The Banality of Bad Behavior in the Financial Planning Business
My eye was caught by a headline in registeredrep.com: “When Bad Firms Happen to Good Advisors.”
Some well-regarded experienced financial planners, the story said, signed on with the most recent mini-Madoff–Sir Allen Stanford and his Stanford Financial Group. Then they got burned.
Interesting story, I thought; even really good, ethical planners got sucked in, it seemed. Here is Bob Hogue, a Houston planner looking to move from Bank of New York:
Stanford offered service providers he knew well: Lockwood Financial’s platform of money managers, with which he had already built his business on, top-notch client and data management technology provided by Odyssey Financial Technologies (a leading European vendor), and a custodial relationship with Pershing, the custodian he was already using. Adding to the appeal, Pershing guaranteed easy transition of client data, no change in account numbers, if Hogue and the three FAs in his Dallas office moved to Stanford. “There weren’t any other firms offering all that,” says Hogue. He and the three other Bank of New York financial advisors joined Stanford’s Dallas office in November, 2007.
There was all the hooplah, too—yacht cruises, fabulous food, beautiful facilities. But Hogue et al weren’t seduced by that.
Or were they?
What Passes for Good Behavior in the Financial Planning Business
Stanford advisors got incentives for selling the CDs, including a 1 percent commission and, depending on the size of the sale, eligibility for a 1 percent trailing fee for each year on the CD’s contract, as well as trips and bonuses and invitations to the annual sales meeting, awarded based on how much money an advisor funneled into Stanford International Bank. [italics mine]
Wait a minute. What do CDs yield– – 3-4%? At those rates, commissions would eat up half the owner’s yield. We cry “usury” at credit card charges in the 20% range–how about 40-50%? And on a CD?
And, if these CDs were in fact yielding higher—7%, 8%–then they were far outside the normal risk range of the usual buyers of CDs.
What kind of a financial planner rakes 50% off the top of a “conservative” product that his customer could buy for nothing at an FDIC-insured bank? Or sells a highly risky product to people looking for conservation of wealth?
According to registeredrep.com, apparently the answer is “good advisors.”
50% fees on CDs? Good? In what dictionary? Let’s get real.
What Good Behavior in Financial Planning Should Look Like
A financial planner friend tells me that when she gets calls from wholesalers pitching products for her to sell, after they describe their new product, their next line is typically “let me tell you how much commission you can make on this.” When she says, ‘never mind that, what’s the yield for the customer?’ the response is usually, ‘uh, hang on a minute, let me look that up.’
That’s the normal pitch. Wholesalers are not stupid. This means: the average financial planner is not in it for you, they’re in it for themselves; that’s why the wholesalers lead with commissions, not benefits to clients.
The same planner tells me she often finds clients who have been put 100% into a variable annuity product, for example, when they have near-term needs for retirement or college expenses. “It makes no sense,” she says. Until you check out how the previous planner made 5%, 6%, 7% commissions up front by selling them this concoction. Then it makes a ton of sense. For the advisor.
Earth to registeredrep.com–bad advisors do this, not “good” advisors! This is the banality of evil. The incessant trickle-down of selfish, anti-customer, opaque behavior eventually makes routine, daily ripoffs get termed “good.”
Madoff and Stanford are anomalies. But the daily, garden-variety, grinding low-ethics, customer-hustling, devious behavior is all too common. See, for example, Michael Zhuang’s comment on a blogpost of just last week.
Can Ethical Behavior Be Increased in Financial Planning?
There are many ethical, customer-focused, honest, trustworthy planners. I know some of them, they do exist. They are as good professionals as in any industry. And there are seedier, greedier industries out there.
But so what? Since when is “he’s worse” an excuse for unethical behavior? Just last month the SEC charged a former President of NAPFA, one of the industry’s two professional associations, with kickbacks. (Well, at least he wasn’t a Madoff….)
What can you do as a consumer? Search hard for the good planners. Don’t let yourself get snow-jobbed. Ask a lot of questions. Do not be intimidated. This is still a caveat emptor business. So caveat.
But–if you run a financial planning firm, you can make a real difference. Dare to be above average. Look at client-focused behavior in other industries. Talk to highly successful firms who are known for straight dealing. You know who they are in your business–emulate them. Read up on trust. Conduct focus groups. Talk to your critics. Steep yourself in the literature on how short-term anti-customer behavior kills long term shareholder wealth. Dare to do good!
Call me naïve, but I still believe that a critical mass of people in the financial planning business know the difference between today’s norm of selfish, short-term anti-client mindset and the longer-term client-focused strategy that is possible, and that in fact creates loyalty and mutual profitability.
If I’m right about that, then it just takes some concerted courage by a few to speak up and start making a difference. And if you’re still reading, maybe you resemble that remark.