Will Financial Professionals Ever Put Clients Interests First?

I have always admired Bob Veres for his good intentions and what he has tried to do consistent with core beliefs that are laudable. However, his recent article entitled: “How to Psychologically Prepare Clients for Bear Markets” stopped me in my tracks as it germinated a small epiphany.

Veres has dropped back fifteen and punted to the old (true but old) reptilian brain argument and investor irrational behavior, and how to communicate with that ole reptile. I totally disagree with his premise and argument. Instead, I would offer that it is the investment sales and advisory establishment that need to be prepared to change its ways once and for all. The industry is built, IMHO, more on self-interest than for client success. This occurs, from my observations, when conventional wisdom continues to ride good but impaired horses like “MPT” (Modern Portfolio Theory), “MVO” (Mean Variance Optimization) and “diversification” off the cliff of reality.

The reality is imposed by the fascist behaviors of governments with their arbitrary, self-serving, and failed ZIRP and NIRP policies. All these policies have done is infuse more chaos and unpredictability into an already chaotic universe – stocks and bonds. Macro models have failed. Micro models have failed. How can big gobs of money act rationally when no one knows when a government will reverse its ZIRP or NIRP policy? Instead of getting clients ready to experience a 30% or 40% drop in the value of their mutual fund and ETF driven portfolios wouldn’t it make more sense to understand the value of quality financial analysis of individual companies and their stocks with a view to a more rational placement of investment capital, not necessarily for the long term but based upon a rational tactical basis?

We have all heard the Don Connolly explanation of why, when mutual fund shares value go down the share prices go down allowing one to accumulate more shares for the same amount of regular investment. I would submit that under the circumstances that have evolved since 2007 this way of thinking is antediluvian, somewhere pre-Jurassic in its relevance today. You see, brokerages and advisors cannot be everywhere at the same time. They can’t be trying to drive new money into their accounts (marketing), and individualize investment approaches for clients simultaneously and still make any money. What’s worse, in the big firms, it is the firm that selects the financial products that will be permissible for use, and it is the firm’s private behind the black curtain brain trust that attempts, frankly with very little sporadic success, to predict interest rates, calculate equity risk premium spreads, quantify the presence or absence of high correlation among and between “asset classes”, and select or tweak the Mean Variance Optimization models and assumptions that drive a handful of  investment portfolios, whether six or fifteen, into one of which every investor must fall based upon a defensive belief in the suitability of the entire effort for a particular investor and for all of them. I would quote from a recent GMO article: “The upshot is that whatever traditional investment strategy you believe in will probably stop working soon. If GMO is right – and they usually are – and you’re a devotee of any kind of passive or semi-passive asset allocation strategy, you can expect somewhere around 0% returns over the next seven years – if you’re lucky.”

Only the exceptionally wealthy, not even the affluent, can be handled in a truly individual way. The rest of the proletariat have to settle what these systemic marketers convince them is in their best interest. Most of the independent advisors I have ever encountered, and these literally numbered in the thousands, were not brain surgeons or rocket scientists. They were hard working, well-meaning individuals trying to make a living helping others in a way they enjoyed. Unfortunately, the system has geared them to be self-interested to the detriment of their clients. That is why, IMHO, unless a broker/advisor/counselor is ONLY acting in the scope of offering a security for sale, or soliciting an offer to buy a security for a commission (classic broker) everyone else with their deck of portfolios, herd of favored mutual funds, and “low cost” ETF portfolios must be deemed a FIDUCIARY and must be held to a standard of always putting the client’s interest first. This is especially true IMHO where the new “robo-advisor” turkeys are concerned. That is the only way to clean up the system and really get alleged financial professionals thinking about how to best meet client needs, goals, and objectives. In my experience, needs, goals and objectives are rarely obtained by the use of pre-packaged portfolios of any kind selected on the basis of responses to a “suitability” questionnaire. Even if the questionnaire has a semblance of validity – which is rare – the alleged solution into which client funds are placed is unlikely to accomplish the desired goal.

One size will never fit all.

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