REGULATORY CHANGES MUST BE MADE TO ENSURE THAT ADVISORS ARE ACTING IN THE BEST INTEREST OF THEIR CLIENTS: FELL

UNETHICAL PRACTICES EXPOSED BY THE FINANCIAL CRISIS - OBSERVATIONS FROM ONE OF OUR BEST AND OUR BRIGHTEST - ANTHONY FELL

The financial services industry has suffered from a steady decline of ethical standards in recent years, including misguided incentives for financial advisors, which has eroded public confidence in the industry, according to Anthony Fell, corporate director and former chairman and CEO of RBC Capital Markets.


Speaking at the Investment Industry Association of Canada conference in Toronto on Thursday, Fell said the financial crisis exposed a slew of unethical practices that the financial sector adopted during the bull market of the previous years.


“In the euphoria of the boom, the industry forgot that there are many practices in the financial business which are legal, but which are also totally and completely unethical,” he said. “Wall Street lost its moral compass.”


For example, Fell pointed to such practices as hidden fees and commissions in financial products, the marketing of highly complex financial products, inadequate disclosure and “conflicted and incompetent” rating agencies.


Unethical practices are also evident in the financial advisory business, he said. For example, he noted that many investment firms offer incentives and rewards to financial advisors who generate the highest volume of sales activity. This encourages advisors to engage in frequent trading in their client accounts, which is not necessarily an indication of high quality financial advice, Fell said.


“In my experience, some of the very best and most professional investment advisors trade in their accounts very little, and therefore do not qualify for reward trips,” he said.


He suggested that advisors should be rewarded for such achievements as high levels of assets under advisement, positive client satisfaction survey results, or recommendations from branch managers.


Regulatory changes must be made to ensure that advisors are acting in the best interest of their clients, and are not influenced by any other incentives, according to Fell. He said it’s not enough to strengthen the Client Relationship Model and impose new disclosure and Know Your Client rules. Rather, all financial advisors should be subject to fiduciary duty under the law, he said.


“My advice to regulators is to become more aggressive and get on it with implementing new regulations to drive the financial industry to place the interests of clients first,” he said.


Fell added that it’s encouraging that the financial crisis has prompted regulators around the world to pursue regulatory reform. But he expressed concerns that the new regulations will be too weak.


“In effect, the new regulations have been reduced to the lowest common denominator to accommodate the weakest banks,” Fell said. “As soon as the new regulations are finalized, the best investment banking, accounting and legal brains on Wall Street will be dedicated 24/7 to getting around them.”


Effective regulations must bring discipline back into the market, and ensure that industry players take responsibility for their own actions, Fell said. He noted that the bailouts of financial institutions that occurred during the crisis in the U.S. have contributed to an erosion of discipline, providing firms with the comfort that they have a backstop regardless of the reckless risks they take.


“Going forward, it’s time to draw the line,” he said. “Let’s get risk and discipline back into the market, stop bailing out governments, banks and others, and make lenders and borrowers responsible for their own decisions.”


Overall, Fell said the consequences of the financial crisis will be felt for five to 10 years to come, as regulatory reforms are implemented and as governments and consumers learn to spend less and save more. He expects that in the next few years, growth in the economy and the stock market will both be sub-par.


IE Staff
Investment Executive
September 23, 2010




































By IE Staff











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