Wall Street Ethics: The Vanguard Test

Last week, Susanne Craig and Jessica Silver-Greenberg of The New York Times wrote a smoking-gun story about the lack of ethics at JPMorgan Chase.

“[As JPMorgan Chase] became one of the nation’s largest mutual fund managers, some current and former brokers say it emphasized its sales over clients’ needs,” wrote the duo.

This is a surprise to people?

For decades, the traditional investment business, aka “Wall Street,” has thrived on a hard-core sales culture, with a legal and ethical credo that amounts to buyer beware. Of course, it’s hard for buyers to beware in such a complicated business with so little transparency.

Every few years, journalists and regulators rediscover the problem with Wall Street. In a follow up story to the JPMorgan piece, A Fancy Financial Title Does Not Ensure High Standards, Tara Siegel Barnard wrote about the latest efforts in Washington, D.C., to require Wall Street brokers to act in their clients’ best interests.

“Two years ago,” she wrote, “the Dodd-Frank financial overhaul law gave the Securities and Exchange Commission the authority to write rules that would require brokers to adhere to the same standard as advisers — a standard known as ‘fiduciary duty’ — but the law stopped short of requiring that the rules be written. Not surprisingly, the S.E.C. has yet to write the rules.”

(Wealthfront, as a registered investment advisor, is a fiduciary).

Our two cents? Real change is coming about, but slowly, as educated consumers find market-based solutions. It’s taken decades, but Vanguard, with its super-low-fee approach and its unique corporate structure, is now one of the largest mutual fund companies. A growing number of brokers are going independent, so they aren’t obliged to sell funds owned by their parent companies. And there are more low-fee online options, like Wealthfront and others.

One of the experts quoted in Ms. Seigel Barnard’s story suggested that if you want to test your brokerage’s ethics, call the firm and ask to be put into a no-load Vanguard fund.

“If you were to call up Merrill, can you get them to sell you and put you into a no-load Vanguard fund?” said John C. Coffee Jr., a professor of securities law at Columbia Law School. “My guess is you cannot.”

If you try Professor Coffee’s experiment, please let us know in our comments section.

Tags: , , , , ,

One Response to “Wall Street Ethics: The Vanguard Test”

  1. Nathan February 8, 2013 at 5:38 pm #

    I am a financial advisor at one of the big firms and I regularly use Vanguard funds. .

Leave a Reply