Winter Musings on a Profession of Financial Advice

To my mind, this is the basis of our two-year debate over the reregulation of brokers and investment advisors. What the folks in Washington, on Wall Street and across the country are trying to parse is this: When are “financial advisors” salespeople who owe no duty to their customers other than fair dealing, and when are they advisors who owe their clients a much higher duty of care?

It seems to me that most reasonable people agree that there’s a legitimate role for both salespeople and advisors in financial services. The problem comes when those lines are blurred in the minds of the public, which often is no accident: salespeople and their firms gain considerable marketing advantage when their customers mistakenly believe they are dealing with professionals who are required to act in their best interests.

What that in mind, regardless of what happens in Washington in this go-round, it seems to me that to create a true profession, client-centered financial advisors need to work toward three goals: 

1. A clear fiduciary standard. Professional advisors must have an unwavering duty to put their clients’ interests first: no exceptions. That means at all times, under all circumstances; no two hats, no “scope of the engagement,” no “for some clients I am, for some clients, I’m not.” The public needs to know that when they retain the services of a professional financial advisor their best interests are at the top of the list, 100%, all the time, under all circumstances. 
2. Clear titles. We need one title to refer to a professional advisor, as described above, that cannot be used by others who do not meet the professional standards. The investing public is not equal to the task of determining when and if their “financial advisor” is acting in their best interest. As with MDs, CPAs, and lawyers, they need to know that if they go to a financial professional that’s called X (your pet title here), they will meet the credentials and the standards of a professional. 
3. Finally, we need a Glass-Steagall type of separation between businesses that create and sell financial products and firms that offer their clients professional financial advice. Let’s face it: the majority of our current wrangling over when and if a broker is or isn’t a fiduciary isn’t about the broker at all. It’s about their firms: principle trading, proprietary products, market making—when is it sales and when is it advice? All these conflicts arise because the firms are in the business of creating and selling, while brokers and advisors are in the business of advising. 

The solution is simple: just separate those functions into two separate businesses. Product firms create and sell to institutions and other professionals; Retail clients go to advisory firms, when they can be assured of getting professional advice, without knowing beans about the inner workings of the financial services business.

Problem solved.