Clem Sunter

When foxes become wolves

2010-09-02 07:45

I remember a story doing the rounds in the City of London in the 1960s. A client rings up a junior partner of a stockbroker and asks what he should do with a particular company’s shares. The partner says he should buy them. The client thinks about the advice over lunch and decides to ring his old friend, the senior partner of the same firm, that afternoon.

The conversation goes like this. “What should I be doing with these shares?” The senior partner says: “I would sell them if I was you.” “But your junior partner told me to buy some more this morning,” the client says bemused. Back comes the reply: “That would be a good idea too!”

In other words, don’t just sit there holding the shares, do something so that it generates a commission. The story was usually told with a chuckle but it does illustrate a serious point. When a client goes to a financial adviser, he expects the adviser to have his interests at heart while gaining a small percentage out of the transaction himself. Nothing comes for free, especially financial advice. What the client does not expect is for the financial adviser to make money; and then provide exactly the opposite advice to another client for the same reason (offering as an excuse that each client has a unique situation).

That is a breach of trust. It is the moment when a financial fox becomes a financial wolf, particularly if the markets regard him as the smartest guy in town and listen to his every word. Should the adviser then say to you: “But you’re an adult, a free-thinking individual. It is ultimately your decision not mine,” you would not be impressed. You rely on his superior judgement.

But let’s go even further. Suppose an adviser offers you participation in a brand new financial instrument which he has assisted in devising, you would presume that he is optimistic about it. If you subsequently discovered that, in designing the instrument, your adviser had taken advice from someone else who intended to make money out of a fall in its value, you would be seriously miffed. And, indeed if you actually did lose money out of purchasing the recommended instrument, you would be hopping mad.

Up to late 2007, this kind of behaviour was somehow tolerated because one way or another everybody was making money out of the markets. However, the huge losses of 2008 and 2009 have revealed just how opaque the financial industry is and just how widespread these duplicitous practices have apparently spread.

For me the ultimate irony is that, in the interests of corporate governance, you are now expected to sign a form, after the conversation with the financial adviser, stating that you fully understand what you are doing. I have always presumed that this was supposed to protect you as the investor. I’m now beginning to realise that it protects the adviser in that he has written proof that you made the decision of your own volition.

We are living at a time when the markets are very dangerous. You need a foxy adviser who spots turning points ahead of them actually happening and has your best interests at heart. It can now be very expensive if he turns out to be a wolf in the fur of a fox.

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