Other Voices

Regulation is only part of the solution

Advisers should seek the highest level of professional competency, not for economic gain, but out of a sense of professional obligation to clients

Apr 12, 2015 @ 12:01 am

By Sean Walters

Recently I spoke on a panel in Australia with Joel Cohen, the prosecuting attorney depicted in the movie “The Wolf of Wall Street.” Mr. Cohen, the other panelists and I were asked how our industry — particularly holistic advisory professionals — might emerge from the shadows created by a few bad actors over the past 30 years.

After the panel, it occurred to me that there is no single cure to the reputational issues facing our industry. Indeed, much like the four fundamental forces of nature (strong, weak, electromagnetic and gravity) I believe there are four forces that, when acting in concert, might do much to repair or restore our industry's reputational status: legal and regulatory forces, market forces, industry forces and personal ethical forces.

In his hugely popular Harvard course on justice, which is available on the free edX platform operated by Harvard and MIT, Professor Michael Sandel argues, “A single rule or principle is not the only way, not even the best way, of reasoning about right or wrong, or justice.” His point is a good one. When faced with environmental, physical, emotional and financial temptation, one needs to muster all available forces to constrain oneself from misbehaving.


There are countless articles and perspectives on our industry's regulatory and statutory constraints. On our Australia panel, Mr. Cohen offered a view from the prosecutor's table. He lambasted “The Wolf of Wall Street,” claiming the film depicted victimless crimes, glorified the upside of the crimes and made it appear to other potential criminals that the downside had only nominal consequences compared with other crimes.

Jordan Belfort's fraud affected 1,513 victims and he served 22 months of a three-year prison sentence. That's less than what most muggers would get for snatching a purse. Mr. Cohen argues for heavier sentencing, clearer and tougher laws protecting consumers, and less red tape for prosecutors in pursuit of “the bad guys.” All as one might expect from a former prosecuting attorney.

One of my co-panelists, John Hempton from Bronte Capital, identifies and shorts fraudulent stocks around the world (including many listed in the U.S.). His approach is to follow the unethical players from company to company — including lawyers, executives and brokers who repeatedly work with fraudulent companies — and leverage market forces against unethical behavior. A huge benefit of this approach is that it serves to expose rotten behavior before too much damage is done. This market-driven lens identifies bad actors, shorts their stocks and allows market forces to force the demise of the company.

A third force is industry-driven. I applaud the efforts of the CFA Institute and its Future of Finance campaign, a long-term global effort to shape a trustworthy, forward-thinking financial industry that better serves society. By focusing on the industry, it aims to create an environment in which investors' interests come first, markets function at their best and economies grow.

Unfortunately, we are still a highly fragmented industry. Perhaps in the spirit of competition, those in our industry relish tearing down competing business models. To the outside world, an “independent team” at Wells Fargo and an “independent firm” with Fidelity as its custodian do not appear that different. Yet these two models have been constantly at odds for more than 20 years.

Some advisers physically recoil (often in front of clients) if they are referred to as a stockbroker or insurance agent — even if they offer those very services! Industry groups fight tooth and nail over variations on the theme of “client-centricity.” We have no single industry association, nor any unified coalition of associations, generating positive dialogue as an industry. The discord and infighting continue as the shadow of ill repute grows longer.


The final force is that of professional ethics — the personal, organizational and corporate standards of behavior expected of professionals. My role on the panel in Australia was to discuss the link between voluntary certification and ethics. I was quick to note that ethics and certification are not bonded by a causal relationship. I haven't seen any study demonstrating ethical behavior to be higher for professionals who hold a certification or lower for those who do not.

However, the voluntary act to pursue and uphold a higher standard than what's legally required through state or federal licensure is inherently ethical. When professionals earn (and maintain) a rigorous certification, they voluntarily adhere to higher standards — including, in most cases, a code of ethics that represents higher standards than what is required by law or regulation.

Consider the principle of integrity. Certainly honesty or truthfulness is essential for a trust profession like financial advice, but I am referring in this instance to product or service integrity, which is defined as “wholeness or completeness.” All professionals as a matter of integrity should voluntarily seek the highest level of professional competency — not in pursuit of economic gain, but out of a sense of professional obligation to those being served.

Fewer than 1 in 10 professionals in our industry hold any voluntary certification.

Many in our industry complain that there are too many credentials. This is another area in which we show our fragmentation. Complaining that the alphabet soup has too many letters is a poor excuse for not eating your soup. At issue in our industry is not the quantity of credentials but the quality.

Sean Walters is executive director and chief executive of the Investment Management Consultants Association.


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