Reputation and Rewards
Earlier this month, Securities and Exchange Commissioner Luis Aguilar made a speech to the North American Securities Administrators Association that should strike fear into the hearts of many readers. He supported the NASAA’s proposal to eliminate mandatory arbitrations in conflicts between advisors and clients, and allow clients to sue their advisor in civil court “the same way a patient could sue a doctor for malpractice,” according to an article on Forbes’ website.
It’s doubtful the proposal will gain traction, though the industry will have a difficult time articulating why a process shrouded in as much mystery as mandatory arbitration is really the best recourse for investors.
After all, it’s mandatory arbitration that has, in some ways, allowed the SEC to dodge its responsibilities to the investing public. In his new book The Death of Corporate Reputation: How Integrity Has Been Destroyed on Wall Street, Yale Law Professor Jonathan Macey explains that, among other things, lax regulation and oversight has lowered the incentive for financial services corporations to invest in ensuring their good reputation.
The economic theory Macey examines is this: Only firms that invest in building and protecting a good reputation will attract customers. Yet companies like Morgan Stanley, Goldman Sachs and Bank of America, as well as law firms, accounting firms and credit rating agencies that support them, have taken severe reputational hits since 2008 (there is no need to go over the list here), and yet many have not only survived, they are prospering.
What happened to the theory? Macey outlines several reasons why the theory no longer holds true, among them the relatively new phenomenon of separating the corporation’s reputation with that of the people who work there.
But he also blames the SEC for letting targeted firms pay hefty fees for violations without admitting wrongdoing, a common outcome to SEC investigations that lets both sides claim victory. Also, its practice of targeting low-level transgressions among virtually all the firms out there means the public can no longer discern between a serious, reputation-damaging violation and what is simply a “cost of doing business.” Also to blame: the revolving door between Wall Street’s top law firms and the commission’s top regulatory positions, something we will no doubt see more of under the current chairman Mary Jo White, herself a former defender of Wall Street.
Advisor Confidence Plummets
If a rising market masks many sins, then there is an omen of doom in our recently relaunched Advisor Confidence Index. Over 300 financial advisors in the RIA channel have agreed to be on our ACI panel and answer a series of questions monthly. They give us their thoughts on the state of the economy and the future of the markets.
The news in the most recent reading is not good: Confidence in the future of the markets has plummeted. This marks the first month in several that confidence among advisors has eroded. Clearly, our panel believes that the stock market has gotten ahead of itself and is likely due for a correction. You can find the exact numbers on WealthManagement.com.
Setting the Record Straight
A correction from our March issue: In our story on overlooked opportunities to invest in a troubled Europe, we incorrectly referred to Columbia Management’s Chris Olson as portfolio manager of the Columbia Acorn International fund. While he is on an investment committee, he is not the portfolio manager of that particular fund. We regret the error.
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