"You Mean They Can STILL Screw Their Clients??"

"Cruel Kindness" -- and Vice Versa

Cruel to be kind in the right measure
Cruel to be kind it's a very good sign
Cruel to be kind means that I love you
Baby, got to be cruel, you got to be cruel to be kind

--Nick Lowe; lyrics, "Cruel to Be Kind"

Which of the following professionals have a legal duty to put their customers' interests ahead of their own?

A. Stock Broker
B. Insurance Agent
C. Realtor
D. Investment Banker

Answer: C

That's right: only Realtors owe their clients what is called a fiduciary duty.

That duty further subdivides into a duty of care, and a duty of loyalty: in plain English, don't be a screw-up, and don't screw your client, respectively.

The issue of fiduciary duty is a hot one these days because stock brokers don't currently owe their clients a fiduciary duty -- and don't want the details of the new financial reform legislation, now being drafted, to impose one ("Dear SEC: Please Make Brokers Accountable to Customers"; The NYT, 11/19/2010).

Instead, stock brokers prefer the current standard, which merely requires that they weigh the "suitability" of particular investments for their clients.

Incredibly, the industry is arguing against a higher fiduciary duty on the grounds that it will raise costs, which will hurt clients.

So, there you have it: allowing brokers to screw their clients is actually good for them, and preventing that is bad.

Realtors, Wall Street & Fiduciary Duty

Goldman to Clients: You Shouldn't Have Trusted Us

If you didn't know, Realtors' owe their clients a fiduciary duty.

What does that mean?

Actually, quite a bit.

The legal definition of fiduciary duty has two components: a duty of loyalty, and a duty of care.

By definition, your Realtor knows more than you do about the housing market -- that's what you're paying them for.

The duty of loyalty means that they won't misuse that advantage.

On the contrary, Realtors commit to use their market knowledge and professional skills to serve their customers' best interests. As opposed to, say, their own.

Now segue to Wall Street.

Already, it's clear how Goldman Sachs, et al are going to defend themselves against the tsunami of lawsuits sure to be brought over trillions in securitized, mortgage-backed securities that Goldman helped sell.

As the world now knows -- and Goldman knew at the time, as evidenced by its bets against said securities -- the securities were ticking time bombs, destined to cost the purchasers -- their clients -- grievous losses.

Goldman's likely defense?

Not that it didn't do it.

Not that the housing market bust was an unforeseeable, one-in-a million occurrence (what statisticians call a "black swan event"). After all, Goldman not only foresaw the bust, but made billions betting on it.

But rather, that its clients were "big boys" -- sophisticated institutional investors who knew, or should have known, what they were doing. Boo-hoo.

Except that that's not what fiduciary duty is about.

Whether Goldman's clients were multi-billion dollar hedge funds or Daffy Duck, it was legally obliged to use its (undeniable) information advantage to act in the clients' best interests.

Instead, it knowingly harmed its clients while acting in its own interest.

If that doesn't constitute breach of fiduciary duty . . . the term's meaningless.