Probably like most of you, I’ve been following the current debate about whether brokers should be held to the same fiduciary standard as RIAs. I’m not a securities lawyer or a compliance expert (and to be honest, I start to glaze over when people start talking about minutiae like principal trading, or whether the CFP Board’s standard is as high as the RIA standard, etc.). But I do feel that in many of the discussions I’ve read, we seem to have lost sight of the big picture: what’s best for the clients. 

Over the years of working with advisory firms, we’ve come to realize the tremendous power that financial advisors have over their clients. For instance, we know (through the work of Olivia Mellan, George Kinder and others) that money issues have powerful psychological effects on people. And we’ve all heard that one of the top causes of divorce in America is financial issues. Consequently, people who call themselves financial advisors or wealth mangers or financial planners have tremendous power over the people who come to them for help with their finances. If advisors abuse that power, it can cause a lot of damage: to their finances and their psyches. 

When we talk about people’s finances, it’s easy to talk about the numbers: the return on an investment was X percent, the cost was Y basis points, and the risk was Z beta, etc. Then we can bicker about whether the clients overpaid, whether their risk was higher than it should have been or than they were comfortable with, and whether the returns were as high as promised (or suggested). But what’s lost in all these numbers is their effect on the clients. Most retail investors (at least the clients of the advisors that we work with) aren’t professional investors or even savvy investors. In fact, they aren’t really investors at all: they’re just people with day jobs who would prefer to put their savings into CDs, but have come to realize that strategy won’t enable them to meet all of their financial obligations or goals. 

So, usually with great trepidation, they go to a financial “advisor” to help them “invest” their savings to achieve their goals. Typically, they don’t know much about investing, finance or the financial services industry—and they don’t want to know. (As I said, they have full-time jobs, and families, which take up any spare time they do have.) They just want to use the financial resources they do have to raise their children, have a nice place to live, send them to college, provide healthcare to their family, retire comfortably, take a vacation once in a while and maybe leave something to their grandchildren. Regardless of how much money people have, usually they are confused and lost about finances. If they don’t’ have enough, then they need to know how to safely grow more; if they have a lot, they need to know how to protect it: against loss, excessive taxes and inflation. 

These aren’t financial issues for most people; they are emotional issues. They have a substantial portion of their self-worth tied up in being able to provide these things. So when they go to financial advisors for help, they aren’t trusting their advisor with just their finances, they are trusting them with their lives and their own sense of self. It’s the same level of trust we have when we go to a doctor, or a lawyer or an accountant. 

Financial advisors are taking the lives of their clients in their hands. If advisors don’t understand this, they can do a lot of damage—or they can do a lot of good. If advisors use their power to the benefit of themselves or their firm by selling unnecessary products (in some cases, annuities or too much insurance) or products with excessively high loads and costs, they damage their clients. Again, the harm is not just financial. By reducing their ability to meet their obligations, clients can be harmed psychologically as well. 

The bottom line here is that most clients want and need advice—not sales. They want someone on their side of the table, to help them navigate the financial services industry to “safely” grow their savings. The brokerage industry knows this: why else would they call their representatives “advisors”? The Obama administration recognized these facts in the Dodd-Frank Act, and, as I understand it, in the Department of Labor’s current IRA initiative.

Isn’t it time the SEC got on the bandwagon to give retail clients what they want and need: client-centered advice from advisors who are required by law to put their clients’ interests ahead of their own and their firms’?

I’m not sure I understand what they’re debating about.