Originally published on ThinkAdvisor.com, January 20, 2015
By Knut A. Rostad
Are Advisors the Solution?
New York Fed’s William Dudley, CFANAdvisors and brokers are upbeat by nature. It’s in their DNA. So it’s no big surprise when Liz Skinner reports that an Investment News survey says “optimism abounds.” Advisors and brokers believe the economy and their own businesses will flourish in 2015; 80% call themselves “optimistic.”
Another reason for optimism in 2015 may be less obvious: there is greater recognition that the lingering dark film of investor distrust—distrust from the continuing bad behavior witnessed on Wall Street—is important. The corollary, as it regards the advice industry: advisors themselves are best able to clean it up. Two recent news items bring home this message.
Dudley, CEO of the Federal Reserve Bank of New York, recently said in a speech what few top regulators say: Wall Street’s bad behavior has caused the demise of public trust; financial firms have a public purpose; amd absent public trust the industry cannot “effectively perform its essential functions.” His message to Wall Street: Either the industry must change their ways or regulators will act.
Dudley concludes that the problem is “The culture of the firms. And this culture is largely shaped by the firm’s leadership. This means the solution must originate from within the firms from their leadership.” If “stewards of these large financial institutions do not … (act) in pushing forcefully for change across the industry … the inevitable conclusion will be your firms are too big to manage effectively … (and) need to be dramatically downsized and simplified…”
Dudley defies more conventional regulatory speech-making and crisply states the problem, its harms and solution. He acknowledges that words alone do not suffice and action is needed, underscoring if the industry doesn’t act regulators will.
Of course we’ve heard strong language before, language too often followed by regulatory inaction or disappointment. Recent experience regarding fiduciary advice stands out. Be it the Dodd Frank mandated SEC staff report, “Study on Investment Advisers and Broker-Dealers” on a uniform fiduciary standard, or the passage of Dodd Frank itself. Or the Rand Report which documented broad investor confusion about advisors and brokers, the FPA victory in the DC Court of Appeals ruling that overturned the “Merrill Lynch Rule.” Each time disappointment replaced any hope that something good for investors would result.
The proof of Dudley’s forced choice between government and market regulation will come – or not come – in time, but this thought keeps returning. The timing, content and clarity of Dudley’s statements are different from typical regulatory pronouncements. They break new ground in the post-financial crisis era. His are not the general statements of hope or aspiration of 2009; his are concise statements reflecting impatience, born of industry and firm failures following 2009.
While not explicitly speaking of those advising or selling to small investors, of course, Dudley might just as well have. Some advisors and brokers will vigorously reject any importance to Wall Street’s “problem” with the public. Yet to the general public brokers and advisers are Wall Street and, among the professions, reside near the bottom of barrel for their honesty and ethics, at least according to Gallup.
Last year Wealthmanagement.com editor David Armstrong raised the question. He noted how CFP Board handled major discrepancies in CFPs’ labeling themselves as “fee only” and also cited research offered by Ron Carson on how advisors and brokers create distrust in appearing to be evasive about fees. He concluded, “Too often it seems that the industry isn’t really concerned with building client trust at all.” Is Armstrong right?
Not according to CFA Institute’s charter holders.
They get it – that public trust matters. The CFA 2015 Global MarketSentiment Survey of more than 3,500 CFA holders underscores how much they do.
Among the findings, 96% agree the investment industry has a “trust problem” and 63% agree the greatest contributing factor is a “lack of an ethical culture within financial firms.” 96% ? This is incredible. I doubt 96% of CFAs agree on the day of the week, yet they agree that there is a “trust problem” that needs to be addressed.
The survey respondents’ most often-mentioned solution to address the problem (30%) is a better alignment of compensation practices with investor objectives. This is followed by, “Zero tolerance policy by top management for ethical breaches.”
Dudley squarely lays the blame for “ongoing occurrences” of bad behavior on the “culture of the firms.” He states that the resulting demise of public trust demands action, preferably from the firms themselves, but if not, from regulators or policymakers.
The bottom line is whether Wall Street executives hear Dudley imploring self restraint more than they hear his “…or else.” Whether he sounds more like Adam Smith or Elizabeth Warren.
For brokers and advisors and their industry leaders it doesn’t really matter. Not if CFA charter holders are correct, anyway, that when all is said and done, its industry leaders who must lead.
