Investment Consultants and Institutional Corruption
A new paper looks at the role of consultants in creating the financial crisis.
BY Caroline Cakebread | May 23, 2013
Harvard University’s Jay Youngdahl, has produced a new paper that examines the role of investment consultants in the recent financial crisis. The paper, called “Investment Consultants and Institutional Corruption, points out that while we’ve looked at the role of credit rating agencies, financial institutions and regulators in contributing to the crisis, investment consultants have largely gone unexamined. Youngdahl, a lab fellow at Harvard’s Edmond J. Safra Center for Ethics raises some interesting questions and offers some suggestions for how to correct what he sees are inherent problems in the industry. Abstract and a link to the paper are below.
Abstract: 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. Download the paper.