Follow the Money (Part 7)

Why is there so much conflict?

Public Domain. Source: Library of Congress

Payment systems are filled with conflict: workers who think they’re not paid enough, managers who think their employees aren’t working enough, owners who think the business doesn’t return enough. Everyone has their own agenda. The question isn’t really why is there so much conflict, but—considering all the different angles—how does anything get done at all?

Yet another conflict in marketplace comes from what we might call professional versus business interests. Professions—like law, or medicine, or accounting—serve a larger public good. It’s in the general public interest to have a well-functioning legal system. When we know that the rule of law will be supported by a strong legal infrastructure, contracts are honored and transactions run more smoothly. The same holds true for medicine, or finance.

Caribou locking horns. Photo: Jim Winstead. Source: Animal Photos

But professionals need to be paid for their services. For the most part, clients know how their lawyers or accountants support themselves. Professional fees are typically transparent and straightforward. (Medicine is a special case, because the government and health insurance companies have become financial intermediaries.) We run into trouble when clients don’t know how their professional service providers are being compensated.

For example, a real-estate lawyer might refer someone to another lawyer who specializes in criminal or family law. The client is looking for expertise, but if the referring lawyer receives a finder’s fee or some other consideration—without the client knowing—that’s a problem. A doctor may order additional tests, or refer a patient to a colleague who’s working on a new drug. If the referring doctor earns something extra from this the patient ought to know. Clients should be able to decide for themselves whether the advice they’re getting is disinterested, or if they might need another opinion. But they can only make informed choices if they know what’s going on.

Photo: Jan Fidler. Source: Morguefile

The same holds true in financial services. This profession benefits everyone. When a company’s stock price rises, its cost of capital falls. The market is in effect saying to that company, “We like what you do, and we’d like you to do more of it.” Finance serves a public good by allocating capital to those who can best make use of it. But clients need to know if the advice they’re getting is biased in some way. They should never be ashamed to ask professionals how they get paid—commissions, bonuses, equity—and what their stake is in the client’s decisions.

The best disinfectant is sunshine. When we shine a light into a darkened room, the cockroaches run for cover—and usually stay there. Things get done in our economy because people want, largely, the same thing: growing businesses that provided efficient, effective service; products that don’t break down or hurt us; more time to pursue our personal interests or spend with our loved ones. If we keep the lights on, the pests tend to stay away.

Conflict is inherent in a competitive marketplace when actors have divergent interests. By letting our clients know where we stand, and why, the clients can best decide where they want to allocate their business. Because where you stand often depends on where you sit—and who’s paying you to sit there.

Douglas R. Tengdin, CFA

Chief Investment Officer

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