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
Finance a la Shmoop! What is an agency relationship? Alright well this
one could have come straight out of Hollywood.
Because in finance land, no relation to Disneyland, the same kind of client agent
thing exists. I'll deal with a lot less than ten
percent per transaction commissions. That's usually standard in the old
Hollywood. Well you are granny gold digger, you're 97 year old husband, just[people at funeral]
died. Leaving you at 43 a wealthy woman. You meet with your stockbroker, now
turned private wealth manager, handsomey mic handsome and assess the
relationship here. Well handsomey, has a fiduciary
obligation to you, to act on your best behalf. He is effectively an extension of
you. He is your agent, in the same way your right hand is your agent when your
back itches. He must be open about his fee structure.
Like a common agency arrangement these days, has the client paying 1% of the[pile of money in mansion]
assets under management with the agent. Whether the agent does a ton of work for
the client like tons of trading, or whether he does a whole lot of nothing.
Well the dicey conversations here then revolve around whether that agent
encouraged his client, to put money in the very high, free hedge and private
equity funds run by the agents firm. And then, well you know, you could ask does
the agent then get a spife, or tip, or free trip for him and his family to[man on vacation]
Hawaii at the end of the year? Hmm does that happen? Could that happen?
Agency relationship. All right well the basic idea here is that an agent must
act in the best interests of the client no matter what. Even if the advice the
agent is giving the client is directly opposite, the best personal interests of
that agent. Like getting a lot of commission and that free trip to Hawaii.
And yeah that is the only relationship we want to have with an agent.[three people in office]
Sorry there.
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