The ink was barely dry on my post grousing about unethical lawyers when this morning's news feed shouted that 7% of active financial "advisers" have been disciplined for misconduct or fraud.
Except, not really.
The findings are based on a working paper by professors from the University of Chicago and University of Minnesota. They examined Financial Industry Regulatory Authority (FINRA) records from 2005 to 2015 for 1.2 million licensed salespeople, also known as registered representatives or brokers.
So what's the big deal?
Both the study and the media coverage missed a prime opportunity to clear up the public's confusion over who are actually "advisers" (or "advisors") vs. financial salespeople.
The offending advisors in the study should've been contrasted with registered investment advisors and fee-only financial planners, who are fiduciaries and legally must operate in their clients' best interest. We're the good guys (and gals) who wear the white hats, yet we continue to get lumped in with the rest. To be sure, there are bad apples in every bunch, but the vast majority of misconduct in the financial world takes place in the sales arena.
The confusion stems over a couple of issues:
- there's a double-standard in our laws and regulations, and
- anyone can call themselves a financial planner, advisor ("adviser"), consultant, wealth manager, etc. without actually providing the advice (in your best interest) that those titles imply.
On the regulatory front, one set of rules is for people who sell financial products, generally investment brokers and insurance company representatives. Technically, they are contractually obligated to place the interests of their employer ahead of your interests. While they can only sell you financial products that regulators consider “suitable,” they may sell you whatever suitable product makes the most money for them or their employer instead of what may be better for you.
The other set of rules is for those who are registered as investment advisors with the federal Securities and Exchange Commission (SEC) or state regulators. They provide investment advice, management, and/or financial planning, usually on a fee basis rather than being compensated by sales commissions. As fiduciaries, they are legally obligated to place your interests first and adhere to a high standard of professional competence.
I agree with industry thought leader Michael Kitces that the solution to this ongoing saga is regulators need to re-separate advisors and salespeople and only allow the use of titles that clearly describe to the public the services actually being offered. If you're a broker or insurance agent, no more calling yourself an advisor, consultant, financial planner, wealth manager, etc.
Back to the study...it should come as no surprise that there's a significant amount of fraud and misconduct in the sales of complex financial products. However, it was rather revealing that the concentration of offenders in certain broker-dealer firms suggests a culture of misconduct. Also, that when offending "advisors" leave a firm, 44% get rehired in the industry within a year's time. Those would be useful targets for regulators to tackle.