Why are single, young, male professionals disrespected?

Why don't we subject investment professionals to malpractice lawsuits and require them to purchase malpractice insurance, like we require of doctors and lawyers?

• It seems like financial malpractice is something that should be one the table for investment professionals like traders and hedge fund managers. It is a licensed profession just like lawyers and doctors, so shouldn't it be subject to malpractice as well? Should finance professionals be expected to purchase malpractice insurance that gives them limited coverage, after which the sums awarded in a malpractice suit then come out of previous earnings and bonuses? It seems like one way to let the market re-introduce the sorely lacking "moral hazard" that has been absent from the market since investment banks ceased to be partnerships. I assume here that the financial professionals would need to purchase an amount of insurance commensurate with the amount of risk they are willing to take. I also assume that insurance would function in place of any bailout.

• Answer:

  First, based upon the question details, I think it is necessary to write up a quick background on the different kinds of investment professionals. They fall into two camps. The first is Investment Managers. An investment manager is a person or a firm whose job is to manage financial assets. He or she typically has set performance goals and risk standards. Investment managers include hedge fund managers, private equity fund managers, venture capitalists, pension fund managers, insurance fund managers, endowment fund managers, and financial advisors. These professionals, or the firms they work for, have a fiduciary duty to responsibly manage the money of their clients. The other group is the "financial services" umbrella. These employees, or the firms they work for, provide certain finance related services. These employees typically work for the large Wall Street banks, as opposed to working for an independent fund like the Investment Managers (although the Wealth Management and Asset Management divisions of these banks fall under investment management). Professions include investment bankers, who advise on mergers and acquisitions and capital raising, traders, who act as market-makers for institutional investors, retail brokers, and research professionals, who sell investment advice for the bank. The important thing to note is that none of these services involve professionals who manage money on behalf of clients. Bankers do not manage client money at all. They manage the banks money, and provide loans to clients, but they are not asked to manage the money of clients. Similarly, traders make markets for clients. The above mentioned funds use sell-side traders to buy and sell positions in certain financial securities. These traders do not actively manage the client's account. Instead, they act as a counterparty for trades, and they make a small profit on the spread (the difference between the price the traders buys a security at and the sale price). Sales professionals on a trading floor might encourage clients (an investment fund) to take a certain position, but the client is under no obligation to do so. Research professionals provide research advice regarding certain stocks or securities. "Chinese walls" have been erected to separate research from banking, thus allowing a bank to have a negative rating on a stock and still pursue the business of that company. This isn't a perfect system, but as I'll soon elaborate on, it doesn't really matter. Finally, retail brokers execute financial transactions for retail investors. Brokers are different than financial advisors in that an FA has a fiduciary responsibility to provide advice which is in the client's best interest, whereas a broker doesn't have this same responsibility. The key difference is that anyone involved in the "financial services" umbrella above, while they may be held to a certain code of ethics, is not actively managing money. Instead, bankers, traders, brokers, and research professionals all provide either advice for managing money properly or the execution. Every transaction they engage in is approved by the client. A banker doesn't buy one company for another without the apporval of the client. Nor does a trader buy stock for a client account with approval of that client. Thus, insurance is not necessary, because all the services these professionals provide are approved by a particular client. In addition, aside from brokers, all the other professionals deal with intelligent people who are running companies and investment funds, and who have a strong understanding of the market before hand. For financial service employees, insurance is not necessary, because the client is ultimately responsible for the underlying investment decision. Investment managers, on the other hand, are responsible for client funds. A hedge fund will pool together money from investors, and will then do whatever it wants with it, subject to the partnership agreement of that particular fund. However, these managers are subject to partnership agreements. Many are also licenses CFA's, which has a very strict ethics requirement. Ultimately, investment managers couldn't use insurance for two reasons. One is, much like above, the client chose to invest with that particular manager. When a client invests in a fund, he becomes an investor in that fund, and he typically has an iron clad contract dictating the terms of the partnership agreement. Again, no one is holding a gun to your head to invest in a hedge fund. It is a personal decisions, and investors will typically make sure that the agreement has stipulations that they can redeem their money if the fund goes sour. Finally, the insurance for a financial firm could never work in practice. Think about it. Insurance is a financial product. For the financial services practices, their is no determinant event that would signal that an employee has not lived up to their expectations. Is a banker responsible for a bad merger, like AOL Time Warner? If this were the case, no banker would ever propose any deals, because the risks would be too great. For investment managers, insurance would work against their business model as well. Hedge funds are in the business of taking risks with money. Investors know that their is the potential for loss when investing in this type of fund. In fact, investors know their is the potential for loss in any type of fund, including seemingly riskless funds like money market mutual funds (which broke the buck in 2008). Insurance on an investment would be enormous, requiring a giant premium, because the policy writer (the insurance company) would need to account for the enormous risks involved with investment management. Overall, this industry is nothing like medicine or law. "Malpractice" insurance would only work to prevent the financial industry from effectively allocating capital. 99% of the work done on Wall Street is ethical, honest work, which is socially useful and productive. The courts can and have been used to punish those who violate the law. After all, Rajaratnam and Madoff are both in jail.