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An Industry That’s Lost Its Way

By: John Bowman

Man looking at Wall St. sign‘The Wolf of Wall Street’ is one of the most talked about films nominated for this year's Academy Awards. Both the movie and its anti-hero, Jordan Belfort, are polar opposite to George Bailey, the protagonist of the 1947 Oscar nominated movie, ‘It’s a Wonderful Life,’ that depicts a humble savings and loan manager whose overriding instinct is to help his clients, often at his own expense.

‘The Wolf of Wall Street,’ on the other hand, arguably glorifies a brash, young stock broker responsible for carrying out massive securities fraud and corruption at Stratton Oakmont in the 1990s. The movie reflects lingering frustration based on the fundamental flaws that still exist in the finance industry, even five years after the beginning of the financial crisis.

When the industry is viewed – rightly or wrongly – as rigged, benefiting only the inner-circle of the wealthy few, investors will look elsewhere. Belfort is just the latest poster child for an industry that has lost its way over the last few decades, leading to withering levels of trust among investors.

Time For Fiduciary Culture

Leaders in the industry urgently need to construct a culture that is built on a system of trust. Clients and their investment professionals must work as partners with aligned objectives, which means that a fiduciary culture is embodied by:

  • Long-term compensation schemes built on client success
  • Paramount concern for the caretaking of underlying beneficiaries
  • Deeper investment in compliance and risk management
  • A fresh and honest look at leadership span to ensure strong internal control
  • Simple and transparent financial product design and communication
  • Firm-wide public commitment to an ethical code of conduct and education

Of course the public and the individual investor have an obligation as well. It’s not enough to wait for the industry to change itself. If investors around the world take it upon themselves to ensure that their financial services professionals are ethically-grounded and deeply competent, the shift to a fiduciary culture will only accelerate.

It all starts by talking with your financial adviser. As always, make sure to keep your adviser apprised of any changes to your risk tolerance, return expectations, or financial situation, but, more importantly, be sure to address the nature of your relationship. Can it be strengthened? Do you feel you trust your adviser and his or her firm?

The best way to get the conversation started is to encourage your adviser or broker to adopt the ‘Statement of Investor Rights.’ The statement outlines what you should expect from them at minimum – such as transparency, effective reporting, clear communication, independence, and objectivity. The statement is a great way to uncover any potential issues that may be lurking beneath the surface of your relationship.

Ask your adviser about his or her standards of care or professional codes of conduct to which they are bound by virtue of their employer or affiliation with the professional association. If your adviser is unable to speak fluently or concretely about such codes of conduct, investigate further.

Then, engage in a discussion about how your adviser will be rewarded. If your adviser’s and your incentives and motivations will periodically be misaligned, how will he or she prioritize decisions and alleviate this tension? How will you be involved? If talking candidly about this makes your adviser uncomfortable or defensive, it’s a red flag.

Demand a thorough and clear explanation of any security or product the adviser recommends. If he or she can’t explain the product’s characteristics and why it’s a strong fit for your long-term investment goals, chances are your adviser doesn’t understand either the product or you well enough. In either case, take this as a sign to avoid such products.

Look for and encourage proper generalist finance training and education. Different credentials may be required depending on what sort of services you expect from your advisor.

We Can Fix This Together

The finance industry can be an extraordinary force for good, helping to solve problems through innovation and entrepreneurial spirit, ensuring the well-being of communities, and achieving the broader goals of a stable and healthy society.

But we all must play our part. George Bailey understood that integrity and long-term relationships make for better citizens and better clients. Let’s collectively ensure that the next great finance story worthy of a Christmas box office open will showcase the industry as a positive, not a negative, force. We need more fiduciaries of Main Street and fewer wolves of Wall Street.

John Bowman is managing director and co-lead, education, at the CFA Institute.

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