From Tom Brakke of the Research Puzzle blog, we get a piece on unraveling who is conflicted in what way in the investment advice/research chain…
It is a chain of dependence for all of us, and we could ask nothing more from the links to which we are connected than unbiased industriousness.
Knowing the conflicts and misaligned incentives that affect the people with whom we deal is a starting point. Of late, Goldman Sachs has taken it on the chin for previously structuring mortgage-related products for clients and promptly shorting them after the transactions. In published accounts, the default adjective for the buyers of the paper is “sophisticated,” even though their purchases collapsed in price. Who knows whether they relied on Goldman for an opinion or if it was simply a transactional intermediary. It is an important distinction.
The giving of advice, whether by a financial planner in a coffee shop or a Master of the Universe in a Wall Street private dining room, should be with all the cards on the table. If there are conflicts, they should be laid out; if there are caveats, they should be provided.
Everyone is selling something in this world, especially in the world of financial services. Before a conversation can begin, one must know exactly how the person on the other side of the table is compensated. This is true for both individual investors and institutional managers, mutual fund wholesalers and investment bankers, investment advisors and stockbrokers.
Well put, Tom.