Most financial planning associations have a "code of ethics" that financial advisers are required to adhere to. These "code of ethics" read like commandments that advisers must follow in order to join professional organizations, to receive financial or other support for their business and to gain access to financial publications that are not available anywhere else in the industry.
The first "commandment" in almost every case goes something like this:
I will put my clients interests ahead of (or above) my own.
This is naked altruism. Financial advisers are asked to abide by a code which is blatantly contradictory. Contradictory because, in order to make money, the adviser must primarily serve his own interests--not the interests of his client.
Writer/philosopher Ayn Rand wrote in "Philosophy: Who Needs It":
What is the moral code of altruism? The basic principle of altruism is that man has no right to exist for his own sake, that service to others is the only justification of his existence, and that self-sacrifice is his highest moral duty, virtue and value.
Financial advisers are being asked, under the guise of "benevolence" and "doing what's right for the client", to give up their right to live for their own sake. Consider that advisers are constantly looked down on (by fee-based advisers) for making money through commissions and that advisers are looked down on (by commissioned-based advisers) for charging flat or hourly fees with no guarantee of performance.
Consider that both commissioned-based and fee-based advisers are often looked down on by the news media simply for working in the financial industry. The media is quick to point out that investment advisers like Bernie Madoff are hucksters while ignoring the multitude of honest and hard-working financial advisers who legitimately try to help their clients succeed in their investment goals.
The Securities and Exchange Commission (SEC) along with the Financial Industry Regulatory Authority (FINRA) buries financial advisers in paperwork just for selling simple financial products. These agencies require fees and licensing to conduct business and impose penalties for non-compliance.
How do advisers react to all of this? Do they stand up for their profession? Do they reject unearned guilt imposed by the industry's ethical code? No. Instead, financial advisers routinely attempt to "give back to their community". But why? Don't advisers think they've earned the money they've made? No. They can't. Not when they must "put clients first" while still trying to make money for themselves.
The alternative to "putting clients first", we are told, is to allow financial advisers to take advantage of their clients. We're told that advisers will "rip off" clients by charging "excessive fees" while giving out poor or incomplete advice. We're told that advisers will only sell the highest commission products and that this will necessarily hurt their clients. In other words, we're told that advisers will "somehow" profit at the expense of their clients.
Sacrificing a client's interests to the adviser vs sacrificing the adviser's interests to the client represents a choice of false alternatives.
By sacrificing the client's interest to the adviser, the adviser may make money in the short-term but loses future business. But does this make any sense? A financial adviser relies on having a "client base". Without regular clients, the adviser is constantly seeking new business. The adviser never gets out of his "business start-up" phase. In a sense, the adviser's job becomes more difficult over time instead of becoming easier. There's no motivation to do this.
Putting the client first is supposed to benefit the client. But, sacrificing the adviser's interest to the client, as is often recommended, means that the adviser becomes less motivated to help the client. This becomes especially apparent when new regulations are enacted that require "client suitability paperwork" to be completed just to do business with clients or when laws on adviser fees and commissions are enacted and enforced. By introducing more paperwork and forcing adviser incomes lower, the adviser is incentivized to leave the business, not stay. How does this benefit the client? It doesn't.
The only real choice for the financial planning industry is to adopt the ethics of rational egoism--selfishness. This means that the adviser's interests should be aligned with the clients. The adviser doesn't benefit at the expense of the client and the client does not benefit at the expense of the adviser. But, the only way for the ethics of selfishness to take hold in the financial planning industry is to eliminate all adviser licensing and suitability requirements and allow clients and advisers to trade with each other freely without interference from the government.
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This entry was posted on December 12th, 2010 by David C Lewis, RFC. Edits may have been made to keep this entry current. · No Comments · Philosophy In Financial Planning