Technology in Investment Banking: Advantages and Disadvantages - Essay Sample

Introduction

Over that past few years, there has been a rapid growth in the investment banking sector with technological advancements and innovations, which has led to new markets of doing businesses. Principal investments and trading are the two core sources of banks' profits despite the still-existing belief in traditional investment banking.

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However, technological advancements and innovations in the banking industry not only come with advantages but also disadvantages. The main demerit has to do with the conflicts of interest that arise after the creation of a world of innovations and technologies (Kumpan & Leyes, 2008). The conflicts, in this case, are so complex such that one cannot figure out who is to carry the blame between the bank and its customers or clients.

The tricky part is that, when a bank provides services, it has to satisfy its own interests while at the same time offer quality services to its clients by meeting their needs and interests (Tuch, 2005). For this reason, it is when a financial advisor cannot really decide upon the interests of the customer to the bank since, in their mind, they still have also to consider the bank's interests. This is the cause of conflict of interest that financial advisors are facing in the market because it is as hard to advise the clients as advising the bank as either way, both the bank and the client have to benefit from their partnerships. A good example of such a case is the competition for investment opportunities between investment banks and the client (Tuch, 2005).

For instance, in the case of Hippo Ltd, which is a stockbroking firm that employs financial advisors, such that, the advisors should be solely rewarded by way of broking commissions. In this case, the advisors are only rewarded when they advise the clients to buy or sell a security. Therefore, from such a case scenario, Hippo advisors are only after earning their remuneration at the expense of their clients rather than addressing the clients' needs by giving them the most appropriate investment advice.

Also, in a case when the New York Attorney General, so-called Eliot Spitzer, majored deeply into the investment banks and investigated how they managed their conflicts of interest between 2001 and 2002. The investigation was approximated at a $1.4 billion settlement. Spitzer realized that the research analysts involved at Merrill Lynch were engaged in downgrading the stock from some company. This was done contrary since there was no change in opinions pertaining to the company, and the reason was that just because the company did not engage in business with Merrill Lynch.

An action was taken against Merrill Lynch, and Eliot Spitzer was the leader when an investigation involving both the federal regulators and the state was conducted to identify any other investment bank that had failed to manage conflicts of interest. The thorough and broad investigation results indicated that ten banks had been unable to manage conflicts.

Relationship

From the report of the Royal Commission into Misconduct in the Banking, Superannuation, and Financial Services Industry (Australian Royal Commission), it is clear that there are misconducts, especially of mortgage brokers and financial advisors (Kolhatkar, 2020). The report focuses on financial services in operation in retail markets (entities).

The report further provides recommendations to the Australian government, financial advisors or regulators, and the entire financial sector that aims at addressing the misconduct or rather the conflicts of interest (Kolhatkar, 2020). However, in the recommendations made, none aimed at ending the integration between banks (financial manufacturers) and the financial advisors or wealth management divisions. The report recommends consideration of consumer interests as the first and foremost priority and that the financial sector must strive to make clear-cut changes that will last forever (Kolhatkar, 2020).

Therefore, based on the major points from the report, it is clear that conflicts of interest do exist mainly in the financial sector. Also, the report provides that any conflict can be resolved, especially the one involving the financial advisors with the client and the bank. Moreover, the report recommends that the interests of the client should always come first and that financial institutions and all analysts involved must work hand in hand to manage conflicts of interest.

QSolutions for Mitigating the Effects of the Conflict of Interest

In Australia, conflicts of interest regulation is a common thing that seeks to settle stockbroking. For this reason, recommendations have been made that seek to address and deal with potential and actual material conflicts of interest. This is provided in the Corporations Law under the s 849 of the pre-FSR (Securities & Investments Commission, 2012). Based on the rules and recommendations attached by legal means, solutions to the conflict of interest can be devised from s 849 obligation through ASIC Policy Statement 122 (Securities & Investments Commission, 2012). The solutions are as follows:The financial advisor involved must elaborate of the benefits (material), interests, and advantages of the advisor and their associates. Thus, ASIC usually consider generic or 'blanket' disclosure if one doesn't comply with the s 849 obligations.

The financial advisor should disclose advantages, interests and material benefits in such a way that the clients are able to understand what they are engaging into and that the financial advisor must consider sophistication levels of their clients before making final decisions on the investments.

For instance, if the customer or client is likely not to familiarize with percentage concepts, the financial advisor should at all times use alternative means such as in terms of dollars. However, there are defenses to breach of the solutions provided under s 849, like for instance, if the advisor was not aware of the benefits involved, interests or merits at the time of making the securities recommendation as provided in the s 852(1) (Securities & Investments Commission, 2012). Another defense has to do with a "Chinese wall" contained in the s 852(2) where the financial advisor was not aware of the interest, benefit, or merits involved due to internal arrangements (Securities & Investments Commission, 2012).

References

Blakely, B., Williams, J., Mayes, C., Kerridge, I. and Lipworth, W., 2019. Conflicts of interest in Australia's IVF industry: an empirical analysis and call for action. Human Fertility, 22(4), pp.230-237.

Burke, J., Hung, A., Clift, J., Garber, S. and Yoong, J., 2015. Impacts of conflicts of interest in the financial services industry.

Kolhatkar, V., 2020. Royal Commission Report Nails Adviser Conflicts Of Interest. [online] Firstlinks. Available at: <https://www.firstlinks.com.au/disclosure-mitigate-conflicts-interest> [Accessed 14 April 2020].

Kumpan, C. and Leyens, P.C., 2008. Conflicts of Interest of Financial Intermediaries-Towards a Global Common Core in Conflicts of Interest Regulation-. European Company and Financial Law Review, 5(1), pp.72-100.

Loff, B., 2011. Conflict of interest guidelines for clinical guidelines. The Medical Journal of Australia, 195(8), pp.442-445.

Mehran, H. and Stulz, R.M., 2007. The economics of conflicts of interest in financial institutions. Journal of Financial Economics, 85(2), pp.267-296.

Pearson, G., 2006. Risk and the consumer in Australian financial services reform. Sydney L. Rev., 28, p.99.

Proimos, A., 2005. Trust an analyst? An investigation of conflicts of interest in an Australian investment bank. Journal of Investment Compliance.

Richards, D.W. and Morton, E., 2019. Providing Financial Advice in a Client's Best Interest: The Influence of Business Models and the Wider Context. Available at SSRN 3410517.

Securities, A. and Investments Commission, 2012. Regulatory Guide 175: Licensing: Financial Product Advisers-Conduct and Disclosure.

Tuch, A.F., 2005. Investment Banks as Fiduciaries: Implications for Conflicts of Interest. Melb. UL Rev., 29, p.478.