About a month ago a senior investment banker from a prominent Wall Street firm grabbed the public spotlight by publishing his reasons for resignation in a New York Times opinion piece. He stated that his primary reason for resigning was that the culture of the firm had strayed away from the core principle of serving client interests first. Among the disturbing revelations in the op-ed were claims of unwitting clients being advised by the firm to enter into securities transactions in which the only expected financial gain would accrue to the investment bank and its employees. The firm’s bankers were no longer expected to be transparent in financial dealings or disclose conflicts of interest to clients as long as they generated a profit for the firm. For their part, the employees who generated the most profits for the firm were rewarded with promotions and bonuses. Client interests were willingly being sacrificed in the pursuit of increasing firm profitability and employee wealth and he no longer wanted to be a part of it.
While some may question the motives behind the public fashion in which the author chose to resign, the issues he describes are real and should not be ignored. Clients are entitled to know in what ways an advisor is compensated. Furthermore, clients are entitled to know why an advisor recommends a particular investment and whether or not any underlying incentive exists for an advisor to recommend one investment over another. The link to the video below highlights the importance of these issues and cleverly (and literally) illustrates the difference between advice given by registered investment advisors (RIAs), like Dowling & Yahnke, and brokers.