Take, for example, a column on the internet to which Our Man in Iowa, Guy Stevenson, sent us a link: "Brokers Flee Brokerages as Declining Assets Show Broken Model." 10/26/10, Financial Advisor Magazine. Setting aside for the moment (or for all time) the over-use of the word "broke" (too many people are broke for that to be even mildly amusing), we noted a disturbing development: lack of appreciation on the part of the powers-that-be for proper internal control of a company, a system, and an industry. The Big Buddy Brokerage Houses seem to accept conflict of interest as a given, a conflict that necessarily accompanies the vertical and horizontal integration of the financial services industry.
(English translation: because a single company sells the product, advises you to buy the product, finances the product, and even insures against loss if the product goes belly-up, there is a certain, shall we say, lack of independence and objectivity on the part of many brokers. It becomes in their best interest to do what is best for The Company rather than the investor.) Hence, brokers who are "troubled" with "scruples" and other unessential "feelings" tend to get out of the business, or go with a smaller company that is not a part of the overall integration of financial services. As the article relates,
While lacking the clout of big brokerages, independent firms boast of one advantage with clients: no conflicts of interest. Brokers at Merrill Lynch, for instance, are pressured to sell funds managed or approved by the firm because they pay a higher commission than those run by other companies, says Paul De Rosa, who worked at the brokerage for 26 years before co-founding his own firm, Gateway Advisory LLC, in Westfield, N.J., in January.Many people interested in the health of the financial industry are reacting, although (in our opinion), not quite as strongly as they could — we're not hearing anyone serious about restoring Glass-Steagall, for instance. Still, half a loaf, etc.:
Registered investment advisors are urging the SEC to adopt the tough fiduciary standard under the Investment Advisers Act of 1940 that governs their profession. If advisors receive additional payments for recommending a particular fund over another, they must fully disclose the arrangement and obtain informed consent from investors every time they sell such a product, says Falls Church, Virginia-based Knut Rostad, chairman of the Committee for the Fiduciary Standard, a group of financial professionals. Advisers must also manage conflicts by, for instance, crediting that additional payment to their client's account rather than accepting it themselves, Rostad says.Naturally, those who make the most money out of (alleged) conflicts of interest are the most vociferous about not being burdened with such trivia. Using an argument that sounds suspiciously like that used to dump Glass-Steagall, they are making an "SSDD"-type argument that boils down to the fox demanding the keys to the henhouse:
The Securities Industry and Financial Markets Association, a lobbying and trade group based in New York, says the stringent fiduciary rules of the 1940 act are unnecessary to safeguard investors and would restrict their options. SIFMA does support the idea of more disclosure.This quote is absolutely priceless . . . I mean, valueless, which describes what the client ends up with once he or she gets the (wink-wink-nudge-nudge) "advice" from his or her financial analyst: "'We believe in a robust disclosure regime where the client can make the decision to consent to conflicts,' says Andrew DeSouza, a SIFMA spokesman."
Really? A client who is compos mentis is not going to be "consenting" to conflicts, period. Doctors, lawyers, accountants, clergymen, and others are called "professionals" because they practice a "profession." Part of being a professional is putting the client's interests first — it's what you're hired to do. You're not hired to put your own interests above that of the client or you are, frankly, a thief, taking money for a service you are not delivering. A "conflict of interest" is exactly that — a conflict between the client's interests that you are being paid to protect, versus your own interests. You're asking — demanding, really — that the client foot the bill for something that benefits you, not him or her.
In short, what the SIFMA proposes is that brokers only be required to tell their clients that they are robbing them, not that they stop it unless asked. Uh, huh. This is what they call a "Hobson's choice." It's like the thief holding a gun to your head and asking you if it's all right to empty your wallet into his or her own pocket. "No objections? You're sure, now. Okay?)
If you think that's bad, however, wait until you see what we've got planned for tomorrow's final episode in this series.