Don’t Hate The Player, Hate The Game- Part 2

We once wrote, "Don't Hate The Player, Hate The Game".  A recent study reinforces the idea that the "game" is broken.  The game we are speaking of is the financial services industry and the study was conducted by the University of Notre Dame and a securities law firm, measuring industry professionals attitudes towards unethical behavior.  You would think that seeing their company brands getting tarnished over the past several years might cause some introspection about how investment professionals view such behavior.  Think again:

“On an individual level, 32% of professionals with less than a decade in the business would engage in insider trading if they could get away with it. That’s [more than] twice the figure (14%) for employees with more than two decades in the industry,” Thomas explained. “What does this mean for the future of the industry, and how will it impact the fragile confidence of investors?”

The poll, which included 925 Americans and nearly 300 British respondents, also finds that nearly one-fourth of financial professionals, or 23%, believe that their colleagues likely “have engaged in illegal or unethical activity in order to gain an edge,” the report says, “nearly double the 12% that reported as such in 2012.”

Overall, nearly one in five professionals feels it is at least sometimes necessary to bend or break the rules to get ahead in the field, the study shows. Plus, 32% say compensation structures or bonus plans “pressure employees to compromise ethical standards or violate the law,” according to the report.

One question I don't know the answer to is whether the industry creates this type of behavior in people OR these people have always been this way and are just attracted to this industry?  One thing I know for sure is that major reform would have the potential to solve the problem, no matter what the cause.  When we started Greenspring we thought long and hard on how a firm should be designed to prevent this behavior.  Here is what we came up with:

  1. Remove bad incentives- can an advisor get paid differently based on his/her recommendation to a client?  If so, this is a horrible incentive that should be eliminated.  Charging a fee only for advice, directly from the client, and not receiving compensation for selling a certain product is the best way to remove these incentives.
  2. Eat your own cooking- the lead up to the financial crisis was clear evidence of this.  There are countless stories of firms selling products to their clients AND betting against the same products they peddled to clients.  Firms should not be investing their own money in a way that is different from their recommendations to their client.  If you wouldn't buy it yourself, don't sell it to your client.
  3. Firm structurewhen a firm has shareholders to satisfy and wall street estimates to hit, client needs may take a back seat. Shareholders of the company that are purely focused on profit create a real ethical dilemma for officers and executives- do what is best for shareholders or do what is best for clients?  We believe a partnership, not beholden to outside shareholders, where the advisors and the employees are the owners removes some of this conflict.  This, in combination with the first two suggestions helps eliminate the bad behavior coming from trying to balance shareholder and client needs.

At the end of the day, you can't regulate morality.  Everyone of the professionals in this study know better and should be behaving appropriately.  One of the great things about capitalism is that the market has a tendency to regulate itself.  Clients are not dumb and the trends are clear.  In a recent report by Cerulli, they estimate that Registered Investment Advisor (RIA) firms (ones that embrace many of the reforms I mentioned above) will grow their market share be 40% over the next four years while wirehouse firms (the big firms represented in the study) will see their market share decline by 5%.  Whether or not regulation gets passed, it seems as if economics may force the industry to reform.

The (k)larity Quotient℠

I’m excited to announce that Greenspring has officially launched the (k)larity Quotient℠, a revolutionary new tool to help companies and retirement plan committees manage their corporate retirement plan.  We are describing it as the retirement industry’s first “fiduciary performance framework.”

The (k)larity Quotient℠ represents nearly a decade of innovation and research and has been in development for nearly an entire year to create the methodology and build the database.

The (k)larity Quotient℠ offers companies a simple, yet profound method for quantifying the critical aspects of a high performing retirement plan.  Using 40 key performance indicators in the 4 key dimensions that drive plan success, they can see how their plan stacks up against other comparable plans.  Most importantly, they get a real sense for what’s working, what isn’t and what steps they need to take to improve overall plan management and performance.  The goal is to provide a simple and transparent decision-making framework that helps companies improve the quality and effectiveness of plan-related decisions, benefiting both employees and the company itself.

We think the (k)larity Quotient℠ has a chance to revolutionize the retirement industry and transform the way companies design, measure and manage corporate retirement plans by giving plan fiduciaries an easy way to identify and fix issues before they became problems. Plus, it’s a very simple and straightforward process for a company to learn if its plan has a high (k)Q℠.  We’ve found it takes roughly 30 minutes for plan sponsors to fill out our questionnaire and gather 4-5 necessary documents.

You can read the press release and also watch a short, 75-second animated video we created to help explain the (k)larity Quotient℠.

Check it out at!

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.