Most people would agree that something went awry with large parts of the global financial system. Most would also agree with some broad-brush characterizations of just what went wrong. A bit too much greed, self-orientation, short-termism. A bit too little customer focus, ethics, regulation.
Hopefully some of the overheated sectors learned something, or were at least chastened. Then again: don’t hold your breath. Here are some anecdotal samplings from the home lending and the financial advisory segments.
Ethical Improvements in the Home Appraisal Business
In an April story the Center for Public Integrity reports:
In a 2007 study by October Research, a real estate news provider, 90 percent of more than 1,200 appraisers polled reported feeling pressure to change property values, usually from lenders, mortgage brokers or real estate agents.
How much pressure? All too often, if appraisers didn’t come up with numbers that fit what lenders wanted, they found themselves blacklisted. How overtly?
Amerisave, one of the largest online mortgage lenders, has close to 12,000 appraisers on its “ineligible appraiser list,” which was removed from the Atlanta-based company’s website after the Center made inquiries about it.
Actions taken? NY Attorney General Cuomo did some vigorous investigation; one results was a Freddie Mac new “Home Valuation Code of Conduct” to go into effect May 1.
Who opposed it? Why, the National Association of Mortgage Brokers, of course.
The same people who, when JPMorgan Chase’s Jamie Dimon said his failure to terminate the company’s mortgage broker business was the “biggest mistake of his career” responded by saying Dimon’s remarks “clearly reflected his poor understanding of the mortgage industry.”
Uh, NAMB vs. Jamie Dimon? Tthat’s one you lose on credibility alone, NAMB.
NAMB’s excuse for its role in the mortgage debacles? Others did it too. So much for ethical learnings.
Ethical Improvements in the Financial Planning Business
There are principled, ethical, customer-focused financial planners; I’ve met many, and know a few well. At the same time, I think few would argue that the sector is a hotbed of high ethical behavior. RegisteredRep.com reports:
According to a recent study by Prince & Associates…15 percent of the wealthy left their financial advisors in 20087 and 70 percent took at least some of their assets out of the advisor’s hands.
Why? False advertising, says Cerulli Associates in the same article: what an advisor says he offers and what he really does aren’t in sync. Bill Bachrach, a respected (by me as well as by the industry) consultant in this space says:
“It’s been way too easy for former stockbrokers to gather assets and dump them somewhere and call themselves wealth managers…If asset management is all you do and you can’t point to some other way you make money, you have nowhere to hide when performance goes south.”
What’s the industry response? Here’s Ken Fisher, a mega-marketer of financial services, responding to two former sets of clients who are suing him for failing in his fiduciary responsibilities:
The lawyers who are representing the clients in both matters are “similarly incompetent." Both cases “will run into a concrete wall. The person who will be sorry in the end is the client, who will wind up spending money on lawyers and getting nothing.” [Fisher said he wanted to teach one lawyer] “a lesson he won’t forget.”
Now there’s a client-focused kind of guy. The kind you’d want out front promoting responsible behavior on behalf of your industry. Customer satisfaction? Let them sue for it, then endear them to you through public insults and threats. Great strategy, Kenny boy.
Then there’s the case of Jeffrey Forrest, fired by his broker dealer, sued by the SEC to keep him from working as an investment advisor. He continues to run an RIA firm in California, and is licensed to sell insurance there. In March, he and Associated Securities, for whom he was a top producer, were found guilty by a FINRA panel.
Associated Securities—surprise surprise—is appealing. Another great customer lesson: never admit you’re wrong. Especially when you are. Goebbels had that one down pat.
Last but not least. Finally, after all the Madoff hoopla—some concrete action:
SEC commissioners on May 14 voted 5 to 0 in favor of a proposal that would require the roughly 6,000 federally registered investment advisory firms that deduct their fees from client accounts to undergo surprise audits. The move is part of a wider effort by the regulator to crack down on advisers with direct custody over client holdings.
Exactly. Bernie made off with all the money by skulking in the gray spaces between regulators: for example, he custodied his own investments and no one checked on them.
So, surprise audits? You betcha, right on, about time. The industry should applaud this effort to help improve its reputation. Thank you SEC!
Why the resistance? Here’s a taste:
A surprise audit would likely cost his firm about $3,000 a year, said Ben Baldwin…That fee would likely be passed on to clients, he said.
“There should be an uproar because it’s going to hurt a lot of consumers,” Mr. Baldwin said.
Others contend that the proposal would force smaller firms to stop deducting fees from their clients’ accounts — a move that would require them to wait for clients to reimburse them for their services.
A National Board member of NAPFA elaborates further:
“When you deduct your fee from the client’s account, you have no cash-flow problems.”
And that, I guess, would be why NAPFA opposes the SEC’s proposal. Because it would force advisors to send invoices instead of directly deducting fees. Thus slowing cash flow.
More Madoffs? An occasional small price to pay if it helps protect advisors’ cash flow.
There are simply too many players like the ones quoted in this post who still see regulation as a hateful intrusion on their god-given right to extract cash from customers’ wallets unless expressly forbidden by federal law.
And there are simply not enough players who see regulation as the regrettable consequence of the presence of the former group of players. They do business based on the simple idea that you should treat people, and most certainly customers, decently. It can’t be easy for you to watch the first group so demean your industry’s reputation.
Many from that first group must have read a blogpost of mine from two and a half years ago: How to Get Your Industry Regulated in 6 Easy Lessons. They’re executing the six lessons marvelously, and I have no doubt they’ll succeed beyond their wildest dreams very soon now.