Many of us had the blessing of spending some quality time with our families over the holiday break. For my family, it was a rewarding time. We played games and sports and watched a lot of movies.
In the midst of our collective movie binge, I was struck at the contrast between two movies: It’s a Wonderful Life and The Wolf of Wall Street. One film I was excited to finally share with my children; the other I would never recommend to them. One, a celebration of the best of the human spirit; the other, a caricature of the depths of our depravity. One, a classic story of repentance, redemption, and reconciliation; the other, of outrageous exploitation, manipulation, and hubris.
Don’t get me wrong; this is not another Martin Scorsese or Leonardo DiCaprio bashing. As a movie buff (and huge fan of DiCaprio, I might add), I realize that some of the best cinema of our time captures evil narratives. I therefore have no moral argument against the artistic license for those who want to show the life of a villain unfold.
I’m convinced that the real outrage over The Wolf of Wall Street was not the glorifying of the “bad guy,” Jordan Belfort, the brash young stockbroker who carried out massive securities fraud and corruption at Stratton Oakmont in the 1990s. After all, how hypocritical would that charge be from a society that monetarily nourishes Hollywood into continually producing disgusting slasher and torture movies?
Rather, the public’s response stemmed from the fact that the movie was a microcosm of lingering frustration based on the fundamental flaws that still exist in the finance industry, even five years after the beginning of the financial crisis.
Main Street feels the residual crisis much more than Wall Street; this crisis was unlike any other. Commentators and historians who blindly focus on the equity market crash, the systemic risk breakdown, the unemployment spike, the GDP collapse, or even the housing crisis aren’t seeing the forest for the trees.
This Was a Crisis of Trust
That’s what makes Belfort’s memoirs played out on screen much harder to swallow than even the iconic Gordon Gekko’s exploits. Trust is the fuel of the finance industry, or any relationship-based transaction or business model, for that matter. When an “agent,” as all advisers inherently are, loses the trust of the underlying beneficiary, the value proposition of the agent vanishes.
When the industry is viewed (rightly or wrongly) as rigged, benefiting only the inner circle of the wealthy corporate bankers and asset managers, clients will look elsewhere. And as the daily headlines incessantly demonize the industry, the general public has had enough with the money games; they’re demanding change — change that reconnects us back to the industry’s origin to facilitate the efficient exchange of capital to help the economy and society thrive.
Belfort is just the latest poster child for the industry’s lost way over the last few decades.
Where Are the George Baileys?
The public is searching for people to trust, such as George Bailey, the protagonist of It’s a Wonderful Life, who produced only humble performance at his family’s fictional savings and loan but sacrificed his honeymoon savings to put the interests of his customers above his own.
In doing so, Bailey helped safeguard retirements, fund housing developments, create jobs, alleviate homelessness, and even save lives. Yes, this is a dramatized story, but it does illustrate our great industry’s main purpose — serving the greater good.
In the current climate, Bailey’s biography may not attract Academy Award–winning actors or, sadly, the interest of the public, but it does capture the persona of the successful adviser of the future.
In a recent survey in partnership with Edelman, CFA Institute found that retail clients overwhelmingly believe that trusting an adviser was the single most important factor in making a hiring decision.
More broadly, they viewed behavioral and ethically related attributes, such as transparent business practices, responsiveness in addressing issues, and integrity, as much more important than performance-centric metrics. An adviser’s utility therefore is overwhelmingly bound up in his or her ability to uphold ethical principles in stewarding the customer’s assets and future.
Demands from customers on Main Street are ushering in a new era: the era of the fiduciary.
Give the People What They Want… and Deserve
How is the industry adjusting to this new demand from their clients? In a phrase, too slowly.
In November of last year, the Economist Intelligence Unit published a report sponsored by CFA Institute titled “A Crisis of Culture: Valuing Ethics and Knowledge in Financial Services.” The report investigated the culture within leading firms around the world in an attempt to better understand the importance placed on ethical conduct.
Sadly, the report offered astounding insight into the weaknesses that still exist in the financial industry.
Despite the near-unanimous agreement that ethical conduct was necessary and established at their firm, over half of respondents believe that career progression at their firm would be difficult without being “flexible” on ethical standards, and only 37% believe that better ethics lead directly to financial results. Just 43% said that their firm offers career or financial rewards for respecting the ethical code of conduct.
This is a concerning disconnect between words and behavior that could be the result of C-suite hyperbole (they don’t mean what they say) or simply the natural lag effect of substantive cultural changes (these values take time to root themselves in the corporate DNA). Either way, the suggestion that ethics is at odds with financial performance is just plain wrong and symptomatic of the hard work that the industry has ahead of itself to restore trust in the public square.
It’s Time for a Fiduciary Culture
Leaders in the industry urgently need to construct a culture that is built on a system of trust. Clients and their investment professionals must work as partners with aligned objectives, which means that a fiduciary culture is embodied by
- Long-term compensation schemes built on client success
- Paramount concern for the caretaking of underlying beneficiaries
- Deeper investment in compliance and risk management
- A fresh and honest look at leadership span to ensure strong internal control
- Simple and transparent financial product design and communication
- Firm-wide public commitment to an ethical code of conduct and education
But we believe the public and the individual client have an obligation as well. It’s not enough to wait for the industry to change itself. If investors around the world take it upon themselves to ensure that their financial services professionals are ethically grounded and deeply competent, the shift to a fiduciary culture will only accelerate.
Unsure where to start? It all starts by talking with your financial adviser. As always, make sure to keep your adviser apprised of any changes to your risk tolerance, return expectations, or financial situation, but more importantly, be sure to address the nature of your relationship. Can it be strengthened? Do you feel you trust your adviser and his or her firm?
The best way to get the conversation started is to encourage your adviser or broker to adopt the Statement of Investor Rights. The statement outlines what you should expect from them at minimum, such as transparency, effective reporting, clear communication, independence, and objectivity. The Statement of Investor Rights is a great way to uncover any potential issues that may be lurking beneath the surface of your relationship.
Ask your adviser about his or her standards of care or professional codes of conduct to which they are bound by virtue of their employer or affiliation with the professional association. If your adviser is unable to speak fluently or concretely about such codes of conduct, investigate further.
Then, engage in a discussion about how your adviser will be rewarded. If your adviser’s and your incentives and motivations will periodically be misaligned, how will he or she prioritize decisions and alleviate this tension? How will you be involved? If talking candidly about this makes your adviser uncomfortable or defensive, it’s a red flag.
Demand a thorough and clear explanation of any security or product the adviser recommends. If he or she can’t explain the product’s characteristics and why it’s a strong fit for your long-term investment goals, chances are your adviser doesn’t understand either the product or you well enough. In either case, take this as a sign to avoid such products.
Look for and encourage proper generalist finance training and education. The studies cited previously show that the industry admits that it is undereducated and that closing this knowledge gap would make the industry safer through lower risk and improved competence.
Depending on what sort of services you expect to receive from your adviser, you should look for different credentials. More sophisticated advisers who are making discretionary investment decisions should pursue the CFA® Program, but depending on the services you use, that “gold standard” level of knowledge may not be necessary. In that case, the Claritas® Investment Certificate is a good minimum indicator that your adviser understands the fundamentals of the industry.
We Can Fix This Together
The finance industry can be an extraordinary force for good, helping to solve problems through innovation and entrepreneurial spirit, ensuring the well-being of communities, and achieving the broader goals of a stable and healthy society.
But we all must play our part. George Bailey understood that integrity and long-term relationships make for better citizens and better clients. Let’s collectively ensure that the next great finance story worthy of a Christmas box office open will showcase the industry as a positive, not a negative, force. We need more fiduciaries of Main Street and fewer wolves of Wall Street!
Martin Scorsese, are you listening?
The future of finance starts with all of us. Learn more and join the effort here.
Photo credit: AP Images
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Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.