Ethics is often seen as skimming off a layer or two of the profitability of a business enterprise.
But that’s merely a short-term view, says Steven Blum, an attorney and veteran instructor at the Wharton School’s department of legal studies and business ethics.
In the long run, Blum contends, adhering to the highest ethical standards confers a unique business advantage on financial advisors because it impels them to conduct their affairs with a discernibly different level of professionalism.
This allows financial advisors to stand out from the competition and foster a deeper level of client trust, which in turn strengthens both retention of satisfied clients and conviction-based referrals of their friends and associates.
Blum’s new book, Negotiating Your Investments, coaches consumers in how to determine what constitutes a good financial outcome and then helps them achieve it, which is what Blum, a tax attorney, seeks to do for his clients across the gamut of financial issues they face.
The flip side of the high standards he advises consumers to seek in the financial professionals they engage is his advice to advisors on what they need to do to meet these standards.
ThinkAdvisor spoke with Blum about his views of an advisor’s professional responsibilities.
Hint: Acting as mere fiduciary is inadequate in Blum’s book.
Your book stresses the importance of expertise. What should an advisor’s professional qualifications be?
The truth is that almost anybody in America can call themselves a financial advisor. There’s not a lot of regulation of that. People who call themselves financial advisors come in many different stripes.
If you’re a financial advisor with a background in finance and economics, you ought to be telling people that. If you have solid degrees from important universities, for example if you have a Ph.D. in economics, you ought to be emphasizing that. I’m not saying you can’t be an advisor without that, but it’s harder if you don’t have expertise in markets and finance.
[Absent a high level of academic grounding], from a consumer point of view, you don’t want that kind of advisor.
Economics, investment, finance are broad areas. What area of knowledge stands out as vital to be an effective advisor?
It is my strong belief that tax savvy around investments is equally important to investment savvy around investments. Both are important ways to put money in client pockets.
And you need to do more than be tax savvy, you need to show it. Advisors say “I do tax planning around investments,” and they do it around products. But many of those products are priced so that a great deal of the tax benefit is captured by the product provider rather than the client.
Different investments are taxed differently; different piles of your client’s money are taxed differently. And those two facts should be heavily coordinated. Highly taxed stuff should be in tax-deferred areas; lightly taxed stuff should be in the taxable [accounts]— to the extent that that coordinates with everything else, obviously. Apart from content knowledge, you advise consumers to seek advisors who are ethical. Do you mean advisors who are fiduciaries?
Frankly I am an advocate for something higher than fiduciary duty. The definition that I advocate for is what I call professionalism. That means that when the client’s interests diverges from the professional’s interests, the professional follows the client’s interests and only the client’s interests.
That’s a higher standard than fiduciary duty, but it’s close. It’s something that a good financial planner wants to tell clients; if possible a financial advisor wants to show or prove it.
Couldn’t the advisor’s telling his clients about his ethical standards be mere rhetoric?
When someone comes to me with a variable annuity inside a retirement account, I know they worked with somebody with a low duty to them. No matter what came out of the advisor’s mouth, I know how they were treating their duty to them.
So how does an advisor demonstrate the kind of ethical professionalism you’re talking about?
Tell clients honestly all the ways you make money, all your streams of revenue.