Back in 2013, I called out the financial services industry for being less transparent than the tobacco industry based on a report about the conflicts of interest inherent in some firms' business models.
Conversations about conflicts of interest in this business are nothing new, especially since the financial crisis. Most recently, the topic has come up in the context of the DOL's new fiduciary rule, which requires advisors to act in their clients' best interests when it comes to retirement accounts--and to disclose potential conflicts related to collecting commissions and recommending proprietary products. Score one for transparency, right?
Transparency is not enough.
Demands for "transparency" imply that access to the details, or "visibility," is all the public needs to make good judgments. The flaw in that logic is that visibility does not necessarily carry with it understanding, or the ability to comprehend and appreciate risk.
If a pharmaceutical company handed you a list of chemical formulas for all of the drugs it produced, it could say it was totally transparent about its products. But would you know just by looking at those chemical formulas how they might affect your body? Most of us need the input of an expert--a chemist, or a medical professional--to help us understand whether these substances are truly safe for us.
Consider that NaCl is table salt; NaCN is sodium cyanide. If someone put two shakers in front of you, labeled only with these chemical formulas that are one letter apart, would you know which one is safe to sprinkle on your food?
Transparency does not equal safety, or in the case of financial services, eliminate conflict--and is not a cure-all for what ails us.
What we need is accountability--in the form of a true fiduciary standard.
Our society places a burden of duty on certain professionals (doctors, lawyers) who are "learned intermediaries" to study, take qualifying examinations, and uphold a duty to put their client's best interests first--not because of some high-minded ethic, but because they have the advantage and responsibility of understanding the consequences and the risks at hand.
Shifting that duty from the expert to the client puts the client in a terrible position--how are they supposed to make good judgments without the knowledge and experience of a professional?
As consumers, we are absolutely accountable for our own health: what we put into our bodies and our minds. Financial wellness is a component of overall wellness. But just as we turn to a highly educated and trained professional to prescribe medicines whose chemical properties and potential risks exceed our understanding, so too should we rely on experts to help navigate the complex, critical tasks of long-term financial planning and investing.
As a society, we hold doctors accountable for keeping us healthy--when will we hold financial advisors to a similar standard?