It would be easy for financial advisors to provide full transparency by disclosing their credentials, ethics, and business practices. At the first meeting with the investor, an advisor would be required to provide a one-page summary document outlining competence, trustworthiness, compensation, and other pertinent data.
This simple, straightforward approach would give investors the information they need to select the best qualified advisors. However, a lot of powerful interests have worked hard in opposition to such plans. Wall Street firms pay millions of dollars a year to lobbyists who make sure there are no regulations that mandate full disclosure.
What are they hiding? Major firms spend huge sums of money building massive distribution systems that sell their investment and insurance products. In virtually all cases, they put quantity of advisors ahead of quality. Consequently, full disclosure would expose a dark business practice that benefits firms and damages investors. You can see why Wall Street insiders want to keep their business practices hidden.
Instead of practicing full transparency, lower-quality advisors simply omit information that would hurt their sales success. They also misrepresent other information so they sound like investment experts. Investors have no defense against these sales tactics unless they know which questions to ask, know how to differentiate good answers from bad ones, and require documented responses from advisors.
Regulatory agencies like the Financial Industry Regulatory Authority (FINRA) and the SEC have not mandated full disclosure for advisors. Instead, they maintain databases that provide partial information about advisor qualifications. Although FINRA has taken steps to make its data more investor-friendly, the databases remain generally tough to access and even more difficult to understand.
Fortunately, private companies are increasing advisor transparency with free tools, services, and information to help investors select new advisors and monitor current ones. For example, last year Brightscope launched BrightScope Advisor Pages, which is intended to help consumers discover information and conduct due diligence on their financial advisors.
My own site, InvestorWatchdog.com, is launching free services later this month that investors can use to obtain information on advisors, compare multiple advisor responses, and monitor changes that affect their current advisors.
Will we ever see mandatory disclosure requirements for advisors that provide investors with the information they need to select professionals with the best qualifications? Not likely. History says major firms will fight to protect their revenues and profits, even if it damages their clients. Remember the tobacco industry?
—Jack Waymire spent 28 years in the financial services industry, and for 21 of those years, he was the president of a registered investment advisory firm. He left the industry in 2004 for a career as an author and blogger. You can reach him at Jack@InvestorWatchdog.com.