From the Editor: The Nest Egg’s Growing Political Clout

At its best, wealth management, the topic of this issue’s cover story, brings together sophisticated financial planning with a mix of appropriate financial products to meet the needs of an individual, couple, or family. As Gary Linieres, sales director for Financial Objects’ ActiveBank in London observes, at the high end wealth management covers not just regular financial investments but art, residential real estate, and health insurance. For the very rich, private bankers often act as a concierge for their clients – not simply advising on investments but also booking a jet to transport them to England, obtaining tickets to Wimbledon, and arranging for hotel reservations.

On the more mundane level where most of us live, financial firms are struggling to find ways of delivering personalized service, or the appearance of personalized service, cost-effectively to sell as many products as possible and grow what the industry likes to call wallet-share.

In some cases, wealth management may provide opportunity for selling products that are better for the financial firms, and their reps, than they are for clients, as is evidenced by any number of court settlements for pushing poorly performing in-house mutual funds to unwary customers.

The financial services industry, which understood a lot earlier than Microsoft the value of spreading money around in Washington, has had a good ride in Congress with legislation like Gramm-Leach-Bliley and changes in bankruptcy laws to make it harder for customers to get their debt canceled. GLB was more technical than the average person cared about, while bankruptcy is relatively isolated and often the individual debtors carry a stigma of irresponsibility, even if a lot of families facing bankruptcy arrived there because of severe medical problems.

But regulators are unlikely to give the financial industry as much leeway when it comes to wealth management and the retirement nest eggs for the mass market it protects. With the privatization of retirement plans, the customer pool will be the huge Boomer generation of active and vocal voters. Firms that push inappropriate products or don’t supervise their sales force could face a host of Eliot Spitzers across the country, angry posts on blogs and Web sites, and new, heavy-handed regulation. Compliance software can help, but it’s only part of the solution.

Before too long, I suspect, some bright and ambitious politician or attorney general will propose legislation, similar to hate crime laws, which substantially increase the penalties for theft or fraud when the action is committed against the elderly, providing just one more worry for financial firms offering wealth management.

It would be refreshing to see the industry get out in front of this with a set of best practices, such as requiring competitive quotes for insurance products, full disclosure (in big print, on the front page) to show the commission a sales person is earning on each product, etc. It’s a truism that financial products are sold, not bought, so much of this will be done person-to-person, without the telephone recordings and electronic trails that stockbrokers are required to use. (Although, there’s no reason that a laptop toting sales rep couldn’t use Microsoft OneNote to record his entire conversation with clients at their homes or job sites and download them to a compliance office.)