The financial services industry has a problem: people don’t trust us. Although it is gradually rebounding, financial services ranks last in terms of consumer trust – behind the pharmaceutical, energy, automotive, tech and food and beverage industries. Among Millennials, trust in financial planners is especially low.
Transparency and Accountability
Part of the problem is transparency. And the other part is accountability.
Look at the tobacco industry. A cigarette company CEO has never been held liable for lung cancer developed by a smoker. Why? Because cigarette packs now include clear, often graphic warning labels explaining the product’s side effects. The industry is transparent about the risks associated with its product.
Even if you ignore the warnings on the package, your doctor will tell you that smoking cigarettes is harmful to your health. Your doctor is legally obligated to give you advice that is in your best interests. He or she is accountable for making recommendations to inform you and enable you to make healthy choices. Financial services doesn’t work this way.
First of all, the “warnings” on financial products are much less clear than those on a pack of cigarettes. They tend to be buried in fine print and full of jargon and legalese that people who are not financial professionals don’t understand.
Secondly, those financial professionals—the people whose job it is to interpret that jargon and help investors make financially healthy choices—are not necessarily obligated to act in their clients’ best interests. (For related reading, see How to Combat the Lure of 'Free' Financial Advice.)
Our society requires certain professionals (doctors, lawyers) to study, take qualifying examinations and uphold a duty to put their client’s best interests first, not because of some high-minded ethic, but because they have the advantage and responsibility of understanding the consequences and the risks at hand. In finance this is known as a fiduciary standard. Not every professional who calls him or herself a “financial advisor” is a fiduciary. In fact, many are not.
Financial advisors who are not fiduciaries are not held to the same standard as doctors or lawyers. They can recommend an investment or financial product to you that will earn them a commission or generate revenue for their employer—even if it might not be the best choice for your financial health.
The Department of Labor’s new fiduciary rule is intended to remove conflicts of interest from retirement investments. But it is riddled with loopholes and concessions to the financial industry. The rule allows advisors to make recommendations or sell products that prioritize their profits over your best interests, as long as they tell you they’re doing it. In other words, as long as they are transparent.
Here’s the problem: “transparency” is just another word for “visibility.” The idea that more visibility is all an investor needs to make good decisions is flawed. Visibility does not automatically translate to understanding or the ability to comprehend and appreciate risk. Transparency does not equal safety, and in the case of financial services, it does not eliminate conflicts of interest and is not a cure-all for what ails us. (For more, see: Don’t Buy What You Don’t Understand.)
What we need in financial services is not just greater transparency, but greater accountability, in the form of a true fiduciary standard. Investors can’t force the government to demand this standard of the industry. But they can and should demand it, individually, of their advisors.
That’s not to say that you should automatically trust a financial advisor just because he or she is a fiduciary. But working with a fiduciary is the first step in establishing a relationship based on trust with a professional who will be accountable to you. (For related reading, see: 6 Questions to Ask a Financial Advisor.)