Everybody knows the doctor’s role. They provide medical advice and services to patients. Patients pay doctors either directly or through insurance based upon the services provided.
The Drug Rep Doctor
Imagine a world where two types of doctors exist. The first doctor, we’ll call the “traditional doctor” provides advice and services for compensation. The second doctor we’ll call the “drug rep doctor” provides advice and services for compensation but is also compensated by drug companies for distributing their products – like a drug rep. They look no different on the surface, they call themselves the same thing, and they even dress the same. In some cases, it’s nearly impossible to tell the difference between the two. As a result, people aren’t aware of which type of doctor they deal with. Doctors aren’t required to disclose this information, therefore, it never really comes up. In fact, most people don’t even realize there are two different types of doctors to choose from. But peel back the layers a bit and major differences surface.
The traditional doctor must swear by the Hippocratic Oath and is therefore held to an extremely high professional standard. Violation results in major punishment and potential loss of license. The traditional doctor must put their patients interests first and avoid conflicts of interest. When conflicts occur, they must disclose this information.
Unlike their competition, the traditional doctor doesn’t accept additional revenue streams. In order to keep up, they must charge more for their services. Consumers don’t understand this and flock to the competition, further exacerbating the issue. Although the traditional doctor’s message resonates with consumers, they don’t have the resources to get the word out.
On the other side, the drug rep doctor enjoys multiple streams of revenue as they hitch their wagon to the pharmaceutical marketing machine. Unlike their competition, they are governed by the drug rep professional standards. As a drug rep doctor, they’re exempt from the rigorous professional standards of the traditional doctor. Under the drug rep rules, they aren’t required to act in their patients best interests. In fact, it’s fair game that they place their interests and the pharma companies interests above their patients. They are not allowed to swear by the Hippocratic Oath. They can legally put their interests and the interests of the Pharma companies above their patients interests as long as their advice is pretty good.
To drive production, Pharma companies set up sales goals with major incentives. As a result, you see certain drugs paying drug rep doctors 10x more than others. Are these drugs really the best for the patient? Naturally, this doctor’s advice comes into question from time to time. However, with such low professional standards, disputes tend to fall by the wayside. The marketing machine pushes the idea that drug rep doctors are to be trusted advocates for patients. They diffuse the idea that their doctors are salespeople. It works.
Think that sounds crazy? This is why doctors aren’t allowed to sell prescriptions. But in financial services, the equivalent is fair game. The scenario I described is how the financial services industry is currently set up.
Originally, the rules in financial services were set up to avoid this type of issue. There were two different businesses. The service and advice businesses (called RIA’s) and the product distribution businesses (called Broker-Dealers). The RIA’s would be like doctors and the Broker-Dealers would be like Pharmaceutical companies.
Early on this worked. RIA’s provided services and advice in exchange for compensation. Standards were set extremely high – similarly to that of a doctor practicing medicine. They began managing investments for large pensions and wealthy families.
The other side was setup to facilitate product distribution. This professional was not allowed to provide broad advice and, instead, played the role of salesperson. They were responsible for distributing products and operated under a much lower standard of advice (for good reason – they were salespeople). Think the Wall Street firms, stockbrokers, and insurance agents selling IPO’s, investments and insurance.
Enforcing The Rules
Over time, demand for advice skyrocketed as people were forced to manage their own retirement. Broker-dealers wanted a piece of the action. They tested it with their sales force and realized two things. First, advisors were better positioned to sell than salespeople – people tend to trust other people that called themselves “advisors”. And second, the SEC wasn’t going to enforce the original rule separating the sales businesses and the advice businesses if they simply began marketing their sales force as “advisors”. As a result, Broker-Dealers pivoted and began rebranding all their stock brokers as trusted advisors but didn’t change anything behind the scenes.
Today we have a situation in financial services very similar to the doctor analogy. Everyone calls themselves an advisor, acts like an advisor and gives advice. Yet two underlying types of advisors exist. These two types look exactly the same on the surface. But, behind the scenes, they couldn’t be more different. Naturally, consumers can’t tell them apart.
So you have the advisors who deliver services and advice under a requirement to act in their client’s best interest. They operate under an RIA and are in the minority. And then there are the advisors who sell and distribute products for broker-dealers. The broker-dealer marketing machine pushes words like “financial advice” and “trusted advisor.” They avoid words like “salespeople” and “product sales.” And for good reason. Today, people want advice from a trusted advisor.
But the problem is that’s NOT what they’re doing behind the scenes. They’re marketing themselves as financial advice firms when they’re really product distribution machines. Consumers are totally confused at best and at worst have no clue that there is more than one type of financial advisor.
Many financial advisors are confused, too, and just follow their company’s lead. Most advisors I know genuinely believe they’re providing the best advice possible to people, even though they’re regularly dealing with major conflicts of interest that make it near impossible. Nobody is immune to conflicts. And “advising” a client to buy a product you happen to sell is a major conflict.
Marketing, Profits, and Regulators
So we know that Broker-dealers market their sales force to consumers as trusted advisors. They convince their sales force to believe they’re trusted advisors. But what about the old regulations separating advice firms from product sales firms? Remember the SEC chose to overlook the fact these firms began calling all their salespeople “advisors” as long as they continued to operate as salespeople. And so that’s exactly what the broker-dealers are doing. When a regulator comes sniffing around wanting to understand the back office operation, they say sure you can come in and look. Check out our operation. It looks just like a sales operation. That’s what we do – we sell products. We don’t give advice. Here is this manual governing our sales force that specifically says you cannot give advice. Here it is in bold. This allows them to continue operating under the much lower broker-dealer standards. Standards that were never meant to be used for providing advice.
From a marketing standpoint, they provide advice. Consumers believe they receive advice. Advisors believe they deliver advice (just ask around if you don’t believe me). But from a compliance standpoint they sell products which keeps regulators happy. From a profit standpoint, they sell products and more is better. As a result, advisors sell questionable high expense products to consumers under an advice mirage. Everyone wins except the consumer. Nothing changes because the consumer lacks awareness, the regulators are content, and the broker-dealers are profitable.
Glimmer Of Hope
Our government seems to have been made aware of this issue based upon the passage of a recent new rule by the Dept. of Labor. This new rule will require ALL advisors providing advice on retirement plans to act in their client’s best interest. It sounds like this would be a given, but unfortunately it’s not.
This is a major change – especially for the broker-dealer firms. It’s forcing them to operate under the much more stringent rules when giving advice on retirement plans. A standard RIA’s already use. This was not the best case scenario – but kudos to the DOL for coming up with a creative way to begin fixing the issue. It’s not going to solve the problem but it is a step in the right direction.
In my mind, the best solution is driven by consumer and advisor awareness. The more people that know about this, the better. Awareness will cause consumers to stop working with and supporting firms that don’t operate under high standards. Advisors who become more aware will be compelled to change. This will either force big firms to change or become extinct.