Regulation Feels Good, ButDon Shaughnessy
The need for regulation of financial advisors arises from an abdication of responsibility by the people who may suffer the greatest cost. That cannot end well.
There are two thoughts that matter.
- The client is the sole planner, everyone else is a helper. If the client cannot prepare their own plans, at least in general, they have a duty to learn enough about it to at least make reasonable decisions. If they do not accept their role, then someone else will “plan them.” The someone else will not know enough to do a great job of it, and the client who does not understand will fail to follow through. No one trusts what they do not understand.
- The client is the regulator. There is an old thought in law, “Caveat Emptor” – Let the buyer beware. In most jurisdictions it has been replaced with consumer protection legislation. Which provides better results? A statute that may not apply because the vendor has found a loophole, or an informed buyer who understands their purchase? I am going with informed buyer.
If we rely on an advisor to be the planner and rely on politicians to protect us from each other, then we are doomed. Each of us has a positive responsibility to learn enough to function in somewhat complicated environments. We cannot safely avoid that responsibility.
In respect to financial planning services, who stands to lose? It is a two person game and the advisor cannot lose. Maybe win or breakeven but not lose. The client could win, breakeven, or lose. The one who stands to lose should reduce that risk by investing in knowledge, even wisdom.
A large share of the people hold insufficient knowledge or wisdom to meet their obligations. What to do?
There is a four step program. Eight steps shorter than AA and notice that doing nothing is as addictive as alcohol.
- Learn about what people are trying to accomplish when they do a financial plan.
- Learn about how debt and investments work
- Learn to understand risk and its effects on decision making.
- Learn that doing nothing is a choice and has a cost
The advisor has a positive duty to help the client meet these requirements. Some see it as a burden, but the highly successful ones do it instinctively. John Page had many, as in way more than many, binders that outlined his unique financial planning process. When a client remarked, “I’ll bet you guard those closely.” John started piling them on the desk with the admonition, “No, take them all; educated clients are the best clients.” An advisor can learn to do this as part of the service, and be rewarded by loyalty and a growing asset base.
You can get a little idea of what a comprehensive planning process can be here.
Clients should expect this level of service. They cannot be confident of success unless they can both understand and measure their achievement against well understood and reasonable targets.
Their is a further risk in consumer protection legislation, called, in economic theory, “Moral Hazard.”
“Moral hazard arises because an individual or institution does not take the full consequences and responsibilities of its actions, and therefore has a tendency to act less carefully than it otherwise would.” -Wikipedia
If clients knew their obligations and worked at getting better, there would be little need for regulation. Until that day, smart advisors will push their clients onto the path of being active participants in each financial decision.
For an advisor, nothing is riskier than dealing with a clueless client.
Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.