There have been some big developments recently on trying to make financial professional more accountable to their clients. Matt Yglesias does a great job explaining this:
“While concerns about improper actions by investment advisors should certainly be addressed, an overly broad proposal could price professional financial advice beyond the reach of many modest income families.”
I don’t normally use canned quotes emailed to me in advocacy group press releases, but those remarks attributed to Financial Services Roundtable chief Tim Pawlenty in a blast that went out Monday afternoon are so on point that I couldn’t help but use them. He’s absolutely got the economics of this correct. If the Obama administration succeeds in forcing investment advisors to give advice that’s actually in their clients’ best interests, it really will put a lot of investment advisors out of business. But rather than making the case against new regulations, it underscores exactly why they are so necessary.
There are tons of people who call themselves financial advisors, coaches, planners, and various other things who are just swindling people into buying products (often actively managed mutual funds) and receiving kickbacks based on their advice.
There is nothing wrong with marketing, of course. The world needs salesmen. But in a properly functioning economy, we understand that the car salesman works for the dealership — he’s not your car advisor. Obama is proposing to force people who purport to be advising on investment strategy to actually give good advice and reveal conflicts of interest. That the bank lobby claims this will put their advisors out of business is a damning indictment of the way they’ve been running their industry. More formal studies show the same thing, that investment advisors reenforce their clients’ worst instincts, “encourage returns-chasing behavior, and push for actively managed funds that have higher fees, even if the client starts with a well-diversified, low-fee portfolio.”
This is spot on. It is exactly why I don’t take any fees from financial firms and will sign a pledge making me a fiduciary for any client that wants one (just send me the pledge you feel the most comfortable with). It’s deplorable that anyone does business any other way. If a professional isn’t working on behalf of their client, they ought not be in the business.