Financial regulators have an impossible task. When someone decides that the method of determining the suitability of a product or service to an investor is no longer of adequate standard, they have to search for something more precise. Unfortunately there is no simple or practical way to define suitability.
Consider the following:
- Few of us know what our own best interests look like, much less what the best interests of another person might be. Best interests rely on personal values.
- Best interests change over time. As none of us know what the future will bring, what may be good today may not be later.
- Which standard should apply? Retrospective assessment invariably includes information available to neither the client nor the advisor when the recommendation was made. Would it have been wrong to recommend the purchase of GM stock ten years before it went bankrupt? Would it be wrong to recommend a particular tax strategy that is later changed by the government? How much inflation should we anticipate?
- No one wants to be responsible for their decisions, as all bad things are someone else’s fault. Lawyers like this idea and regulation makes it easier to find spurious examples. Always notice “best interest” is context dependent, so where does it lead?
Financial regulators are trying to redesign the entire process by looking at only one, somewhat insignificant piece. They are partly right in assessing the problems with compensation, but are wrong in assuming that the actual transaction is the entire relationship. I’m pretty sure we advisors don’t wow clients based on our ability to fill out forms to purchase insurance or investments.
Most advisors derive income from commissions arising from the sale and service of products, but most provide far more than the delivery of products. Clients need and appreciate other services, things such as new information and concepts, tax planning, budgeting, long term financial plans, a counselor when things get tough, a conscience when a new Harley looks attractive or someone to quarterback with other professionals and family. Advisors provide these services for free as they are all necessary to determine what product is right for each individual before receiving commission on the product.
By comparison, advisors who provide nothing but product sales usually end up without clients. Good advisors know that the other services they provide are essential. If commission based compensation is taken away, these services will be billed by way of fees. My experience tells me that clients who are faced with a bill after every session often discontinue asking for it. So are they better off? If there’s a switch in our industry to fee based we won’t know for a long time but history in other countries says “no”.
Good advisors ask and get answers to the harder questions that people won’t ask themselves. What is that worth? How much life insurance is appropriate? Good advisors sell common sense, experience, and the ability to deliver it. They just don’t get paid for that part. So would it be in the best interest for clients to be without it?
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