First Lose No Money

Is there a financial equivalent to the maxim “first do no harm?”

What if one of the guiding principles of medicine was applied to the world of financial advice?

What would the financial services landscape look like if product manufacturers and advisors were required to play by rules similar to those that exist for physicians?

First, my guess is that the financial corollary to the application of primum non nocere (first do no harm) would be:

• First do not lose money.

I have had countless conversations over the past year or so with people who cannot believe they are actually paying to hear someone tell them that they are in relatively good shape because their portfolio has outperformed some index by fifty basis points.  Meanwhile, in absolute terms that index and subsequently the portfolio have decreased twenty to thirty percent.

Most people—particularly those approaching or in retirement—rightfully care about preserving their existing wealth in real (inflation adjusted) terms.  Saving money is difficult.  Most people simply want to avoid taking two steps back when it comes to their accumulated assets and the ability to draw a sustainable stream of income from those assets. 

Preservation of principal should be a first order issue.  There are plenty of products that exist—both annuity or insurance-based and derivative-based—that financial advisors can use to create a floor of downside protection that mitigates the “two steps back” scenario.  

Second, I also have a feeling that, similar to physicians, financial advisors would be required to become much more focused and develop deeper knowledge and skills within their areas of specialization.  The notion of a financial services generalist who is all things to all people is unrealistic, even if the advisor is fee-based and refers to specialists for product transactions.

Financial services silos do exist but they are largely premised on the economic realities of the human learning curve as it applies to product distribution.  Consumers would benefit from having a financial advisor equivalent to the AMA list of physician and practice specialties.  

Last is the issue of liability.  Maybe it makes more sense in this regard to think about medicine moving closer to the world of retail investing. 

How about the notion of dispute resolution and the capping physician liability through a binding arbitration process managed by the American Medical Association?  FINRA arbitration—which is final and binding—is basically the sole recourse for retail investors who feel they have been harmed by an advisor.  No state or federal lawsuits—just binding arbitration mediated by an industry-sponsored mediator…