Surprise, Surprise, Surprise, (Part 3)

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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By | 2017-07-17T12:35:19+00:00 March 31st, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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