How do we begin to undo the damage and set things right? In my last Intelligent Investing column, I outlined an eight-point proposal to reform Wall Street in becoming part of the solution. Assuming there is still time left to make the changes and the political will to see the reforms through, let's start with one of the most basic elements in the Wall Street equation: the folks who sell you stocks and plan for your retirement.
Too Many Titles
First and foremost, I call for the professionalizing of the role of all individuals providing financial services. It has all gotten too confusing for the average investor (and apparently for the befuddled regulators). We are amid an explosion of titles that suggests that all financial-service providers are well-trained and educated (and of similar expertise) to understand what they are recommending to investors. As recent history has sadly demonstrated, there are far too many con artists, fraudsters, scamsters and financial morons out there masquerading as know-it-alls.
Open a newspaper or magazine, plow through online research or listen to those touchy-feely TV commercials, and you are immediately bombarded with titles: stockbroker, registered representative, financial planner, investment adviser, account manager, financial representative, financial associate. Some of those titles are real, but others are fanciful. We don't need fanciful in this day and age. And we certainly need less confusion when trying to invest our savings or arrange for our old age.
We must implement a comprehensive system that certifies competency and ensures that consumers are not overwhelmed by professional designations. It is high time to separate mere teleservice operators from individuals qualified and certified to answer sophisticated financial questions and provide competent advice. While there may be a place for both rookie cold-callers and skilled financial planners on Wall Street, consumers must know which is which when dealing with brokerage firms, investment advisers, financial planners, banks and insurance companies.
The Financial Services Professional (FSP)
In furtherance of that approach, I urge the implementation of a uniform licensing model. For starters, most financial professionals should be required to pass an entry-level examination that tests for basic knowledge of the building-block financial products and the regulations governing their sale. You pass that test, and you are entitled to bill yourself as a Financial Services Professional (FSP).
Once you have that base title, the FSP has to earn the right to sell more sophisticated products, or offer more sophisticated services. Just as folks looking to hold themselves out as Certified Financial Planners (CFPs) must study, gain certification, and abide by professional rules, we should look to extend that form of certification. We should implement a system whereby the right to sell specific financial products requires the passing of product-specific examination with attendant continuing education obligations. If you haven't passed the test and don't maintain your continuing education credits, then you lose the right to use the titles and engage in the product solicitations.
Accordingly, we must create a rigid system by which FSPs disclose to the public their specific product/service qualifications-everyone uses the same title and only that title. You pass the options certification, perhaps you can note on your business card or during presentations that you are an FSP with the additional designation of an Options-FSP-but that's it. No options specialist or options investment counselor. One size fits all.
At present, hundreds of thousands of registered folks generally are registered with their firm, and that firm then submits the registration applications to a regulator. As such, you try to chase down a given FSP, and you get caught in a maze of where they may or may not be registered, and the confusion of what each organization may or may not disclose to you (and how you have to ask for that information).
The next step is to professionalize the career of FSPs, so that they are modeled after similar schemes for doctors, lawyers and CPAs. I am not suggesting that lawyers, doctors or accountants are more professional or better than folks on Wall Street-quite to the contrary, there are more than enough bad actors in all walks of life. Nonetheless, just as professionals should be afforded some respect for the significance of their qualifications, those professionals should also be expected to conduct themselves in a manner worthy of that respect.
The point here is to celebrate the death of the salesman-not to pillory the hundreds of thousands of hard working and honest men and women who are presently stockbrokers. My goal here is a simple one: To free those employees from the yoke of their employers, and to encourage them to pursue more professional goals than merely opening up new accounts or generating the largest number of commission dollars for the month. Those employment conditions denigrate the importance of FSPs and reduce them to little more than used care salesmen trying to push clunkers off the lot. The investing public needs more honesty than a fast-talking salesman, and those who labor at the many branch offices around our country aspire for more than that pejorative cartoon of a career. As such, yes, I hope that the job of stockbroker becomes an anachronism within a generation and is replaced by a more sophisticated, more fairly compensated professional.
Wall Street needs a rigorous, comprehensive continuing education system that updates FSPs on all product-related developments and material changes in regulations. As a lawyer, I am personally required to complete 24 hours of continuing education credits every two years. I pay that cost out of my own pocket and attend whatever seminars I choose. We should create a similar system for FSPs. For this CE program to work, we cannot impose time-wasting obligations on FSPs. If there are no substantive new developments in a specific area, say options, during the ensuing 24 months, then the obligation may be fulfilled by a course that reviews recent regulatory issues involving options and perhaps some guidance on developing trends in risk management. We don't want to turn this into a pure revenue-generating device for regulators or professional associations, and we don't want to make professionals feel as if they are merely going through the motions.
Reform the Registration System
As a lawyer, I sat for the bar in 1984 and have been admitted to the practice of law ever since. My license to practice law exists as long as I satisfy my continuing education requirements every two years (24 hours of courses) and have not engaged in any conduct that would disbar me. I don't lose my license if I quit law firm A and join law firm B, which is essentially what happens to most stockbrokers who find their registrations in limbo during periods of unemployment.
Stockbrokers are only deemed registered when they are employed by a member firm, and then have only 24 months to find subsequent employment or their registration expires. That system has given far too much leverage to the employer and has resulted in registered employees pushing unsuitable house product or the lesser-performing funds of a favored affiliate. The more onerous it is to leave a brokerage firm, the more pliable the stockbroker becomes to the demands of his or her employer-and those demands may well pressure the captive employee to do things that are wrong, if not illegal. Think of it this way: Imagine what would happen if you lost your driver's license every time you sold a car or returned a rental. As long as you pass the eye test for your renewal, your license is renewed-and I don't know of any driver's license with a mere two- year life. Am I comparing apples and oranges-yeah, you're right. But still, this issue is often at the root of much consumer fraud on Wall Street. It has to be changed.
Unified Disclosure Database
Similarly, the public should be entitled to easy access to a single unified database for all FSPs. Additionally, the information provided should not depend upon whether you contact one regulator or another. We need to create a centralized, public database that is easily accessible via the Internet and has a user-friendly interface backed up by a supportive customer service staff.
As a lawyer, I personally welcome uniformity among all professional databases, including those in my profession, in the medical profession and in the financial services community. What's good and fair for one should be the same for all. Further, whatever disclosure is mandated for those in these regulated professions should also be mandated for those who do the regulating-and I would also urge the inclusion of all elected officials at local, state and federal levels. What's good for the goose is good for the gander. Sunshine is good for all living things.
In keeping with my call for uniform disclosure, I urge the adoption of a single Fiduciary Standard for all FSPs. We must demand that FSPs work at their employer's company but always for their clients. We must also insist that FSPs are subject to a strict Fiduciary Standard that exalts the client's best interest above all else.
The current Suitability Standard that has held sway on Wall Street for generations must be abandoned. It's just not good enough-not anymore-for a financial professional to only have to find something that's suitable for his or her customer. No, the job- the profession-must demand more. It must demand that you find the very best that you can for your client, and that you never, ever consider how much goes into your own pocket when recommending investments.
As a wizened Wall Street veteran, I know that he who controls the drafting of the rules controls the regulation. A fiduciary standard for a CFP may be quite different from that of an investment adviser, and quite different again from that of a stockbroker. Worse, I am already seeing signs from brokerage industry interests and their cronies that the battle for defining the Fiduciary Standard may well be riddled with conflicts of interests and competitive concerns. We may get a Fiduciary Standard that is so watered down as to not be all that different from the current Suitability Standard now in effect at broker-dealers.
This is a fight worth waging. Today, your stockbroker is only required to recommend buys and sells that are suitable for you-not necessarily in your sole best interest. Other financial professionals are subject to the more stringent Fiduciary Standard-recommendations are made by folks acting in the role of your fiduciary, with an obligation to find the best bang for your buck and not something that pretty much fits the bill but puts more fee or commission dollars in their pockets.
The present compensation system on Wall Street is essentially one based upon the more I sell to you, the more I make. Look where that has dragged us.
As long as Wall Street is largely based upon transaction compensation; i.e., stockbrokers earn a commission for every buy-and-sell ticket, the conflict to churn accounts and to push pricey product will remain. Many brokers avoid the temptation and do right by their clients, but the overwhelming corruption of this compensation system is simply too much to be tolerated.
One alternative is to pay salaries to FSPs in lieu of commission-based compensation. Another option is to pay a percentage of the profits in an account or the increase in assets under management. Some of these alternatives are already the favored practice among some FSPs, but the commission system is stubbornly embedded in the broker-dealer community.
Regardless of the compensation structure, every daily confirmation, every monthly statement and every annual account statement should clearly set forth the full compensation earned by the firm and the servicing professional, and further set that data out as a percentage of the overall cost. Customers should be fully informed of the incentives that existed and that may have prompted the recommendation. Similarly, if a customer wishes to offer additional compensation to a financial service professional, such private arrangements should be permitted provided that they are filed with a regulator and approved.