About 20 years ago, I came to the conclusion that the primary job of financial advisors is to protect their clients from the financial services industry. That’s not to say that all, or even most, financial services companies are inherently bad: they aren’t. However, when you have control over billions of dollars of other peoples’ money, there are powerful financial incentives to put one’s interest ahead of theirs.
A good example of this came last year in the travails of Wells Fargo & Co. In case you were distracted by the divorce proceedings of Brad and Angelina, it came to light last fall that incentivized by large bonuses and high compensation for good sales numbers—and terminations for underperforming—thousands of Wells Fargo employees had been opening additional credit card accounts for millions of existing clients without their knowledge or consent.
Now, I’m not saying that Wells’ upper managers were aware of this widespread fraudulent behavior: but I am saying that because their compensation was largely based on increasing profits, and the resulting stock price increases, they didn’t have much of an incentive to look for the reasons behind these sudden increases in “productivity.”
As part of my admittedly infrequent series on “Financial Services Explained,” primarily for younger advisors and others who are new to the industry, I offer the following observations, prompted by Janet Levaux’s January 13 ThinkAdvisor story “SEC Fines Morgan Stanley $13M for Overcharging Clients.”