The buck has to stop somewhere.
Readers of my weekly column will have likely come to the realization that I am a proponent of legislators and regulators taking strong steps to protect the environment. As a matter of fact, given my advocacy through STANDUP (Scientific Testing And Necessary Disclosure Underpin Professionalism), it should be obvious that I'm a proponent of having tougher standards on a number of matters. Since climate change seems to be topical (finally) and the professionalization of financial advice is still seen as a "backburner" issue, I continue to draw parallels. It wasn't so long ago that the environment was considered a backburner issue, too.
The challenge regarding climate change is that corporations have never been forced by society to put a price on things that had previously been "free." Economists call these things "externalities." For generations, corporations could pollute with impunity because there were no regulations to prevent them from doing so. They could make more money by simply sending effluent down the river or up in smoke than if they came up with a way to sanitize the byproducts of their efforts. They pretty much all knew that what they were doing was wrong, but there were no economic incentives for them to do the right thing; so they kept on doing the wrong thing.
The way I see it, there are similar impediments against getting advisors to switch from a commission-based and transactional business model to a fee-based and planning-oriented business model. Although the relative merits are obviously not as cut and dried, there are powerful economic impediments that are slowing the transition of retail financial advice becoming a bona fide profession, too.
In my opinion, there are simply too many advisors making too much money using a transactional model. Even if they could make as much or more using a fee-based model, there's that little matter of completing the transition that needs to be addressed. Everyone wants to get to heaven, but no one wants to die first.
Just as death might be said to be a necessary precondition of eternal happiness, it might also be said that the death of a commission-based business model is a pre-condition of a fee-based model taking its place. Most advisors I talk to concede that from a client's perspective a fee-based model is better. The trouble is, when you can earn as much or more using a commission-based model and would likely have to take a pay cut in making the transition and no one is forcing you to make the transition, human nature, being what it is, is likely to cause inertia to set in. Most advisors, when handed this set of circumstances, would just as soon continue to do business the way they always have. Societal welfare be damned.
The phrase "if it ain't broke, don't fix it" springs to mind. For more than one generation, it was considered socially acceptable to pollute waterways and the air we all breathe. In time, governments came to recognize the larger obligations they had as the custodians of societal welfare regarding matters like the environment. The challenge was to put a price on something that had never been priced before and to police and enforce transgressions.
If the business of giving financial advice is ever going to be recognized as a true profession, something similar will have to happen. People are going to have to realize that the value of advice is in the advice itself (and its purposeful application), not in the products that are used as secondary bi-products. Slowly, the financial services industry is moving away from giving away the advice and charging for transactions to giving away the transactions (those burgeoning discount brokerages) and charging for the advice (those professional, STANDUP, fee-based advisors).
John J. De Goey, CFP is a Senior Financial Advisor with Burgeonvest Securities Limited (BSL) and author of The Professional Financial Advisor II. The views expressed are not necessarily shared by BSL. www.burgeonvest.com www.johndegoey.com
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