It is often said that financial planners face a hopeless moral dilemma – a “conflict of interest” between what’s right for the client and what maximizes profits for the adviser.
An article published in the March 1, 2012 online issue of Financial Planning, titled, The Ethics Dilemma, outlines the issue:
In theory, planners are expected to act as fiduciaries for their clients, meaning that a planner must put a client’s best interests ahead of his or her own. In practice, no human being is truly capable of doing this because in the real world our ethics aren’t pure.
The conclusion drawn by the author is:
…like every other human being on the planet, my ethics aren’t absolute. Financial planners have many conflicts of interests with their clients…
In other words, the author of The Ethics Dilemma believes that financial planners need to hold themselves up to an impossible moral ideal. He needs to put a client’s best interests ahead of his own yet, at the same time, the author believes that his ethics (as well as everyone else’s) aren’t absolute – making the moral ideal impossible.
Do Professional Organizations Really Promote This Idea?
By definition, financial planners cannot live up to an impossible moral standard. While it’s reasonable to assume that one financial planner’s opinion does not represent the view of the industry at large, there’s evidence that professional organizations encourage, and even demand, that we do just that.
For example, the Certified Financial Planner Board of Standards stipulates, as part of its internal ethical code, that all advisers adhere to the board’s concept of “integrity”: “Integrity demands honesty and candor which must not be subordinated to personal gain and advantage.”
The International Association of Registered Financial Consultants believes that we should, “at all times put my client’s interest above my own.”
The National Association of Personal Financial Advisors tells us: “Dealings and recommendation with clients will always be in the client’s best interests. NAPFA members put their clients first.“
Few people would disagree with the idea of acting honestly and with integrity in business deals. Honest and integrity seem at odds with the idea of personal gain or self-interest. In fact, for most people, “honesty” almost seems inextricably linked to the concept of “altruism”.
Is Altruism A Proper Moral Standard?
The so-called “robber baron”, Jay Gould, coined the phrase “honesty is the best policy” in an essay he authored at just 14 years of age. It was a phrase he lived his life by until the day he died.
But, the word “altruism” was coined by French philosopher Auguste Comte, and is derived from the Latin word alter or “other.” Altruism literally means “other-ism.” It’s the placing of others’ interests above your own and, if the ethical codes of professional organizations are to be taken literally and seriously, it’s the moral standard that financial planners are told to live up to. But is it a proper moral standard?
On the surface, altruism sounds good. It sounds benevolent. No one wants to harm their clients, least of all the clients. What altruism assumes is that someone will be harmed in any relationship, primarily owning to each individual’s own interests. This is how the concept of a “conflict of interest” arises. Since personal interest or gain is what causes harm, a philosophically committed altruist frames the moral discussion such that his own personal interests are subordinated to others.
But then this obviously raises the question “do other’s interests harm us in the same way we suppose our interests harm others?”
This question is generally avoided, though the answer is — logically — a resounding “yes”.
Under a consistent view of altruism, a conflict of interest is never avoided, since it’s assumed that everyone’s personal interest is at odds with everyone else’s.
But, is this true?
This is yet another question conspicuously absent from the moral theory of altruism. Missing from the moral equation here is a discussion of “what is a value?” and “what is in a person’s best interest?”
We skip these first moral questions and move right along to a second line of questioning revolving around some variation of, “who should be the beneficiary of our actions?”
And, because no one really wants to hurt another person, the natural conclusion is to put a client’s interest first.
Underneath the hood, altruism demands – as a moral duty – that others’ interests be placed above yours (in this case, your client’s interests are to be placed above your own). We often mistake this moral duty as benevolence. But, duty means”that which is owing,” which makes the issue of benevolence and generosity both irrelevant and impossible. In fact, under altruism, it’s your client’s moral right to demand that you benefit him at your expense. That is not a theory of benevolence, and it’s no way to run a practice.
The Moral Dilemma Is Revealed
Many advisers sense that consistently practicing altruism would be career suicide. No one can put others’ interest ahead of their own, consistently, and continue to run a profitable business. An adviser may feel that it’s moral to always put others first, but impractical to actually do so. Business requires selfishness. It requires an acceptance of the profit motive.
Like the author of “The Ethics Dilemma,” many advisers turn to a particular kind of amoral existence – a pragmatic approach to ethics with a strong dose of altruism in the background. In fact, many professional organizations allow for this by mixing elements of altruism with elements of pragmatism. There is some sense that the financial planner is benefiting himself but, at the same time, an appearance of altruism must be upheld as the moral ideal.
They call this “balancing conflicts of interest” or “managing conflicts of interest.” However, if you were to state openly what is meant by this approach, it would (and should) scare your clients half-to-death.
Would you, as a client, want to work with an adviser who proudly proclaims that, “my ethics aren’t absolute,” and that his solution is to simply, “balance conflicts of interests”?
No way. You would run like hell from this adviser. You couldn’t trust him and you shouldn’t.
His confession of a flexible moral code is a confession of dishonesty. After all, if his ethics aren’t absolute, if he believes that your interests are in conflict with his own, you can never know beforehand if or when he will cheat you. Ethics, after all, is often seen as a psychological battle between what is good (or ideal) and what is practical.
What about advisers who don’t want to be dishonest? Who don’t really want to be morally flexible? What does the balancing act between altruism and pragmatism do to a financial adviser who just wants to be a good person? It does what you would expect: it makes him feel guilty for his very existence, and there is no shortage of evidence for this. In every major industry organization, there are plentiful examples of advisers who are proud to “give back” to their community.
For example, in the December 2012 issue of The Register, a financial planner was interviewed and asked how financial advisers could “give back” to their community. Rather than question the premise of “giving back,” the financial planner responded, “Get involved! I am an active member of two local volunteer civic groups. One assists our seniors and the other raises funds for community improvements for youth. I am a leader of my church financial committee and I volunteer at a food pantry for the area needy.”
Echoing The Register, AdvisorOne profiled Nelson Ball in its December 20th (2012) article, reporting that Ball, “really, really gives back.” Ball proudly proclaims that he wants to continue working for as long as he can so that he can, “work and give away a large part of what I make.”
What’s wrong with lending a helping hand?
Nothing, if you really and truly want to help someone.
But, don’t confuse helping others out of a sense of benevolence with a moral duty to help others. There is nothing wrong with charity or helping out those who are down on their luck. The issue here isn’t about being helpful or kind to our fellow man. The issue is the idea of “giving back.” Giving back to whom? You only need to “give back” something that you didn’t earn, and never had a moral right to, in the first place. If financial advisers are trading their services for their clients’ money, there’s nothing to “give back,” unless one feels morally guilty for their success.
By and large, advisers join religious organizations, community organizations, volunteer at homeless shelters, and find a multitude of ways to “do good.” Why? Because, in a certain sense, their deeply-held philosophical viewpoint is… their profession isn’t good. According to the altruist morality, these advisers haven’t earned their money. They are morally unworthy. Yet, at the same time, being profitable “works.” It provides security for the adviser’s family. It is a practical means of making a living.
What about the “feel good” aspect of being altruistic? Many advisers don’t feel that they are burdened with guilt (at least, not explicitly). Instead, they say that “giving back” makes them feel good and that, in turn, is what perpetuates further giving.
This giving allegedly makes them a good person. But feeling good is not how a rational person chooses moral actions. Feelings are not the basis of morality – they will not and cannot determine what is “good” and “evil.” For example, a cannibal may feel good after having a meal, but no rational person would use this as a guide to moral perfection. Likewise, taking cocaine may make a drug addict feel good (at least temporarily), but the act is actually self-destructive.
These may seem like extreme examples, but in principle, they stem from the same premise.
Since altruism cannot be consistently practiced, it leads to a pragmatic approach to ethics which leaves advisers torn between doing what they believe is moral and doing what they believe is practical. What is needed is a moral revolution in the financial planning industry, a reason-based approach to morality and business development.
What’s The Solution?
The financial planning industry needs to adopt an ethical code based on rational selfishness.
Traditional ethics sees the problem one of two ways: either advisers put their interest above their clients’ or advisers put their clients’ interests above their own. This is a false dichotomy. No subordination, no sacrificing of interests, is necessary. Rather than promoting the vague, non-objective, idea of “managing conflicts of interest,” the industry needs to advocate the principle of mutually beneficial trade.
Advisers must put their own interests first, ahead of their clients’, but this does not mean that advisers must profit at the expense of clients. “Personal interest” here, does not mean — and cannot rationally mean — harming the client. In fact, if financial advisers value their business, and their clients, they will do everything in their power to ensure their clients’ short and long-term success. This is the only way to remain profitable and stay in business.
Advocating this kind of ethical code is also the only way to cleanse the industry of dishonest advisers. It will lift the burden of guilt that many advisers face, but never openly admit. It erases the adversarial relationship between client and adviser by making “conflicts of interest” a non-issue.
Where can the industry learn this new moral code? Where can you learn this new moral code? Ayn Rand. Yes, the controversial author who promoted the moral code of selfishness in her novels.
Whether you pick up Rand’s epic novel Atlas Shrugged, or whether you delve into her intellectually intense non-fiction works like The Virtue of Selfishness, one thing is clear: Rand demonstrates that your interests do not have to clash with your clients’. In fact, Rand demonstrates that there is absolutely no conflict of interest among rational individuals. She demonstrates that the only ethical code that can be followed consistently is a code of selfishness.
Don’t let your altruistic peers point to cartoonish and unrealistic caricatures of egoism, like Bernie Madoff. Bernie Madoff knew and understood that what he was doing was not in his own best interest. In fact, his words paint a clear portrait of a broken and tortured soul:
I am actually grateful for this first opportunity to publicly speak about my crimes, for which I am so deeply sorry and ashamed. As I engaged in my fraud, I knew what I was doing was wrong, indeed criminal…I am painfully aware that I have deeply hurt many, many people, including the members of my family, my closest friends, business associates and the thousands of clients who gave me their money. I cannot adequately express how sorry I am for what I have done.
On the two-year anniversary of Madoff’s confession, his son Mark – devastated by the news media’s ongoing coverage of his father’s Ponzi scheme- hanged himself in his SoHo apartment. Madoff’s life is ruined, his family permanently destroyed, his business and personal relationships have been reduced to ashes. That’s not selfishness. It’s self-destructiveness. It’s actually the natural end-result of being self-sacrificial. It’s a variant of altruism, not of selfishness.
How The Financial Planning Industry Can Reorient Its Moral Compass
Professional organizations and educational institutions must be willing to accept, teach, and promote Ayn Rand’s ideas of rational selfishness. Advisers must be willing to adopt a new moral code, eliminate conflicts of interests caused by irrationality, think and plan long-range, and discover what actually constitutes their best interest. Finally, they must be willing to place their own interests first, thus benefiting their valued clients.
Educational institutions should teach advisers how to align clients interests with advisers, not make one side subordinate to the other. Professional organizations should not promote the idea of “conflicts of interest,” for conflicts only exist among irrational people. They should not promote the pretense of altruism through ethical codes that demand advisers place clients’ interests above advisers’, for this sets up a hopeless contradiction and an impossible moral ideal for advisers.
Every year, every day, the Securities and Exchange Commission, the FINRA, and every state Insurance Commissioner’s office grows stronger. They grow stronger because we, as an industry, sanction it. We openly admit to being in conflict with our clients. It sends the message that we are irrational, that we cannot be trusted, that we need laws to protect our clients from us. Our sanction of a pragmatic-altruistic moral code sacrifices what remains of our autonomy to the state and federal government. Is this what we really want?
We point fingers at fellow advisers who sell commission-based products. We fight over which industry organization should have dictatorial power and control over the industry. Every once in a while, an article like “The Ethics Dilemma” bubbles to the surface, reminding the industry and regulators that financial advisers cannot be trusted. That they are inherently dangerous to clients. That personal gain must be tamed. That the lure of profits will create conflicts of interest that must be “managed.”
Until industry organizations and advisers throw off the pretense of altruism, until we put our own rational best interests first, we will continue down our own road to moral and political serfdom. We can turn back the tide. The question is: will we wake up and do it before it’s too late?