It seems that each passing day brings more bad economic news: a softening job market; weak retail sales; deepening bank troubles; record foreclosures; a shaky stock market. Much of these troubles emanate from the collapse of real estate; as its gloom ripples across the economy, the chain reaction was bound to extend even to the financial advisory world.
Our cover story (“Caveat Vendor”) addresses a specific case, fraught with legal implications, of financial advisors embroiled in the mortgage crisis. Some advisors reaching for yield were investing their clients’ money in collateralized mortgage obligations. But brokers were generally not given good product; the tranches with good collateral went to institutional investors and the weaker collateral went to the retail side.
This raises a lot of questions: Where does the buck stop at the firms where such products were approved? How aware was the sales force of the potential risks in these products?
Regardless of the poor performance in the executive suites, as far as your clients are concerned, the buck stops with you alone. (Well, perhaps not when litigation or arbitration is involved.) Ultimately, the advisor must vet products, resisting investment vehicles with funky names like “inverse floaters” absent a deep knowledge of their risks and benefits.
Though smaller in scale, this is reminiscent of the tech and Internet bubble of the ’90s, when very little due diligence went into investments whose names seemed to bear so much promise. Remember, at that time Wall Street mucky mucks embraced those investments, though not always in their private e-mail communications.