As we discussed a few weeks ago, RIAs sell verbs (ongoing advising, financial planning, ongoing asset managing, managed account services, other services), whereas agents and brokers sell nouns (products).
The Investment Advisers Act of 1940 governs verb sales to the left side of balance sheet. Investments are assets. Assets means left side of balance sheet.
Asset management as a discipline differs dramatically from wealth management. I am not the genius who first communicated this: 1990 Nobel laureate Harry Markowitz is.
In 1991, shortly after his Nobel win, Dr. Markowitz was asked about how Modern Portfolio Theory could be applied to consumer wealth management. Published in the inaugural issue of Financial Services Review, Dr.Markowitz answered: “The ‘investing institution’ which I had most in mind when developing portfolio theory for my dissertation was the open-end investment company or “mutual fund” ... there were clear differences in the central features of investment for institutions and investment for individuals, that these differences suggest differences in desirable research methodology and that a note on these differences may be of value.”
The crux of the difference between asset and wealth management as disciplines is the understanding of the lens through which the fiduciary advisor views the world.
In the case of asset management, the lens is that of the asset and maximizing risk-adjusted reward for a given asset-managing mandate.
In the case of wealth management, the lens is that of the human experience of the client across the table from the advisor and who, hopefully, comes to own, and continue to own, assets.
In our (perfectly valid) arguments about whether “best interests” means the same thing as “fiduciary,” and to whom the label of “fiduciary” applies, we lose sight of the question: “fiduciary of what?!”
The ’40 Act (along with ERISA and other legislation) governs fiduciary conduct in the field of investment management (left side of balance sheet).
Because the role of an asset manager is institutional, the fiduciary premises articulated in the ’40 Act, and subsequent clarifying guidance, are delivered through the lens of how one behaves when one serves as a fiduciary in the field of asset management.
A day in the life of a fiduciary in the field of institutional asset management looks quite different from a day in the life of a person who acts as a fiduciary in the field of human wealth management.
Wealth management means the same thing as active financial planning—management of the intersection of assets and liabilities for the benefit of the PERSON to whom the wealth accrues, when they are able to manage asset growth in excess of liability meeting.
A fiduciary asset manager is not responsible for mitigating the consumer’s liabilities. (Mitigating liabilities is what insurance does.) The current regulatory interpretation of “investment advisor” as meaning the same thing as “financial advisor” makes this necessarily so. (Does it not? Challenges invited!)
Is fiduciary “investment advisor”—someone who perfectly practices the institutional asset management principles that earned Dr. Markowitz the Nobel Prize—the way we want to govern the conduct of fiduciary “financial advisors?”
I’m asking because it seems to me that a fiduciary investment advisor managing accurately to the mandate they were given by a client could inadvertently lead to a client running out of money in retirement, and still qualify to call themselves a fiduciary investment advisor.
This could occur because, in a corrective market environment, an investment advisor who does not deploy liability management tools could deploy proper accumulation strategies, but if the market performs poorly, their client could still run short on available funds for retirement due to market forces outside of the advisor’s control.
Are we sure this is the frame under which we want to operate?
Harry Markowitz seems to think that the field of modern asset management, which he invented, is an institutional construct, and that it does not mean the same thing as does consumer wealth management.
I tend to agree with Harry.
I think the current regulatory framework asks, and then inaccurately answers, suboptimal questions.
I would like to see this change in the future.
What do you think?
Michelle Richter, resident agitator, is the founder and principal of Fiduciary Insurance Services and executive director of the Institutional Retirement Income Council.