Financial advisors today find themselves in a major ethical dilemma: Should they represent their own monetary interests before those of less-sophisticated clients?
Or, should they mention, as history has repeatedly shown, that the larger financial system contains more built-in major risks that cannot be hedged and can destroy years of accumulated wealth in a single major economic event?
Whatever their names–financial advisors, RIAs’, financial planners–these professionals are licensed, supervised and often very immersed in the financial industry, product capabilities and market history.
As a result, they know the history and inevitability of recessions, the personal financial benefits that accrue to the selective presentation of material facts in sales presentations, and that there are major structural flaws in the global economic system which can totally derail the best financial plan for individual investors.
Listen to what the Mark Carney, Governor of the Bank of England, said at a conference on inclusive capitalism on May 27, 2014:
–“Inclusive capitalism is fundamentally about delivering a basic social contract comprised of relative equality of outcomes.”
–“Capitalism loses its sense of moderation when the belief in the power of the market enters the realm of faith.”
— “Market fundamentalism…contributed directly to the financial crisis and the associated erosion of social capital.”
–Major global banks operate “in a privileged heads-I-win-tails-you-lose bubble” and observed that “there was widespread rigging of benchmarks for personal gain.”
Nor do you have to go to the other side of the Atlantic to hear criticisms of the current economic system and the too-big-to-fail flaw that has made large banks larger, more profitable and more risky than even before the 2008 recession.
— The largest U.S. banks are “practitioners of crony capitalism,” need to be broken up to ensure they are no longer considered too big to fail, and continue to threaten financial stability, according to Richard Fisher, president of the Dallas Fed. “These institutions operate under a privileged status that exacts an unfair tax upon the American people,” he said on the last day of the annual Conservative Political Action Conference.
“They represent not only a threat to financial stability but to fair and open competition … (and) are the practitioners of crony capitalism and not the agents of democratic capitalism that makes our country great,” said Fisher.
–“To put it badly, there are two ways to become wealthy: to create wealth or to take it away from others. The former adds to society. The latter typically subtracts from it, for in the process of taking it away, wealth gets destroyed,” according to Joseph Stiglitz, Nobel Prize Winner in Economics, 2001.
Sitting Idle As Financial Problems Affect Millions
While these are serious criticisms of specific problems from important economic officials, there are even greater problems facing millions of individual investors that surface on a weekly basis in the form of new studies and surveys.
Take this example from the U.S. Senate study, hardly a champion of individual investor rights, which found that “women over the age of 65 are twice as likely as men to live in poverty in retirement because of lower wages, more time spent out of the workforce and lack of access to retirement savings plans.”
Specifically, the study said 12% of all women over the age of 65 live in poverty, compared to 7% for men. For women living alone, the poverty rate is 19% compared to 11% for men. The poverty rate among African American and Latino older women is even higher with 20% of African American women and 23% of Latino women 65 and older living in poverty.
Financial advisors also can see the damage caused by the wealth destruction caused by the 2008 recessions which decimated home equity, one of the largest sources of retirement wealth, if they take the trouble to ask.
So the question arises: Can advisors do an adequate job of advising clients to prepare for their financial futures if they neglect to mention the unhedgeable financial risks waiting to emerge in the current financial system?
Or, as the upcoming president election approaches and some Republican candidates propose decimating Social Security, Medicare and Medicaid, should advisors just keep to the straight-and-narrow practice of suggesting products and strategies, without ever mentioning the structural financial problems that will derail any clients’ long-term financial plan?
Or should advisors also sit idle as the largest firms in the financial advice business (Principal, Merrill, Morgan Stanley, CitiGroup, LPL and others) take the revenues generated from client money, and then send it to lobbyists who actively work to enact policies and regulations that directly work against unsuspecting customers? (For more on this basic industry conflict of interest, see the article here on this site, “Is Your Financial Advisor Working Against You?” )
If advisors chose to make a real difference in their clients’ lives, they have the duty to think big and use their financial knowledge and experience to explain economic history. Then, they must encourage clients that the current financial system is not working in their best long-term interests. This is the essence of ethical financial planning.
When advisors choose not to share this valuable knowledge in financial planning scenarios, they are perpetuating the inequities and allowing the unhedgeable risks to build.