Ralph’s Used Car Analysts
Imagine, for a moment, that the federal government runs out of things to do and decides to police car dealers. Soon there’s a Warranties & Exchange Commission, followed by a Financing of Automobiles Standards Board, which issues Generally Accepted Odometer Principles.
All pretty harmless, if the main purpose is to prevent fraud. But maybe an angry car-buying public wants more vengeance against the people who sold lemons. And so the government goes after what is portentously called the Conflict of Interest. Under this economic theory it would be wrong for the car salesman to say the Tahoe is a terrific car, if he wrote in a private e-mail that he would rather drive an Expedition. If General Motors sent him a case of wine, they would both be prosecuted.
Sure, we could treat car salesmen like securities analysts and have them attend mandatory ethics courses whenever they step out of line. But would this give car buyers better deals? The main thing keeping the GM dealer honest is that across the street is a Ford dealer. All car dealers have a conflict: They get commissions from what they sell, and they don’t get commissions from the competitor’s products. So what? If you don’t trust what the salesman has to say, you can always go to Consumer Reports.
The ruckus over stock analysts has created a marketing opportunity for Charles Schwab & Co., which doesn’t get underwriting commissions for stocks (see Neil Weinberg’s story, p. 71). Acting as a Consumer Reports for stocks, Schwab has a great service to offer; over the past year its “strong buys” have beaten the market, while the “strong sells” have underperformed.
Schwab’s enemies aren’t going to let this upstart have an easy time of it. They can point to the discount broker’s own ulterior motives, which include making a profit. Hey, Schwab brokers promote Schwab index funds, when they could send you to cheaper alternatives from Vanguard. Conflict!
But wait a minute. Do we really expect a Schwab salesman to say his product stinks and you ought to shop across the street? You go to Schwab to get an impartial opinion on whether GM or Ford shares are a better buy. You don’t go there to get an opinion on whether Schwab or Vanguard is a better money manager.
