To Be (Independent)

Posted by on 12/14/09 in Creativity, Ethics, Literature, Stewardship

“Words, words, words,” once said a dispirited Hamlet to a loquacious and perpetually disoriented Polonius in Shakespeare’s eponymous play (Act II, Scene II, Line 192).

And though we take some pride in avoiding cynicism, we must confess to at times feeling similarly resigned to the cacophony of regulatory rhetoric. There are certain words that are bandied about with gusto by those striving to “clean up” the investment industry; however, the same words are quickly adopted and co-opted by the industry itself, perpetuating a sort of Orwellian confusion on investors both sophisticated and not, retail as well as institutional.

As we enter 2010, we thought that we would occasionally identify a word with profound influence on how investments will be crafted, sold, and regulated in the years to come. We’ll offer a brief analysis of how the word is used, and then suggest how to manage the linguistic confusion going forward.

Syntrinsic’s first Commentary Word is “Independent.”

Independentadj.—Not controlled by another. Not forced to rely on another for money or support. (Encarta)

At a time when certain professional affiliations are unpopular, it has become de rigueur (i.e. fashionable) to promote oneself as independent even when one is not. We have heard it quite often and more so this past year. “No, I have nothing to do with my parent company that borrowed billions from tax payers. I’m just an angry citizen like you are.” “No, they just issue my paycheck. I have no other affiliation with that unethical bank/insurance company/broker-dealer.” “I am totally independent. I don’t use my firm’s research. My firm’s restrictions just apply to other financial advisors, not to me.” “Sure, they fly me out to New York but that doesn’t bias my due diligence at all.”

It is no secret that many firms and/or professionals claim to provide “independent” research and advice even when their compensation and advancement are tied to their recommendations. The challenge for investors, then, is in trying to understand how “Independent” can be interpreted.

In the spirit of investor empowerment, we would suggest a handful of questions for investment professionals related to independence:

  1. Does your firm restrict you in any way from accessing third party research and using it to provide recommendations to your clients?
  2. Are you or your firm in any way restricted from evaluating and recommending potential investments solely on their merits, without concern for revenue sharing?
  3. Are you or your firm compensated differently to recommend different investment products?
  4. Do you or your firm have other businesses (e.g. trading, investment banking, securities lending, etc.) that may profit from our investment decisions?
  5. Are your supervisors compensated differently depending on the investment strategies and/or products that you recommend?
  6. Legally, are we YOUR client or a client of your firm?
  7. Would regulators describe you as an independent contractor or as an employee, registered representative, insurance agent, trust officer, etc. of your firm?
  8. Who gives you gifts?

As with any questions that you ask investment professionals, you would get responses to these questions in writing and ask for verification where needed. But you already know that.

Think about independence as you review this week’s attached update, in particular the sections on TARP funding and Credit Rating Agencies, and the policy makers that influence both.  You may find yourself in a fit of existential angst, asking:

“To be (independent) or not to be (independent); that is the question:
Whether ‘tis nobler in the mind to suffer (as taxpayers and citizens)
The slings and arrows of outrageous(ly earned) fortune,
Or to take arms against a sea of (policy and industry) troubles,
And by opposing (the perpetual escape clauses) end them?
(so we don’t have to go through this again in 10 years)”

William Shakespeare, Hamlet (with full blame for the parentheticals on Syntrinsic)