Have you ever noticed how much better people behave when they know they’re held accountable?
My husband and I belong to a dinner group that holds events at independent restaurants, and for each dinner, we are asked to bring a bottle of wine to share. At first some folks were bringing wine that no one wanted to drink, so we began labeling the wines with the name of the person who brought it. Immediately, the quality of the bottles brought to share improved significantly!
During the last several years of economic and stock market gyrations, the issue of accountability could have saved us all lots of grief. If mortgage companies were held accountable for the home loans they made to consumers, they might have been more honest about the reality of the borrowers’ ability to repay the loan. If the rating agencies had been truly accountable to investors, who used their ratings to make purchase decisions, junk mortgages would not have been magically transformed into AAA investments by Standard & Poor and Moody’s. The lack of confidence in our financial system – caused by the lack of accountability – created the domino effect of losses beginning in 2007.
Recently, I went back and reviewed a book I’d read that was published right after we experienced the Crash of ’87 – when the US stock market experienced a 22% drop in one day, followed by similar drops in the international markets. “Liar’s Poker“, by Michael Lewis, tells the story of his experience as a bond salesman for Salomon Brothers in the years before the crash. One passage in the book really illustrated the conflict of accountability to clients vs. the firm:
Who do you work for? That question haunted salesmen. Whenever a trader screwed a customer and the salesman became upset, the trader would ask, “Who do you work for anyway?” The message was clear: You work for Salomon Brothers. You work for me. I pay your bonus at the end of the year. So just shut up, you geek. All of which was true, as far as it went. But if you stood back and looked at our business, this was a ridiculous attitude. A policy of screwing investors could lead to ruin. If they ever caught on, we’d have no investors. Without investors, we’d have no business.
The only justification – if you call it that – I ever heard for our policy came unwittingly from our president, Tom Strauss, himself a former salesman of government bonds. At lunch with one of my customers, he offered his opinion: “Customers have very short memories.” If that was the guiding principle of Salomon Brothers in the department of customer relations, then all was suddenly clear. Screw’em, they’ll eventually forget about it!
The issue of accountability to investors was raised again in a recent New York Times article, The Mutual Fund Merry-Go-Round. David Swensen, Chief Investment Officer at Yale University and the author of the article, discusses how the mutual fund industry uses market volatility to produce profits by convincing investors that they need to move in and out of funds, chasing the “best” performers. This activity benefits the mutual fund industry and the brokers who receive a commission to sell them, but not investors, who are virtually guaranteed to sell low and buy high. (The blog, Why DFA?, outlined why we use a specific mutual fund company to implement our investment philosophy, and avoid the conflicts outlined in the article).
Meanwhile, the profits made by these mutual funds, brokerage firms and insurance companies are used to make large campaign contributions to politicians and payments to lobbyists who are working to keep the “fiduciary standard” (putting the client investor’s interests first at all times) from being applied to them. It is highly unlikely that these industries will ever be subject to the same standard that Registered Investment Advisors like the Asset Advisory Group have to follow. The push for change will have to come from investors, not the government.
Who does your advisor work for? How are they compensated? Are they more accountable to a company and the products they sell than they are to you? Every investor needs to ask these questions. If they did, the quality of advice brought to the table would improve significantly!