Bill Cara

What is a Financial Advisor?

June 10, 2022

Although we read about Financial Advisors all the time, my question is not as simple as simply referring to someone who is licensed as a Financial Advisor, like me for instance.

Financial advice could be, say, should you restructure your debts? or should you afford to buy that new car? or is this a good time to start a retirement fund?

Is financial advice the same as investment advice, like say, is Wheaton Precious a good investment?

Aha, the name Financial Advisor has different meanings.

In addition, the same meaning could be called by different names. For example, Securities Investment Advisors, which is how they are licensed in the Bahamas, are licensed in the United States as Financial Advisors.

People who do not speak English as their first language are often confused by the words we use. An investment pool is nothing to do with a swimming pool, for example. The drilling season might be hot but has nothing to do with flavor, which would be a seasoning. The manuscript for my book is a draft but hopefully is not cold. A racket is a scam and not something to play a game with. A bear is not bare and devoid of clothes.

This point really hit home when I lived in Havana where I was having IT experts program my trading systems. Their command economy is completely different from our capitalist economy. Their culture was rich in the arts and sciences but poor in business. Their language was Spanish, and their use of English made me shake my head every day when they couldn’t understand the simplest investment concepts. For example, the answer to my question, what is the best job in Cuba is answered, truck driver. Why is that? It’s because we get to keep everything that falls off the truck.

So, I found myself trying to frame every word, every sentence, in ways that these brilliant university grads in computer science could understand or at least relate to, and still move the project forward. In the end, I had learned the meaning of mañana, and that taught me that words and context matter.

Unfortunately, nomenclature in the capital markets and Financial Service industries doesn’t mean much these days. A simple question of “What is a bank?” could result in an endless answer. A bank today could be an agent, an advisor, a principal trader, a securities depository, a lender, a trustee, an insurer, an insurance agent, a real estate investor, a realtor, and many other things that operate under the same brand umbrella, most of which have conflicting duties and responsibilities.

It seems to me that we want to maintain the confusion in order to maintain the system, which speaks to our being deliberately inefficient. Inefficiency establishes a need for new industries to modify bad habits when we should simply stop the bad habits. That’s capitalism because, in the end, things still get done. It’s called effectiveness, something that command economies cannot always count on. For example: “They pretend to pay us. We pretend to work.”

In my world, Financial Advisors could be wealth managers (i.e., licensed to buy for a principal) or stockbrokers (i.e., licensed to sell to a principal) or insurance agents (i.e., licensed to sell insurance products), or anything really that the Humongous Bank & Broker (HB&B) company is licensed for, which is almost everything that involves money. Financial advisors could even be lawyers practicing as lawyers or professional accountants who practice as auditors. It would not surprise me that someday, even the stock jockeys at Seeking Alpha, Kitco Media, or Stansberry Research, will be representing themselves as financial advisors. After all, today there are work-from-home social influencers who have financial advice blogs. Some of them are teenagers working from their mom’s basement.

So, terminology and regulation are a concern, one that is getting worse.

You see, when Humongous Bank & Broker (HB&B) can do pretty much anything to us as so-called financial advisors, then in return, pretty much anybody can call themselves financial advisors. What’s good for the goose is good for the gander. Isn’t that what our laws are based on?

Decades ago, I advised the accountancy profession to not go down this road and when they refused I quit two of their professional organizations. Then when I saw securities regulators taking this same slippery slope, I complained. But they also ignored my concern.

For years I have been saying that the United States Securities Act of 1933 and the Investment Advisers Act of 1940 are collections of obsolete and unworkable laws. With capital markets nomenclature now devolving into street slang, the wrong quality of people is attracted, frauds are soaring, and rising regulatory costs are out of control.

The investment industry has changed drastically in the past almost 100 years. Changes to rules and regulations are now woefully inadequate to deal with the most basic issues of conflict of interest and basic issues of nomenclature.

Years ago, I explained the difference between statute and civil law as being almost totally black and white versus securities law, which is mostly gray. In the case of securities law, all matters are subject to civil service and industry regulatory authority, which are highly politicized. The framework that while not perfect once did work. But not today. Today, even the most basic rules, regulations, and nomenclature, like “Best Interests”, “Fiduciary” and “Bank” are no longer applied within the securities industry, and there is little or no enforcement against non-licensed others who are self-branded as financial advisors.

In a word, the financial services industry is a mess, and the biggest losers are the capital market stakeholders.

I would hope we had a system where a Buy-Side Securities Investment Adviser was exclusively licensed to give securities investment advice, a Buy-Side Financial Advisor was licensed to give only non-securities financial advice, and a Sell-Side Broker-Dealer was exclusively licensed to sell investments.

There should be a clear line of delineation with non-licensed people whether they be organized broadcasters/publishers or individuals in the public who are known as social media influencers.

Lawmakers could start with legislating a new Bank Act that terminates the possible reliance on all so-called Chinese Wall conflict of interest defenses because they are laughable.

I would like to think that a Financial Advisor is an individual’s or family’s most trusted ally for decisions related to investing, but sadly that is no longer the case. In fact, the public may even when dealing with licensed persons be getting the opposite of what they think they are getting in the form of an advisor. They might be getting a salesperson.

The problem is that most people do not know precisely what a Financial Advisor is.

An Investment Advisor (IA) is, in law, a securities industry registrant who holds a license to trade in securities on behalf of a client. Sounds straightforward, but it isn’t because investment law enables that agent to also be a principal and a developer, distributor, and direct seller of financial products and services that the client may have no need for or even want.

The bottom line is that some registered advisors are salespersons with a license to sell and not to advise or manage securities on behalf of others. That is a fact.

In some countries, there is a licensing distinction between Stockbroker and Investment Advisor/Portfolio Manager as the latter must serve the client strictly as a fiduciary. It’s impossible to ask a salesperson to be a fiduciary for the people they are selling to.

Sadly, too few countries have such regulations under the law, and even worse, the United States Securities and Exchange Commission is under much political pressure to keep the “Best Interest” lines blurred. In other words, it should be a simple matter to discern the difference between “should” and “must” best serve the client, but political pressures make a simple matter complex and never get solved.

In most countries, Investment Advisors are allowed to legally operate with blatantly obvious conflicts of interest. They are asset gatherers for financial services companies whose services include advising to the client and buying for and selling mutual funds and other financial products as well as capital market securities to the client, including their own securities positions and positions of other of their clients, all perhaps in the same transaction, without the client even knowing.

Incredibly, this impossible situation for the owners of capital is fully known to the world’s securities regulators who themselves are agents of the governments that enact such ridiculous investment laws. Moreover, these regulators are all intimately knowledgeable of massive fraud that routinely occurs because of such conflicts of interest and the so-called (but worthless) financial industry protection mechanisms put in place to prevent the theft of client monies.

Despite fraud that is committed repeatedly against investors by Humongous Banks & Brokers (HB&B) as a direct result of decisions made at the highest levels in these firms, often made for their personal benefit, the industry’s response from persons in authority is that the lowly individual Investment Advisors they have employed are always the problem.

Seldom are these financial services companies prosecuted, the ones with names such as Fidelity Advisor, BlackRock, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley, Schwab, T. Rowe Price, USAA, Vanguard, and Wells Fargo. The source of the problem is that in addition to serving the public, these financial services companies are also agents for and advisors to the US government and its central bank. Moreover, they are also advisors to other governments and central banks that are in fact competitors.

Being all things to all people has plagued the securities industry with conflicts-of-interest cancer.

In the formal hearing of the Canadian Securities Administrators to determine the future of electronic trading, I pitched a simple logical structure that my friend, the Ontario Securities Commission executive director at the time, found incredulous as it was in his view not practical. In my view, eliminating conflicts of interest was essential to market integrity, but I knew that financial services companies would never go for it because their “Know Your Customer” KYC rule was not just for self-protection, but to be able to know how to trade against the customer.

I recommended that all securities of an owner be held by an independent depository, which required a three-way transaction to settle. If to complete the transaction required margin, a separate transaction between buyer and lender would be needed. The owner of the capital should be enabled to choose any of one or more depositories and if needed, any of one or more lenders.

In other words, I wanted the power to go to the owner of capital, which is as should be, rather than Humongous Bank and Broker who in reality are intermediaries. Simply put, if a seller offers 1000 shares of a company at a price and the buyer meets the price with good funds, there is no need for an intermediary. However, with the system now in place, intermediaries control all transactions and have the advantage over the owner of capital. The system is medieval. The banks are the feudal lords, and the owners of capital are obligated to pay them fees.

In every sense of the word medieval, the system is wrong.

For that formal hearing of securities regulators, I had been asked to be the public’s sole representative. But my recommendation was dismissed when even 20 years ago electronic communications and software made my recommendation possible. A few years later, blockchain technology made it completely secure.

In cases where fraud on the public is suspected, the regulators issue a notice of investigation, and the companies typically respond with a “no contest” response and pay a fine to end the matter. In the case of the largest financial services companies, individual fines have ranged from millions of dollars to humongous multiple billions.

Yet the parties who pay these fines are the actual shareholders of these financial services companies and subsequently the thousands of employees that management lays off in order to try repairing the shareholders’ damaged bottom line, which the managers do in order to stay in control. The wrongdoers never pay.

Such is the situation in our capital markets.

On behalf of the public, I have personally addressed the Senate Banking Committee of Canada in addition to the chairpersons of all the major Canadian Provincial Securities Commissions in formal hearings about these atrocious laws, rules, and regulations. I am but one voice of many. But my arguments are all for naught because money talks. Big money embraces the status quo and rejects activism.

Sadly, our elected representatives and law-making governments have long been bought and paid for by the Humongous Banks & Brokers (HB&B) of the world – the financial services industry giants that now control the once free capital market. As a direct consequence of the investment laws and regulations they have successfully lobbied for, the most egregious behavior of bankers has gone largely unchecked, giving rise to the term Too Large to Fail (or prosecute).

At the lowest end of the financial service food chain are the independent buy-side Investment Advisors and Portfolio Managers who feel as I do that securities laws and regulations must change. Ultimately, capital markets must return to the control of the owners of capital and all Financial Advisors must be agents only, and not principals, or else the entire system will eventually collapse.

Lawmakers around the world must get that message.