founder and chief executive of ad agency Devito/Verdi.
If you think the fallout from the Facebook IPO will end any time soon, think again. Ad executives, public relations experts, wealth managers and financial advisors say the debacle - whereby untold scores of orders never made it from an IPO crossing system onto the market and Facebook shares barely stayed above their opening price -represents a real danger for Wall Street.
It's more than just further plummeting of Facebook's shares: down to $28.68 a share at midday last Wednesday. That's a drop of 24.5 percent from its ballyhooed opening at $38 on May 18 - when mainstream investors expected a quick pop from the social networking giant's shares.
But now, a $50,000 investment is worth only $37,737 and the Facebook experience will make it harder for Wall Street and fund firms to salvage relationships with investors who don't live and breathe the ins and outs of trading. Investors who have day jobs that have nothing to do with finance.
"Facebook stock has plummeted since its IPO, and the company is in the midst of a crisis PR nightmare," said Ronn Torossian, chief executive of the public relations firm 5WPR. "From minute 1 of a delayed launch with Nasdaq technical problems to lawsuits swirling around, Facebook is entering a danger zone, The court of public opinion doesn't wait - and this downward cycle of media attention is harmful."
So far, financial firms are doing little to address this subject. Comment requests placed to Facebook, Morgan Stanley, J.P. Morgan and Goldman Sachs as well as a dozen major asset managers were either declined or ignored as of press-time.
"I do not see any of the major wire houses or financial firms attempting to answer client concerns with this IPO," says Philip Cioppa, managing principal and chief investment officer at Arbol Financial Strategies.
Much of this, Cioppa says, is "due to the fact that everyone runs scared of the [U.S. Securities and Exchange Commission] and the Financial Industry Regulatory Authority."
"No one wants to be implicated if an error was made or unethical behavior is discovered," he says. "Communication is a lost art in the financial world."
Meanwhile, financial professionals such as Paul Franke are stepping up to the plate and calming investors who otherwise feel ignored by Wall Street.
"Over the Memorial Day weekend, nearly everyone expressed their outrage to me at the failure of the Facebook quote to rise much above the offering price of $38," said Franke, who is director of research at Quantemonics Investing and also manages a portfolio on the social media platform Covestor.
"With nearly two years of non-stop hype building up to the offering, the Wall Street underwriters really look bad pricing the stock well above any common sense valuation when measured against the other Internet companies already trading publicly," he says.
Scared investors can be dangerous investors. Just ask Mark Martiak, senior vice president and senior wealth strategist at Premier/First Allied Securities, a New York broker and financial advice firm.
During the financial crisis of 2008, Martiak had a client who, despite Martiak's pleas, sold out of his separately managed accounts-only to lose millions.
"He lost his confidence and couldn't stomach consecutive daily losses," Martiak said.
Investors in Facebook, now behind the game by 24% or more, need a long-term outlook. "Advisors need to provide assurances daily when they sense that their clients are shaken by the market's volatility," he said.
In fact, some say that the Facebook IPO is already creating marketing opportunities for fee-only wealth advisors who adhere to fiduciary standards regarding costs. The argument: if an advisor doesn't make money per transaction but rather from a percentage of assets, there is little incentive to repeatedly push customers into new risky products.