Alhambra Investment Partners is a registered investment adviser. The SEC defines investment adviser as “any person or firm that for compensation is engaged in the business of providing advice, making recommendation, issuing reports, or furnishing analyses on securities, either directly or through publications”. That is in contrast to the broad definition of broker provided by the SEC: “any person engaged in the business of effecting transactions in securities for the account of others”. The difference is obvious. Investment advisers are in the business of providing advice; brokers are in the business of effecting transactions. This important distinction is a key factor in deciding who you want to manage your investments.

The traditional Wall Street business model marries an investment bank with a brokerage firm.  The investment bank’s purpose is to raise money for client companies and the brokerage firm acts as the distribution channel for the securities created by the investment bank.  The investment bank is not concerned with whether the security they create is a prudent investment for the investors who purchase it through the brokerage firm.  Obviously, they will try to package and price the investment in such a manner that it is attractive to potential investors but ultimately those who provide the capital for these investments (clients of the brokerage firm) must depend on their own expertise to determine whether it has an attractive risk/reward profile.  The brokerage firm, by law, cannot offer an investment opinion on the securities being structured by their investment bank.

In this business model, the individual investor has traditionally depended on the reputation of the investment bank as a primary means of determining whether they will invest in securities created by the bank.  Until the mid-1980s most Wall Street firms were structured as partnerships and this evaluation method worked fairly well since the reputations, as well as the capital, of the principles of the firm were at risk.  Since that time however, firms have reorganized as limited liability corporations and raised large capital bases which has allowed them to create larger and larger streams of income from lending, investment banking and particularly trading for their own account.  It seems obvious that the managers of these firms, now, no longer risking their own capital or personal reputation, would not be as prudent in the choice of securities to underwrite, the funds they lend or the trading strategies they employ.  The potential rewards of “getting the deal done” became so large that the quality of the deals became secondary.  The individual investor, not realizing that the game had changed, continued to trust the investment banks and brokerage firms.  As these investors have discovered over the last decade, that was a colossal mistake.

The Internet bubble starkly revealed the depths to which Wall Street investment banking firms were willing to stoop in order to collect their outlandish fees.  The investment banks, taking advantage of the public’s appetite for any security with dot com in the title, brought to market increasingly dubious companies that were immediately scooped up and driven higher by insatiable investor demand.  The analysts of the brokerage firms associated with the major investment banks were intimately involved with courting and selling dot com companies with little revenue and no profits.  These analysts provided legitimacy for the newly issued securities by issuing buy ratings soon after the IPO in the name of their brokerage firms. Later it was discovered that in private these analysts disparaged as worthless the very companies they were telling the public to buy.  The lure of huge bonuses based on investment banking fees was so great that they willingly sacrificed their personal integrity.  Some, such as Henry Blodget of Merrill Lynch, were barred from the industry for life for these indiscretions and the rules were changed somewhat to reinforce the wall between the brokerage firms and the investment banks, but the recent financial crisis proved that the reforms did not resolve the conflicts of interest that plague Wall Street.

If the Internet bubble wasn’t sufficient evidence that Wall Street was not looking out for the best interests of investors then surely the housing bubble and subsequent financial crisis finished the job.  The toxic assets created by Wall Street nearly brought down the world financial system and individual investors once again bore the brunt of the cost. The public was forced to fund bailouts that were opposed by a majority of Americans and are a primary cause of the current political discontent.  The public does not trust Wall Street nor do they trust the political class to enact regulations that will protect the public from future bank and broker malfeasance.

Alhambra Investment Partners and other investment advisers eliminate the conflicts of interest inherent in the Wall Street model. Alhambra does not accept compensation from any third parties. We are not paid by any brokerage firm, mutual fund company or securities issuers. We are compensated solely by our clients for providing investment advice. We work for you and must adhere to a fiduciary standard. What that means is that we must invest your funds solely for your benefit and must disclose conflicts of interest, if any.