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Chapter 11. The Retail Investor: Victim ... > The Buyers' Side of the Capital Mark...

The Buyers' Side of the Capital Market

Mutual fund managers represent the buyer's side of the market for stock in companies—not the sellers' side (which are companies and investment banks). Mutual fund managers are paid to help their buyers purchase valuable stocks. If an investor buys a security or a mutual fund in a brokerage account, his broker has a “suitability” requirement. That is, the broker has a legal obligation to be sure that the investment is a suitable one for the client—a form of qualification of the client for the purchase. But if an investor buys a mutual fund directly from the fund advisor, the advisor has only disclosure responsibilities, not suitability ones.

Because mutual funds are buyers' side agents, buying shares in companies not trying to sell them (as investment banks, companies, and brokerage houses do), mutual fund managers shouldn't be tempted to exaggerate the value of IPO shares like the analysts and salespeople at investment banks are. But in the midst of the bubble, one could hardly tell the difference between the two because many mutual fund companies have their own brokerages that sell individual stocks (not only mutual funds) to the public and thus hyped dot-com shares right along with the banks, VCs, and the press.


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