This essay was originally published by the CFA Institute for their Enterprising Investors website.
Do some investment industry professionals protest simple transparency rules to the detriment of both themselves and their clients?
A lot of debate about fiduciary rules and responsibility continues. What’s it all really about?
I suggest one word: transparency.
In “Discovering Phi: Motivation as the Hidden Variable of Performance,” after interviewing more than 200 investment management leaders and surveying approximately 3,300 investment professionals, researchers found that:
As an industry, we clearly have a problem. But it’s one with an easy solution: simple, plain-language disclosure of conflicts — something everyone is capable of producing.
I have worked in the investment industry for many years, serving as managing director for a large investment bank and asset manager, as a senior officer inside two trust companies, and now as head of a high-net-worth investment consulting and advisory firm. During my career, I have encountered three critical industry problems that need to be addressed:
Related to the last bullet, if we are honest with ourselves, lack of opportunity is what keeps many of us out of trouble. And when there’s an opportunity to pocket 12b-1 fees by investing in one fund rather than another, how do we resist the temptation to take them, but then disclose it, on say page 121, in very small print?
When questioned, firms are quick to proclaim that they disclose all issues and conflicts, and that they are heavily regulated by the Financial Industry Regulatory Authority (FINRA), the US Securities and Exchange Commission (SEC), the Office of the Comptroller of the Currency (OCC), and various state securities and banking regulators to ensure they are operating properly. If “nothing is rotten in the state of Denmark” though, what explains the “Discovering Phi” findings? And, why do firms continue to bury disclosures in documents that are hundreds of pages long?
I hope changes will occur to help reduce incentive structure conflicts that often serve the interests of the broker and the product provider rather than the client.
If they do, I believe it will be a positive for investors and for Wall Street, which many studies show has a big image and confidence problem, especially among younger generations who are the industry’s future.
Rules that could foster true fiduciary responsibility are likely to need a push to get the industry over natural anxieties about change and coming to terms with past failings.
Until this happens, however, what’s my message to clients of asset managers, brokerage firms, RIAs, or bank trust companies?
When investing, don’t rely on a transparent, free, and open disclosure of information. Ask questions related to all fees and options before making any type of investment.
And always remember, if any firm makes excuses, or protests too much about plain language, simple disclosures about conflicts, and easy-to-understand reporting, my turn of an old phrase, Caveat Investor (investor beware).
Finally, what’s my message to the industry?
If you protest too much and continue to resist change, beware yourself. If you aren’t more transparent, investors might force change by significantly reducing the demand for your services.