Why is Bernie Sanders Missing the Trend in Financial Services?

Bernie Sanders has accused the financial services industry of being engaged in “the business of fraud;” since this industry comprises about 6% of the U.S. workforce, this is one serious allegation. The good news is it is not true.

I need a break from writing about insurance companies and wire houses who often mislead and overcharge their customers. Even though their conduct is despicable, it is not illegal. They simply work under a different standard, called the suitability rule. This means, legally, they do not have to look out for their clients’ best interests. While many consider this sleazy, they are not breaking the law.

What is missing from Mr. Sanders’ rants is the fact that awesome things are happening in the financial industry that are overwhelmed by the headlines concerning the Madoffs of the world and “too big to fail” banks.

Here are eight reasons to be optimistic about the financial services industry. These companies, trends, and individuals are leading a financial revolution in this country.  This will save consumers billions of dollars and tremendously improve their standard of living in retirement.

1. Vanguard. This is an investment company that is owned by its fund holders, which allows the corporation to use its profits to lower the costs for its owners (who are also its customers). Even a socialist should love this model. No company holds more assets than this Goliath. Though Vanguard has been around for a while, its recent growth spurt says much about the direction of this industry.
2. DFA. Dimensional Funds sells so-called smart low-cost index funds. This company works hard to keep investors on the straight and narrow. DFA only allows access to these funds by advisors who believe in a long-term strategy and diversified portfolios. They make sure clients are basing investment decisions on evidence, and not emotion. (Full disclosure I use both Vanguard and DFA in my own retirement accounts.)
3. Credit Unions. These organizations are also owned by their customers. Plain vanilla loans for all types of purchases are widely available. Their costs are bare bones because Credit Unions don’t have to worry about paying high salaries or bonuses to “fat cat bankers.”
4. Robo Advisors.  Technically speaking, they don’t give financial advice and just manage assets. These companies are great for young investors just starting out. Little or no minimums are required. Low-cost, evidenced-based investment portfolios can be had for a minimal fee. This was unheard of just a decade ago.
5. Fee-Only Registered Investment Advisory Firms.  These companies abide by fiduciary standards and will not accept investment commissions. This limits conflicts of interest and leads to much greater financial transparency. While most advisors still are based on the brokerage-based sales model or confusing fee-based structure (which is a hybrid between earning fees and commissions), the trend is starting to shift.
6. Stronger Regulation. While there is still much work to be done (Regulation of the 403(b) market is atrocious), the trend is improving.  A potential game-changer is a new proposal by the Department of Labor that would require fiduciary management of retirement accounts. This proposal has the entrenched, non-transparent incumbents scrambling for a new strategy.
7. Millennial/Gen-X Influence.  Individuals born during these time periods tend to mistrust conventional wisdom, value transparency, and are comfortable with technology. Many new firms have launched over the last few years with these principles at the core of their version of a corporate culture. Taking clients golfing, while keeping them in the dark about the investment process will soon go the way of the VHS.
8. Free Information. The internet hosts a multitude of great sources of financial information. Just go onto an aggregator like Abnormal Returns and you will find material on just about any financial topic written by some of the smartest people around. More people need to be made aware of these services instead of focusing on the next Ponzi scheme or financial bubble.

I am lucky enough to be a part of a cutting edge Fee-Only R.I.A. I can truthfully say we are out to change the world. We have a culture that always puts clients first. This is not just lip service. Specific client contact systems, evidence-based investing, superior technology, combined with a unique corporate culture guarantee it. I would not be surprised if many firms try to copy our model. The difference being, we chose this model. It was not forced upon us by regulators.

This would not only be great for investors, but would finally make people respect the financial services profession. This will lead to increased investment participation and would lessen the load of entitlement programs, like Medicare and Social Security.

Advisors could truly lead the way for changing the direction of this country without having to resort to cheesy, disingenuous, commercials narrated by Hollywood has-beens. Cuff-links and suspenders should not be criteria for selecting a competent advisor.

While Bernie Sanders has some valid points concerning income inequality, demonizing an entire sector of the economy is counterproductive. Bernie might be surprised by this, but there are many advisors out there looking to level the playing field. Alienating people like us will certainly not help his cause.