The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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Goose and Gander

10/29/2011

Clients frequently ask me about making investments in businesses or real estate outside the stock market.  I am required to tell them that I have a conflict of interest, because my fee income could decrease if they reduce the funds under my management in order to make the outside investment.  In other words, it is theoretically possible I might recommend against a good investment just because it would cost me.  While it seems silly to my clients, it is still a good rule.

But, taking off my advisor hat and putting on my economist hat, there is no such rule.  A former Fed governor was paid by the Iceland Chamber of Commerce to write a glowing report of Icelandic economy shortly before it collapsed.  Companies often pay economists to write glowing reports on the economic impact of some new project or rule, and those economists are not required to disclose they were paid.

At long last, that is starting to change, and I’m glad.  The American Economic Association is currently writing ethical guidelines for economists.  Those guidelines will require we disclose all “relevant and material financial relationships.”  Although it would not unfortunately be binding, it would certainly change the tone. 

If financial advisors have to disclose conflicts of interest, so should economic advisors!

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