Agency Problem

  

You know how child actors in the 1980s always ended up getting their money stolen by their parents or by some unscrupulous manager? That's the agency problem in a nutshell.

The issue revolves around whether the client can trust his/her agent to act in the best interest of their clients, especially when a conflict of interest comes up. Namely the kind of conflict that can be summed up as "it would be in my client's interest to keep this money, but it would be in my interest to invest it in this deal where I'm the founder and get paid more than handsomely if that risky deal does well." But it doesn't just affect the cast of Diff'rent Strokes. It comes up in all sorts of large and small ways any time a person is given financial sway over another.

A common and relatively benign version comes up when financial advisors try to sell you mutual funds from their company first, before offering similar products from competing firms. Most of these funds are likely interchangeable on a basic level, but it just goes to show: you can't trust anyone. For other definitions that get dark, see American Experience Table.

Related or Semi-related Video

Finance: What is an Agency Relationship?202 Views

00:00

Finance a la Shmoop! What is an agency relationship? Alright well this

00:07

one could have come straight out of Hollywood.

00:09

Because in finance land, no relation to Disneyland, the same kind of client agent

00:15

thing exists. I'll deal with a lot less than ten

00:18

percent per transaction commissions. That's usually standard in the old

00:22

Hollywood. Well you are granny gold digger, you're 97 year old husband, just[people at funeral]

00:27

died. Leaving you at 43 a wealthy woman. You meet with your stockbroker, now

00:33

turned private wealth manager, handsomey mic handsome and assess the

00:38

relationship here. Well handsomey, has a fiduciary

00:42

obligation to you, to act on your best behalf. He is effectively an extension of

00:48

you. He is your agent, in the same way your right hand is your agent when your

00:53

back itches. He must be open about his fee structure.

00:57

Like a common agency arrangement these days, has the client paying 1% of the[pile of money in mansion]

01:02

assets under management with the agent. Whether the agent does a ton of work for

01:07

the client like tons of trading, or whether he does a whole lot of nothing.

01:12

Well the dicey conversations here then revolve around whether that agent

01:17

encouraged his client, to put money in the very high, free hedge and private

01:22

equity funds run by the agents firm. And then, well you know, you could ask does

01:27

the agent then get a spife, or tip, or free trip for him and his family to[man on vacation]

01:32

Hawaii at the end of the year? Hmm does that happen? Could that happen?

01:36

Agency relationship. All right well the basic idea here is that an agent must

01:40

act in the best interests of the client no matter what. Even if the advice the

01:46

agent is giving the client is directly opposite, the best personal interests of

01:51

that agent. Like getting a lot of commission and that free trip to Hawaii.

01:54

And yeah that is the only relationship we want to have with an agent.[three people in office]

02:00

Sorry there.

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