As I write this, the financial reform bill is in conference committee to reconcile the Senate and House versions of the proposed new law, which is expected to be finalized and presented to President Obama just in time for Independence Day. At this point, a fiduciary duty for all financial advisors (which appears in the
House bill but not the Senate bill) is still a possibility. In fact, the Obama Administration just released a list of five items it considered essential for financial reform: At the top is a fiduciary duty for brokers. As Deputy Treasury Secretary Neal Wolin put it in a speech on May 27 at the annual FINRA conference: “Clients receiving investment advice don’t distinguish between broker/dealers and investment advisors and neither should the law.”
Right now, though, it’s still a less than even chance that we’ll get a level fiduciary playing field this time around. Since the last time around occurred in 1940, you might think that doesn’t bode well for finally getting financial consumers the protections they need and deserve from their advisors, regardless of whether she’s a broker, an insurance agent, or a financial planner. Yet, as I sit here staring out at the Sangre de Cristo Mountains (playwright Eugene O’Neill said that the hardest thing about being a writer is convincing your wife that you’re really working when you’re looking out the window), I can’t help but think that a fiduciary duty for all advisors is an idea whose time has finally come. In fact, I suspect it’s another inevitable step in a long transition from product sales to a truly independent profession of financial advice.
My seemingly unfounded optimism stems from reflecting on the history of financial advice (the product of staring at the mountains), at least as far back as the start of the financial planning movement in 1971. I know, I know, those guys who met in the Chicago O’Hare Hilton were dyed-in-the-wool mutual fund salesmen looking for some way of selling funds during a down market when they couldn’t give them away. But the solution they hit upon–comprehensive financial planning–was far more than merely a powerful new marketing tool (which indeed it was). Either through sheer brilliance or the intuition of good salesmen, in “financial planning,” those guys hit upon the single solution to three major and related societal challenges that Americans were only just beginning to face: people were living longer (driving up the costs of retirement and medical care); Social Security and defined benefit plans were becoming increasingly untenable; and everyone would have to assume responsibility for their own retirement.
The Genesis of a Profession
In addition to creating a better way to sell financial products, those fund salesmen started the snowball of client-oriented advice down the mountain, where it continues to gain momentum. Once they started talking about giving advice on complex and often arcane subjects to a largely unsophisticated (in financial matters) public, they were really talking about a profession. And all true professions have, among other things, independence from outside influence, and a clear duty to use their superior knowledge for the clients’/patients’ benefit, instead of their own.
While every major financial downturn from the Arab Oil Embargo in ’73 to the Sub-Prime Collapse drove more clients to turn to advisors with a long-term, comprehensive perspective, the next major step toward independent advice came from technology: The desktop personal computer. It’s hard to overemphasize the impact of the information revolution; on our society in general, and on financial advice in particular.
The computers on their desks enabled advisors to run calculations and analyze data that had formerly tied them to large institutions. The emergence of the Internet cut the cord: access to information, products, and tools far beyond the offerings of even the largest institutions was now available to any advisor, anywhere. The practical barriers to independent advice were down.
Riding on that technology wave came innovation after innovation, such as Schwab Advisor Services (which recently reclaimed its original name), which allowed advisors to deduct fees directly from client accounts, eliminating monthly billing. Even more important, it led to Schwab OneSource–the open mutual fund marketplace that sounded the death knell for proprietary products, and in my view, for wirehouses in general.
A Better Business Model