Errors of Commission

Steve Abramowitz

I WAS A RABID football fan as a kid. I would sweep across our front lawn, fantasizing about the many and varied ways I would run to daylight for Hewlett High School. But when I finally got the chance, I lasted only a few practices. I hadn’t counted on all the bruises that came with the program.

So, too, was it with my brief stint as an independent investment advisor affiliated with a large discount broker. After a career as a university professor, and while still working part-time as a psychologist, I realized my lifelong dream of becoming a financial advisor. But once again, I got stopped at the line of scrimmage.

I fancied myself a deliberative portfolio manager, not the administrative secretary that the job required. I sought the heady stuff like aligning asset allocations with clients’ needs and risk tolerance, but instead found myself walking them through tortuous retirement-plan application forms.

Admittedly, the investment world hardly needed another self-proclaimed portfolio manager to rake off maybe 1% of an investor’s stake, or about 10% of his or her average annual return. I limped off the playing field chastened and wiser about the distinction between dream and reality.

But I’m not here just to bemoan my fate. In my brief time as an advisor, it soon became apparent that questions of trust and integrity were far more difficult than those of which way to tilt a portfolio. Often legally bound as fiduciaries to put clients’ interests before their own, financial advisors must wrestle with the moral weight of their recommendations.

Consider the ethical dilemma that arose when a 78-year-old widow, whom I’ll call Ivy, gingerly entered my office. She told me she had earned just $27 in annual interest on her $10,000 of savings at her local branch of a national bank. Haltingly and vulnerable, Ivy asked if she might safely get more. She said her and her deceased husband’s state pensions amply covered her living expenses. My client impressed me as frugal. She had no significant debt. She also had a whole-life insurance policy she could tap in an emergency.

It soon became evident that Ivy was not investment savvy and that any financial decisions would be made by me. This was a few years ago, when interest rates were infinitesimal but possibly soon heading higher with inflation. I suggested certificates of deposit to increase her return and Series I savings bonds to protect against any rise in inflation.

Those recommendations were easy for me. Sure, there were alternatives, but this strategy seemed eminently justifiable. I charged an hourly fee for my services, so my compensation was not affected by selecting two commission-free investments. No need to wrestle with a conflict of interest between what’s best for my client and what’s most beneficial for me.

But what if my income was tied to commissions, which CDs and savings bonds do not produce? I was lucky. I had other sources of income, while most advisors don’t. I have attended several advisor conferences and don’t recall even a handful of presentations on CDs and savings bonds.

How do advisors who depend on earning commissions defend a practice that repeatedly pits their own financial well-being against their conscience? The mantra is, “We need to be compensated for our time and expertise.” Certainly they do, and they should be. And an hourly fee would accomplish that and do an end run around commissions and the inevitable confrontations with an inherent conflict of interest.

I know what you’re thinking, folks. How could this obviously sanctimonious guy level an hourly fee of $175 that might well gobble up much of his client’s first-year interest income? Well, this one was almost pro bono. I charged Ivy for a 15-minute session, and helped her set up her CD and TreasuryDirect accounts, which took far more than 15 minutes. With that attitude, maybe it’s no surprise I didn’t last long as an investment advisor.

Don’t get me wrong, I’m no saint. I regularly raise rents on my tenants and I peeked over the shoulder of the girl sitting in front of me during my college econ final. My journey as an investment advisor didn’t go as planned. But I managed to leave with my soul intact.

Steve Abramowitz is a psychologist in Sacramento, California. Earlier in his career, Steve was a university professor, including serving as research director for the psychiatry department at the University of California, Davis. He also ran his own investment advisory firm. Check out Steve’s earlier articles.

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