When President Obama announced recently that his administration would seek to more tightly restrict the nation’s retirement account brokers it became clear that the industry was in the midst of a bit of customer experience crisis. America’s millions of individual investors and retirement plan participants—the very people that industry is supposed to serve—do not trust them.
“When you go to a doctor or a lawyer, you expect the advice you get to be in your best interests. But the same doesn’t always hold true in the world of retirement savings,” PBS quoted Labor Secretary Tom Perez saying in a conference call announcing the move.
To be fair, most brokers, advisors and mutual fund managers are experienced, serious professionals with the best interests of their customers at heart. Unfortunately, many average investors are willfully under-educated on the basics of financial expenses and what constitutes a fair and reasonable amount to pay for investment advice. The difference lies in knowing the difference.
Few average investors know that, in addition to licensing by the Securities and Exchanges Commission, the retirement brokers are largely self-regulated. Interestingly, the entire matter pivots on a single, awkward word rarely used outside the financial industry known as “suitability.”
In principle, suitability is a simple notion. Any financial product—a stock, a mutual fund, an annuity, or an insurance policy—that a broker might recommend to a client must be suitable for that client. What makes one investment suitable for a given customer and not for another is defined by a loose set of criteria that includes the client’s age, income, risk tolerance and financial health, among other factors. Its interpretation is left largely to the broker.
It follows, then, that a broker or advisor who recommends risky options trading strategies to a retired grandmother on a fixed income would not be abiding by the tenets of suitability. In the industry’s estimation, the representative would be non-compliant with the rules and could face reprimand, fines or even de-licensing—serious penalties to be sure.
As standards go, however, suitability is a low bar—especially when so much is riding on the concept. In no way does it require the broker to choose an investment that is good for the client, though the uninitiated investor might assume that it does. In fact, nothing about suitability even requires the representative to have the customer’s best interest at heart.
To that end, there are commissions, sometimes behind the scenes, paid by mutual funds, insurance companies and other providers of financial product to the financial advisors for recommending their products. If challenged, a broker need only prove that the investment was a suitable option for the customer in question, not that it was the best, or even a wise choice.
In short, suitability is not accountability. And accountability is what America’s retirees and retirement savers truly need. In industry terms, accountability is wrapped up in yet another term known as fiduciary responsibility, which requires the broker to make all decisions in the best interest of the customer.
So, what’s the solution? As a Content Strategist—as a word guy—I would, of course, focus on the words. To paraphrase Shakespeare: “That which we call suitability by any other name would smell as sweet.” I would venture that if the standard were raised to one of accountability, the industry would, in fact, smell all the sweeter.
In the end, it really comes down to simple matter of customer experience management. Always put the customer’s needs first and good things follow. For the financial services industry, being more customer centric, more personalized, and more relevant via digital channels is, at the very least, a giant leap in the right direction.