Conflict of Interest – A Case Study

I’ve discussed the Fiduciary Rule in this space many times, and as I’ve written, the battle to preserve the status quo was going to be fierce.  A court ruling last week may have finally killed the Rule, which isn’t terribly surprising given the deep pockets of those fighting it.  I thought I’d share a timely story to make the Rule a little more ‘real’…

Back in 2015, I held the title of Sports and Entertainment Director for Morgan Stanley.  That fancy title only meant that my partner and I did a lot of business working with Sports clients, and a subset of Morgan Stanley advisors were granted this honorary title as a way to brand the practice.  Morgan Stanley hired a few athlete spokespeople, printed a bunch of glossy brochures, and voila!  They were now experts at catering to this glamorous demographic.

In the summer of 2015, Fitbit was preparing for their IPO, and guess who was helping to underwrite it?  Morgan Stanley.  As part of our Sports and Entertainment honors, there were regular conference calls where management could tell us about exciting new products geared towards our special group of clients.  That spring, the Fitbit IPO was prominent on every call.

We weren’t required to sell it.  We were just highly encouraged to sell it.  Many times.  The sales pitch was easy;  a wearable sports gear company, a sexy IPO, a chance to get in before the masses.  Athletes would eat it up!  At least that’s how it was scripted for us in the meetings.

Fitbit went public on June 18th, 2015.  I’ll never forget the congratulatory phone call from our Sports and Entertainment leaders at how many shares our group had sold (proudly, my partner and I took a pass).

Nearly 3 years later, Fitbit just hit a new all-time low, after…wait for it…a Morgan Stanley analyst downgraded the stock! It’s now down 80% from its glorious debut.

An IPO is a very risky investment, even in the best of scenarios.  The conflict for us was blatant.  Morgan Stanley was underwriting the IPO and the bankers needed to sell a ton of the shares.  Enter our group of Sports and Entertainment clients, and you have a match made in Wall Street heaven.

The bankers were just doing their job, that’s what they get paid to do.  They expected us to do ours, which in Wall Street banks means:  go sell the product.  It happens every day, at every bank, with every client.  No one was doing anything illegal or abnormal, but was this in the best interest of my athlete clients?  Should a 25 year-old NFL client, who’s barely hanging on to a roster spot, have a fresh IPO stock in his portfolio?

Part of the recent court ruling was based on an argument from financial industry attorneys, stating (and I’m quoting directly from court documents) “brokers may provide some financial advice when assisting investors with a sale, but this by itself does not convert them into an adviser – much less a fiduciary.”  The court agreed.

Think about that for a second;  the people at the big banks and insurance companies argued under oath that they are not giving you financial advice, they’re only selling you products and shouldn’t be held responsible for whether that product was indeed good for you or not.  This despite a clear perception in the public that…well, of course they’re providing financial advice!  Not to mention the ‘advisor’ title often displayed prominently on their business cards and websites.

The Fiduciary rule may not survive the courts, but I believe it will now survive in spirit.  Perhaps having this dispute fought in the public eye is exactly what the industry needed (how else could you get the firms to admit under oath that they are merely salespeople?).  The SEC is focusing on the use of job titles by the industry, as a way to clearly define to consumers if the person handling their money is a true advisor or a salesperson.  Hopefully, everyone will soon be able to differentiate product sales from advice, and then people can decide for themselves who they trust to help manage their portfolios.

Disclaimer: All written content on this site is for information purposes only. Opinions are solely those of Innovate Wealth unless otherwise specified. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.  

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