Paradigm Shift: Be Good or Be Gone
Over time, the financial services industry has changed dramatically, moving from one way of conducting business to another, which has significantly affected the way advisors market and sell financial products. These radical changes, or “paradigm shifts” have been driven by demand from both the industry and from investors, which has forced advisors to grow professionally.
For example, during the 1970’s and early ‘80s, advisors worked for captive organizations and sold their products almost exclusively. Then the demand to lower marketing costs for financial institutions and a need for more investment choices for consumers resulted in a paradigm shift – advisors became independent and FMO’s began to emerge to assist them in their marketing efforts.
Shift Happens
Currently there is a new paradigm shift that is taking place in the industry, one that is changing the way many organizations and advisors are doing business. And like those of the past, this shift is taking place because the demand for change is being driven from all sides. Investors are disgusted with the lack of ethics in the financial services industry and regulatory agencies are showing their teeth and biting hard.
In the past two years, the Securities & Exchange Commission (SEC), National Association of Securities Dealers (NASD), and State Insurance Departments have levied fines that total over $5 billion against tens of thousands of brokers, agents, brokerage firms, and insurance companies for ethical misconduct.
Simply put, the industry as a whole is demanding a shift to absolute honesty and competency from advisors like never before, and the term “suitability” is quickly becoming the buzzword as we move forward. Like dinosaurs, “hard sell” financial hucksters are poised for extinction and are quickly being replaced by a more educated, sophisticated and informed ethical financial advisor. Consumers demand and deserve honest information, comprehensive product knowledge and suitable recommendations before making any investment decision.
Shift for Success
So what can you do now in order to determine product suitability for your clients? Start by incorporating the regulations adopted by the National Association of Insurance Commissioners (NAIC) into your own practice even if your State does not require it. The NAIC model has identified four critical points that must be evaluated prior to making a product recommendation to a client:
- Financial Status
What is their total financial picture, which includes debt obligations, living expenses, liquid assets, short term income needs, and current income?
- Tax Status
What is their income tax bracket, and that of their beneficiaries? What is the tax status of each of their investments, and what would be the tax consequences of a sale, replacement, or exchange?
- Investment Objectives
What are they really trying to accomplish with their portfolio? Are they a high-risk gambler or are they hyper-conservative?
- Other Relevant Issues
What is their age, health, family concerns, and future outlook?
So the shift is on. Those who will survive and prosper in this industry will be the advisor that learns how to sell from their heart, not from their wallet.
Published in: Senior Market Advisor Magazine - August, 2005 — SMA Website
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