Originally published by Don Peppers on LinkedIn: This Just In: Feds Make It Illegal for Financial Advisers to Cheat Their Clients
Yes, you’ll be happy to know that it will now be illegal for financial advisers to steal money from their own clients. Yesterday the Federal government released a long-awaited and much debated new rule that actually requires your financial adviser (i.e. your stock broker, banker, or insurance agent) to put your personal financial interest ahead of his or her own interest, when dealing with your retirement funds.
Seriously? We needed a complicated, detailed regulation just to ensure that financial advisers don’t cheat their own clients?
Yes, apparently we did, and now we have it.
If you ever wanted solid evidence that the system is rigged against you, here you have it. Apparently a large segment of the investment management community pads its own pockets by charging clients more than necessary to achieve their financial objectives, and/or by taking undisclosed but perfectly legal “kickbacks” from the investment funds they recommend, and/or by charging exorbitant (and unwarranted) fees for routine services.
A government study estimated that these practices cost US consumers some $17 billion a year and reduced the annual rate of return on an average consumer's retirement account by about 1%.
It should never have come to this. Your financial adviser should always have put your interest, as an investor, ahead of the adviser’s own interest, or the firm’s interest. They think of themselves as professionals, but the very definition of a professional is someone who puts the client’s interest first. It’s in a doctor’s own financial interest to keep her patient sick, and it’s in a lawyer’s financial interest to string his client’s legal problems out as long as possible. But for the most part, doctors and lawyers don’t do this, so we call them “professional.”
Not financial advisers, however. Being a financial adviser is not a “profession,” in the doctor-lawyer sense. Not at all.
Now obviously, there are plenty of very good, client-oriented financial advisers out there (my own, for instance). But I think the investment environment seduces many advisers to the dark side. Day in and day out they are surrounded by a culture that celebrates and rewards successful trading. When you trade with someone else, you are buying and they are selling (or vice versa). And the counterparty on the other side of your trade is your adversary, not your client. Pure and simple, whatever value you gain in a trade, your counterparty gives up. Now it may be the case that you and the counterparty have different interests (you may be looking for stability, for instance, while they’re looking for more growth prospects) but still, trading is by definition a zero-sum game.