Surprise, surprise, surprise. They cheated their clients, too.
People who work with other people’s money are supposed to abide by a series of rules called fiduciary duties. The duty of care states that you’re supposed to know what you’re doing. The duty of loyalty states that you’re supposed to put yourself in the money-owner’s shoes.
This can conflict with an advisor’s self-interest. So when brokers “churn” client accounts, eating up principal with transaction fees, we say that they’ve violated their duty of loyalty. A rational investor wants to minimize his fees, not maximize them.
Well the conflict in the big banks is legendary. For example, when a large client provides significant fee-based business to the bank, everyone from the securities analysts to the retail brokers are encouraged to give preference to that issuer’s bonds, stock, and other securities. This was famously prosecuted in mid-decade. The everyday customers were used as a means to get big-fee underwriting business.
At the end of the mergers boom of the ‘80s, one smaller client summed up the mega-dealers’ approach this way: “Loyalty one, two, and three was to themselves. Four and five was to their buddies. The client came in last.”
Douglas R. Tengdin, CFA
Chief Investment Officer
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