Fiduciary Duty

As one of the themes that underlies this current crisis, fiduciary duty or the lack thereof is a permanent feature of my rants.

In this regard, Mike Shedlock has a blog entry from yesterday that highlights the current climate of expediency, apathy and selfishness that allows public officials and politicians to perpetrate what is by now a well documented criminal con on society.

This is the relevant bit:

Where is the fiduciary responsibility?

OK. Time for the rant.

James Kochan, the chief fixed-income strategist at Wells Fargo Fund Management who helps oversee $179 billion said of the trend toward looser debt covenants “We got ourselves in trouble with that in the past and here it is again. It’s not that surprising, but it is disturbing.”

The article goes on to say, “Money managers say they have little choice but to go along. They need to find a home for the record $29.4 billion that has flowed into high-yield bond mutual funds …”

That last statement was not attributed to anyone specifically. However, it is clearly part of the problem. Where is the fiduciary responsibility? Where?

Yes, Virginia, There is a Choice!

Of course there is a choice. If a fund manager does not think he can wisely invest fund flows, then he should not take them.

The correct choice is to say, “We think this market is fully priced, we do not like the risk-reward setup, and we advise treasuries, or sitting in cash, or whatever.”

I heard many horror stories from people whose managers said they were willing to go to cash. In 2008 none of them did.

Wells Fargo, Fidelity, Vanguard, etc., all offer a whole range of products, none of them giving any discretion to the fund manager. The money comes in, the managers put 100% of it to work collecting a fee for his services, even if the manager thinks the market is primed for a huge drop.

A friend told me his experience at a large brokerage firm that had 500 managed account programs consisting of the usual gamut of garbage: big cap, small cap, mid cap, emerging markets, blends, various grades of bonds, foreign equities, a dozen blends, energy, bio, semiconductors, tech, ad nauseum.

All 500 strategies had one thing in common: They were all 100% long 100% of the time. There was not one alternative strategy that allowed shorting or hedging or simply taking half the chips off the table if the risk reward setup was unfavorable.

Why is this?

Fee Structure Offers Managers Huge Incentive To Do Wrong Thing

Part of the problem is the fee structure system itself. Typically clients only pay fees when the money is invested. Thus, there is a huge incentive to “invest” whether it makes any sense or not, even in cases the manager is pretty sure it is wrong.

The second problem is, if the manager does not take the money, it will go somewhere else.

To that I say, so what?

Ultimately the only choice is to always act in the best interest of the client, even if that means sending them somewhere else, not accepting new funds, or sitting in cash waiting for better opportunities.

Putting money to work, even though a manager thinks “We got ourselves in trouble with that in the past and here it is again” is precisely one of the things blatantly wrong with Wall Street. Unfortunately, that attitude is all too commonplace. Don’t expect it to change anytime soon.

This is my second rant on the subject. In case you missed it, please see Rant of the Day: No Ethics, No Fiduciary Responsibility, No Separation of Duty; Complete Ethics Overhaul Needed.


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