Here we go again.

Pick up your newspaper this morning. The business headlines are screaming about a crackdown on auction-rate securities brokers. Those are the extremely risky debt instruments with long-term maturities that typically reset interest rates through weekly auctions.

The problem Wall Street has run into is twofold. Not only can these be extremely complicated and volatile forms of fixed income, but the market for auction-rate securities has dried up. The ongoing credit crisis started by a meltdown in mortgage-backed securities is spreading to auction-rate markets.

The result is that investors in these complicated debt instruments are stuck. And big financial firms such as UBS and Wachovia Securities are now facing scrutiny by regulators over how they sold these ARS products to investors. According to a front-page story in Friday's Wall Street Journal, UBS is being formally charged by the state of New York with misrepresenting the risks involved with the ARS market.

With the meltdown in mortgages spreading to so many other parts of the economy, isn't it time for the investment management business to wake up? How long will it take advisors to realize that at some point, if things don't change, investors won't keep coming back?

How long can an industry survive that routinely loses its customers billions of dollars through questionable advice and bad products?

Of course, financial management is a booming industry. Although it's feeling the impact of a downturn in banking, advisors continue to make billions of dollars in profits. The result is that many financial advisors still continue to push complicated products with expensive fee structures.

Bigger Picture

But the picture isn't complete unless you also consider the plight of individual investors and the practices of advisors servicing that market. Of course, they're using a more sophisticated mix of financial products with institutional money managers and big pension fund administrators. But with the average investors, most advisors are still big advocates of high-priced actively managed mutual funds.

What is even more ridiculous is that the continued love affair advisors have with star fund managers flies in the face of developments in the market for exchange-traded funds.

Never before has such a powerful tool been available to investment advisors. Using ETFs, advisors can add value through portfolio design, implementation and ongoing management process. ETFs allow an advisor to build a portfolio focusing on those things that have been proven to add value: strategic asset allocation, low fees and systematic rebalancing.

Yet many investment advisors and brokers have been slow to embrace the benefits of ETFs. This comes despite the fact that ETFs are an investment structure that allows the advisor to build and manage extremely sophisticated, institutional strength portfolios at a fraction of the cost of other alternatives. They're simple, transparent, tax-efficient and index-based.

Traditional actively managed mutual funds are by far the most widely held investment structure of all time, with nearly $12 trillion under management. You will find them in 401(k)s, IRAs and taxable accounts for virtually every investor. The problem is that the mutual fund industry extracts billions of dollars of fees from client portfolios and produces mutual funds that, on average, fail to meet their stated benchmark.

What other industry could survive by offering a product that continually produces sub-par results while charging high fees?

To prove the validity of this point, all that must be done is examine the recent history of a few of Wall Street's most infamous blowups.

In the 1980s, limited partnerships were the investment structure of the day. Investors were sold partnerships that invested in things like oil and gas, real estate, equipment and aircraft leasing, cable television, movie productions and cattle feeding. Regardless of the investment, all limited partnerships had several things in common: high front-end commissions, huge ongoing management fees, virtually no liquidity and questionable investment merit.

At the height of the limited partnership debacle, the investment management industry was reaping huge profits from their sales. By the mid-1990s, however, investor losses in limited partnerships were in the billions of dollars.

Next came the government-plus funds and the option income funds. Both were heavily marketed mutual fund concepts that offered investors a way to earn a higher yield without taking additional risk. Investors were led to believe that their government-plus and option income funds were a safe way to earn high dividends, but soon found out that they were taking far more risk than they realized.

Again, investors ended up holding the bag.

At the height of the technology bubble in the late 1990s, most investors had no idea how risky their portfolios were, and we as an industry did very little to educate them. Instead, the industry kept rolling out technology IPOs of questionable merit, we offered mutual funds that were narrowly focused and far riskier than investors realized, and we moved away from basic principles of asset allocation and diversification.

Again, when it was all over, investors had lost billions of dollars and the investment management industry was diminished.

No Finger-Pointing

The point of examining some of the worst moments in the history of the investment management industry isn't to place blame. The goal here is to change the way advisors think about what they offer to customers.

The investment management industry is entering a defining moment for several reasons. Information has never been so readily and easily available. The next generation of investors, our future customers, have grown up doing their own research and learning the markets. They know the Internet like the back of their hand and know how to use it to get information.

These investors will be less dependent on financial planners for information and ideas. If advisors are going to capture new business, they need to do it with superior ideas and strategies—not the fund of the month.

Investment management is becoming more transparent. As it does, advisors have to offer clients greater transparency in fees, performance and service.

ETFs allow this industry to add value to the portfolio management process and capture more assets by addressing many of the problems that have plagued Wall Street over the years.

When I first entered this industry, investors needed to call a broker to access information about the markets. The only way to get a quote during the day was through your broker. There was no such thing as 24-hour financial news, the Internet or investor chat rooms.

Dynamic shifts in technology have placed more power in the hands of investors. If advisors don't adapt and provide more thoughtful portfolios and a responsible fee structure, they're going to have trouble surviving a rapidly changing marketplace.