A January 4, 2014, headline from a national financial publication read:
“How to Invest as Rates Rise”
The article begins with a rationale on why interest rates are likely to rise, proceeds to predict the impact of rising rates on stocks and bonds, and follows with recommendations under the heading “What to Do Now.”
The author of these recommendations? According to his online bio, the writer is a Yale graduate with a background in reporting on financial topics. An accompanying photo suggests he is perhaps in his mid-thirties. There are no indications of extensive experience in the financial industry except as a reporter.
This apparent lack of experience does not preclude the author from offering an opinion, nor does it imply his recommendations are wrong. He faces almost no restrictions on his commentary (other than those imposed by his editor), and under most circumstances, will not be held liable if readers suffer financial loss by acting on his inaccurate recommendations.
In contrast, many well-trained (and presumably more knowledgeable) individuals working in the financial services industry are significantly restricted from offering similar opinions, particularly in writing. Further, if their recommendations proved to be in error, these financial service professionals could be subject to legal and civil action by customers who relied on their advice – even when the recommendations included disclaimers.
Why can those with minimal financial credentials often be the freest and most pointed in their commentaries?
Understanding Conflict of Interest – “How do you get paid?”
A business dictionary defines conflict of interest as “a set of circumstances where one’s judgment or actions in a primary interest may be unduly influenced by a secondary interest.” In many instances involving financial services, the secondary interest is compensation – i.e., “How does the person providing the information get paid?”
Information from brokers, agents and advisors
Brokers and insurance agents are primarily compensated by financial institutions for connecting customers with products and services. Because brokers and agents usually have greater knowledge of the products or services than their prospective clients, they operate under suitability or fiduciary standards established by national and state organizations. Their recommendations should be appropriate for the individual’s unique circumstances, and/or in the prospective customer’s best interest.
People licensed in the financial services industry must limit their commentary to their credentialed practice. Insurance agents may not comment on stocks and bonds unless they are also licensed as securities representatives, and vice versa. Unless they are specifically certified, they are even enjoined from critiquing a competitor’s products and services.
Financial professionals who receive fees for their expert counsel operate under similar constraints. Advice or information should relate to one’s licensed areas of expertise. In the event a fee-based advisor also receives compensation as the result of a sale of product or service, this arrangement must be disclosed.
Firms or individuals may disseminate information on their products and services, which may include discussions of ideas or strategies, third-party commentary, and even personal opinions on why customers may find these items valuable. But suitability concerns and the limitations of one’s scope of practice will usually preclude specific recommendations.
Because it directly or indirectly promotes the firm’s products or services, these communications are often classified as “sales material” even if the content is purely informational. Consequently, most broker/agent/adviser publications (including this one), will undergo internal legal review to ensure the content is accurate, falls within the limits of licensed activities, and does not present (or even imply) specific recommendations or guarantees – i.e., you won’t see “what to do now” in print.
Information from the financial media
Writers for news publications or stock pickers on television shows are paid by their employers. Like anyone else who makes public comments, they are subject to libel and slander standards, but free to have opinions and make recommendations, often without disclaimer. Instead of suitability or fiduciary standards, the operative phrase regarding their advice is “caveat emptor” – let the buyer beware. Because of this distinction, journalists and financial “entertainers” are the least regulated in what they say or do.
However, commentators who also work in the business or engage in financial service-related transactions are subject to disclosure and conflict of interest regulations not imposed on commentators with no industry affiliation. Recently, several prominent financial “gurus” have run into trouble over perceived conflicts of interest. In one instance, a seminar speaker and syndicated columnist promoted a credit card issued by a company in which the author had an endorsement agreement. In another, a broad-topic newsletter recommended specific investments through a broker-dealer in which the writer had an ownership interest.
Who Can You Trust?
As “outsiders” in the financial services arena, financial news outlets and personalities may claim to be independent sources of financial information. Good journalists and reporters can certainly be valuable watchdogs, uncovering bad behavior and alerting consumers. And since their primary product is information, there is strong incentive to get the facts, present them accurately, and offer good advice.
But this information is not “spin-free.” Success in the financial media requires attracting and retaining an audience – and advertisers. And while conflicts of interest may not be readily apparent, editorial slant may be tilted to satisfy an audience or appeal to potential advertisers. Tabloid journalism has its audience, even for finances. And people usually advertise in media outlets where their product or service is well-thought-of. In addition, many media information businesses are seeking the largest audience possible. When casting a wide net, it’s sometimes easier (and more profitable) to write “life insurance is a rip-off” than discuss why consumers have continued to purchase the product for the past century.
Competent brokers and agents have in-depth knowledge of their products, services and potential applications that exceeds that of people outside the financial services industry; they can legitimately be called experts. Some people are of the opinion that when an expert’s compensation comes from products or services, the information is somehow tainted. Actually, considering the stringent compliance oversight and the legal, financial, and professional sanctions that could result from misinformation, there’s a good chance it’s quite the opposite. The challenge for consumers is not so much trusting the information, but determining if they agree with the underlying philosophies used to interpret the facts.
The reality: all information sources have biases, and potential conflicts of interest. In a sea of financial data and commentary, understanding the different constraints financial information providers operate under should help you evaluate the trustworthiness of the source, and whether the information is not only accurate, but in line with your perspectives on financial success.