Not All Advisors Are the Same – How Can You Tell the Difference?
By Maria Elena Lagomasino, Chief Executive Officer, GenSpring Family Offices

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Over the last dozen years in wealth management I have seen much change in the industry, (some of it good and some not). In particular, I have seen a blurring of the lines that once existed between firms selling investment products and those advising on their merits. Regrettably, our regulatory agencies have failed to stay abreast of this change by not requiring banks and broker-dealers to adhere to the same fiduciary standard which has always applied to investment advisors.

The frog story

The changes in the industry were subtle, much like the frog story: A frog was placed into a container of cool water. The cool water was in a pot on a stove. Unfortunately for the frog, the water didn’t stay cool for long. “Why didn’t the frog jump out?” you might ask. Because, the water heated up little by little to a boiling point. By the time the frog realized his predicament, it was too late.

How did the wealth management industry change so dramatically?

Starting back in the Great Depression, laws separated banks and brokers. Three separate regulatory schemes existed to govern three separate wealth management functions— (i) banks taking deposits and making loans; (ii) brokers creating and selling securities; and (iii) investment advisors managing clients’ money and advising clients.

When the law separating banks and brokers was repealed in 1999, banks and brokers were allowed to merge—and they did. Brokerage rules and a brokerage mindset—otherwise known as a “sales culture”—swept through the banks, eventually overtaking the fiduciary culture which had prevailed in the banks’ private banking groups.

In effect, what had been separate activities—advising families from the families’ perspective (the fiduciary culture) versus selling investment products (the sales culture)—became one. Many wealth management institutions blurred the distinction by utilizing the term “advisor” for individuals who were actually engaged in the activity of selling investment products. As a result, advocacy and fiduciary obligations to clients were trumped by the push to sell more products to clients and as a result make more money from clients.

Though many private bankers sincerely intend to put clients’ interests first, it has been my personal experience that the new sales oriented business model trumps words and good intentions.

The muddy middle

The real issue is that advice that is in a client’s best interest and sales of products to customers are not the same and are in many respects incompatible—it’s like comparing apples and oranges. It’s okay to advise and not sell products; it’s okay to sell products (as long as it is clear that it’s a sales relationship) if you are not also advising on them. But it’s not okay to wrap sales of products in a veil of “advice” that is not in the client’s best interest.

Families that started working decades, or even generations ago, with private banking groups which acted in their clients’ best interest—as fiduciaries—now find that their relationship with their wealth manager has changed. These relationships have evolved to be one between a customer and salesperson rather than a fiduciary relationship of trust and loyalty to the client. Many clients are unaware of this change—and it costs them dearly.