Providing financial advice is similar to providing medical advice in that there is inherent uncertainty about whether recommended actions will achieve the desired results.
In medicine, the term "iatrogenic injury" refers to situations in which harm is caused by the treatment itself. The history of medicine includes a number of procedures once thought to be necessary and helpful but subsequently deemed unnecessary or even dangerous.
It is an unfortunate paradox that qualified professionals who are dedicated to helping others occasionally cause harm despite good intentions and adherence to the best current practices.
Harm stemming from something unknown to the profession must be chalked up to the price of advancing knowledge and developing that profession's skills. Harm caused by those who manipulate or withhold information about the potential dangers in a recommended course of action is inexcusable.
The history of the financial services profession, especially recently, has been blemished by the intentional withholding of information in order to serve the interests of corporations or unscrupulous advisers over those of investors. With each revelation of a financial services industry scandal, financial services representatives look less like professionals and more like snake oil salesmen.
I found it interesting that in response to a complaint filed July 31 against Merrill Lynch & Co. Inc. of New York by Massachusetts securities regulators, the company closely associated its denial of wrongdoing with the good intentions of its financial advisers.
Here is a quote from the company statement: "We are disappointed that Massachusetts filed this action, because it ignores the only reason our advisers sold auction rate securities: They believed they were good investments for clients willing to trade some liquidity for higher return."
From what has been reported about the complaint, it is clear that far more than the intentions of the advisers is in question. For example, it is alleged that managers in the home office saw the auction market evaporating, knew there would be adverse consequences for investors and yet, in an effort to minimize company losses, pushed sales by pressuring employees in trading and re-search to recommend the securities.
Such conduct would warrant punitive action by regulators and litigation against the company by investors. Often, advisers, like regulators and investors, are deceived when financial services firms produce false or misleading information.
Even though they intend to serve the clients' interests, their reputations are tarnished, and their compensation suffers, as assets under management tumble. If they face litigation from aggrieved clients, they may have little recourse against the firm that misled them, especially if they must depend upon that same firm to provide their legal defense.
Because advisers who provide comprehensive and continuous advice are fiduciaries, they are held to a "prudent expert" standard of care. A key responsibility is to perform comprehensive due diligence on the investments they recommend.
Given the complexity of many types of securities, this is no easy task under the best of circumstances. If financial services firms play hide and seek with information that is material in determining the value and marketability of securities, a fiduciary's capacity to perform due diligence is undermined, as is the
trust between the companies that make investment products and the advisers who perform an essential role in distributing them properly.
In a robust and healthy profession, the major participants are united by a common commitment to serve the best interests of clients — a fiduciary standard of care. The frequency and severity of financial scandals will diminish if we can raise the level of professionalism in the financial services industry.
This won't guarantee that all advice will achieve a positive outcome for investors, but it will help assure that failures are unintentional and less frequent.
Litigation and regulation are highly inefficient methods of elevating professionalism; nevertheless, that is the path that we are now on. A far more efficient and sustainable approach would be for the industry to drive the process from within.
A necessary first step for leaders in the financial services industry, including its most dedicated and successful advisers, and its most responsible corporate executives, is to insist upon delivering products and services that demonstrate fiduciary responsibility.
Blaine Aikin is president and chief executive of Fiduciary 360 LP in Sewickley, Pa.
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