Almost five years after the last in a series of “once in a century market disruptions,” the chairman and chief executive of the Financial Industry and Regulatory Authority Inc. (FINRA), Richard Ketchum, has a few thoughts about how they can improve in the future. “I would focus as an adviser more on negative scenarios. And if I were a firm, I would focus on the training and education of those advisors to make sure that they look at… negative scenarios,” Ketchum commented in a panel discussion for compliance and risk management executives, according to the Wall Street Journal.
Similarly, Susan Axelrod, FINRA’s executive vice president for regulatory operations commented, “People have to be out there having this conversation, not waiting for the portfolio to change and the customers to complain.” While sage advice from FINRA, it is reasonable for investors to expect planning, training, and monitoring for the inevitable market decline is already part of the everyday conversation on Wall Street.
Unfortunately, it is not according to Peter Mougey, a shareholder with the Levin, Papantonio law firm who heads the firm’s Securities & Business torts department. “
Wall Street has the tools to minimize risk and volatility in its clients’ life savings but all too frequently these tools are not used. Many financial advisors believe they are smarter than the market and can outperform the applicable indicies,” says Mougey.
As a result, these advisors recommend higher risk and untested structured finance. In fact, according to Mougey, the overwhelming weight of both academic and industry research indicates that the right mix of stocks, investment grade bonds, and cash, commonly known as asset allocation, is the remedy for market disruption, smoothing market volatility, without sacrificing returns.
“In my practice, I have seen, time and again, financial advisors recommend the flavor of the month high commission product, whether it is a REIT, TIC, or hedge fund, to investors rather than relying on time tested plain old vanilla asset allocation,” says Mougey.
When asked about specific products that Mr. Ketchum felt were particularly troublesome, Ketchum declined to comment but instead mentioned “long-duration, fixed-income products”. Citing that clients have potentially been hearing about these products for so long that they have become “numb” to the message.
Joshua is a writer and researcher with Ring of Fire. You can follow him on Twitter @Joshual33.
