The SEC recently
Each person's worldview is a bubble shaped by experiences and relationships. When an organization tries to enlighten others, success depends heavily on whether they can pop their own bubble to better understand the worldview of the audience they are trying to help.
After watching these videos, I can sadly report that the SEC did not get out of their bubble.
The SEC recently finalized
But getting back to the videos — Jay Clayton, chairman of the SEC, narrates the five installments, each lasting two to four minutes, in a soothing voice.
The introductory video sets the tone. He reviews two questions investors should ask: Is their financial professional registered with the SEC or the state and are they a broker or an investment advisor?
It is here we first glimpse Clayton’s bubble mindset. His favorite question to ask an advisor? “How much of my money is going to fees and costs and how much is going to work for me? — implying he thinks the only service advisors provide is investment management. Doesn’t he know the good advisors provide financial planning, too?
The second video deals with the difference between brokers and investment advisors. Both can give advice on securities and create investment strategies, Clayton explains. A broker can complete the transaction, but the investor is responsible for making decisions about investments. The investment advisor can do all this — plus they can make the decisions about investments for the investor.
Clayton states a financial professional can be both a broker and advisor or a combination of the two. I wish he would do another video clarifying when that combination would be appropriate. My bet: he couldn’t provide a good answer.
The third video highlights the differences in how brokers and investment advisors are paid — commissions or asset management fees. This highlights another aspect of Clayton’s residence in the bubble: Does he not understand that many advisors these days charge hourly or flat fees?
And then he makes a big bubble statement — “The advisor, by charging an ongoing investment advisory fee, gets paid more only if your account grows, so in that key way (emphasis mine), your financial interests are aligned with your advisor.”
To me, this poses a significant suitability issue. Does Clayton mean to imply it’s OK for the advisor to take more risk to grow the portfolio so both the advisor and investor can make more money?
After stating that the SEC sets rules requiring that financial professionals manage conflicts, and that the SEC prohibits financial professionals from putting their interests ahead of the investors, Clayton concludes the video by — wait for it — telling investors to make sure to ask about conflicts.
Insert eye roll and deep sigh here. Why is this the investor’s responsibility?
The fourth video in the series addresses which financial professional is right for the investor: a broker, a discount broker or an investment advisor. Clayton says that if investors want ongoing advice and monitoring based on their broad financial goals and market movements, they should use an investment advisor.
Whoa! Should anyone really change their investments based on market movements? It sounds like Clayton, himself, is in need of a real financial planner to help him create a goals-based investment policy to get the right asset allocation so as not to make the common DIY mistake of market timing.
In the final video , Clayton stresses that investors need to make sure their financial professional is registered and directs them to the
He ends with another version of his favorite question: “If I work with you, how much of my money will go to work for me?”
It’s a question that makes me queasy. Here is my answer: If all investment management fees are low and the portfolio is tax efficient, the appropriate amount of investment money is “going to work” for the client. (As an aside, he didn’t recommend asking a prospective advisor about tax efficiency in portfolios, which often eats up more money than fees.) And is he counting real financial planning as part of his “money working?” He should.
This gets me to the final bubble to pop. While I’m sure Clayton means well, I come away from these videos with the impression that his working with Wall Street hasn’t exposed him to the real work of many advisors on Main Street. Many advisors provide financial planning under an asset fee structure. Most investors are seeking to build a secure financial future. Here’s the real question Clayton should have investors ask: “Is comprehensive financial planning included in your asset management fee?”
Advisors are part of the problem. By providing financial planning under an investment management fee, the value of financial planning is devalued. Charging AUM only puts undue focus on the idea that investment management is the only important part of the engagement. Charging flat or hourly fees for all financial planning services — including asset management —mitigates the misguided message that investing is the Holy Grail.
If the SEC really wants to protect investors, it needs to recognize that the public needs and wants advisors who provide financial planning and who act as true fiduciaries.
Until that day comes, these videos and other education efforts will just be empty words — ones the public ignores because the rules are too confusing and only add to their distrust of the financial services industry.
