Category: Bob Veres’ Blog

Everywhere you look in the financial world, you see conflicted advice that is (at least potentially; I would say inevitably) harmful to consumers. In the quaint old days of the late 1980s and early 1990s, advisors used to complain about the conflicts of interest at Money magazine and the other financial publications, which would breathlessly report on "the best mutual funds to buy now" every six months or so. Innocent clients would ask their advisors why they were selecting inferior funds. Money's editors were acting on the obvious conflict of advertising dollars; you need to be touting the products whose sponsors pay the bills. Less obvious was the fact that Money needed, as a matter of business survival, to be seen as the key source of financial information. So its writers had to denigrate the advice of advisors and keep everybody excited about changing their portfolio and continuing to read about what to buy next. Today, the cable financial channels have taken this investment pornography to striking new levels. Jim Cramer screams at the audience, and nobody ever checks the track record of his predictions. Men in business suits predict the future with a straight face. Stock touts used to be marginal members of the criminal underclass, on a par with touts at the racetrack. Now they're celebrities and media personalities. Meanwhile, investors are bombarded with cynical advertising from the large discount brokerage firms, who straightforwardly tell them they can beat the market if they will sign on to self-churn their portfolios. Full-service brokerage firms pretend to give you objective advice while they slyly siphon off as many of your retirement dollars as they can into their bloated bonus pools. Large insurance companies tell their agents to sell you the policy regardless of your actual financial needs. There are sleazy bucket shops that manipulate penny stocks and sell whatever they're paid to push that day, and it seems like we will always have a handful of Ponzi schemers among us. I've just defined a hierarchy of sorts, from least to most sleazy. You can debate the actual rankings. The point is that except for some of the activities of the bucket shops and the occasional Ponzi frauds, everything else on this list is not only legal, but tolerated in our society. In fact, I would argue that they are actually favored in the marketplace over the professionals who operate at the top of the spectrum. These various frauds and subtle dishonesties get far more attention, individually and collectively, than the honest advisors who try to give their clients the best advice available without compromise, and who, for the most part, are far better trained to do so. Consider that in our society, the magazines and cable financial shows are considered respectable members of the journalistic profession, and the nonsense they put out reaches millions of consumers every day–which is millions more than you do in your daily practice routine. The self-churn advertising efforts reach millions more, and they act symbiotically with the cable programs to co-create the dangerous illusion that what happened ten minutes ago is relevant to your retirement portfolio. Brokerage and insurance companies have somehow positioned themselves as the adults in the room, and the regulators believe they're the good guys because, even though the wirehouse structure provides incentives for brokers to bend the rules and slyly give self-serving (or company-serving) advice, even though a broker's success is defined by the money he extracts from his customers, the wirehouses, unlike the bucket shops, have compliance people who try to control the sleazier behaviors. We are currently starting up another round of debate about how financial advice should be regulated, with FINRA stepping out of the lower end of my spectrum and claiming to be the solution. I think it might be helpful if, this time around, we all took a step back and looked hard at all sources of investment advice in America, and asked ourselves if the net result of each provider's advice is helpful or harmful in light of even the most basic research. Should cable stock touts be required to disclose the track record of their prior predictions on a disclaimer that scrolls across the bottom of the screen as they're confidently telling us where the markets will go next? When Jim Cramer is screaming that he loves this or that stock, should there be a superimposition on the screen next to his reddening face that shows the subsequent performance of other stocks he has screamed about in the past? Should the discount brokerage messages saying that you can day-trade your way to owning a tropical island be investigated for blatantly false advertising? Or should they be required to show a bold disclaimer, similar to what we now see on packs of cigarettes, showing the normal result of a novice investor self-churning his own portfolio, perhaps with the help of Jim Cramer's image on the TV screen? As you move deeper into the realm of cynically conflicted advice, does it make sense for any agent of a product manufacturer–in our world, brokers and insurance agents–to be allowed to pose as a provider of objective advice? Or should they, too, carry a disclaimer? My point is that the current regulatory debate is far too narrowly focused. Protecting the public is not really a matter of bringing in a new bureaucratic organization that pays its executives millions of dollars a year. It should be about evaluating the objectivity and effectiveness of all forms of advice that are provided to consumers, and deciding whether it is in our society's best interests to impose some sensible guidelines. We have similar guidelines in place for medical advice, so we know that a broader system can work. If nothing else, this more encompassing evaluation, and more awareness of the full spectrum of bad advice, would expose FINRA not as the good guys, but as an organization that actually fits somewhere toward the bottom of an unpleasant cohort. This would make it all the clearer how ridiculous it is that FINRA should be striving to regulate the professionals who live and work at the top of the financial advice hierarchy.

I heard the same basic lament at the FPA Retreat and NAPFA National Conference, at the FPA NorCal Conference, at the TradePMR conference and the AICPA's PFP meeting in Las Vegas. It was widely discussed at the TD Ameritrade Conference. Everywhere, these days, advisor clients are suffering from what might be called a loss of hope. A growing number of clients seem to believe that the world is coming apart, and therefore have no enthusiasm in investing in anything that depends on an optimistic view of the future. The specifics vary. It may be despair that the Democrats or Republicans are ruining the country, or that the political system is so badly broken that our country will careen into some future catastrophe. The debt burden is so large that we cannot possibly dig out, and therefore we all face a dark future. Other countries are overtaking the U.S. for global economic supremacy. Most often, it seems to be linked to the scaremongering we see in the media, either for political purposes or because scaring people out of their wits has recently become a surprisingly attractive viable business model. So too is depressing people with unrelentingly gloomy prognoses of the future. I want to hear what clients are telling you, and I want to find out what clients are saying to the advisors who attend these two national meetings. But I also want to know what you (and they) are saying in response. Have you found an effective way to lead them away from the mental cliff of despair about the future? All of this brings back vividly my earliest days in the financial planning profession, when an individual named Howard Ruff published a newsletter called "Ruff Times." Howard Ruff believed that the world was going to hell, the economy was about to come apart, the markets were on the verge of collapse, and everybody should stock up on gold coins, canned food and water and plenty of ammo. He preached that his followers, who numbered in the tens of thousands, should avoid stocks altogether, and those who followed his advice missed the entire bull market of the 1980s and 1990s, when it was throwing off the most generous investment returns in world history. I think Howard Ruff would admire the doomsayers of our more modern era, for their ability to muster remarkable statistics and carefully select their facts and arguments. Recently, I looked at the Harry Dent materials, curious to see what the man who thought the bull market would rage on even after the collapse in 2001 had to say today, and of course now he's a raging bear. He robbed people of perspective as they went over the top of the bursting bubble; now he will rob them on the way back up. By giving a one-sided, misleading vision of the future, Dent and Howard and the others will pocket more than you and I are likely to earn giving more nuanced, honest and less self-serving advice. Against that backdrop of well-paid pessimists, it may be hard to notice the bigger picture. Suppose somebody had taken your clients aside in 1925 and shown them a highlight video of the future, of all the years leading up to 2012. There would be scenes of a major stock market crash, years of depression with unemployment reaching 25%, soup lines, bread lines, the dust bowl. Then they would see the horrors of a second global war, the unleashing of the atom bomb, a cold war that constantly threatened unspeakable nuclear armageddon, a presidential assassination, a nasty war in Vietnam. The movie would show an alarming rise of global terrorism and the demolition of America's largest, tallest building, flashpoint wars in the Middle East and the Balkans, numerous oil crises, the bursting of a major tech bubble, and the world taken right to the brink of economic collapse before Wall Street firms were handed the keys to the national treasury. Chances are, they would watch the video, then uncurl themselves from a fetal ball, and sell everything. The money would be stuffed safely in a mattress–and they would have missed 6-7% real returns a year over a bumpy ride that led to higher and higher levels of wealth. The point here is that we pay far too much attention to politics, geopolitical events and the latest headlines when we shape our view of the future. Extrapolating from our dysfunctions leads us down the road of pessimism, and there are many well-paid enablers who are happy to point us in that direction. But this obscures the true dynamics of our economy and our culture, which never takes place in the headlines. The real work of building the future is done by the millions of people who get up in the morning and go to work and get things done–who invent things, and build things, and figure things out, bit by bit, until one day we look around and realize that people no longer ride horses to get from one coast to the other. The real story of the past 90 years would never make the highlight reel. It is the story of incremental improvements in our lives, of more efficient food production, the advent of radio and television and powerful computational and communication devices, the ability to fly anywhere in the world, longer lifespans, more wealth and more interesting things to do with our free time. Progress and increasing prosperity–and future stock market returns–are the sum of all the effort that ordinary people make every day to build a slightly better world tomorrow than we have today. If you lose faith in the future, it seems to me, you are losing faith that all that energy and effort and creativity of all those people, not just here but all over the world, will have a beneficial effect on the world going forward. Catch me on a good day, and I'll readily concede that our elected representatives are not contributing very much to that long-term growth. I expect that there will be wars and downturns and excitingly negative headlines on the highlight reel of the next 50 years. I think our job, in the profession, is increasingly to focus attention away from the highlights to the bigger, less visible picture, to counteract the pernicious effect of the press, the gurus and soothsayers and professional pessimists. If your clients have lost faith in the future, I think it is important to remind them of exactly what they have lost faith IN–the hard work that they and their colleagues and neighbors and fellow citizens are contributing to the future every day, the talent and creativity of the human mind, the diligence with which we apply it. These things carried us through fearful challenges, all the way from squatting in caves to private space launches. Investing is a bet that the obstacles before us now, even the self-created ones, will not stop that progress, and it seems like a pretty good bet to me.

If there's one thing I can't understand in our messy battle over fiduciary status, it's the lobbying position of the Financial Services Institute and its now-35,000 members. I can see why FSI worked to prevent a rule that would have required inheritors of stretch IRAs to take the money out within five years, and I can certainly see why the independent broker-dealer lobbying organization wants to preserve independent contractor status for hundreds of thousands of dually-registered advisors. But taking a strong position against the fiduciary standard makes no sense to me, and it makes even less sense that the organization strongly supports FINRA in its efforts to take over RIA regulation. Yes, I've asked executives in the broker-dealer community to explain why independent BDs would want to lock arms with the larger brokerage houses on these issues. Many of them don't understand it either. I've asked advisors who are affiliated with LPL, Cambridge, Securities America and Investacorp to help me grasp their lobbying position, and often I get blank stares. Many of them didn't know their broker-dealer had given them FSI membership, in a blanket enrollment, until they received a message telling them how to promote FINRA as the best possible regulator for RIAs. (Among other talking points: it would level the "playfield" for broker-dealers, and broker-dealers are willing to spend time and money preparing for and complying with frequent examinations.) I've heard people in the BD world mischaracterize my position on conflicts of interest, so before I explore this further, let me be clear. I believe that fees are the future of the profession, and I believe that as the profession evolves we need to exclude sales agendas from the profession–not the industry, but the profession of financial planning and investment advice. There are thousands of dually-registered advisors who have successfully made that journey, and I believe they are real members of our profession. It's also clear to me that some of the broker-dealer firms–I'll single out Cambridge, Raymond James and Commonwealth here–are actively promoting this transition from sales to service to genuine professionalism among their advisors. That's why it's perplexing to me that an organization that purports to represent those professionals would use its lobbying dollars to fight the fiduciary standard that so many of their advisors have long since embraced. Many of them have moved out of the sales culture, but FSI is fighting to drag them back into a sales-oriented regulatory structure. I happen to believe that FSI actually has 124 members, not 35,000; the larger number represents people who did not affirmatively sign up on their own. But I really don't see how these positions benefit these independent broker-dealers either. FINRA is not their friend. Over the years, the brokerage world's SRO has gone to extraordinary lengths to create an unlevel playing field tilted toward the large brokerage firms and away from their independent competitors. The plethora of rules, the blanketing regulatory burden, the selective enforcement all seems to me clearly intended to stifle them as a competitive threat. Smaller BDs commit a foot-fault and the firm is put out of business while the hammer of sanctions falls on the head of its executives. Brokerage firms, meanwhile, routinely sell junk to their clients, take enormous risks with their capital, and bring the global economic system to its knees. Has any brokerage executive been charged with anything, much less convicted, much less sanctioned? Has any brokerage firm been put out of business by FINRA? Is this the organization that the independent BDs want to fight to bring deeper into their business lives? When I talk to dually-registered advisors about this, and we explore it for a few minutes, they inevitably come up with the same cynical explanation. The BDs must want to exert more control over their reps. They need FINRA regulation so they can throw up their hands in helplessness and tell their affiliated advisors that they simply have to impose a lot more control, a lot more compliance, a lot more supervision–which, of course, they can't do as much of now without transforming their reps from independent contractors into employees. Meanwhile, if FINRA is also regulating advisors who have dropped their licenses or never had them, this will eliminate the temptation for all those dually-registered advisors who haven't sold an annuity in a decade to switch from LPL to TD Ameritrade. Victor Suvorov, in a book about the former Soviet Union, memorably stated that the Soviet government posted armed guards all across the Western European border, with their guns trained inward, to make sure nobody managed to escape the Worker's Paradise. But Soviet leaders never bothered to patrol the border with China. Who would want to defect from one communist state to another? I think advisors should ask their BD home offices why they think these are the right lobbying positions to take, whether these surmises are correct. Why are you lobbying against a consumer-friendly obligation that I've embraced, and doesn't that make me look less consumer-friendly to the public? If this is the logic behind one of the most active lobbying efforts in the industry, then 124 broker-dealers are promoting their own interests in Washington at the expense of their affiliated advisors, both on the fiduciary debate and the FINRA effort to take over regulation of RIAs. I suspect that if they get what they're lobbying for, the wirehouses won't need their support any more, and FINRA will get the green light to make life far more miserable for the independent BD competition, tilting the playing field so far that the BD's will slide right off the edge. It's too bad, because I think if the independent BDs could align their interests with their advisors, they could mount a lobbying effort that would make the brokerage firms very uncomfortable, and preserve the growing professionalism that so threatens Wall Street's status quo. And I'm still confident that the march of fiduciary will continue, no matter what FINRA does or is allowed to do, no matter what the arguments in Congress. I hope that when the history of all this is written, it will be remembered that FSI stubbornly placed itself on the wrong side of history on these crucial issues, at a crucial time in the profession's evolution.