Those Who Have the Gold Should Not Make the Rules

Treat clients the way you would like to be treated; this is pretty simple to understand. No need for legions of lawyers, thousand page documents, or best interest contract exemption clauses. Unfortunately, in the world of investment advice whoever has the gold makes the rules. This could not be more opposite from The Golden Rule.  It does not have to be this way.

Imagine a world where this simple principle would define client investment advisor relationships. To quote Bob Veres, “enforcement would require common sense rather than a close reading of minutia.”

Broad principles would replace thousands of regulations fraught with loopholes to be exploited by skilled lawyers. Just like creating an investment portfolio, simplicity should be the default setting when constructing broad regulation to protect consumers.

When I taught middle school, a guiding principle was the basis for my classroom structure. The first day of school we would go over the golden rule. I actually had a gold poster which said “Do unto others as you would have them do unto you.”

Many of my fellow teachers had all kinds of legalese for the students to sign. Behavior contracts, homework agreements, and a seemingly endless list of classroom rules that had to be notarized by multiple parties.

After much trial and error, I realized most of the students and parents would sign all this stuff without really reading it. This made the contracts about as valuable as the paper they were printed upon.

I decided to tell the students do not do anything in this room you would not want done to you.

Thinking of teasing somebody when they got a wrong answer? How would that feel if the positions were reversed?

Speaking while the teacher is trying to explain something? Imagine if you were the teacher, would this be something you would enjoy?

Putting gum on somebody’s seat or in their hair? I am sure you would enjoy this experience if the gum stuck to you!

Here was the rule: Before doing anything in this room, ask yourself if you would be upset if someone did this to you. For the most part, this worked and it also let the students have much more freedom.

They could chew gum as long as they did it softly and kept it in their mouths. They could eat healthy snacks and drink water as long as they didn’t make a mess or cause a distraction. They could go to the bathroom without asking as long as they did not abuse the privilege.

This worked with hyper-active, hormonal middle school students. Many Brokers fall into this same category. Why shouldn’t this strategy be the building block for the regulation of investment advice?

Here are some questions brokers should start asking themselves:

  • As a client would you like it if you found out the mutual fund that was sold to you had total fees two to three times the industry average with inferior returns?
  • How would you feel it if you needed to sell an investment but were told you could not or had to pay a ten percent penalty to exit?
  • Would it be a comfort to know your investment advisor had little or no knowledge about finance and most of his training focused on sales techniques?
  • Think you would enjoy buying an investment because you were misled?  The promise of market returns with no risk is one of the oldest tricks in the book.

Simple questions like these can go a long way toward establishing a client friendly regulatory structure based upon principles and common sense.

If the golden rule was the standard in which investment advisors’ actions were judged, private REIT’s, leveraged funds, equity indexed annuities, and revenue sharing would most likely disappear from the investment landscape without lengthy legal ramifications.

It’s pretty simple: Treat your client they way you would want to be treated. I did this in a classroom and found this made the students and their parents pretty cooperative, because they knew I was fair.

Doing this with clients would establish an enormous trust factor. The referrals that would most likely follow would more than offset the lost commissions from a previously conflicted business model.

In the much bigger picture, switching to a principles-based structure could restore much-needed trust in the financial industry as a whole.

Maybe we do not need one lawyer for every 265 Americans! The U.K’s. ratio is one for every 151,000 of its citizens. Principle-based regulations would help narrow this ridiculous gap.

Let’s let the golden rule decide how to regulate investment advice; after all, it does come from a pretty good source.




This content, which contains security-related opinions and/or information, is provided for informational purposes only and should not be relied upon in any manner as professional advice, or an endorsement of any practices, products or services. There can be no guarantees or assurances that the views expressed here will be applicable for any particular facts or circumstances, and should not be relied upon in any manner. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment.

The commentary in this “post” (including any related blog, podcasts, videos, and social media) reflects the personal opinions, viewpoints, and analyses of the Ritholtz Wealth Management employees providing such comments, and should not be regarded the views of Ritholtz Wealth Management LLC. or its respective affiliates or as a description of advisory services provided by Ritholtz Wealth Management or performance returns of any Ritholtz Wealth Management Investments client.

References to any securities or digital assets, or performance data, are for illustrative purposes only and do not constitute an investment recommendation or offer to provide investment advisory services. Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. Past performance is not indicative of future results. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Please see disclosures here.

What's been said:

Discussions found on the web