Opinion: Financial advisors require a Hippocratic Oath

It’s been said that “first, do no harm” is part of the original Hippocratic Oath. Although the phrase does not appear in a version of the oath dating from AD 425, the sentiment “I will abstain from all intentional wrong-doing and harm” does appear in more contemporary versions.

We need a similar oath for financial advisors, especially since most advisors are currently not held to a fiduciary standard. If regulators won’t commit to requiring advisors to do what’s right, they could at least require them to refrain from doing what’s wrong.

As with any industry or profession, the business of giving financial advice involves the promise of competency, but there is a wide range in quality. Smart, professional clients often have strong personal motivation and financial literacy. Thus, the smart and rich generally tend to make better financial decisions. Many financial advisors suggest that these superior decisions are the result of superior advice when, in fact, they are often the result of the decision-makers just being more discerning. At the same time, competition at the top of the financial-advice food chain for lucrative, engaged clients assures these investors that they will likely get good advice.

The Hippocratic Oath would be most applicable, then, to the bottom of the continuum (i.e., bad advisors). When an advisor is dealing with unsophisticated clients and those who are, relatively speaking, poor, there is a lot of room for doing harm. Such harm might be less consequential in terms of absolute dollars but more detrimental in terms of lifestyle impacts felt over the course of one’s life. There is no one to protect the poor sod who is overinsured by a commissioned sales rep or put into a high-cost product when suitable and cheaper products exist.

It’s this last point where the most meaningful gains can be made for the largest segment of the population. Without a meaningful Hippocratic-style oath, the next best thing would likely be to disintermediate financial products by eliminating embedded compensation, leading to product meritocracy. 

As it stands now, advisors, whether at banks or independent, recommend actively managed mutual funds even though there may be cheaper index funds and ETFs available. If all products paid the same (i.e., nothing), advisors would be free to make recommendations based on product merit alone. We have evidence to support this. When embedded compensation was eliminated in Australia about a decade ago, there was an immediate shift away from higher-cost products to lower-cost alternatives. Removing the incentive to do what is easy paved the way for advisors to do what is right, which is what should have been happening all along.

In Canada today, many investors are using products with higher costs than necessary. Forcing advisors to put more cost-effective options on the menu and to highlight them would help minimize harm caused by the financial advice industry today.

But advisors are being incentivized to recommend products that are not in their clients’ best interests. The industry likes it that way because it’s good for business. Thus, we need a Hippocratic Oath to counteract sales-related incentives that have existed for over a generation.

As in most lines of work, the notion of harm is subjective and difficult to reliably identify in advance — or to enforce after the fact. There are still some bad physicians out there. While the principles involved in an oath are imperfect, they represent a clear step forward. At a minimum, an oath would provide an explicit moral compass for decision-making, which could tilt recommendations away from sales pitches toward more evidence-based products and strategies — a clear win for clients.

John De Goey is a portfolio manager with Designed Securities Ltd. He can be reached at jdegoey@designedsecurities.ca.