Recently in these pages I argued that the nature and impact of digital technology in our world has made the idea of secrecy largely obsolete and, further, that this new and radical transparency will dramatically change contemporary culture and (especially) the financial services industry.
I argued: “Instead of trying to maintain the self-serving secrecy that has dominated our industry for so long, especially because such secrets will keep getting exposed sooner and sooner, the key to our longer-term survival will be to remake who we are and what we do to serve clients in a transparent future.”
This month I want to consider what a truly transparent future might look like in a bit more detail. These ideas must be offered tentatively of course, as good science demands. As Nobel laureate and physicist Steven Weinberg notes in a similar context via his outstanding new history of science “To Explain the World”: “Philosophers have tried to prescribe rules for scientific research. It never works.” Or, to quote a Danish proverb (often attributed to another great physicist and Nobel laureate, the Dane Niels Bohr): “It’s difficult to make predictions, especially about the future.”
Yet even if we can’t know with any degree of precision how the future will look, we can with reasonable confidence predict the general trends that we expect to continue and the areas where change will almost surely occur.
As a starting point, it should be clear (pardon the pun) that if transparency means anything, full disclosure will be a key part of our future. The Internet and everyone’s instant access to it militates against secrecy everywhere all the time. If nothing can be expected to remain secret, it’s silly to try to hide things.
I don’t mean full disclosure in the sense of lots of fine print that nobody reads and nobody wants you to read. Instead, within financial services, I mean full disclosure in the sense of conveying real understanding about what is being offered and why, about what can go wrong and the likelihood of something going wrong, and about what one’s goals are and ought to be along with a clear statement of what success will look like or cannot look like. Full disclosure will mean real clarity and no more complexity for its own sake (so as to justify a higher fee).
True transparency will also focus on fees. No more ducking and avoiding the subject. No more hidden rewards. Every client deserves to know how much the services purchased really cost and how much the advisor is being paid (as well as by whom).
Full disclosure should also mean true fiduciary status for all financial advisors. My own experience as well as the available research have shown that individual investors don’t know who is a fiduciary or what a fiduciary actually is.
The vast majority of advisors are trying to do the right thing, but financial incentives are insidious. The confirmation bias we all suffer means that we as advisors will truly come to believe that the investment option that pays us more is better than the lower cost option. That tendency plays right into the hands of the suitability standard that currently governs broker and insurance agent activity. And since fees are the best indicator we have of investment success over time, the impact is significant.