John Lefferts' Blog

Tuesday, January 22, 2013

The Extremes

It seems these days that those who communicate the most extreme views (I call them “the extremes”) tend to get the greatest attention, yet represent a vast minority of most reasonable thinking folk’s viewpoints. It’s happening in sports, science, politics, academics, religion, business and our entire society in general. As the sheer amount of information and pace of its delivery has increased by volumes in the past couple years, it’s not so much the rational level headed middle ground that gets the attention of readers so much as it is those who sensationalize their views. “Back in the day” when we once received our information from only 3 national TV networks, a handful of magazines and the local daily newspaper, each with a strong and somewhat balanced editorial review process, I’m sure very little that today is front page news on Huffington Post, Business Insider or the Daily Caller that I scan every morning (among others), would have made it as news. (Yes, I know I’ve already lost all those under age 35). In order to stand out and be seen or read out of a flood of information, it seems that the headline that shocks the most is the one that gets the attention, particularly with new media that appears to have no editorial limits at all.  And unfortunately, the uninformed often read what the extremes write as truth when most of these nuggets of information pass for opinions at best, and some not very well informed ones.

I use this as a backdrop to what I’m seeing in the financial media as well. The extremes are clearly more entertaining to read, but don’t come with warnings that if you believe much of the junk that is written it is truly a hazardous line of thought to follow. In football, concussions have always been a risk and one to find ways to minimize, but ban football altogether as I read in one headline?…I don’t think so. A horrendous shooting happens at a school, but arm every teacher with a handgun?...really? Tax rates are going up a few ticks, so it’s time to leave the country?...Poor Michelson lives such a tough lifestyle in the USA, surely he can do better elsewhere.  

I’ve been following this several year long Dodd-Frank debate and as it relates to retail financial services, the possibility of an SRO for RIA’s and the probability of a “harmonized” fiduciary standard for all those who give personalized investment advice. The extremes play in this space as well. The strong trend in the business is towards “independence” and away from the proprietary product manufacturer models. This is nothing new as it’s been the clear-cut trend over the past several decades. But as the economics of the business have changed, regulations move more fervently towards favoring unbiased advice and the backdrop of Wall Street scandals are still fresh in our memories, there is a tremendous amount of conflicting information about what truly being “independent” means. There’s a well written article in this month’s Financial Planning Mag FP article link that poses the question, “And what precisely, does independence mean anyway?” to which I’m sure I’d hear many variations of responses. Many years ago while recruiting to a proprietary product manufactured sales model, I would argue that it was truly independent since we had access to non-proprietary products and services as well as the name brand. Of course, no mention that all pensions, stock options, employee benefits, recognition and management comp was driven solely by the sale of the proprietary product. I chuckle (nervously) when I recall even saying that, but I probably believed it at the time and it’s taken almost 5 years to shed that warped belief.  Yes, as it’s been said many times before, compensation DOES drive thoughts and behavior.

The extremes in the biz have written that the only way to give unbiased advice that is free of conflict is to 1) be compensated by fees only  2) not be affiliated in any way with FINRA and 3) not become licensed to or ever receive a commission. I always get suspicious when one infers theirs is the ONLY way and this is no exception. This argument infers that a “fee only” (for which defining is a whole different discussion) advisor who has rent, staff, technology, etc. expenses to pay monthly is unbiased and unconflicted as to what his/her fees and/or % of AUM charges are? And that being held to an inspection on average every 10 years or so is better than the rigor of a FINRA inspection every other year? And that by recommending a product to fill a client’s need cannot/will not be done because it is only designed with a commission attached. Tell that to the widow who’s life you just destroyed by what I would consider malpractice in not securing life insurance when/as needed...simply because it is acquired through the payment of a commission. (okay, I admit that the malpractice comment is a bit extreme as well)

We see extreme positions taken on both sides of this argument just like we see a similar banter between conservatives and liberals in politics. There is seldom anything accomplished when one is unwilling to compromise which is what we’ve been witnessing in beltway politics as well as in our own business. I often read the material that Michael Kitces writes and his latest blog post was very well done. Kitces blog post here He astutely points out that you’re defined not by what you call yourself, but rather how you behave. Personally, I believe that a Hybrid/Tribrid advisor can be as much a fiduciary as the non-FINRA regulated fee-only advisor. All advisors of every stripe are placed in potentially conflicted positions daily. It is how they behave that defines their trustworthiness, not their business model.  

The public distrust of politicians is at an all time low. It’s my observation that it is their polarized and extreme positioning that has put them in that position. And my fellow professionals, we’re doing the same to ourselves. Yes, I’ll continue to read and be amused by some of the extremes and what they say, but at the same time, I fear that we are dragging ourselves down a slippery slope in the view of public opinion. My two bits for most of the extremes comes in a quote from the ever popular President Lincoln…."Better to remain silent and be thought a fool than to speak out and remove all doubt"