54 Pages Posted: 24 Apr 2013 Last revised: 23 May 2013
Date Written: April 25, 2013
Analyses of the financial crisis of 2007-2009 and the continuing effects of a difficult investing environment have largely focused on factors such as the roles of failed and complex financial products, inadequate credit rating agencies, and ineffective government regulators. Nearly unexamined, however, is a key group of actors in the financial landscape, investment consultants. Investment consultants stand as gatekeepers between large investors, such as private and public retirement funds, and those from “Wall Street” who design and sell financial products. Investment consultants hired by these asset owners practically control many investment decisions. Yet, as a whole the profession failed to protect asset owners in the recent financial crisis and has yet to engage in serious self-examination. Much of the reason for the failure can be traced to institutional corruption, which takes the form of conflicts of interest, dependencies, and pay-to-play activity. In addition, a claimed ability to accurately predict the financial future, an ambiguous legal landscape, and a tainted financial environment provide a fertile soil for institutional corruption. This institutional corruption erodes the confidence and effectiveness of the retirement and investment systems today. While not proposing a comprehensive system of reform, this article illuminates a way forward for those in the industry who have the desire to address and implement necessary corrective activity.
Keywords: Institutional Corruption, Investment consultants, Fiduciary duty, Wall Street, Money managers, Self-dealing, Retirement crisis, Modern Portfolio Theory, Defined benefit pensions, Multi-employer plans, Taft-Hartley plans, Department of Labor, Securities and Exchange Commission, Conflict of interest
Suggested Citation: Suggested Citation
Youngdahl, Jay, Investment Consultants and Institutional Corruption (April 25, 2013). Edmond J. Safra Working Papers, No. 7. Available at SSRN: https://ssrn.com/abstract=2255669 or http://dx.doi.org/10.2139/ssrn.2255669