On one hand, the regulatory emphasis on controlling the actions of investment sales professionals shows a systemic distrust for these contributors to the economy. On the other hand, new regulations, such as the Labor Department’s fiduciary rule, ignore their very existence in the zeal to protect investors. The result is massive confusion and a lack of understanding of the critical role sales professionals play in capital formation, which is essential for economic growth. This confusion and lack of understanding have led to actions that threaten the existence of the investment sales professional.
How do investment sales professionals contribute to the economy?
The role of the investment sales professional is simply to find the capital that is essential to develop and sustain the economy. This capital ultimately comes from individuals, but there are a variety of paths taken to its deployment. There is the direct investor who a sales professional must find and persuade to take the risk of parting with money for a particular investment. There are also the myriad of indirect investors who must be found and persuaded to put money into a financial institution, with the promise of some potential benefit (investment returns, capital preservation, insurance, etc.). Then there are the sales professionals that must persuade financial institutions to invest directly or put money in other financial institutions.
In all cases, the ultimate beneficial owner is the individual investor.
The importance of the sales professional is best understood in the context of economic growth. It is well known that economic growth is the source of income, wealth and the funding of goods and services. Without growth, there is contraction, generally referred to as a recession, and if extended it is described as a depression.
This vital economic growth occurs when capital in various forms is used to produce more capital, which is then used to produce even more capital. Growth turns to contraction when capital is not used or when the expenditure of capital does not produce growth. This process of funding, rewarding and refunding is a continuous one.
Growth occurs because there are far more successes than the loudly criticized failures. Reinvestment of capital is necessary to replace the goods and services that become obsolete.
The deployment of capital to produce economic growth is the central role of the investment sales professional.
This role of capital deployment is the fuel for the economic growth that produces the benefits for the individual investor. Without new capital formation, obsolescence would erode the economy and the standard of living.
In spite of this critical role, there are no trade groups or other organizations dedicated to advancing the role of the investment sales professional. The lack of such a voice exacerbates the undervaluing of this role.
Self-recognition is the first step towards public recognition. If sales professionals are unclear about their contribution to the economy and the wealth of the nation, it is difficult to expect awareness by the casual observer. Much of the focus of the sales professional has been on the investments and products they bring to clients. While this is necessary, when that view is so myopic that it shuts out the sales professional’s worth, public acceptance suffers.
Sales professionals need a creed, in much the same way as other professions. The creed of the sales professional should be based on the value offered by the professional, in contrast with the value derived from investments and investment products. Sales professionals that claim to offer the services provided by others (investment managers and advisors, for example) serve only to deny the sales professional’s own value.
The profession also needs to adopt standards of conduct from within, and not rest idly by, waiting for regulators to write the rules of behavior. As with a professional creed, the standards must reflect the value provided by the professionals themselves. Such internal standards should exceed the externally imposed standards of conduct.
With the combination of a clearly articulated value, a creed that reflects those values and a set of high standards, sales professionals will gain public respect and become recognized as a cornerstone of the financial community.
Methods of Compensation
Among the greatest threats to the investment sales professional are the irrational compensation arrangements that have evolved. If the value provided by the sales professional is capital formation, compensation should boldly reflect that fact.
Compensation methods that reflect capital formation should properly reflect the capital introduced and maintained in the economy. There is no need to justify fees or other forms of service based compensation. The public expectation already exists that if something is sold, compensation is appropriate!
The issue is not the amount of the compensation but the basis for it and an understanding of what is being rewarded.
Sales professionals should be compensated for raising capital and that compensation should reflect the amount of capital raised and the length of time it remains deployed. The sales professional’s compensation should be paid by those seeking the capital in proportion to the value to the seekers.
While sales professional regulation is extensive, there is no question that regulation is required to prevent abuses and to maintain an orderly process. Great improvements can be accomplished by a few well designed changes.
The most important change is the unrestricted use of titles that are inherently deceptive or confusing. Describing a sales professional as an advisor or counsellor should be considered to be deceptive. Other titles such as vice president or director hides the true role and should not be permitted. A registered representative is equally meaningless to the general public.
Sales professionals should establish a title that conveys the proper role and prohibit the use of any other descriptors.
A second reform is the indiscriminate distribution of disclosures. The current practice of using enormous volumes of disclosures, whether applicable or not, undermines the value of the disclosures themselves. Investors are overwhelmed and relevant information is lost in the volume of irrelevant material.
This could be corrected by imposing a standard that requires simplicity in disclosure language and limiting disclosures to those which can be proven to be reasonably relevant in each situation.
Much of undervaluing of sales professionals is their own failure to recognize that their efforts serve a greater purpose than the immediate rewards that are earned.
Increased recognition does not require major changes in practices, compensation reforms or new regulation but instead what is required is a fundamental understanding of the good that sales professionals render in their day-to-day activities.
— Check out How to Prove Your Compensation Is Reasonable on ThinkAdvisor.