Getting Your Financial Ducks In A Row

In the financial services industry there are many products, services, business owners and employees that one would think would have one common goal – the welfare of the people they serve through investments, financial planning, insurance and other financial areas. Unfortunately, in an industry rampant with conflicts of interest it has become the norm, not the exception that people in the industry push forward in spite of the conflicts, not once the conflicts have been disclosed and resolved.

Examples of conflicts of interest include salespeople that are paid only if they succeed in selling a client a product. This is what happens in most commission-only sales positions. Other conflicts arise when fee-only planners persuade a client to move their money to the planner in order to help them manage it, when in fact the planner is really not a planner at all, but simply an asset gatherer and the client may not receive any better advice once the assets are under watch of the planner.

Other examples include home office personnel that review applications, transfers, and contracts for completeness and compliance reasons. In these situations the home office employee must act in compliance to the law, but not necessarily ethically to the client. Finally, a major conflict occurs when employees and independent contractors for companies sign contracts that prohibit them from serving the interests of clients first, rather they must remain loyal to their company first, the client taking a back seat.

In my opinion, for anyone working in a position within the financial services industry there must be no subordination to the rule of maximum information – created by David Holley of the University of Southern Missippi. In order for the financial services industry to move from and industry to as profession, there must be rules in place (the maximum information rule) that require as much information as possible be disclosed to the client. This would require the salesperson, advisor, employee and company take steps to make sure the client understood the disclosure, not merely have the disclosure given.

An example of this would be the salesperson that is required to give a prospectus to a client when the client purchases a mutual fund. Under the maximum information rule not only would the prospectus have to be given, but also explained to the client – every area that affected the client’s purchase or potential purchase. Under my definition of the maximum information rule it would also require that in any transaction the client be notified either verbally or preferably in writing what the fees and expenses are and what the salesperson or advisor is making on the transaction.

I would argue that there are not different levels of disclosure and information giving or withholding needed within different levels in the industry. The reason why I would be against this and why it would be detrimental to the industry is you would have many people within the industry try to avoid giving information by doing their best to “move to another level” where the required information be given in one level need not be given in another. Having this segregation would lead to avoidance of the maximum information rule which defeats the purpose of having such a rule.

People would argue my point and say that such a rule would prohibit growth in the industry and stagnate sales and income for employees in the industry. They may be right – in the short term. But I would ask them if they were truly professionals, to whose benefit should they be working for? If not for the client, then whom? And finally, the main question would be, “What do you have to hide?” The financial services industry must not be a zero sum game between professionals and clients. It must be win-win.

I would argue that perhaps it’s the way in which people are paid (commission) in the industry that deters them from wanting the maximum information rule. I would also argue that it would force a cleansing of the industry as now those people who wanted to stay in, would have to become much more knowledgeable about the products and services they are providing – as maximum information would require this.

In the long term, I believe you’d see more of a movement to a true profession as those who were great salespeople, but terrible professionals would leave and those that were professional and saw the industry as a profession would stay. By law of supply and demand, the supply of those providing services would decline, but the demand for those still in would increase as they would by default be more professional. I am using the term professional loosely here. I know that being a professional is much more than giving as much information as possible. But it does mean in this circumstance that if you are selling a product or service, under the maximum information rule – you must know what it is you’re providing – thus requiring competence and betterment of one’s knowledge in order to remain professional.

Financial planning and services is such a juvenile industry taking baby steps in its mission to be a profession. The maximum information rule would allow some obstacles to be removed and the profession to start taking giant leaps towards being recognized as a profession and not simply a sales job.