How Do You Eat an Elephant?

Like the punch line to the old joke, "How do you eat an elephant?," the Setting Every Community Up for Retirement Enhancement (SECURE) Act strives to address America's enormous retirement savings crisis "one bite at a time." 

The law, which makes it easier for workers to save for retirement, was signed by President Trump at the end of last year, just as the Center for Retirement Research at Boston College announced that total retirement wealth holdings of middle-income Americans have declined in real terms since 2016 – despite a continuing bull market in U.S. equities and historically low inflation. It's a step toward addressing one of the biggest elephants in the room for U.S. workers. 

The Retirement Funding Gap
According to the National Retirement Risk Index, almost half of today's working-age households are at risk of not being able to maintain their standard of living in retirement. The percentage is even higher if healthcare is considered. 

And 20% of Americans have less than $5,000 in retirement savings

"Most Americans are in serious financial trouble and don't even know it," noted Charley Ellis in my 2015 book A Force for Good, warning of the specter of "large numbers of poverty-stricken elderly people who outlived the retirement funds they once thought ample for a comfortable retirement."

"Too many U.S. workers face the prospect of spending their old age in poverty," reads a recent headline from the Financial Times

One of the core shared expectations society has of our financial system is that it will enable Americans to save enough money to live on as long as they're alive. 

Yet the gap between that basic goal and reality – the "retirement funding gap" – has gone unaddressed for years. And like the federal deficit, the longer the issue has persisted, the bigger it's become. 

How the SECURE Act Can Help
The SECURE Act – the first major piece of retirement legislation in more than a decade – makes it easier for employers to offer retirement plans to their workers. That's critically important because workplace access to a retirement plan is a key driver of retirement savings in a world where defined contribution plans have virtually replaced defined benefit plans (and where one-third of workers don't have access to a workplace plan at all). 

For example, the act offers tax credits of up to $5,000 for three years to small businesses that set up retirement plans. 

It also makes it easier for businesses to join together in so-called "multi-employer plans" and hire "pooled administrators," thereby leveraging economies of scale.

More significantly, the SECURE Act addresses a daunting challenge for retirees – converting their savings into reliable income streams. According to Blackrock's DC Investor Pulse survey, 93% of plan participants are looking for guidance about how to do just that. The SECURE Act requires plan to provide an annual statement about how big workers' retirement "paychecks" will be. It also allows for funds in 401(k)s and other types of retirement plans to be invested in lifetime income products, such as annuities, that can help manage longevity risk.

These and other provisions of the SECURE Act won't in and of themselves solve the retirement funding crisis. 

Any policy solution needs to address how to monetize the trillions of dollars in home equity values that represent, for most savers, their single largest asset. (Reverse mortgages aren't the answer.) 

Ultimately, there can be no policy substitute for individuals taking personal responsibility for saving early and regularly throughout their lives, working longer, planning carefully and intentionally about how to convert their savings into income and living within their means, recognizing they will likely need to live for 20 to 30 years on what they've set aside. Now more than ever, even with helpful legislation on their side, retirement savers and retirees need the advice of financial professionals with their best interests in mind. 

But what is worth celebrating about the SECURE Act is that it represents one of the few examples in recent years of true societal stewardship – a collaborative, research-driven, needs-based, bipartisan effort across the public and private sectors to take a bite or two out of one of the biggest elephants in the room. 

Warriors for Opportunity

Financial capitalism – free markets powered by a robust financial system – is the dominant economic model in the world today. Yet many who have benefited from the system agree it's not working the way it ought to. 

U.S. political discourse seems to be increasingly against capitalism. Democratic candidate Elizabeth Warren – representing one of many voices on the progressive left of American politics – has proposed an Accountable Capitalism Act and unleashed a broadside of policy proposals that would:

During October's democratic presidential debate held in Ohio, Warren charged, "Giant multinational corporations ... have no loyalty to America. They have no loyalty to American workers. They have no loyalty to American consumers. They have no loyalty to American communities. They are only loyal to their own bottom line."

And it isn't just campaign-trail politicians questioning the system. Billionaire Salesforce founder & CEO Marc Benioff recently said in The New York Times that "Capitalism, as we know it, is dead." 

Fewer than 50% of millennials have a positive view of capitalism, and their views have apparently darkened in the past five years. 

Economist Thomas Piketty, who wrote Capital in the 21st Century, a highly influential book on inequality, is advocating for "participatory socialism," stating, "The time has come to exit this phase of making property sacred."

Even a recent cartoon in The New Yorker shows a college financial aid applicant being asked, "So where do you see yourself fitting into "late-stage capitalism?"

"Late-stage capitalism?"

Are we in fact witnessing the twilight years of capitalism?

After the past 50 years, during which capitalism has spread across developed and developing countries around the globe and arguably helped to lift more than two billion people out of extreme poverty?

Even as capitalism has powered one of the longest and most sustained economic recoveries, as well as one of the most durable bull markets in our lifetimes, with the S&P 500 trading near all-time highs?

Economically speaking, the past 50 years have been as good a period in human history as has existed in human history. The so-called "Misery Index" – the sum of the unemployment rate and the inflation rate (developed by Arthur Okun, a head chairman of the Council of Economic Advisers under President Johnson) – is lower at any time since the 1950s.

But you wouldn't know it from much of what you read, watch and hear today. 

So What's Going On?

If we dial down the animosity, overheated rhetoric and political partisanship, then these headlines and sound bites reflect one of the important debates we could be having: What societal goals do we want our free-market economic system to support?

It's not a new conversation. But it's been evolving and getting more intense in the 21st century. We can't seem to make up our minds about what we want. 

Going into the financial crisis of 2008 – 2009, society was sending signals suggesting we wanted growth at any and all costs. Leverage was the tool used to jack up what had been sustainable growth to unsustainable levels.

Then after the world stepped back from the brink of financial collapse, we started introducing modifiers in front of the word capitalism – moral capitalism, inclusive capitalism, fiduciary capitalism, sustainable capitalism – modifiers signaling we didn't want growth that: 

These modifiers seemed to convey a desire for growth balanced with economic stability, sustainability, equality and intergenerational equity.

Then along came Donald Trump, who promised in 2016 to deliver better standards of living for the middle class – people on the bottom 60% of the economic ladder who haven't had real (i.e., inflation-adjusted) income growth since 1980 – through his own version of "Ayn Rand capitalism," powered by a $1 trillion tax cut and one of the most sweeping across-the-board deregulatory initiatives we have ever seen. 

Unfortunately, the design of the tax cuts, combined with low interest rates, has supercharged the wealth of the top 1%, whose outsized share of financial assets is now worth more than the bottom 99% combined. 

At the same time, so-called "oligarchic drift" – the ability of corporate and individual actors to tilt the playing field in their favor and influence the writing of the rules of the economic game to their advantage – has become more and more pronounced. 

These developments have energized many groups, including the progressive and more extreme political left, who are now calling to replace capitalism outright with "socialism."

Throwing the Baby Out With the Bathwater?

So, is it time to abandon the most successful economic system the world has ever seen?

In my opinion, that would be a huge mistake.

But we need to acknowledge that capitalism, as it exists today, is increasingly seen as failing to serve a broad-enough segment of society's needs.

An insightful analysis of how capitalism is falling short was recently offered by billionaire hedge fund manager Ray Dalio. In an article titled "Why and How Capitalism Needs To Be Reformed," Dalio proposed a critique of capitalism focused on inequality of opportunity:

"I have also seen capitalism evolve in a way that is not working well for the majority of Americans because it's producing self-reinforcing spirals up for the haves and downs for the have nots. ... This is creating widening income/wealth/opportunity gaps that pose existential threats to the United States because these gaps are bringing about damaging domestic ... conflicts [that] are weakening America's condition." 

Among the many data points offered by Dalio is the fact that Americans whose fathers were in the bottom income quartile have a 40% chance of staying there. This fact is supported by The Economist's recent "Special Report – Poverty in America," which noted "child poverty often leads to adult poverty and all of its problems" and "where you grow up affects the trajectory of your life."

Our Challenge

As participants in and beneficiaries of the most effective economic system the world has ever invented, we all need to help reframe the conversation about capitalism to balance negative narratives being amplified through the megaphone of the current presidential campaign. 

Some of this is already happening. This summer, the Business Roundtable (a collection of more than 100 CEOs of the largest American corporations) issued a landmark statement endorsing a new definition of corporate purpose. 

Corporations, the group stated, need to commit to delivering value to all stakeholders, including not just shareholders but employees, customers and clients, suppliers and host communities – as well as to "an economy that serves all Americans." 

An important first step. But I think advocates of capitalism need to go further. 

Our discussion should focus on the challenge of inequality of opportunity raised by Dalio. Opportunity is, after all, a core element of the American Dream, enshrined in our Declaration of Independence through the iconic clause, "life, liberty and the pursuit of happiness." Opportunity is the reason so many people come to America.

One of the most inspiring cases for capitalism is the Netflix documentary The Pursuit, which features Arthur Brooks, former President of the American Enterprise Institute. 

In the documentary, Brooks describes capitalism as "an aspirationally based system." An ardent supporter of free markets, he calls himself a "warrior for opportunity."

Capitalism, he says, needs to start with "a want to lift people up." He also says, "Capitalism alone can't fix society. ... Morals have to come first ... based on the sense of social solidarity ... a sense that we are, in fact, our brother's keeper."

That's ultimately what will underpin capitalism's legitimacy: to be an engine of opportunity. 

In that way, we all need to become warriors for opportunity. 

Financial Innovation ... for What and for Whom, Exactly?

Unless you've been taking an extended nap, you've probably read or heard about Libra, a proposed digital currency, over the past few months. A venture led by Facebook and a group of other organizations, it's one of many digital currencies vying to become part of our global financial system. But without proper planning, regulation and oversight, it could be a destabilizing force and end up doing more harm than good. 

Libra's stated mission is to "enable a simple global currency and financial infrastructure that empowers billions of people." As a potentially new currency with potentially massive reach, Libra is certainly worth a closer look.

But in addition to asking, "What exactly is this?" I'd argue we need to take a step back and ask some fundamental questions, like:

The case for Libra and other digital currencies runs uphill. So far, digital and cryptocurrencies have been magnets for fraudsters and criminals operating on a global scale, in no small part because they lack the kind of regulatory framework and controls that exist around traditional currencies.

Facebook CEO Mark Zuckerberg and other advocates of Libra have touted potential consumer benefits like convenience, speed of execution and reduced transaction fees. But, as financial regulatory reform expert Karen Shaw Petrou asked in a recent column, does it make sense to "[justify] this Facebook venture on this single measure of consumer welfare?" She continued, "How much better does it have to be for price and speed – assuming [they arrive] – to trump safety, security, inter-operability, liquidity, transparency and sovereign backstops?"

Libra's risk–reward equation is asymmetric. When and if Libra experiences widespread adoption, consumers may gain access to a faster, cheaper way to pay for goods and services. If, however, it becomes a major force in the financial markets and somehow goes off the rails, then, as Petrou points out in another op-ed, "the household savings of vulnerable consumers and the stability of global finance are on the line." To the point, perhaps, of triggering another global financial crisis. In a recent report, the Group of Seven (G7) Working Group on Stable Coins warned that without sufficient regulation and oversight, digital currencies that reach global scale could threaten the international monetary system, monetary policy, global financial stability and even fair trade.

Petrou shared similar concerns in her op-ed: "Global regulators are deeply, and rightly, fearful that concentrated operational risk creates single points of failure with sweeping systemic consequences if too many counterparties or customers rely on a single system."

To be sure, there is nothing wrong with financial innovation, per se. In fact, as Yale Economics professor and Nobel Laureate Robert Shiller writes in his book, Finance and the Good Society: 

"[T]he best way ... is not to restrain financial innovation but instead to release it. ... Ironically, better financial instruments, not less activity in finance, is what we need to reduce the probability of financial crises in the future."

But, he goes on to say, "Innovation has to be accomplished in a way that supports the stewardship of society's assets."

Do digital currencies like Libra pass that test? 

Missing the Point?

How Private Equity Investment in Wealth Management Could Be Bad for Clients

For the past two years, the financial press has been breathlessly reporting a surge in merger and acquisition activity in the wealth management industry. 

Hellman and Friedman paid $3 billion to buy pioneering digital advisor Financial Engines. Goldman Sachs paid $750 million to acquire United Capital. Reverence Capital Partners paid an estimated $2.3 billion for Advisor Group and Tucker Anthony Associates picked up Wealth Enhancement Group, which itself had executed 13 independent advisory practice acquisitions since 2013 – just to name a few. 

All this activity has certainly been good for financial industry investment bankers. But I question whether it is a good thing for the wealth management industry or, more importantly, for our clients. 

Why Wealth Managers May Sell

There are legitimate reasons for the boom in wealth management M&A activity, most of them having to do with a confluence of factors making it harder and harder to operate smaller broker-dealers or registered investment advisers (RIAs), including:

As a result, many of the deals getting done are consolidation strategies – small firms selling to aggregators, plugging their subscale businesses into larger platforms that have the resources to invest in technology, keep up with regulatory requirements and offer a broad, up-to-date product platform in an era of continuous innovation. 

What's Wrong With This Picture?

This trend could be problematic for a number of reasons. First, much of the M&A activity in wealth management is being driven by private equity firms, which have accumulated larger and larger pools of investor capital – so-called "dry powder" that needs to be put to work. These private equity players have raised capital from limited partners attracted by the opportunity to make money servicing the increasingly complex and challenging needs of baby boomers entering and navigating their way through retirement. 

The problem with this dynamic is that private equity firms and the wealth management industry have entirely different time horizons. The promise private equity firms make is that they will invest their limited partners' capital over three years, improve the returns of the wealth management business they invest in by consolidating them and/or operating them more efficiently, and then "harvest" those investments in five to seven years. 

That short-term time horizon can be seen in deals where one private equity firm sells to another. Lightyear Capital, for example, recently sold two of its investments: Wealth Enhancement Group, to TA Associates, and Advisor Group, to Reverence Capital Partners. Why? I haven't asked Lightyear founder Don Marron. But Lightyear Capital had been the majority owner of Wealth Enhancement Group since 2015, and purchased Advisor Group in 2016 with PSP Investments. My guess is the time had come to "harvest." 

Effective wealth management, by contrast, is best delivered (some might say can only be delivered) over long time horizons. A few years ago, I posted a blog on my LinkedIn Influencer site titled "The Long Haul." It features a financial advisor having dinner with a long-time client whose retirement home was built with the proceeds of an investment portfolio carefully stewarded over 40 years. 

A private equity fund with a five-to seven-year holding period is unlikely to be the best steward of a wealth management business whose value proposition to clients requires continuity in advice and execution, or where results are measured over decades. 

That "horizon mismatch" has the potential to lead to suboptimal outcomes.

The second problem is that a number of private equity-driven deals have used leverage. To finance its acquisition of Advisor Group, Reverence Capital is using $1.6 billion in below-investment-grade bonds. They are able to do that because wealth management businesses have the kind of recurring revenue streams that are attractive to lenders. But what happens when the market, now at historical highs and well into the teeth of a decade-long bull market, turns down?

The third cause for concern is that the principal objective of private equity firms is to generate returns for their limited partners and, in the process, for their general partnership. Wealth management just happens to be a fruitful area in which to accomplish that. There is nothing "purpose-driven" about the investments private equity funds are making in wealth management. It's all about returns. 

If Not Private Equity, Then Who?

I would argue the best owner and manager of a wealth management business is an organization committed to wealth management for the right reasons – one that wants to make a positive difference in the lives of their clients. 

It's an organization that has both a long-term horizon and enough scale to invest in their platform and compete effectively. 

Most importantly, it's a firm that is employee-owned. Because aligning the interests of clients with those of the advisors helping them to manage their wealth has always been a critical ingredient for effective wealth management. 

Those kinds of firms exist. The firm I work for is one of them. But they are not owned by private equity funds – and never will be.

Answering the Important Questions

For me, the best part of working at Baird is the people I get to work with. Mike Antonelli is a great example. A Market Strategist for our Private Wealth Management business, Mike, like me, is the author of a blog where he shares insights on the market and our industry for readers like you. Also like me, Mike is often a guest speaker at client events in Baird’s branch offices across the country.

I recently had the opportunity to sit down with Mike and talk about our experiences at those events, and it turns out we get a lot of the same type of questions from clients concerned about whatever might be happening in the world and how it could impact their financial futures. We know Financial Advisors get these questions, too, and most are some variation of “Are we going to be okay?” This realization led to one of the best conversations I’ve had about the purpose of wealth management and the potential value a good financial advisor can add in people’s lives. You can read a transcript of it here.

Are You a "Neuro Fiduciary?"

The word "fiduciary" has come up a lot in recent years, and it's often equated with the idea of a financial professional keeping their clients' interests first when providing investment and wealth management advice and services. 

This begs an interesting question: Do people learn to serve as fiduciaries through education, coaching, experience and working with clients – or are we hardwired to be good fiduciaries? Or bad ones?

Can we tell by "mapping" our brains whether someone is going to be an effective financial advisor, investment committee member, or foundation, endowment or pension fund executive?

Don Trone and Sean Hannah certainly think so. They've staked the future of their leadership development company, 3ethos, on a research framework and assessment that purports to do just that. 

Trone, a former Coast Guard officer and helicopter pilot, has long been recognized as the "father of fiduciary" processes and standards in the United States. Hannah is the director of the Center for Leadership and Character at Wake Forest University's School of Business and is a retired colonel in the U.S. Army. 

Together they are doing groundbreaking research in the nascent field of "behavioral governance," which is the fiduciary equivalent of behavioral economics, pioneered by Nobel laureate Daniel Kahneman and his collaborator Amos Tversky (both profiled in Michael Lewis' 2016 book, The Undoing Project). Or, put differently, it's the governance equivalent of behavioral finance, developed by another Nobel laureate, Richard Thaler. 

Is It All in Your Head?
Trone and Hannah describe their area of study as "Neuro-fiduciary: The discovery and advancement of the neurological, psychological and functional capacities that constitute an effective fiduciary."

Their goal is to "accelerate the development of fiduciaries" – including professionals (like financial advisors and portfolio managers) but, even more so, "lay fiduciaries," which they see as the area of biggest need and opportunity. 

Trone and Hannah believe neuro-fiduciaries (think of them as old-style fiduciaries with a dash of leadership and stewardship mixed in) are key to generating better investment outcomes for the organizations they represent. 

"There are over 8 million fiduciaries in this country," Trone told me in a recent interview, "less than 5% of whom are professionals. The rest are volunteer or part-time members of investment committees of not-for-profit organizations, or on mutual fund boards, or 401(k) plans. Most of them don't fully understand what their responsibilities are."

(Confirming Trone's point, a 2017 survey of almost 1,000 plan sponsors showed nearly 70% had not received any formal fiduciary training. And the U.S. Department of Labor has started asking plan sponsors, as part of its audits, for documentation regarding training initiatives.)

But focusing on training alone misses the mark. 

"A person can't make use of training if they haven't developed the right capabilities," Trone told me. 

Understanding the Wiring
Hannah was a member of the academic team that identified six "neurological capacities" that determine a priori just how effective a fiduciary someone is likely to be:

"'Fiduciary' defines duties as moral obligations – what you have to do," they write. "Behavioral governance defines duties as moral aspirations – what you want to do, who you want to be."

In the case of financial services, Trone says, "Neuro fiduciary is exhilarating – 'fiduciary' is exhausting." (Or, one might add, boring.)

"As an industry," Trone told me, "we have failed advisors, trustees, investment committees by not understanding what it takes to be better fiduciaries, and not giving them the tools they need to become better at behavioral governance." 

If Trone and Hannah's theories are correct, the financial services industry could conceivably one day measure someone's suitability to be an effective fiduciary – and identify areas they could improve to be more effective in their roles. Which, in turn, could improve the investment and wealth management outcomes their clients are depending on them to provide. 

Philanthropy Humbugs

Why Some Acts of Charity Draw Criticism

It seems Ebeneezer Scrooge's favorite refrain is alive and well in, of all places, philanthropy. It's becoming increasingly common to hear a chorus of "Bah! Humbug!" when sizable donations are announced – particularly when the donor is a wealthy individual or family. 

How did we get here? How is it that in a time when there is so much real, urgent need in our world, it's socially acceptable to condemn someone's altruism and decry their donations as money misspent?

As a society, we're facing a myriad of complex challenges – growing wealth and income inequality, climate change, hunger, refugee crises, immigration policies, deteriorating public finances, resurgent nationalism, racism and political turbulence in countries around the world, to name just a few. Frustration over these matters is playing out in, of all places, philanthropy. 

Getting to the Heart of the Matter
This is something Phil Buchanan, chief executive of the Center for Effective Philanthropy, tackles in his work and recent book Giving Done Right. As he remarked in a recent opinion piece in the Financial Times, "This generalized cynicism originates with those who are understandably frustrated about wealth inequality but misdirect that frustration in a way that threatens to erode cultural norms about helping others – and about the importance of charity."

In some cases this frustration is more warranted than in others. Museums around the word are now rejecting donations from the Sackler family, which made billions through their ownership of Purdue Pharma – maker of the oft-abused and heavily marketed painkiller OxyContin.

However, we've also witnessed criticism of some remarkable gifts from arguably less "tainted" sources. Former New York City mayor Michael Bloomberg gave $1.8 billion to Johns Hopkins University in late 2018 – the largest gift ever to a single institution – only to have one commentator call it a "dangerous distraction." After the tragic fire at Paris' Notre-Dame Cathedral, donors pledged nearly $1 billion to support a rebuilding effort. A number of donors, including wealthy business people, committed to give more than $100 million each. But a headline in the New York Times read, "As Rich Lavish Cash on Notre Dame, Many Ask: What About the Needy?"

Where Skepticism May Lead to Healthy Change
One area of philanthropy that has recently been critiqued is donor-advised funds (DAFs), which allow people to set money aside for a future charitable gift (and receive a near-term charitable deduction against their taxes) without having to designate the benefitting nonprofits or dates for those grants. As a result, beneficiaries could wait months or years to receive funds. This appears to have been the case in certain years in the Bay Area, home to the Silicon Valley Community Foundations (SVCF), which manages more than $13 billion in assets, much of which came from donations by the area's tech elite. 

A great deal of that money is sitting in DAFs, awaiting recommendations from donors as to which organizations it will eventually benefit. Criticism arises when grants paid by certain community foundations as a percentage of assets fall below the 5% minimum payout requirement applied to private foundations (which doesn't happen all that often), spurring calls for changes in the tax code. It also hasn't helped optics that the largest sponsor of donor-advised funds is for-profit wealth management behemoth Fidelity. 

From Humbugging to Effecting Change
It's one thing to "humbug" philanthropy and discuss the potential pitfalls of large gifts from wealthy donors. It's another thing to call for the rejection of donations. As Phil Buchanan commented in the Financial Times, "Of course, critique is vital. But a cynical, generalized dismissal goes too far. Why give if all you get is grief?"

Philanthropy, after all, is not complicit in perpetuating or exacerbating income inequality. We need to encourage everyone (who is so inclined) to give to whatever causes they feel passionate about and we need to resist telling – or even feeling we have the right to tell – wealthy donors where, how and to whom they can give their money away. 

Getting it Right

SEC's New Rule Protects Investors While Preserving Choice

Like many in the wealth management industry, I've been watching, speaking and writing about the Securities Exchange Commission's Regulation Best Interest Rule for some time (most recently for Financial Planning, Investment News, The Wall Street Journal and Bloomberg TV). Now that the rule has been approved and published in final form, you can put me squarely and unequivocally in the camp of those who believe it represents one of the most significant milestones in the past decade along the path to restoring individual trust and confidence in financial markets and financial advisors. 

Protecting Investor Interests and Choice
The beauty of Reg BI is that it offers a solution to an equation no one had been able to solve in the years since the Dodd Frank gave the SEC authority to so a decade ago. It simultaneously raises the bar for investor protection while preserving individual investors' ability to choose who they work with (what kind of advisor), what products and services best fit their individual and family situations, and how they pay for those products (with commissions or fees or a combination of the two). 

It does so by explicitly rejecting a one-size-fits-all approach to wealth management. As SEC Chairman Jay Clayton stated in his opening remarks, "a one size fits all approach to regulating BDs (broker dealers) and RIAs (registered investment advisors) doesn't work because BDs and RIAs have inherent differences". 

A Higher Standard of Care
Reg BI, in its final form, means we will never have a "uniform" or "harmonized" standard of care across retirement accounts, advisory accounts and brokerage accounts, which was the somewhat utopian vision behind so-called "fiduciary standard" provisions of the Dodd Frank Act. 

But what we do now have – for the first time in our lifetimes – is a clear regulatory principle and standard of client care consistently present (if differently implemented) across all activities that financial advisors engage in on behalf of their wealth management clients: The requirement that they put their clients' interests first. 

Hard to believe it has taken this long and been this difficult to get to this point. 

Reg BI has many vocal critics. But I honestly believe this rule is a win for everyone. For individual investors and their specific needs. For advisors and their ability to serve their wealth management clients. And for the underlying optimism that necessarily underpins the act of investing one's hard earned savings in financial markets – the belief that tomorrow can and will be better than today.

The Brave New World of “Bio Bonds”

Karen Shaw Petrou (profiled in the Wall Street Journal with her guide dog Zuni) has earned her way to the top of a short list of experts in global financial regulatory issues. But what she's most proud of these days isn't her work consulting with banks and regulators. It's a new bill recently introduced in Congress that would provide federal guarantees to investors who help develop cures for blindness.  

More than four million U.S. adults and nearly half-a-million children are blind or have severely impaired vision. Petrou's "Eye Bond" legislation would enlist the public and private sector in the quest to cure blindness. The legislation would create a five-year, $1 billion pilot program that would offer loans to researchers doing vital research on blindness. The federal government would guarantee up to 50% of the principal of securities issues by banks and investment banks to biomedical researchers selected by the National Eye Institute for work in curing multiple causes of vision impairment, including age-related macular degeneration, combat injuries, glaucoma, diabetes retinopathy and sickle cell retinopathy. 

The bill, H.R. 2620, was introduced with bipartisan support in the U.S. House of Representatives in May by Rural Development FDA Appropriations Subcommittee Chairman Sanford Bishop (D-GA) and Energy and Commerce Subcommittee Ranking Member McMorris Rodgers (R-WA). 

The Potential to Make an Impact
If successful, Eye Bonds will lay the groundwork for a new class of investments called “Bio Bonds,” which could help raise crucial funding for research, treatments and, hopefully, cures for other diseases and disabilities. Both Eye Bonds and Bio Bonds fall into one of the newest and fastest-growing categories of socially responsible investing known as “impact investing”. 

Impact investing goes a couple of steps further than traditional a “negative screening” approach to socially responsible investing, in which investors cull their portfolios of companies engaged in activities that aren’t aligned with their values, like tobacco or gun manufacturing, gambling or alcohol.

Impact investing also goes beyond another variation of socially responsible investing, known as ESG investing, in which investors rank companies against a variety of environmental, social and governance metrics designed to measure their overall corporate responsibility.

By contrast, impact investing involves targeting investment dollars at a particular cause or problem, like climate change, or water quality in third world countries, or eradicating malaria. Or, in the case of medical research, the so-called “Valley of Death” associated with translating early discoveries and breakthroughs into effective treatments and ultimately making those commercially available to consumers.

There is plenty of funding for basic biomedical research from sources like the National Institute of Health, various foundations and other types of philanthropy. There is also funding for late stage, clinical trial research from venture capitalists and biopharma companies. But there is relatively little support for translational research because it involves significant time and money and isn’t always successful.

A More Institutional Approach?
MIT finance professor Andrew Lo has proposed a different investment approach to the Valley of Death when it comes to potential treatments for cancer and other deadly diseases: a $30 billion Mega Fund that would provide money for drug research in return for royalties from those products that became commercially successful.

Lo’s reasoning is that investors are (and should be) scared away by the long odds of having any single new orphan drug approved by the FDA. Instead, investors in risky translational research need to prudently diversify research and development risks by having “multiple shots on goals” – as many as 150 different investments, each requiring as much as $200 million from beginning to end – through a single, diversified portfolio.

It’s not hard to see why the innovations proposed by Petrou and Lo are getting a lot of attention.

“Even if you’re not blind, or don’t know anyone with severe vision impairment,” Petrou points out, “if the financial instruments in this legislation work for blindness, they will also work for other diseases and disabilities.”

When and if they become a reality, both Bio Bonds and Lo’s Mega Fund would probably be too risky for the average individual investor. That’s currently true of many types of impact investing. But finding ways to combine targeted impact with manageable risk is likely to be the next big wave in socially responsible investing. And it’s something I’ll be paying close attention to as the trend continues to develop.

Is Finance a Profession?

During a recent speaking engagement at Wake Forest University's School of Business, I discovered a goldmine of academic thought and analyses regarding the distinction between a business and a profession. 

For example, "Is Business a Profession?" is the name of an undergraduate course taught by Professor Matthew Phillips. It's also the subject of a new book – Honorable Business – by Professor Jim Otteson. And it's the focus of a white paper by Professor Sean Hannah titled "Towards a Noble Profession of Business" (which is one of the most cogent explorations of the subject I've ever read). 

All of this helped bring into focus a question I've been thinking about for years: Is Finance a Profession?

What Distinguishes a Profession?
Upon further reflection, I've concluded that some segments of finance are professions. Some are evolving into professions. Some aspire to be professions. And some never will, nor should they be. 

To understand my reasoning, it's important to start with the characteristics of a profession as identified by the academics referenced above: 

These are all features society associates with professions like law, medicine, accounting, architecture, and engineering. 

The Professionals of Finance
By these benchmarks, the field in financial services that seems closest to being a profession is asset management. The rules and regulations governing this business were established by the Investment Advisors Act of 1940 and years of legal precedent. Those rules and regulations impose a fiduciary duty on anyone who provides investment advice for a fee. Many of the analysts and portfolio managers employed by asset management businesses are Chartered Financial Analysts (CFAs), required by the CFA Institute as charter holders to pass a rigorous three-part series of examinations and to live and work by a professional code of ethics. 

Close behind (and closer than most people fully appreciate) is wealth management. 

The dominant business model for financial advisors has evolved over the past several decades from commission-based brokerage to fee-based advisory, where financial advisors are held to a fiduciary standard on much of the work they do for clients. 

Today's financial advisors generally are far more highly trained than the much-maligned "stock broker" of the 1960's and many hold credentials like the CFA, or Certified Financial Planner (CFP), whose code of ethics requires members to act as fiduciaries, or a host of others including Certified Investment Management Analyst (CIMA), Certified Private Wealth Advisors (CPWA), Chartered Financial Consultant (ChFC). 

Many financial advisors won't work with a client without some form of financial plan or discovery process, which allows them to determine which products or services best fit those clients' needs (which one would expect a fiduciary). 

Not entirely. Not yet.
So why, then, isn't it possible to make a blanket declaration that finance is a profession?

Because not all businesses in finance operate under a fiduciary standard, have codes of conduct, certify their employees, or even have a professional obligation to their clients. 

Writing about Goldman Sachs in his contribution to my book, A Force for Good, longtime industry observer Charley Ellis points out, "Most of the organizations Goldman Sachs work with are not clients. Some are customers – even important customers – but not clients. And still others are not customers, but counterparties." A financial services firm's duties to clients vs. customers vs. counterparties are subtly but importantly different. And many consumers of financial services are not aware of those differences. 

Generally speaking (though not always), professions refer to the people and organizations they serve personally as clients. People who have checking accounts, credit cards and lines of credit at a bank are generally referred to as customers. Investors who deal with stock and bond traders are most properly called counterparties, not customers or clients. Financial firms are obliged to ensure products and services are suitable for their customers. They are obliged to deal fairly with counterparties. Both are lower standards of care than the fiduciary standard that applies to clients of professionals. 

A Matter of Trust
There is another reason it's not possible make an unqualified statement about finance as a profession. 

As Professor Hannah warns, "A business... cannot simply declare itself to be a profession. Professions are granted status only when they earn it from the constituents they serve. It is clients and broader society... who will determine... a profession". 

A little more than ten years after the financial crisis of 2008-2009, finance remains the least trusted business sector globally, according to the 2019 Edelman Trust Barometer. And a recent survey  by RealClear Opinion Research shows "45% of Americans say Wall Street and investment firms make it harder for them to achieve the American Dream." By Professor Hannah's standard, there's still a lot we need to do before broader society views us not through the lens of caveat emptor, "let the buyer beware", but through the lens of credat emptor, "let the taker believe in us."