Tag Archive for: ethics

Brokers, CFA charterholders, and fiduciary duty: Charterholders are not always fiduciaries

CFA charterholders have strong feelings about fiduciary duty. This showed up in responses to my blog post on ” ‘CFA credential implies a standard of care not always upheld,’ says Forbes opinion piece,” which discussed brokers and fiduciary duty. So I’m happy to see that the CFA Institute has addressed this topic in “What’s a Broker to Do? Fiduciary duty and obligations under the CFA Code and Standards (registration required)” by Jonathan Stokes, head of Standards of Practice at the CFA Institute.

CFA charterholders who are brokers aren’t always fiduciaries

Stokes sums up the obligations of CFA charterholders who work as brokers as follows:

Although members and candidates must comply with any legally imposed fiduciary duty, the Code and Standards neither imposes such a legal responsibility nor requires all members to act as fiduciaries. In particular, the conduct of CFA charterholders who are broker/dealers may or may not rise to the level of being a fiduciary, depending on the type of client, whether the broker is giving investment advice, and the many facts and circumstances of a particular transaction or client relationship. (Bold added by Susan Weiner.)

Obligations vary by broker type

Charterholders challenges and obligations vary by broker type, according to Stokes’ article.

Execution-only brokers are not subject to fiduciary duty, but conflicts of interest should be disclosed. “Among the conflicts brokers should disclose are whether they offer different levels of services to all clients and whether they pay referral fees to outside organizations,” writes Stokes.

Retail brokers‘ clients should understand they’re in a relationship with conflicts of interest. I wonder how many grasp this. Clients often don’t absorb the significance of what’s written in a hastily skimmed client agreement.

Stokes says

For those who work in a sales capacity rather than a true advisory role, the client relationship is often based on the understanding that the range of investment advice is limited to that firm’s proprietary products or to other firms with distribution agreements with the brokerage firm…. Where the client agreement clearly states the nature of these conflicts, the client is deemed to understand that he will receive selective and potentially conflicted investment advice.

Institutional brokers “pose a particularly challenging area for application of the Code and Standards,” says Stokes. He notes that “disclosure of all relevant transaction details, including costs and commissions, is essential.” Moreover, “With multiple clients’ interests and objectives at stake, the institutional broker must remain impartial and reconcile (to the best of his or her ability) any conflicting client directions.”

GMO’s Jeremy Grantham on "The Ethical Hole In Finance" at #CFA2010

I think the financial industry has lost its way and become a rogue industry. It’s out of control. 

These are the comments with which Jeremy Grantham, co-founder and chief strategist of GMO opened “The Ethical Hole in Finance” part of his presentation to the CFA Institute’s annual conference on May 17.

Grantham criticized the decline of ethics in investment banking since the golden years of the 1960s. Back then head of investment banks would never have permitted today’s unethical practices. “They would have shot you,” said Grantham.

“The ethical standard today is ‘Don’t go to jail if you can possibly help it,’ ” said Grantham.

Grantham said the shift from partnerships to public companies has accelerated the decline in investment banks’ ethics. It would help to return to partnerships, but that isn’t going to happen, he said. A more practical step is to require investment banks to spin off their hedge funds.

Grantham suggested that investment management firms should shift their business to more ethical companies. However, he admitted, GMO has not made this change. Grantham said that if you take business away from the firm that does business one-quarter point cheaper, that’s not in the short-term interests of your clients, even though it’s in their long-term interests. There’s a “creative tension” between these two forces,” he said.

Follow the CFA Institute’s annual conference
You can learn about presentations at the CFA Institute’s annual conference as they occur. Read the CFA Institute’s conference blog or follow the conference using the #CFA 2010 hashtag on Twitter.

Receive a free 32-page e-book with client communications tips when you sign up for my free monthly newsletter.  

Copyright 2010 by Susan B. Weiner All rights reserved

Dan Ariely says disclosure may hurt investors: Report from his #CFA2010 talk — #CFA2010

Most investment professionals, including CFA charterholders, figure that more disclosure about financial advisors’ conflicts of interest will help investors.

Not so, said Dan Ariely, author of Predictably Irrational, to the CFA Institute’s annual conference on May 16. In fact, disclosure may not improve investors’ decisions.

Two countervailing forces apply when a financial advisor reveals conflicts of interest, said Ariely.

Let’s assume the financial advisor tells a client that he’ll receive a higher payment if the client chooses Fund A over Fund B.

On the one hand, the client will tend to discount the advisor’s opinion because of the potential bias, said Ariely. On the other hand, the advisor will feel freer to push Fund A because he has revealed his conflict. Ariely believes that this second force will overwhelm the client’s discounting of the advisor’s opinion. As a result, investors end up no better off despite disclosures. 

You can watch Ariely present
Some of Ariely’s past presentations have been captured on video. You can view Ariely on YouTube. 

Follow the CFA Institute’s annual conference
You can learn about presentations at the CFA Institute’s annual conference as they occur. Read the CFA Institute’s conference blog or follow the conference using the #CFA 2010 hashtag on Twitter.
Receive a free 32-page e-book with client communications tips when you sign up for my free monthly newsletter.  

Copyright 2010 by Susan B. Weiner All rights reserved

Tweets on talk by Harry Markopolos, Madoff whistleblower

Here are my tweets on today’s talk to the Boston Security Analysts Society by Harry Markopolos, the Madoff whistleblower and author of No One Would Listen.

  • “This case was a global tragedy” said Markopolos. “It was beyond evil.”
  • Madoff case is only in its 2nd innings, said Markopolos. There’ll be more arrests due to cooperating witnesses.
  • CFA# Code of Ethics is important to Markopolos. “It’s about investors and doing the right thing,” he said.
  • CPAs, is this true? CPA code of conduct lacks affirmative duty to report fraud.
  • Lesson #1 for Madoff victims: 0-25% is proper allocation to hedge funds, said Markopolos
  • Lesson #2 for Madoff victims: Never put all of your eggs in one basket, said Markopolos
  • Markopolos book is a good road map for conducting due diligence, said Sam Jones of the CFA Institute’s board of governors.

The next session of “How to Write Blog Posts People Will Read: A Five-Week Teleclass for Financial Advisors” will start in April. For more information, sign up to receive “Information on upcoming classes, workshops, and other events” as well as my free monthly newsletter.
Copyright 2010 by Susan B. Weiner All rights reserved

Madoff whistleblower Harry Markopolos speaks

You can see Harry Markopolos speak in the video excerpts that make up part of “One-On-One With Harry Markopolos: Validated, But Not Satisfied” on WBUR’s website.

According to an editor’s note, “More interview excerpts will be posted March 30 in conjunction with a special profile of Markopolos slated to air on Morning Edition.”

Also, you can view the “60 Minutes” interview with Harry, including some clips from the BSAS Market Outlook dinner.

provocative quote about target date fund (TDF) advisers

Are target date fund advisers swayed by a conflict of interest?

On p. 41 of CFA Magazine (Jan./Feb. 2009), Mark Ruloff, director of asset allocation for Watson Wyatt Investment Consulting, says, “Advisers…are implementing the glidepath. They might have a bias toward keeping higher equity allocations longer because it helps their own fees…. There are legitimate reasons for advisers to arrive at different glide paths, but there’s the appearance of a conflict of interest.”

What do you think?

Warren Buffett on compliance officer

This is a great quote from Warren Buffett.

Everyone must be his own compliance officer. That means everything you do can be put on the front page of the newspaper, and there will be nothing that cannot stand up to scrutiny.

Jim Ware of Focus Consulting Group cited this quote in his talk on ethics to the Boston Security Analysts Society. I tracked down the wording in a New York Times article.

Investment industry in denial about ethics

There’s a disconnect between what investment managers say about ethics and what they actually do, said Jim Ware of Focus Consulting Group in his presentation on “Ethical Leadership in the Investment Firm” to the Boston Security Analysts Society.

Investment firms ranked ethics as one of their top five values in surveys conducted by Focus Consulting. That’s good. “We believe that ethics and integrity should be the spine of your organization for it to be sustainable,” said Ware.

But, in practice, investment firms don’t always take the high road when confronted with ethical challenges, both routine and extraordinary. In his presentation, Ware listed nine common ethical challenges that investment firms may fail. Many of them concern marketing, such as “putting the best spin on personnel changes” or “hiding the salient features of a product.”

I wonder if there’s an investment firm on earth that hasn’t tried to spin personnel changes.

Read more about ethics in Ware’s article, “Ethical Leadership in the Investment Firm.”