At the annual Schwab Impact conference, the general sessions and the educational ones cover the gamut of advisors' concerns: Greg Valliere's comments on the markets and the economy in light of the coming elections; Condoleezza Rice's take on the international political and economic scene; the latest thinking of money managers like AQR's Cliff Asness and Sam Dedio of Artio Investments. But there was another undertone to the meeting that may suggest that forces are moving that will benefit all advisors' clients.
As the SEC continues to study “gaps” between broker-dealer and investment advisor regulation it is worth noting that practically no one on the broker-dealer, bank or insurance side of what Vanguard’s venerable founder, John Bogle, calls the industrial financial complex of big bank-brokers, securities product manufacturers, insurance companies (often the same companies) or their lobby group, SIFMA, has spoken about the client’s needs and their experiences with intermediaries.
We understand that this is no surprise. The money tied up in this complex, Mr. Bogle has stated, is hundreds of millions of dollars every year. But as it is a “zero sum game,” he notes, and this money comes directly from the pockets, college funds and retirement accounts of regular Americans:
As Mr. Bogle stated in a speech on 2009:
“But Wall Street marketers and entrepreneurs loved this new system of speculation in complex products, quantification, innovation, and unconstrained risk, for it made them billions in profits. So it was easy for Wall Street insiders to wallow in the wealth it generated for themselves, and ignore its destruction of their clients’ wealth. Revenues of our stock brokerage firms, money managers, and the other insiders soared from an estimated $60 billion in 1990 to some $600 billion in 2007.”
It is time to address this.
Ordinary Americans are paying an enormous price for the investing that they must do in order to send kids to college or retire. Because many of these fees have been hidden inside products sold by Wall Street professionals who have not had to disclose the actual costs to the investor, and often are sold under the guise of advice, these ordinary Americans do not understand the extent of the costs they are paying. In fact, the vast majority of ordinary American investors think they do not pay for advice. It truly is, as Mr. Bogle titled his book, a “Battle for the Soul of Capitalism.”
Something must be done.
At Schwab Impact on Thursday, BlackRock Managing Director and Head of the U.S. Private Client Group, Michael Lewers, actually said in a short speech how important BlackRock’s fiduciary duty is to clients, and how seriously they take that duty. In a 90-second speech, he said the word "fiduciary" at least five times. Thank you for that, I applaud you. It is time that more companies follow your lead and start thinking about the client-centric experience. The registered investment advisors (RIAs) in the crowded auditorium know how important this is—they live it every day.
Sales is important too, just don’t disguise it as advice
At a dinner on Wednesday, the head of a large independent BD-RIA firm also noted that there is enormous value in great salespeople. I agree. We also agreed that there is enormous value in great fiduciary advice to investors, and that advice to individual investors should be fiduciary. We further were in violent agreement that these two functions should not be blended. To put it bluntly, the selling of product to investors under the veil of advice needs to stop. If you are going to sell, then sell, above board, and be proud of it. Call yourself a sales professional. Don’t say you are an advisor and then advise a client to buy a product that is in your interest rather than theirs. That’s just “fraud,” as my dinner companion said.