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Investment Professional or Faux Pro: Which Will You Be?

At a gathering a little while ago, an advisor (let’s call him Fred) buttonholed me and said, “We’re not all bad guys, you know. We’re not monsters.” Then, without another word, he turned and disappeared into the crowd.

At first, I assumed Fred was complaining that investor advocates had unfairly demonized him and his cohorts. But talking afterward to other advisors, I soon learned that Fred’s outburst actually reflected a feeling of submerged tension and anger aimed elsewhere. All through the investment industry’s rank and file, people find themselves quietly at odds with their industry’s leadership over their public image, self-image and sense of self-worth.

The matter at issue is professionalism. Specifically, are advisors free to become real professionals? Or does their industry, for financial reasons, hold them back and insist on maintaining less rigorous standards that relegate advisors to second-class status?

The issue’s being played out by proxy in the current debate about whether regulators should impose a best interest standard and whether they should ban mutual fund trailing commissions that give rise to conflicts of interest. By saying “no” to both these initiatives, some elements of the investment industry have deliberately scorned two of professionalism’s most sacred tenets: do what’s best for your client and avoid conflicts of interest wherever possible.

That brings me back to Fred. I never got to respond to him before he walked away. I’d like to do so now and say this:

Fred, I know you aren’t all bad guys. I know that most people in your industry work hard every day with their clients’ best interests at heart. And they don’t do it because a law or rule or regulation requires it. They do it because they feel it’s what they’re supposed to do as professionals. Investment professionals. That’s how they see themselves. That’s what they want to be.

It’s also what they need to be. Because they understand their clients need advice that’s unbiased as well as proficient. Clients need advice aligned entirely with their best interests. Advice with integrity.

Advisors also know how crucial professionalism is to attracting and retaining clients. Advisors understand it’s the key elements of professionalism — objectivity, independence, trustworthiness and responsibility — that bind them powerfully and in the most positive way to their clients, to their livelihoods and to the best aspects of their calling.

But, too often, advisors are constrained from acting professionally, or their image gets tarnished, by the business models imposed upon them. They know it’s not good, for example, that the current system allows proprietary product sales incentives and trailing commissions to create conflicts of interest. They know it’s not good that the current suitability standard permits advisors to recommend expensive products instead of lower-cost alternatives. These are things no real profession would tolerate.

So the status quo won’t do, Fred. Not if advisors hope to attain true professional status. Reforms are needed — real reforms — to ban those conflicted compensation schemes and remove those constraints. Will this trigger profound change in the way advisors and their firms must do business? Certainly. But surely good advisors don’t object to changes aimed at enhancing the integrity and professionalism of their occupation. They don’t fear those things or regard them as burdens.

On the contrary, what I imagine good advisors find burdensome are the industry’s squeamish equivocations about duties and obligations in the advisor-client relationship. Relationships with clients are an advisor’s most precious asset, but what does it do to those relationships when an industry lobby group tries to sell the bizarre self-contradicting notion that it’s not in clients’ interests for advisors to act in their clients’ best interests? Or that it’s OK for firms and advisors to routinely be paid in a manner that blinds them to what’s best for their clients?

It makes it look like advisors want to shirk their responsibilities, not embrace them. This just hollows out their image as professionals, and that’s bad for business because diminishing advisors’ professionalism undermines the most valuable thing they have to offer.

It’s also doubly frustrating for the best advisors because they know they could earn a fair fee for their advice legitimately if transparent fee-for-advice business models are adopted. They don’t fear that change. They just want it to apply across the board to all types of firms and advisors so some aren’t put at a competitive disadvantage.

But the time for muffled frustration is over, Fred. Regulators are at a crossroads right now on these issues, and a direction is about to be chosen. Advisors who yearn to be true professionals need to make their views known.

The heart of the question, therefore, is whether you and those like you on the front lines will stand up and tell your leadership and policy-makers across the country that you’re willing to embrace the highest standards to safeguard your clients; that you favour reforms banning conflicted compensation practices and eliminating constraints on your professionalism; and that you’re prepared to make the adjustments necessary for those crucial reforms to take hold.

If that’s your stance, send an email to your provincial or territorial regulator telling them so. Send a copy to Investment Executive. Say it however you wish, but start by telling them that you want to be a real investment professional.

This article appears as an Inside Track op-ed in the online version of Investment Executive.