The capital markets are a complex web where at the end of the road two parties intersect – those who need capital and those who provide capital.
Despite the nebulous nature of this enormous market place, this intersection can simply be divided into two sides:
- ‘buy side’ – those with capital – think of insurance companies, pensions, endowments and individual investors and
- ‘sell side’ – those seeking capital or those selling securities on behalf of those in need of capital – think of large or small corporations, small businesses and traditional wall street firms.
The incentive of each is diametrically opposed – the Buy Side wants to acquire the most value at the cheapest possible cost or lowest possible risk. The Sell Side wants to sell the least amount of value at the highest possible price. Wall Street has traditionally been the facilitator of these transactions but in doing so has traditionally represented the Sell Side. As an individual investor, never confuse what side of the intersection you are on – you are always on the Buy Side.
Based on our experiences and observations – many advisors are affiliated with broker/dealers (Wall Street) – these are ‘Sell Side’ entities. The Sell Side’s obligation to its clients is ‘suitability’ – a product or security needs to pass a suitability standard. This bar in our opinion is too low for those who place a high value on their capital.
The Buy Side’s obligation – as a manager of an investment portfolio – is as a fiduciary – a much different and higher standard. This places a burden on the investment managers to act in a manner consistent with fiduciary standards. This also keeps the investment manager on the same side of the intersection as their client.