Wall Street’s Sales Culture is Under Attack

By Jack Waymire, President & CEO, Paladin Registry on Friday, April 27th, 2012

The financial service industry is dominated by a sales culture that has flourished for more than 35 years. Wall Street companies protect this culture by spending more than $300 million per year on lobbyists who make sure industry regulations favor companies and not investors.

Two of the lobbyists’ biggest challenges are fighting fiduciary standards and mandatory disclosure requirements (transparency) for brokers. These activities are intertwined because fiduciaries are required to put investor interests first and withholding pertinent information violates this requirement.

On the fiduciary side, Wall Street companies want to be held to a lower ethical standard called suitability. Brokers are supposed to make “suitable” investment recommendations for their clients’ assets. This deliberately vague standard is difficult to enforce, in particular when it is based on verbal information.

The fiduciary standard is not vague – advisors have to put investor interests first. Those interests should be documented so there is no risk of misinterpretation or miscommunication. Institutional advisors call this document an Investment Policy Statement.

On the transparency side, Wall Street companies have a lot to hide. One of the biggest secrets is the thousands of new brokers who join this high turnover industry every year. The fact of the matter is, there are no minimum education or experience requirements to be a broker. Anyone who passes a Series 6 examination is an instant investment expert.

Wall Street wants new brokers producing revenue as soon as possible. Fiduciary standards and transparency negatively impact the achievement of this goal. Investors would not buy from new advisors if they had all of the material facts.

This Wall Street strategy creates a substantial risk for investors when they select financial advisors. It is the investors’ responsibility to obtain the facts they need to make the right decision when they select new financial advisors. Wall Street is betting most investors do not have a process for gathering facts and they do not know good answers from bad ones.

This is a good bet. Based on studies conducted by Investor Watchdog (www.InvestorWatchdog.com) less than 5% of individual investors have any type of process for evaluating advisor credentials, ethics, and business practices. An even lower percentage use FINRA’s BrokerCheck to review the brokers’ compliance records. There are a lot of risks when people invest in the securities markets, however selecting a competent, ethical financial advisor should not be one of them. 

Investors need facts so they can make informed decisions when they select new financial advisors. The facts include education, experience, certifications, associations, licensing & registrations, compliance records, methods of compensation, and financial services. This information helps investors select advisors with the best qualifications, not the best sales skills. It also helps them avoid advisors who omit, misrepresent, and exaggerate information when they sell investment products.

Advisors can make it easy for investors by providing the facts or they can use the Wall Street approach and make it investors’ responsibility to obtain data on their own. Keep in mind the Internet is a game changer. Investors can view data on the FINRA website, visit advisors’ websites, Google search advisor names, and use third party websites to obtain a substantial amount of information without talking to advisors.

Current clients also need facts so they can monitor their relationships with advisors. Facts include asset allocation, performance reports by manager, risk analytics, investment expenses, and advisor information that changes over time.

All of the information should be delivered in profiles or reports so investors have a permanent record. The sooner advisors treat individual investors the way they do institutional investors the better.

Jack Waymire spent 28 years in the financial services industry. For 21 of those years he was the president of a Registered Investment Advisory firm that licensed more then 300 professionals and served more than 50,000 investors. He left the industry in 2004 to market his book, Who’s Watching Your Money? The 17 Paladin Principles for Selecting a Financial Advisor that was published by John Wiley. He also launched his first website in 2004,www.PaladinRegistry.com, that featured key content from his book and a service that profiled more than 300 pre-screened financial professionals. In excess of one million investors have used the information, tips, and services on this website. In 2008, he founded a second website, www.InvestorWatchdog.com, that provides free tools investors use to select and monitor all types of financial professionals. Waymire is a columnist for Worth magazine, frequently quoted in the media, and a regular contributor to major blog sites.  

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