Let’s Have a Bit of Clarity

The Simple Solution to the Advice Problem

When I began my career in the financial services industry, I spent a few months with a large insurance company. I was quickly indoctrinated with the internal sales culture, while trying to maintain a perception of being a trusted advisor to clients. Many of us called ourselves Financial Advisors even though we had scant training to give any advice beyond basic investment or insurance advice. We had met regulatory requirements, but these were found severely wanting. The only accurate title for me would have been "insurance agent" or "financial product broker." I had been trained to sell insurance products and mutual funds, and use a financial plan to make the argument for a need for the products I was selling. Most individuals in this office used similarly inaccurate titles. There was an "old-school" insurance agent who did not play this game, however. He used the title "insurance agent" and did not pretend to do anything but sell life insurance. He did not cloak his intentions with financial plans. If you met with him as a potential client, you knew he was selling life insurance and would be paid by selling a policy to you. He was also very successful and remarked often on how unnecessary the "Financial Advisor" title game was to success.

I have ranted over the past several posts (here and here and here) about the confusion many financial service companies intentionally create to make it difficult to discern the salespeople from the advisors working in a client's best interest. We were taught the art of this confusion very early at the insurance firm where I worked. Reflecting back on that time, simply eliminating this game from the financial services industry would go very far toward curing many of the ills that have been beset on consumers by the industry. Using titles which reflected a professional's job duties would create clarity and help clients recognize whom they are working with. People providing financial planning services putting the client's best interest first would call themselves Financial Planners. People who offered investment advice putting the client's best interest first would call themselves Investment Advisors. People selling insurance products and working under a suitability (not a client's best interest) requirement would call themselves Insurance Agents. People selling mutual funds and stocks and working under a suitability requirement would call themselves Stock Brokers. Simple, effective and clear. Consumers would no longer be confused about whom to see for what purpose.

I do not see this transformation happening without legislation to force the issue. There is profit to be had in the confusion game. Large financial services companies are able to steer clients away from fiduciary financial planners by claiming to do the same work. It also seems that there is a certain shame to being labeled a salesperson among many people in the financial services industry. I am certain there is no shame in holding this role. Salespeople hold a vital position in the distribution system of any product or service. Drug representatives are important to make doctors familiar with new and better medical treatments. Educational tool salespeople are necessary to bring innovative teaching methods to our schools. These salespeople play a vital role in their industries, but neither would ever think to begin treating patients nor teaching students without first attaining appropriate training and making a career change. The financial services industry would be well served to adhere to this type of clarity. Separating the advice service professionals from the distribution professionals would benefit you, the consumer, dramatically.

If you agree, I ask you to contact your Senators and urge them to consider pushing for legislation which splits up the advice channel from the distribution channel. Ask them to support legislation which requires that professionals dispensing financial advice and financial planning services be held to a fiduciary standard. Ask them to support legislation which creates a distinct financial planning profession.

Financial Reform Update

Yesterday afternoon, the Senate again took up the Restoring American Financial Stability Act of 2010 and again voted against beginning debate on the bill. A third vote to gain cloture is scheduled for today. There remains a high degree of certainty that a financial reform package will move forward. All indications are that both parties recognize the importance of reform and the American people's desire for such legislation. What we are watching is the political dance on a difficult issue. Striking a balance between strong regulation which protects the American people while not harming the potential positive effect the financial industry can have on our economy is no easy task. We shall see what today's vote brings.


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