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Lockshin: All advisors must deal with the threat of low industry standards -- before investors do it for them

The gains of the last 20 years could be scuttled if advisors don't band together to raise the standards of training and education

Friday, August 17, 2012 – 4:27 AM by Guest Columnist Steve Lockshin
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Steve Lockshin: We cannot be left to regulate ourselves.

Brooke’s Note: There are few people who have the standing in this RIA business to come on strong about standards. But Steve Lockshin comes at things from pretty darn unique perspective. He has been Barron’s No. 1 advisor for a long time but he’s also shifting gears to put his money, mouth, time and reputation on the line to create an organization in Advizent where advisors pay big money to have their feet held to the fire of no-joke standards. See: Steve Lockshin and Charles Goldman begin to unveil Advizent, a venture that could put thousands of RIAs under a single cooperative. Steve imagines that this article may trigger some defensiveness from advisors who read it. But, as a pilot, he is also exposed to exacting standards from another quarter — the Federal Aviation Administration. Each year he is required to spend three to five days in training to stay licensed. Why, he wonders, does his very serious profession have no equivalent oversight?

Most days I wake up scared. I wake up afraid that someone — a competitor — will be able to offer a client better service, better advice, or some solution that I or my firm should have suggested and didn’t. It is this fear that drives me to seek out the knowledge that I believe is required to be a successful provider of financial or wealth services.

The key to being a great financial advisor, in my opinion, is a healthy balance of breadth and depth of skills, tempered by an appropriate amount of thirst for knowledge — and a healthy dose of paranoia.

But all all of these ingredients are worthless without the moral and ethical grounding required to provide the client with the best possible advice — even when it means acknowledging that you may not know the answer. Granted, there are many practitioners who may possess more knowledge than their competitor in any given discipline; but all must possess the drive, fear, or humility to cause them to self-regulate their study of each specialty. See: What is the value proposition of a financial advisor — and how is a budding RIA culture upping the ante?.

Therefore, as an industry we must make a uniform decision to raise the bar of standards and education, lest we run the risk of permanently undermining the gains made by the advisory industry over the past 20 years. See: Advizent makes Jack Bogle its standards czar, a no-pay, no-conflict position. Suffering from fraud, conflicts of interest that are reported in the mainstream press, and with no real standard to rely upon, individual investors are losing faith. The investment advisory business has operated for decades with a reputation that has exceeded the skill set of the average advisor. I am speaking of all advisors; from brokers to dually registered advisors/brokers, the independents as well as fee-only advisors — anyone offering investment advice to less knowledgeable consumers. See: Brian Hamburger hammers the FINRA SRO proposal in a letter.

Much too easy

Said another way, the free enterprise system has been effective at the very top of the industry; forcing the best advisors to become educated in order to attract a qualified staff and a discerning client. That free market has provided a threshold for entry that includes values and knowledge. However, I believe the system that allowed me to enter the industry with near zero training cannot repeat its past sins without potentially destroying its credibility. If RIAs are to fulfill their collective destiny in creating a new and better financial advisory industry, a more reliable threshold of quality needs to be established. While the 99% of the population without extreme wealth is most often disadvantaged, I am often surprised by how vulnerable the very wealthy can be at the hands of advisors lacking in knowledge or willing to compromise their morality for the sake of compensation. See: Financial advisors cross the CFP’s ethical line when they play psychotherapist, study says.

Getting into this industry was simple. As a representative of a registered investment advisor, I had to pass a test that the average person could study for in a few hours. As a registered representative of a broker-dealer, my test was a bit more rigorous, and required a few days of classroom force-feeding to prepare. Neither test contributed significantly to my tool kit of skills with which to serve my clients. With either of these tasks completed, any individual is free to tout themselves as a professional financial advisor, as was I. See: Schwab launches 'university’ for advisory personnel.

Health versus wealth

Contrast the requirements above with those of a physician. In order to practice their profession, physicians are typically required to undergo four years at a top university, four years of medical school, and three to seven years of internship and residency. And then, upon receiving their M.D.'s, practicing physicians swear to the Hippocratic oath; promising to uphold their profession honestly and ethically.

Health and wealth top most individuals’ lists of important things in life. Without our health, achieving one’s goals can be challenging, if not unattainable. However, most Americans take their health for granted. Instead, the focus of daily life becomes the pursuit of financial security, and for most Americans that means specifically the reduction of debt and/or saving for retirement. At the fiscal levels required to successfully retire, the effects of poor advice can have meaningful consequences. On a more macro level, if Americans are unable to support themselves in retirement, the economy is certain to suffer.

Why, then, are the educational and professional requirements for those providing critical services to so many Americans different? Federal and state governments regulate the medical profession, while a self-regulating organization oversees the behavior of brokers and the SEC monitors the self-reporting of registered investment advisors. Though it varies by state, the requirements for continuing medical education range from 10 to 50 hours per year, whereas brokers and advisors of RIAs have minimal ongoing requirements.

Painfully clear

A high bar — that’s a simple standard for most people to grasp as a requirement for professionals. Our government must require that professionals serving our most important needs meet a minimum standard of skill and care; and, in many cases, they do.

The disparity between the education requirements for physicians vs. advisors/brokers is painfully clear. In fact, brokers and advisors have it easier than professionals in most industries. Pilots, for example, must pass annual FAA certification and requisite training. Lawyers and accountants have ongoing continuing education requirements, and law enforcement officers must requalify frequently to carry a firearm.

In contrast, I took a test in 1994 to act as an investment advisor representative. It took a weekend afternoon to prepare for that test. That was my last required exam as an advisor of an RIA. As a dually registered individual, I studied for my Series 7 exam in a cram course that lasted four days. See: As DOL contemplates stiff fiduciary-related penalties on advisors, NAPFA and FPA find rare concord with FSI.

The exam, admittedly, required some preparation and even some skills at math. Since that time, I have been subject to FINRA Rule 1250, requiring registered representatives to complete continuing education, which must be acceptable to FINRA, typically on a quarterly basis. The tests are an embarrassment, to say the least, with the standard so low (yet acceptable to FINRA) that any individual with a modicum of common sense can pass the associated test by simply guessing at the most logical answer. Each period the entire course and test take five to seven minutes to complete, limited only by the speed at which the test-taker can click through the course.

The bar for RIAs and dually registered advisors is too low. Although many professionals in financial services choose to further their professional skills through education, consumers can make little from the alphabet soup that follows our names. I applaud the course work offered by Investment Management Consultants Association, CFA Institute, Certified Financial Planner Board of Standards, fi360, CEFEX and the like.

However, the course load is not uniform (unlike medical school or FAA recurrent training or firearms training) and the outcome of certifications (CIMA, CFP, CFA, ChFC, CLU, etc.) requires explanation to the consumer. Moreover, I suspect only a small sampling of advisors has any of these certifications, let alone more than one. Today, investors rely most heavily on banks and brokerages and often have no basis upon which to verify that their financial advisor is qualified and capable to serve their needs and is truly working for them, not merely pushing products that are better for the advisor than for the investor. However, the same can be said of fee-only advisors as investors have no standard by which to judge the skill-set of their wealth manager.

unsuitable SIFMA

Investors deserve better. We, as an industry, need to be better. Clearly we cannot be left to regulate ourselves. FINRA has asked only that we pass a simple test — that is the bar. Even convicted felons get a crack at becoming registered under both regimes. The SEC has asked even less than FINRA, as there are zero ongoing requirements for an advisor in an RIA that are not administered by the RIA itself. We are failing consumers, and the reputation of the financial industry continues to suffer.

In theory, consumers can uncover conflicts of interests by reviewing offering documents, prospectuses and other regulatory filings. The reality is much different. Disclosure documents are written in mind-numbing legalese. Consumers who bother to read the filings are hard-pressed to find answers to questions as basic as how an advisor is compensated. Regrettably, the financial services industry is notorious for confusing and misleading language—small print if you will — and lots of it. That problem is exacerbated by government regulations compelling disclosure of details so voluminous that they are indigestible by the typical investor.

Moreover, the ongoing debate between the Securities Industry and Financial Markets Association and those supporting the Investment Advisers Act of 1940’s fduciary standard is an embarrassment to our industry. SIFMA, a quasi-lobbyist association, has fought for low-level “suitability” standards that let brokers recommend a laundry list of investments that may not be well-tailored to their clients’ specific needs. Creating and protecting wealth is a trusted honor that many individuals in our industry abuse, don’t understand or simply don’t care about. We owe it to ourselves and to our clients to demand more from our industry and to hold ourselves to a very high standard. Investors deserve the same duty of care and knowledge that we expect from our doctors. I wonder if the executives at the SIFMA firms supporting the low bar of “suitability” — almost encouraging conflicts of interest — would relish the idea of a conflicted advisor serving their family’s needs?

I also wonder if Rep. Spencer Bachus (D-Ala.),, supporting the self-policing of advisors, would be delighted at being advised by the broker who squeaked over the line, barely passing the exam to become registered? The Bachus bill is an expensive solution rife with potential conflicts. Moreover, FINRA supports the current low bar and, given that it’s an SRO, is unlikely to raise that bar, possibly crippling the brokerage industry. See: Amazed and confused: Advisors struggle to make sense of Bachus’ Wall Street Journal Op-Ed salvo.

Be afraid

The formula for progress in this area is straightforward and should be supported by those that hold themselves out as professionals: Raise the bar by establishing exacting ethical guidelines and objective standards of competence. Make them simple and communicate them broadly. Conduct periodic audits for compliance. Identify the firms that qualify; in effect, create a Good Housekeeping Seal of Approval for financial advisors. Then revise the standards as necessary to keep pace with changes in the financial community. Continually raise the bar. Most of all, ensure that the persons and organizations developing and applying the standards are independent of the firms being audited.

The investing consumer needs and deserves accountability along with simplicity and reliability. Until this happens, we should all be afraid — investors most of all. It’s time to restore confidence in the financial services industry.

Steve Lockshin is a co-founder, with Charles Goldman, of Advizent, a venture aimed at bringing a unified mass of high-AUM RIAs under one umbrella. Lockshin founded both Convergent Wealth Advisors, a Los Angeles-based RIA with $10 billion of AUM, and Fortigent LLC, which acts as an outsourcer to $50 billion of RIA assets and was recently sold to LPL. He is also rated as Barron’s top financial advisor both for California and the United States.

Mentioned in this article:

CEFEX, Centre for Fiduciary Excellence

Top Executive: Carlos Panksep

Robert Henderson

Robert Henderson

August 20, 2012 — 2:33 PM

Steve, I totally agree. I have been a proponent for years of more rigorous standards. The majority of “entrance exams” for our industry focus more on compliance than anything else, and often on topics that have no relevance to our practice (ie. options, security registration process, etc.).

I believe that there should be some standard financial education requirements – a CFP “Lite” designation, the AAMS, whatever. But something that actually focuses on a broad range of financial topics – but would need to fall short of “advanced” certifications (CFP, CFA, etc.). And ongoing CE should be a must. I have never understood why we don’t have those requirements.

In addition, I have also felt that upon entering the industry, there should be an “apprenticeship” period – similar to that of a CPA in most (many?) states. Unfortunately, entering our industry can be as simple as passing a 1 hour exam, being given a phone book and a “Good Luck” from a manager.

I agree with a previous post – until we raise the bar, we will never truly be considered a “profession”, but simply a sales force.

Jack Waymire

Jack Waymire

August 21, 2012 — 6:13 PM

I represented InvestorWatchdog.com at a meeting of seniors yesterday and this topic came up. I said the answer was easy. Who was the winner when there are low requirements? Wall Street wants the industry to be easy access for two reasons. 1. It is easy to hire and license thousands of new reps every year. 2. They can get the new reps producing revenue the next day. As usual the victims are the investors who believe advisors have to be ethical experts to sell investment experts. Why is it this way? Wall Street is dominated by a sales culture. How much do you have to know to sell a mutual fund?
How about this? There are no education or experience requirements to be an advisor and convicted criminals can obtain securities licenses as long as the crime was not securities related. Can you say axe murderer?
Investors, who can afford them, should only select RIAs and IARs who acknowledge they are fiduciaries, work for one of the three forms of fees, and practice full transparency (documented).

David Lazenby

David Lazenby

August 17, 2012 — 6:00 PM

Steve. First of all thank you for your efforts to step back from the day to day practice of advice and serve up your observations of the current reality and help us see the plausible constraints of “what got us here may not get us to where we need to go”.

As a Licensed Psychologist (also passed CFP exam in early 80’s) working for the last 15 yrs in your industry… more narrowly in the financial planning, service or experience delivery side. I might offer a few additional observations:

1. Physicians are one of the least trained professionals in advice delivery. In fact, I helped design an elective bedside manners course back in the early 80’s. It is only in the last few years that a seminar version in now required in all med schools. However there is still no performance outcome assessment. (i.e.doing vs. knowing gap). Extra yrs of training the same skills (technical) may only yield better technical expertise. For example in my residency training some of the most advanced personality theorist (expert at explaining behavior) failed the outcome measures (were clients willing to be influenced and implement advice…in short start and sustain behavioral change). Lets get more quality measures for delivery of advice.

2. Consider the analogy of NFL combine for advisers…it is performance based (both past/present), uses character profiles, assessment of ability to manage complexity, and responses to adversity (resilience, GRIT, optimism). Lets get the skill measurement out in the open and more american idol like. Perform, Feedback, Coaching, Practice, Perform…repeat. That is how professionals accelerate performance.

3. One example: In the advice world advisers are trained to ask great questions…if you ask well they will trust, respect, etc…In all my yrs of training (1500 hours of video tape analysis of real sessions) I was never measured on my quality of questions. I was assessed and scored on the quality of my responses (which can be observed, tiered, scored, standardized, etc). In my discipline all the science supports response quality as the basis for trust for example. Lets bring more science to the delivery of advice.

Thanks again for drawing attention to how the sausage is really being made and delivered by the general financial advice profession (your not the only one feeling a twinge when you describe your observations). Here’s to a productive “raise the bar” dialogue.

As my former college football coach used to say “scratch where it itches”.

Dr. David Lazenby
Chief Science Officer



August 17, 2012 — 4:50 PM

I agree with everything the author stated. And, I have no hope that financial services will ever become a true profession. There is no one right answer, therefore no peer review, therefore the opportunity for salespeople to manipulate the system exists. An industry like ours can never be effectively regulated for those reasons. The UK and Australia eliminated commissions from the equation and they still are dealing with regulatory problems. We’re stuck with what we have. Paranoia is indeed healthy for advisors. My paranoia drops each time I get a new client who brings a portfolio to me full of high priced garbage product, no financial planning, zero service and a small chance of success for the client to achieve their goals. When that happens, I shake my head regarding the lack of professionalism present, and am thankful I am in a position to take the business and hopefully keep a client for life by providing all they are missing and asking for.

Sharon Pivirotto

Sharon Pivirotto

August 17, 2012 — 5:56 PM

Well said, Steve. What’s even more frightening, in my opinion, is when we see generalists working in a specialized field like the pension industry. I still scratch my head when I see advisers selling and servicing ERISA plans on a commission basis, with no training or education on ERISA or a solid understanding of what actions would make that adviser a fiduciary.

I’m a strong advocate for training and education standards in the pension industry (in fact I wrote an article titled The Birth of an Industry Leads to the Need for Specialization earlier this year) and will closely follow Advizent to see what trickle down effect it has on implementing standards in the specialized segments.

Sharon Pivirotto

Sharon Pivirotto

August 17, 2012 — 5:55 PM

Well said, Steve. What’s even more frightening, in my opinion, is when we see generalists working in a specialized field like the pension industry. I still scratch my head when I see advisers selling and servicing ERISA plans on a commission basis, with no training or education on ERISA or a solid understanding of what actions would make that adviser a fiduciary.

I’m a strong advocate for training and education standards in the pension industry (in fact I wrote an article titled The Birth of an Industry Leads to the Need for Specialization earlier this year) and will closely follow Advizent to see what trickle down effect it has on implementing standards in the the specialized segments.

Robert Henderson

Robert Henderson

August 21, 2012 — 6:24 PM

Jack, that makes sense. The problem in our industry (as compared to law, accounting, doctors, etc.) is the low barriers to entry. Even with Paladin/Watchdog (of which I am a happy member!), there are limitations to what is “reportable”. With such low minimum standards, the skill level and experience of different advisors can be so vastly different. And in so many cases, years of service does not equal “experience”.

It’s very frustrating indeed.

Jack Waymire

Jack Waymire

August 22, 2012 — 9:02 PM

Make no mistake Wall Street wants easy entry: No minimum education or experience requirements, easy test, even convicted criminals can obtain securities licenses. Wall Street hides this mess from investors by fighting fiduciary standards for reps and any form of mandatory disclosure. The bottom-line is investors have to step-up and protect their own interests. Wall Street is betting they won’t do that. So far Wall Street is right.

Rick Johnson

Rick Johnson

September 11, 2012 — 3:35 PM

Although doctors have years of training, there is the same degree of difficulty determining their skill set as there is with Investment Adivser Representatives. A few years ago, I was in a bicycle accident and had numerous broken bones, surgeries, etc. I bounced around to different doctors and surgeons some with multiple university degreees in addition to being doctors. Yet, the care I received was simply awful. All these doctors cared about was running up their bill. Conincidentally not unlike registered representatives who have quotas to acheive and run up their own bill.

Personally, I have 4 professional designations including the CFP. No one has ever said that they came to do business with me because of my 4 designations. Truthfully, the 4 designations have helped me become a whole lot smarter than my peers, but not much help in gaining new clients. People do not care how smart you are. They only care if you care about them.

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