This last week I was honored to be invited back to speak to a conference of the Investments and Wealth Institute, a highly regarded professional association for financial advisors, investment consultants, and wealth managers who embrace excellence and ethics. As I was preparing, I noted the strong parallels between the breakdowns of ethics in banking, the resulting legislation and its unintended consequences with what their industry is now facing.
The Department of Labor is implementing new rules impacting all financial professionals who work with retirement plans or provide retirement planning advice. The rule, aka the “DOL fiduciary rule,” mandates that significant disclosures to clients be made, even to the compensation advisors earn for investment decisions.
I was reminded of Marianne Jennings, J.D., a world-renowned ethicist about whom I’d written not so long ago. Ms. Jennings has noted that all rules and regulations begin as ethical issues, and she references a well-defined cycle that is always repeated.
I described to the audience about how that cycle always begins with some rules, with people finding loopholes around those rules. And, as long as everyone acts ethically, they are typically left alone. However, when unethical behavior is exhibited by a few, then there are inevitably egregious stories of customer abuse, and as those stories become more widely publicized, the cycle moves to the right and the public demands laws/rules addressing the unethical behavior.
In mortgage banking some borrowers were charged high fees and given mortgages which they could not afford, resulting in stories of families losing their homes. As the cycle predicted, these stories were published by the media and the public demanded action, resulting in the Dodd-Frank legislation, which had some unintended consequences.
As I told the audience, more than ever before following IWI’s Code of Professional Responsibility, making sound ethical decisions and acting in the best interest of the clients would prevent further issues resulting in fiduciary rules.
However, some in the industry have not followed the IWI Code of Professional Responsibility. And so now the unintended consequence is that all are subject to new rules, regulation and monitoring which will result in more scrutiny. I predicted that similar to the banking industry, the outcome may result in the larger advisors, which have the economies of scale and the lobbying power to minimize the effects of the new rule, moving way ahead of the smaller firms.
The big advisors will stay afloat. The impact on the smaller firms may be equivalent to what has happened to community banks who disproportionately bear the high cost of compliance, many of whom no longer exist. The danger is that small advisory firms could suffer a significant impact, leading to a substantial compression of fees and a very high cost of compliance to the firm. The smaller firms could thus feel pressure to close their doors as they could not afford the costs.
Again this is a very similar situation to the banking industry and what has occurred in the last ten years. These rulings could lead to the larger advisory firms increasing their market share and the smaller ones driven out of business.
The mission of the Investment and Wealth’s Institute is to deliver premier investment consulting and wealth management credentials and world-class education. They do an amazing job and offer the CIMA and the CPWA certifications, which are held in high esteem in the industry.
To this group, ethics matters and permeates every layer of their profession. As trusted advisors their word is their bond. And yet a few have stepped outside of the IWI guidelines and now everyone in the investment advisory industry will have to take the consequences. As Dan Ariely, James B. Duke Professor of Psychology and Behavioral Economics at Duke University who I have often quoted cautions, the few who are dishonest can cause the collapse of the entire system.
The bottom line is ethics pays; in market share, profits, reputation, customer satisfaction and, in the end run, less hassle and rules. The ever-tightening noose of regulations that govern our financial and investment advisory industries will get even tighter if a few keep pushing it.
As always, the many have to pay for the infractions of the few.
Richard Bowen is widely known as the Citigroup whistleblower. As Business Chief Underwriter for Citigroup during the housing bubble financial crisis meltdown, he repeatedly warned Citi executive management and the board about fraudulent behavior within the organization. The company certified poor mortgages as quality mortgages and sold them to Fannie Mae, Freddie Mac and other investors.
