Friday, January 15, 2010

"Financial Services"-- The Global Lexicon Misnomer

This is part 1 of a series of 3.

"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so."--Mark Twain

We nod then shake our heads in complete agreement with commentators these days regarding the sad state of the "financial services" industry. But if you believe the term "financial services" defines anything, how much do you really understand about the current environment?
If this makes you wonder, then I suggest it is important for you to understand the difference in what we understand as financial services, financial sales, and financial advice.

Use of the term "financial services" has become a global lexicon for anything money related, but generally depository and brokerage institutions.

Depository institutions (banks) are not service organizations, nor should they be. If they attempt to act as "service" institution while still maintaining a profit motive, they automatically become conflicted
. This happened before the passing of the Glass Steagall Act, and again after its repeal. See the video below for a complete explanation of how and why these organizations came to be.

Including brokerage firms in the context of financial
services is like describing a car dealer as transportation services (ascribing equality and purpose with airlines, and public transit). Brokers are simply middlemen. A primary issue for these intermediaries over the past 15 years has been to justify existence much less exorbitant fees compared to online brokers or Ebay who only charges $80 for a car trade.

It is amazing to me that widespread failure of traditional brokerage firms took so long. Amazingly they are not failing because of public epiphany related to the true value of their service, but because of their own greed.

Financial sales which takes place at financial dealers typically coexists with financial brokerage (hence the term "Broker/Dealer" or "BD"). After the Great Depression laws and a regulatory body were established to protect the public from a firm who can act both as an intermediary and a manufacturer/packager/distributor of financial products. Similarly depository institutions ventured into this world as well, before B/D's and banks made it easier by merging.

We joke about the company store of yesteryear, but many willingly opt for that alternative without justification. How much would we trust Ebay in the intermediary role if it became a primary dealer of goods? Amazon and Ebay are two very different businesses that complement each other well.

So that is it. We have covered 90% of the entities lumped under the term financial services in the U.S. So where do you go, and who can/does provide financial service or give financial advice? Anyone and everyone. Literally.

And everyone does. Especially when it helps them get paid at their day job.

I believe in the value of financial brokers and even dealers as much as I believe in the value of Ebay and Amazon. I just don't believe that entering a trade into a computer justifies paying someone a substantial amount of money to perform it for you. And I believe any other "service" of value is the exception and not the rule.

I also believe in the value of depository institutions. I just don't believe they care more about the safety of my money than their income.