Seeming ill-prepared, regulators failed to constrain them. Throw Bernard Madoff’s massive fraud into the mix and it is no wonder that trust is scarce. “Investors are angry,” says Barbara Roper, a consumer advocate.

“With the global economy having been brought to the brink of collapse and taxpayers forced to bear the costs, it is understandable. And financial advisors are also a target. I don’t think it can be said that financial advisors as a whole served their customers particularly well.

“Some pursued practices that elevated short-term profit over long-term sustainable business practices. In effect, they said, ‘Trust us,’ and there was a lot riding on their view of the world being correct. Consumers are now paying a heavy cost for them getting it so wrong.”

Survey data would seem to bear out her point about a break in trust. According to the Chicago Booth/Kellogg School Financial Trust Index, a quarterly measure of Americans’ confidence in financial institutions, trust in bankers (on a scale from 5 to 1) slipped from 2.6 to 2.5 in March, and in brokers from 2.19 to an all-time low of 2.09 (both recovered slightly by the October survey). A June poll conducted by Opinion Research Corporation (ORC) on behalf of ShareOwners.org found a third of American investors described themselves as “angry.” Another 45% were in favor of action to correct problems in the financial markets.

Roper, director of investor protection for the Consumer Federation of America (CFA), says the break in trust must be addressed and is a reason her organization welcomes the Financial Regulatory Reform proposed by the Obama administration. Announced in June, the plan would revamp how the US regulates its financial system and protects consumers.

Power would be given to the Federal Reserve Board to oversee all companies that could jeopardize the financial system. It would ensure financial institutions have enough cash to cover crises and would create a national supervisor to oversee banks. It would rein in the derivatives market and create a Consumer Financial Protection Agency (CFPA) to set a minimum consumer protection floor across all the states.

Legislation is on its way through Capitol Hill, but most industry groups maintain the CFPA is not needed. They argue it may be dangerous to remove consumer regulation from prudential regulators, as this may create irreconcilable conflicts or result in an activist CFPA that promotes commoditization of products at the expense of innovation.

From the standpoint of the CFA, which represents 300 nonprofit organizations with a combined membership of 50 million people, the Obama administration’s proposal is a consumer group wish list. In particular, under it the Securities and Exchange Commission (SEC) would gain authority to ensure that broker-dealers who offer investment advice are held to a higher fiduciary standard.

The SEC could also ban forms of compensation that may encourage intermediaries to sell inappropriate products to investors. “This higher fiduciary duty and pre-sale disclosure could fundamentally change the way Wall Street and financial planners do business for the better,” Roper says.

ACCORDING TO BOSTON-BASED research firm Dalbar, the number of people calling themselves financial planners rose from about 25,000 in the 1990s to around 650,000 by 2006. No training or experience was needed to claim the title. Many sales people called themselves advisors, planners or consultants to pitch particular products, and neither advisors nor their clients realized the problem. And this was not restricted only to the US market. For example, banks in Germany have been widely criticized for pushing sales promotions under the headline of advice. Yet, only in the wake of the Lehman collapse did clients become sensitive to this distinction.

“Over the last 15 years, broker-dealers have had it both ways,” argues Roper “They could market themselves on the basis of advice-driven services without accepting the higher obligations to customers that their title implied. Regulation is now catching up. It will no longer be so easy to blur the lines between sales and financial advice, so conflicts of interest can be skirted.”

For Roper such stern measures are necessary to regain trust. In the years ahead, she argues, there will be more need, not less, for financial services as retirement planning falls more to the individual and as retiring baby boomers shift into the decumulation phase of their lifestyle. “I think now is a good time to establish the ground rules,” explains Roper, “so investors can return to the market with confidence.”