Imagine waking up one morning and finding out that the local association of Certified Public Accountants was lobbying for more complicated tax laws simply so that they could charge more money for preparing your taxes? Or finding out that lawyers were encouraging the state to let them get paid on a different case by the same person that you were suing? Or discovering that there is a medicine that cures your chronic illness, but your doctor doesn’t get paid by that company so he doesn’t prescribe it?
True professional organizations recognize conflicts of interest within their professions and deal with them in their various codes of ethics. Consumers generally don’t understand or recognize that financial advisors literally don’t even have a uniform code of ethics. Perhaps this is why an article in Barron’s recently noted, “There isn’t a lot of love out there for financial-services firms. For the past five years, diversified financial companies have ranked dead last in the Reputation Institute’s annual consumer survey of industry reputations– scoring even lower than the widely despised cable companies.” (subscription required for link)
The financial services industry knows that if their front line employees were forced to act like true professionals abiding by a strict code of ethics, most of the big players in the industry would be out of business almost overnight. Think I’m kidding? Professional services companies lend themselves to smaller practices and fragmented industries because there aren’t the economies of scale in providing advice that you get from selling products. Consider the true professional industries. Can you name even a few law firms that aren’t based in your city? How about accounting firms? Can you name a single national corporation whose primary mission is to employ doctors?
But I’ll bet you’ve heard of Citicorp, JP Morgan, Wells Fargo, Bank of America, Merrill Lynch, Morgan Stanley, Fidelity and Charles Schwab. These firms know that if their industry were truly composed of professionals acting on behalf of clients instead of their firms, their business would quickly become fragmented like other similar industries. Not that you can’t make good money. It’s just very difficult to consolidate power and volume in a professional services industry and the large investment firms aren’t about to willingly give up that power (and the money that comes with it) any time soon. The status quo is their friend.
Today there are devoted public employees working hard behind the scenes actually trying to make the financial services industry more accountable. But the big players in the industry are pulling out all the stops to put these “lowly” bureaucrats in their place. They are spending millions and pushing hard on elected officials alike to put a stop to the heresy of insisting financial advisors in this country actually have to do what’s in your best interest. Roughly 90% of so-called advisors have no such legal obligation. Most are “hybrids” that sometimes act as advisors, with fiduciary obligations and sometimes brokers, when they can generally do what serves their own interests even if that doesn't align with their clients' interests.
What to do? First, ask your advisor to state in writing that they always have a fiduciary obligation to do what is in your best interest. If they don’t agree to that, then the only real solution is for investors to fire their “hybrid” advisors and hire only advisors that don’t have licenses to sell things like insurance, annuities, and an array of investments. If you really need those, a good advisor can just help you find them, without the carrot of a giant paycheck waiting at the end of the dotted line they are asking you to sign. If everyone did that, the market would make the rule rather than DC.
That’s the truth. Unfortunately, the problem is that most investors can’t handle the truth. For some strange reason, they prefer to have a double agent standing on that financial wall that separates them from their golden years. And their gold.
For more insight into the “acts of desperation to protect the status quo” see: Fiduciary Proposal Feels More Heat