In his newest Fiduciary Corner column for InvestmentNews, our CEO, Blaine Aikin, looks at the high cost of conflicts of interest and four suggestions for how a fiduciary should address them.
Just the idea of trying to reconcile a conflict of interest with a fiduciary duty is difficult. How can a fiduciary be trusted to put the best interests of their client first when they have a financial stake in their decision-making? And, as Blaine mentions, it is more than a trust issue, it is a results issue.
In the column, he cites two scholarly studies, one from the Financial Analysts Journal (requires membership to view entire article) that shows how disclosed conflicts of interest increase the operational risks for hedge funds and another from the Government Accountability Office showing that undisclosed conflicts results in underperformance in both DC and DB plans.
Given that conflicts both add to public distrust of the industry and are more likely to result in poor performance, Blaine offers his four conclusions on conflicts of interest:
- Avoiding, rather than disclosing and managing, conflicts is by far the more preferable option
- If a conflict must exist, full disclosure is an absolute must
- Conflict disclosures should be verified by regulators or independent auditors
- A self-regulatory authority for advisers is itself a conflict, and therefore the wrong solution for oversight
Make sure you read Blaine's full article at InvestmentNews.com and click the "Recommend" button at the top of the page if you like it. And, make sure to leave your thoughts in the comments section below.
I am in the financial planning business, I examine a good number of portfolios of brokerage clients. Some of what I see are simply boggling. My article "The staggering cost of conflicts of interest"
http://investmentscientist.com/2009/04/08/staggering-cost-of-conflicts-of-interest/
is based on a true story. Investors tend overlook conflicts of interest. They shouldn't
Posted by: due diligence advisor | April 20, 2009 at 06:58 PM