More Bad News About Wall Street Ethics

More Bad News About Wall Street Ethics

In 1989 author Michael Lewis, in his book Liar’s Poker, revealed that the role of a bond trader at Salomon Brothers, the biggest trading firm on Wall Street during the 1980s, was “to call someone he doesn’t know and try to sell that person something he doesn’t want.”  Dan Wheeler, the founder of Dimensional Fund Advisors’ Financial Advisor Services Group, reported a similar experience as a stock broker at an unnamed major wire house during the same decade. He recently wrote in his blog, “The lack of ethics and the exploitation of investors were ingrained in the firm’s culture… I was there to make money for the firm. I was not there to provide investment advice, even if that was the advertised role of the broker.”  Today, thirty years later and seven years after the crash of 2008 and the subsequent Dodd-Frank regulatory overhaul of the financial services industry, have things improved?

Apparently not.

The University of Notre Dame and Labaton Sucharow LLP recently completed a study of workplace ethics in the financial services industry. They surveyed over 1200 investment bankers, investment managers, and other professionals working in the U.S. and the U.K. According to the authors, “Despite the headline-making consequences of corporate misconduct, our survey reveals that attitudes toward corruption within the industry have not changed for the better…especially when considering the views of the most junior professionals in the business. Most concerning, is the proliferation of secrecy policies and agreements that attempt to silence reports of wrongdoing…”

Here are some of the study’s key findings:

  • More than one-third (34%) of those earning $500,000 or more annually have witnessed or have firsthand knowledge of wrongdoing in the workplace.
  • 25% would likely use non-public information to make a guaranteed $10 million if there was no chance of getting arrested for insider trading.
  • Nearly one in five respondents feel financial services professionals must at least sometimes engage in illegal or unethical activity to be successful.
  • 27% of those surveyed disagree that the financial services industry puts the best interests of clients first. This figure rises to 38% for those earning $500,000 or more per year.
  • Nearly one-third of respondents (32%) believe compensation structures or bonus plans in place at their company could incentivize employees to compromise ethics or violate the law.
  • 25% of respondents earning $500,000 or more annually have signed or been asked to sign a confidentiality agreement that would prohibit reporting illegal or unethical activities to the authorities.

As a financial services professional I am deeply disturbed by these findings.  It’s one thing for a home handyman to lie about services that may not be needed or to charge for work not performed.  The financial impact on the consumer, while egregious, can usually be overcome.  But bad financial advice can have a devastating effect on a family’s ability to enjoy – or even achieve – their retirement.  I am reminded of the first part of the Hippocratic Oath taken by all medical professionals: “Do no harm.”  Although there are numerous ethical standards to which some industry professionals such as Certified Financial Planners commit to adhere, there is nothing that applies across the entire financial industry.  And – based on the study results – many financial advisors may not care anyway.

Is there any hope for change on Wall Street?  Wheeler laments that “Wall Street has no incentive to change the culture. There is too much money to be made. No one ever goes to jail and the billions in fines are insignificant relative to their bottom line.” But he also writes that “Fortunately investors do have a better alternative today, the ‘fee-only advisor’… many of them were ‘converts’ from the ‘dark side’ as I love to call it. This conversion was easy because they had a conscience…”  Unfortunately, the number of fee-only advisors is dwarfed by the number of advisors with compensation models largely invisible to the public, let alone their own clients.

The study concludes, “Educating a generation of young professionals—early and often—on the importance of ethics, transparency and honesty is crucial if we wish to affect real change in the industry and avert another, perhaps more destructive, financial crisis.”  I couldn’t agree more.

Here’s a link to the study: http://www.secwhistlebloweradvocate.com/LiteratureRetrieve.aspx?ID=224757

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