With films like “The Big Short,” “Boiler Room” and “Wall Street” permeating the pop culture consciousness for several decades, it’s no surprise there’s an underlying distrust of those who manage wealth for a living.
In these films, wealth managers and stockbrokers are depicted as taking advantage of a market ripe for manipulation and, in turn, the general public. It’s a recurring depiction that has tarnished the reputation of the industry — but, unfortunately, those depictions sometimes are rooted in fact.
One of the most familiar issues plaguing the industry, said Kroon & Mitchell senior portfolio manager Phillip Mitchell, is the temptation to take advantage of the gap in knowledge between themselves and the general public.
“In a world where if you just know 5 percent more than the person across from you but can exploit it 100 percent — that’s the issue,” Mitchell said. “You’re in a unique position of trust, and it does get exploited. The tough part is, you can’t say it’s only these guys doing it. … I think it’s just the knowledge gap that’s huge.”
In fact, there’s a second knowledge gap that can cause some problems, as well. The wide range of certifications financial advisors can attain results in a knowledge gap within the industry, as well. Whereas all doctors go to medical school, not all financial advisors have obtained the same certifications, and the differences are stark.
Mitchell, who is a CFA — chartered financial analyst, a CPA — certified public accountant, and a CTP — certified treasury professional, said there has been a push to regulate the field more strictly.
The CFA Institute’s code of ethics calls for charter holders to place the integrity of the investment profession and the interests of clients above their own personal interests. But while the institute tracks its charter holders and has the ability to review and reprimand for unethical behavior, not every financial advisor is credentialed with a CFA — and therefore, isn’t subject to the policing of the CFA Institute.
“The tough part, in general, is that in a topic like ethics, very little is quantifiable,” Mitchell said. “It’s a complex field. The problem is, people don’t have enough information to know if the advice they’re giving and receiving is of the highest ethical standard.”
One way wealth managers can exploit consumers is simply by not being forthcoming about the fees associated with hiring an advisor. Mitchell said it’s not uncommon for someone to hire a financial advisor without knowing exactly how much they’re paying — due to commissions being deducted automatically from mutual funds, or misjudgment of how those commissions are calculated.
And Mitchell’s concern isn’t rooted only in the short term. He also worries about what will happen to society when, 20 or 30 years down the road, people start to realize the money they’ve been setting aside for retirement simply isn’t enough.
“The fact is that people don’t know that,” Mitchell said. “You’re consuming something and don’t know what the cost is.”
There’s no easy fix to close the information gap, but the first steps are increasing efforts to educate the public. Mitchell said, historically, the investment field has not done much in the way of outreach with the public, but several organizations are looking to change that.
Raising the base knowledge of the general public is one way to mitigate the amount of exploitation occurring in the investment world. Mitchell also said the proposed update to fiduciary regulations that would require fee and cost explanations and create a more uniform standard for the financial industry is a huge step in the right direction.
“That could drastically change the field for the better,” Mitchell said.