By Knut A. Rostad
Originally published on ThinkAdvisor.com, October 11, 2016
With Fiduciary September 2016 just complete, two unrelated items on October 3rd – one a regulatory action by Massachusetts and the other a Wall Street Journal Op-Ed – remind us why Fiduciary September exists and what a strong sales culture can mean.
The Journal piece by Lou Gerstner, former IBM CEO, may be the briefest (642 words) “advice” on the DOL rule. The Mass suit suggests why it may be the best.
Gerstner wastes no time criticizing the (unnamed) CEO overseeing a “recent retail banking debacle” for saying, employees “Did not do the thing we asked, namely to ‘Put the customer first.’” Gerstner highlights what he says is a fallacy in executive ranks: that corporate statements of values instill “corporate culture.”
Statements of values or virtues don’t instill a corporate culture. Compensation policies and budgets do. Culture follows policy. To understand the “corporate culture,” Gerstner advises to forget the statements, and quips, “People do not do what you expect but what you inspect.”
Hours later, Massachusetts securities regulator, Secretary William Galvin, files an “administrative complaint” against Morgan Stanley, charging the firm operated a “sales contest” that was “unethical and dishonest.” While the complaint alleges a sales contest, the larger point regards firm-wide policies and practices.
Galvin alleges that “Morgan Stanley’s firm-wide culture emphasizes the aggressive cross-selling of banking and lending.” Morgan CEO James Gorman affirms this point, according to Galvin, when he stated in 2014, “We drove new production records in mortgage and securities-backed lending.”
The complaint sets out Morgan Stanley policies and compensation incentives that Galvin alleges help broker-advisors “Push banking and lending products on clients.” Those incentives includes quarterly awards for managers, “net award” incentives for broker-advisors and $50 for assistants for each application processed. The complaint also alleges “incessant monitoring and tracking to pressure” broker-advisors.
An (unnamed) former Morgan Stanley broker-advisor who opposed the program is quoted as saying, “I felt my role as a financial advisor and fiduciary was to help customers save and make money and not go into bad debt.”
The alleged practices are obviously anti-fiduciary. Products are pushed to gain market share and benefit the firm and those broker-advisors and they are pushed absent any disclosures to clients of the incentives and their conflicts. Galvin again: “The complaint lays bare the culture at Morgan Stanley …. the high-pressure effort to cross sell banking products to its brokerage customers without regard to the fiduciary duty owed to the investor.”
A Morgan Stanley spokesperson disagreed and claimed the complaint is without merit and that the “securities-based loan accounts were opened only after discussing the product with each client and obtaining their affirmative consent.”
Selling, of course, is what broker-dealer agents do and cross-selling is part of banking’s DNA. Consultant Charles Wendel wrote recently in BAI Banking Strategies that the “cross sell” is “the biggest near-term payday available to banks.”
Galvin’s complaint illustrates what a strong sales culture can mean and how it can override fiduciary conduct. Most noteworthy are allegations of what broker-advisors did to sell and to overcome client objections and to get clients to open accounts that clients apparently neither requested nor needed.
Also noteworthy is the sales conduct that Morgan Stanley apparently considered proper. The differences between sales and fiduciary are basic, yet are often overlooked in today’s discussion. Galvin’s complaint puts these alleged sales practices under a microscope to give full meaning to the sales culture at the firm. Like an ALS Ice Bucket Challenge, this meaning is hard to ignore.
The DOL rule adroitly addresses sales conduct, conflicts and the wide gulf between opposing cultures. It goes “live” April 10, 2017. The question is how many firms will be ready. How many firms will have begun to restructure to replace their sales cultures with advice cultures? There is no quick fix. Offering fees in place of commissions, for example, can no doubt be helpful in some cases. But it’s no silver bullet.
Finally, Galvin also illustrates the Gerstner principle of corporate culture. It is policies and priorities that matter, not statements of values or virtues. In the same way that the Institute’s Best Practices tell investors what they can expect from an advisor with far greater clarity than can fiduciary principles on their own.
Related article: See Bruce Kelly in Investment News.
