Courtney Milan, a writer with a background in law, has written two excellent posts on the subject of the conflicts of interest that can arise when agents act as both a client's agent and publisher.
For example, say Alice is a writer and Sue is her agent. Sue is negotiating with ABC publishing for the rights to Alice's latest book: A Tale of Three Cities. The agent has just opened up an publishing division for electronic books. If Sue thinks that Alice's book is going to be a bestseller and wants it all to herself, how hard do you think she is going to work at getting Alice a deal with ABC publishing? How hard do you think Sue is going to work at getting any other publisher interested in the manuscript?
Further, if Alice decided to publish with her agent rather than a traditional publisher, what motivation does the agent have to get the best possible deal for her client? None, since the more money her client gets, the less money she gets.
Courtney's first post: a mea culpa
Courtney's second post: agency publishing and conflicts of interest
Passive Guy, a retired attorney, has this to say about Courtney's posts:
Passive Guy congratulates Courtney on presenting the conflict of interest issues in a way that any non-lawyer should be able to understand. She describes real-life situations for agents and authors and how the conflict inherent in the agent-as-publisher can poison those relationships even if both parties have the best intentions.
Had you sat through as many legal ethics presentations as PG has, you would have a greater appreciation for Courtney’s achievement.
Here's the link to PG's post: Agents Who Publish Their Clients are Engaging in Unethical Behavior – Courtney Drops the Hammer.
Update: In PG's comments, Pat Chiles kindly posted a link to, The (Publishing) Times They Are Achanging, by accordingtohoyt. Another good read.