We’ve all heard the term, “too big to fail.”
It’s been used in reference to banks, insurance companies, and other financial institutions that are (according to Wikipedia):
“so large and so interconnected that their failure would be disastrous to the economy, and they therefore must be supported by government when they face difficulty.”
Many people have debated the merits of this theory until they are blue in the face and there is still wide (and often vitriolic) disagreement.
Too Big to Change
However, I’m going to propose a different theory about many of these same institutions that I think most reasonable people can agree on: “too big to change”
I’ll define “too big to change” as the following:
“A company or industry that is so deeply entrenched in its way of doing business that it deludes itself into thinking* it has made positive changes when in fact it has done nothing whatsoever.”
*Or attempts to consciously misguide the public into thinking
This theory applies not just to companies that are large in stature, but any company in which a certain way of thinking permeates throughout the organization in such a way that it is nearly impossible to overcome.
Too big to change results when even honest and intelligent people “drink the corporate Kool-Aid” and fall in line in order to perpetuate the old guard’s sales and profits.
Too big to change almost perfectly describes the vast majority of the financial services industry today.
Lobbyists try to Convince us that Wall Street Has Changed for the Better
The idea of too big to change was inspired by a June 5, 2014 article by Ben Steverman of Bloomberg.com called Wall Street Fights for Our Right to Pay 5% Fund Fees.
In his article, Mr. Steverman basically sums up everything that is wrong with the world of financial advice and why Wall Street is fighting tooth and nail to prevent real change that benefits investors.
Here is a perfect example of what I mean:
When interviewed at a Securities Industry and Financial Markets Association (SIFMA) event earlier this year, Ken Bentsen Jr., CEO of SIFMA, was asked about the stark difference in experience an investor would have depending upon which type of “financial advisor” they worked with. [I put “financial advisor” in quotes because the term itself is meaningless. Anyone, regardless of experience, qualifications, or credentials can call themselves a financial advisor (or wealth manager, or financcial planner, or any other fancy sounding term)]
Specifically, by working with a brokerage firm, an investor would likely be sold a load mutual fund that carried with it an up-front commission of 5 percent. On a $100,000 investment, this would amount to $5,000 simply for buying the fund (with no requirement that the “advisor” provide any other guidance or planning).
On the other hand, an investor who was working with an independent, fee-only investment advisor or financial planner might pay a simple hourly or retainer fee and would likely be recommended a very inexpensive no-load index fund.
Per Steverman’s article, here was Bentsen’s response:
“the investor should get to choose the type of account they want to have.” Banning load fees, he said, means “you take away choice from investors.”
Why the Financial Services Industry is Too Big to Change
Since I can’t personally ask Bentsen to elaborate on his point, I’ll do my best to translate the argument he was trying to make (from the perspective of the SIFMA member firms he represents):
- “We know that the average investor is unfamiliar with the differences between a commission and a fee, or terms like load or no-load.”
- “We also know that 5% commissions are very profitable for us and our advisors.”
- “If we were required to put the client’s interests first, it’s highly unlikely we could continue selling the high-margin products we do today (particularly in light of things like index funds and term life insurance). Thus, we think it’s best to keep things as they are now.”
- “By framing our argument based on consumer choice, we can deflect blame and accuse anyone who tries to change the industry of reducing the options available to investors.”
Will Bentsen or any of his member firms ever come out any say the above? Of course not.
However, the reality is pretty simple. The hand that feeds a large percentage of financial services companies, particularly those that interact with individual investors, depends on the following:
- Commissions on the sale of mutual funds, insurance, and annuities
- Proprietary products and investment vehicles
- An investment public that assumes they are receiving advice, when in fact they are simply buying products from sales people
Unfortunately, this mentality is in stark contrast to what investors need and should be demanding.
Instead of working with a professional who both puts their interests first and is educated and credentialed, most Americans who have a relationship with a “financial advisor” are not receiving advice at all. They are buying products from someone who earns a commission only upon a completed sale.
This is essentially the same relationship one would have when buying a car from an auto dealership. And no consumer who is being honest with themselves has an expectation of receiving unbiased advice from a car salesperson.
Incentives are Powerful Things
All of the above to say that incentives are powerful things. While it isn’t always money that drives people, in this case it absolutely comes down to money.
I think Upton Sinclair said it best:
Logic, evidence, and doing the right thing are often not enough to overcome the wall of big money.
Instead, when profits have been made a certain way for a very long time, a company (or industry) is unlikely to change on its own. It takes big, forward thinking to seize the day and that is indeed a rarity in history.
Just think about these companies and industries that didn’t adapt (or waited too long):
- Montgomery Ward
- Toys “R” Us
I hope that the product pushing, commissioned sales firms experience a similar fate. However, in the meantime, they are going to continue to extract as much in commissions, sales charges, and wrap fees they possibly can while, unleashing their high margin products on the unknowing public.
I applaud Mr. Steverman for writing a great article highlighting this issue and I hope that investors pay attention.
Ultimately, the quickest route to change will take place when investors let their wallets do the talking.
When they stop opening them up to pay broker commissions and fees, the industry will have no choice but to change.
What You Can do About it
As an investor, you can protect yourselves by taking a few key steps:
- Demand that your financial advisor state in writing that they act as a fiduciary 100% of the time in working with you
- Ask for a detailed accounting of the exact fees and commissions your advisor has charged you since the inception of your relationship
- Seek a second opinion on your investment portfolio from a fee-only Registered Investment Advisor (RIA)
Although the above won’t solve every problem you may face, it is a strong step in the right direction to ensure you aren’t falling victim to the unnecessary commissions and fees charged by Wall Street brokerages, banks, and insurance companies.