Financial Services Should Take a Page From the Physician's Code of Conduct: First Do No Harm

One of the early principles taught in medical school is "first do no harm." Sadly, this core value is currently a topic of raging debate at the SEC (Securities and Exchange Commission) as the Securities Industry and Financial Markets Association (SIFMA) continue to argue for suitability standards that are different from the fiduciary requirements that Registered Investment Advisers (RIAs) are held to.

The question of a corollary standard to "first do no harm" has yet to be efficiently and uniformly applied to the financial services industry despite the long and detailed list of regulations and guidelines under which advisors work. This includes rules applied by the SEC, FINRA and many other agencies. Simply put, there is significant language around disclosure and the inability to guarantee returns but none that accurately and acutely state, in plain language, that the interests of the consumer comes first in wealth management.

As an industry, financial services professionals are generally divided into two types of compensation models -- product sales and advice. The challenge today for the consumer is differentiating between the two, especially when many brokers' and advisors' claims sound similar. This added layer of complexity requires consumers to become educated so as to understand the variety of offerings between firms. Sound confusing? It is, even for sophisticated investors. But, today, that's exactly the state of affairs.

Choosing Your Investment Advisor the Way You Choose Your Doctor

Most consumers pick their investment advisor the same way they choose a primary care physician or dentist -- by asking their friends whom they like. Without an efficient, effective and objective way of assessing wealth management firms, consumers of all income levels and wealth are left to gravitate towards those companies who build brand and whose clients will advocate for them. In the contest of brand building, the companies who maximize profits over principles will reign.

Recently, however, two financial services titans have joined together along with dozens -- and soon to be hundreds -- of independent advisors to create a brand that symbolizes and embodies the fiduciary standard that they are committed to uphold. Using modern day social marketing, the vetted wealth management firms are rapidly gathering together to "crowd source" their influence of total dollars in assets under their advisement. According to Steve Lockshin, one of the co-founders of Advizent, the consortium "...will build a brand that consumers can rely on as an un-conflicted resource when searching for top advisers throughout the United States. Post-Madoff, the housing crisis, bank failures and the constant force feeding of product to consumers; consumers don't know who to trust." His partner, Charles Goldman, former head of both Schwab's and Fidelity's Institutional units, says that he will feel successful when, "...our mark will be well known by consumers in identifying companies that they can trust. Via an Independent Standards Board and annual audits to those standards, Advizent will cut through the marketing malarkey and serve the consumer first and foremost."

Will Advizent Work And What Is New And Different?

While this consortium idea isn't new to the industry, what is new is the influence that Steve and Charles have as a result of their individual success, wide range of industry contacts and knowledge of trends and market opportunities. Charles is the only person to have held the senior positions at the two largest industry custodians and Steve is currently the #1 ranked Independent Advisor in the nation, as rated by Barron's magazine. After only ten days, and an unplanned launch when the media surfaced Advizent, the company has attracted over $80B in assets from firms who have logged into their site and registered as members. Their goal is one trillion dollars (that's $1,000,000,000,000) within a few years.

Advizent's model includes a mandatory physical audit of member firms. This entails that these companies must meet the criteria established by consumers for consumers via their Independent Board. While they have yet to disclose the requirements, Advizent gave simple examples including a firm's requirement to separate custody from discretion and audit (i.e., unlike Madoff), retain sufficient Errors & Omissions insurance, meet the key fiduciary standards, and other operational structures. Other qualifications listed on the Advizent website, which is currently targeted only to member firms, include: $250 million in assets under management, a compensation model which eliminates conflicts and other processes designed to assist consumers when choosing advisors. Advizent plans to launch the consumer website near the year-end.

I first became interested in this story after reading Brooke Southall's article in As a wealth marketing strategist, I was impressed to see a commitment to leverage a large amount of dollars towards marketing and education. Financial service firms have been particularly reluctant to allot funds to marketing as the return on investment is not well understood and, quite frankly, the required budget to compete with the Wall Street budgets is simply not available to any individual RIA. I see an opportunity for firms to educate consumers and also provide a central brand to aggregate and engage a community of RIA's.

Another reason to pay attention to this business story is to learn from the personal successes of Steve and Charles. Although they have attained success in their business lives, they are committed to tackling a giant project and doing well by doing good -- running Advizent as a consumer oriented business and not an association. As an ego-centric industry, most RIAs are inflexible to serving their clients in any way other than their way. The Advizent model gives them a voice while allowing them to run their practice unfettered.

For the consumer, Advizent promises a brand he/she can trust, transparency, and standards that matter to consumers. For member firms, the Advizent model expects to utilize its community influence by securing things like Errors & Omissions insurance greater than any firm could secure themselves at the same or lower rate, a dedicated research team to understand what advisers need from asset managers and vendors and acting as a bridge to those companies. All of the services help the RIA to benefit the consumer.

While they are off to a near viral start, Advizent has a lot to deliver in order to succeed. They are trying to crack an established model that has a lot of brokers, asset managers, shareholders and the like in its corner. I, for one, am anxious to see the consumer benefit and support any model that effectively accomplishes this task. As Lockshin quietly told me, "...some folks won't play ball at first because they have too much invested in the current model. This is going to be come along or get dragged along. It may take time, but the power needs to shift to the consumer."

Financial services needs to fix itself and repair its relationship with consumers who have developed mistrust of an industry who has harmed them. I look forward to watching Advizent and others disrupt the current Wall Street revenue and business models, thereby, forcing a paradigm shift to benefit consumers.