Raising capital by going public can be a boon to a financial services firm, its officers or executives and shareholders, and, of course creating capital is the American way. But what is the impact on individual investor customers or clients when their financial services firm is publicly traded? Is the client experience different at a privately held firm than at a publicly traded one?
For broker-dealers that are publicly traded, the balance is complex: for the company to grow, clients and customers must feel that their interests are being served; however, deals must be done, and products and securities sold. How would this change if the SEC concludes, after the current study on this subject, that brokers who provide advice must put clients' interests first?
A Delicate Balance of Interests
Does the added pressure to constantly grow revenues and add to shareholder value mean that a public broker-dealer or investment advisor is at more at odds with investor interests than a private broker-dealer would be? How does a public broker-dealer align shareholder interests and investors’ interests? In other words, does the pressure of a public company to always grow revenues for shareholders change the BD-RIA's (registered investment advisor’s) relationship with customers or clients?
Former Fed Vice Chairman Alan S. Blinder (left) pointed to his views about this issue in an e-mail reply to these questions on Thursday. Dr. Blinder is now the Gordon S. Rentschler Memorial Professor of Economics and Public Policy at Princeton University. In a forthcoming article, “It’s Broke, Let’s Fix It: Rethinking Financial Regulation,” to be published inDecember in the International Journal of Central Banking, he writes about the connection between sales, traders and executive compensation and risk-taking.
“Just like the traders and sales personnel who work for them, top executives of corporate financial institutions derive the lion’s share of their compensation from bonuses that are normally linked to the firm’s annual profits,” Blinder states in the article. “They, too, get rich in the fat years and pass the losses on to shareholders in the lean years. So they, too, rationally want to go for broke.”
Blinder notes in his article that the U.S. Treasury Dept. recommended in its June 2009 “Financial Regulatory Reform” white paper that the Fed provide guidance to financial services firms to “align executive compensation practices of financial firms with long-term shareholder value, and to prevent compensation practices from providing incentives that could threaten the safety and soundness of supervised institutions.”
Of course, Blinder articulates in his article a much broader sense of financial reforms than the simple question I pose about loyalties to clients and loyalties to shareholders, but it is related. He continues in his paper that, “The Fed’s guidance gave particular attention, by way of example, to clawbacks, to risk-adjusting incentive pay, and to reducing the sensitivity of pay to short-term performance.” In encouraging pay adjusted for longer-term performance, Blinder includes as potentially useful, the “say on pay” provisions, which give shareholders a voice and a vote on CEO pay—which was also enacted as part of Dodd-Frank.” But, Blinder remains “a bit skeptical that government can legislate compensation practices effectively.”
When Reps or Advisors Are Affiliated, Not Employees
In the case of a public BD, what about corporate officers' duty of loyalty to shareholders, employee-reps' loyalty to the firm, and because, In the case of LPL, a BD-RIA, in which most reps or investment advisors are affiliates and not employees, does their duty to customers/ clients change when the firm changes from privately to publicly owned?
First let me state that I am in no way picking on LPL—an independent industry leader. Last Thursday, Philip Palaveev, president of Fusion Advisor Network and a frequent contributor to www.AdvisorOne.com, noted in an interview that “LPL has kind of been the torchbearer in many directions in the industry. Because of their presence, today advisors have the ability to choose better broker-dealers, lower transaction costs for their clients and more affiliation models.”