The Zone of Interest is a book by Martin Amis that fictionalises the administrative zone of Auswchitz (and I highly recommend it). An investment world without best interest standards, where the old, the infirm, the weak and vulnerable are maligned, abused and consumed, is too a Zone of Interest:
I was particularly drawn to a recent article by Ellen Bessner, a lawyer representing financial firms and “advisors”, entitled “Serving senior clients is becoming a more risky endeavour”.
The article is about the increasing prevalence of complaints made by elderly investors and highlights a generalised case of a senior who complains, with the help of a family member, about investment performance (i.e. losses) brought about by unsuitable investments for his or her age.
The article then goes on to flesh out 4 reasons as to why this is happening, none of which discusses the fact that “advisors” are rarely trained to professional standards; commissions drive advice and transactions drive commissions; suitability standards drive transactions and not portfolio and hence risk management structures; recommendations and rationale are not required to be in writing and little or no point of reference with respect to the risk/return/asset & asset allocation/liability profiles of the often mixed bag of investments are ever provided. Moreover no disclosure of the true nature of the relationship is likewise provided, and this has not changed under the CRM. The construct is designed to deceive, designed to place people in a place where they are least likely to be able to accept the risks of the transaction relationship they have been guiled into.
And, according to Ellen, the reasons why there are more complaints:
Perversely Ellen blames the fact that aging populations has led to a drive to educate investors about their rights in contractual relationships: this education and information she says has led seniors to take their advisors to court, to seek independent judgement on their advice via the financial services ombudsman (OBSI) or to take their complaints to the regulators. Perhaps Ellen would like no education over contractual investment relationships or dare I say it human rights: ignorance does indeed breed a blissful transaction relationship.
The second point is really point 1 again, but I will elucidate: it complains about the fact that there is no cost to taking a complaint to OBSI, that you can hire a lawyer for free (though she does not let this one hang) and that “lawyers” see dollar signs when they see an elderly client with a financial complaint…those damned lawyers! Ellen tends to omit a great deal of the road that often leads people to the point where they have no other option but to seek help from OBSI, lawyers and regulators, as well as the road beyond, and she also omits to opine on those “advisors” who never pay their regulatory penalties or those firms named and shamed by OBSI who refuse to pay up. The picture has not been fully painted, but one point is clear, investors have rights and this a problem.
Point 3 is about investors buying the highest yielding investments available, the highest risk investments available, because they have not saved enough and they need the highest returns possible to meet their expenditure needs. So we have here an admission that yes, investments were not suitable but that the “advisor” was not responsible. Responsibility is an important issue and present “suitability standards” allow “advisors” to avoid this nicety, this responsibility to balance risk/return and financial needs through portfolio structure, advice and education. Ask yourself this question? Where is the record of the process whereby the “advisor” made recommendations over structure and content appropriate to financial needs and risk aversion, the client declined and wanted something much more risky? Well, it ain’t there and that is the problem, or a good part of it.
Point 4 is a different matter and I am not sure why it has been slid into this argument, but it has its uses and I will aside here: in a best interests standard regime, advice and recommendations would focus on the needs and disposition of the investor of interest and manipulations of the sort described would find it very hard to survive.
I think Ellen has argued very forcefully for best interest standards!