In most parts of the world, accountants, lawyers and other professional firms typically operate as limited liability partnerships or privately-held companies but almost never as publicly-traded corporations. This is partly because professional services firms are people-intensive businesses that do not scale easily to provide substantial returns on capital. But the main reason is that, if professional firms were to be publicly-listed, there would be a natural conflict of interest between making money for shareholders and upholding the standards of a regulated profession.
Returns versus regulations
Imagine engaging a publicly-traded accounting firm to carry out an audit. When the audit partners have to answer to their shareholders and their professional regulators, which master would they serve? Would the auditors diligently carry out all the sampling and fact-checking required of a thorough audit? Or would they be inclined to cut corners, sign off and move on the next client, to maximize their billable hours? This is already an issue in privately-held accounting practices but would become a true conflict in a publicly-traded accounting firm.
The curious case of banks
When it comes to investing, banks have managed to position themselves as professional advisors, even though their role is a hybrid of shareholder interests and professional standards. When working with a non-fiduciary bank advisor, typically about half of the fees reward the shareholders of a publicly-traded corporation, while about half of the fees are retained by the individual advisor. Even though advisors have good intentions, they are influenced by products, incentives and banking culture to promote investments that benefit the bank and are “suitable” for the client, rather than in the client’s best interest. An example of this is preferred shares, which we discussed in a recent blog post. Preferred shares, because they have lower returns and higher risks than bonds, are typically not recommended by professional investment firms but are promoted by advisors who benefit from a lucrative split of the 3% underwriting fee with their bank.
Implications
Charitable boards, who have a fiduciary responsibility for the organization’s funds, should consider partnering with a professional investment manager that provides the same fiduciary standard of care. Would you work with an accounting firm or law firm if it were a publicly-traded corporation? Probably not. Yet foundations and charities often choose to work with non-fiduciary bank advisors for their investments, without fully considering the inherent conflict of interest – between making money for shareholders and upholding professional standards – that lies below the surface of the bank’s well-polished brand.