"We are calling on brokerage clients to take personal responsibility for their investments by seeking out a second-opinion on their holdings."
Falls Church, VA (PRWEB) April 20, 2010
While Friday’s SEC suit accusing Goldman Sachs of fraud was a headline-grabbing announcement due to the criminal nature of the complaint, in reality nothing new was exposed. Grey Owl Capital Management asserts that the conflict of interest described in the allegation is systemic in the brokerage industry.
"Brokerage houses manufacture and sell financial products as opposed to acting as fiduciary for clients," said Jeff Erber, Managing Director at Grey Owl Capital Management. "Is anyone really surprised that Goldman Sachs allegedly placed the interests of a multi-billion dollar hedge fund client above that of its other clients?"
Large brokerage houses and the financial advisors they employ do provide valuable services to their clients. However, they do not have to place their clients’ interests above their own and sometimes they do not. Clients need to be aware of this fact. While the Goldman Sachs example is somewhat esoteric, there are more frequently occurring and more broadly distributed examples of this same type of conflict including the following:
- Syndication of initial public offerings (IPOs). When the investment banking arms of large brokerage firms take companies public and sell many of the new shares to their retail clientele, are the banks pricing the shares for their retail clients or the company they are taking public? What is the broker or agent’s incentive when offering the investment? What is the firm’s incentive?
- Principal-protected-notes and other structured products. How many retail clients realize that the structured products they buy are really a loan to the bank? Do clients who received a 100% return of principal on the notes they purchased before the 2008/2009 stock market crash realize that due to firm bankruptcy, Lehman Brothers clients did not receive anything close to 100% of their principal for notes purchased at the same time?
“This is not a broad indictment of the brokerage industry,” said Eric Brugel, Managing Director at Grey Owl Capital Management. “Rather, this is a call to brokerage industry clients to recognize the true parameters of their relationship with their broker.”
“We also are not calling for significant regulatory reform,” continued Erber. “All another layer of rules will do is further enhance the professionals’ information advantage. More thorough coverage of these issues by financial media would help. More importantly, we are calling on brokerage clients to take personal responsibility for their investments by seeking out a second-opinion on their holdings.”
Several years ago, it was difficult if not impossible for independent advisors to compete with the robust platform of services offered by the large brokers. Today, the large brokers no longer have the advantage of a broader product suite. Now, there are countless qualified, independent advisors that serve clients’ broad needs without the conflicts of interest present with large brokers.
Independent registered investment advisors (RIAs) have a fiduciary responsibility to their clients and must place their clients’ interests above their own at all times. In addition, independent advisors who hold the Chartered Financial Analyst designation annually sign an oath that states they must “place the integrity of the investment profession and the interests of clients above their own personal interests.”
The complete SEC complaint can be read here: http://www.sec.gov/litigation/complaints/2010/comp-pr2010-59.pdf
About Grey Owl Capital Management, LLC
Grey Owl Capital Management, LLC is an SEC registered investment advisor whose mission is to provide superior absolute investment returns for clients. Founded in May of 2009 and located in Falls Church, VA, the firm provides a go-anywhere, opportunistic investment process that seeks out the best alternatives for capital appreciation across multiple assets classes. The firm’s principals both hold the Chartered Financial Analysts (CFA) designation. You can find out more about Grey Owl Capital Management, LLC at http://www.greyowlcapital.com or by calling 888-GREY-OWL.