Strengthen Trust, Grow Your Business:
Make Sure Clients Know the Scope of Your Responsibility to Them

 

ENVESTNET PRACTICE MANAGEMENT SERIES

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A client or prospect might read every word of the New York Times and the Wall Street Journal. Or he might catch barely two minutes of news on the car radio. Either way, the onslaught of news about financial reform is creating a chance to strengthen client trust and the relationship in general. Take advantage of the heightened awareness, and communicate your responsibilities as an advisor.

Americans want the excesses of the 2000s to be corrected, and the vehicle has become financial reform legislation.

If and when the bill passes, just about every part of our financial system will be altered in some way. Hedge funds will register as advisors, the SEC will take on a new array of responsibilities, and some investment advisors will be regulated by states rather than at the national level.

For all financial advisors, a key item charges the Securities and Exchange Commission, after six months of study, to put both Registered Investment Advisors and brokers under the same fiduciary umbrella, putting a client’s interest first.

In the meantime, the one thing that is clear about the term “fiduciary” is that almost no one has a clear understanding of what it means. The concept has just about as many interpretations as there are participants in the financial system, professional and individual alike.

An Envestnet study reveals that both clients and advisors want a fiduciary standard in the relationship. By 93% or better, RIAs, brokers and hybrid advisors said that “acting in a client’s best interest” is a major factor in the selection of an advisor. This is the case even though advisors believed that clients do not understand the differing fiduciary standards for various financial professionals.*

YOUR FIDUCIARY RESPONSIBILITY

The cornerstone of “put the client first” is to understand the full scope of his/her financial situation. Are there significant accounts in other financial institutions? How do they interact with the assets that you will be managing?

The more you know about your client, the better you will be able to serve him/her.

“Fiduciary” means a holistic approach

Even if the term “fiduciary reform” doesn’t mean much to people who are paying attention to earning a living and saving for their children’s college and their own retirement, they do understand the concept and what they want from their financial advisor. In some cases, it is possible that a client has a more clear idea of the advisor’s role than the advisor does. When clients come to see you, they are turning over their fears, doubts and goals to you. While they might not say this clearly, their message is “it may be my money we are talking about, but you are ‘on the hook’ as much as I am.”

Take advantage of this responsibility. Use it as a tool to cement a relationship with the client and understand more deeply how you can be part of their financial lives.

Nick Murray, a highly respected financial services consultant, says that, advisors should never present themselves as investment managers as their value proposition.

As Nick says, “if I’m ... the steward of the household/family’s most cherished financial goals – and the portfolio manager second, it’s almost inexpressibly easier for the clients to focus on my essential value to them, and how completely it transcends guessing which small-cap value raindrop will get to the bottom of the window before all the other, similar raindrops.”**

In other words, the “put your client’s interests first” rule gives you permission to expand the scope of your involvement with the family’s entire financial life. A fiduciary approach calls for you to have a broad view of the full span of clients’ lives. With the trust from a solid relationship and an expanded view of your client’s financial situation, the fiduciary concept means that you have more opportunity to capture all or most of client assets. That opportunity will ultimately grow your business to a higher level.

Communication tools

To be a successful communicator with your clients and prospects, it is up to you to make sure that prospects and clients understand your fiduciary concept. How can you make sure that you get your message of responsibility to come across in the most clear fashion possible?

Begin with your personal value proposition, emphasizing that you provide more than investment selection. Make sure that you focus on ways to reinforce those ideas in your meeting. Here are two suggestions:

1) Consider your terminology. We know that “fiduciary standard” is a term that can have multiple meanings. For an advisor, there is no universally accepted standard. Clients are even further from a clear understanding of the term.

So why not incorporate “responsibility” as a related, but more understandable, term? Mention “fiduciary” early on, but make it more clear by using simple, more universally understandable words and language.

2) As you organize your thoughts, consider the classic feature/benefit style. For example: “Our technology allows us to look at your information in many different ways (feature), so we can review your investments in light of changes in the markets and economy (benefit).”

Plan your presentation

Be the leader in the meeting. Know what your key messages are and plan how you will get them across. Think about how certain words will affect the person on the other side of the table.

Organize your thoughts so there is a logical “flow” and that one idea leads logically to the next. Consider starting with the fiduciary concept. Because it is both a regulatory issue and a personal marketing issue, it can be woven into every part of your discussion. Refer back to your responsibilities as you cover other topics.

Anticipate difficult questions, and think about how you will answer them.

Your goal is to maintain control of the conversation right from the beginning, to know where you are headed and where you want to be when it is time to stand up, shake hands with the client or prospect and usher them to the door.

Key points that underscore your fiduciary responsibility

Although you may not specifically mention "Bernie Madoff," "housing meltdown," or other key events of the past two years, your presentation can still address lingering client fears and concerns that are related to these episodes. Incorporated into a meeting with prospects or clients, the strategic points which follow can help you provide assurance to them that you take full fiduciary responsibility:

1) Comprehensive advice that maintains a balance and focuses on your clients' goals. The cornerstone of “put the client first” is to understand the full scope of his/her financial situation. Are there significant accounts in other financial institutions? How do they interact with the assets that you will be managing?

The more you know about your client, the better you will be able to serve him/her.

2) Individuals’ results vs. institutions. A study by research firm Dalbar underscores how trying to time the market can negatively influence returns. In the study, the average equity mutual fund investor earned 3.9% of a possible 11.9% over a 20-year period, while inflation posted a 3.0% return during that time.***

Why do institutions consistently perform better than individuals? While many factors are cited, the more professional, unemotional approach of an institution is inevitably part of the list.

You can make the point that part of your role is to help balance emotions in a turbulent market. One of the most valuable ways an advisor can support a client’s goals is to provide objectivity and help maintain a consistent investment strategy.

3) Focus on understandable, straightforward investments. Help clients understand the due diligence process that underlies the investment options you represent. Explain the criteria for why you selected the investment partners that you are utilizing.

4) The Three Cs: Costs, Complexity and Conflicts. Reviewing investments based on the “3 Cs” recognizes the standard of care, acting in the client’s best interest.

Products that are considered costly, complex and conflicted are being examined by regulators. Firms have to justify why they have recommended these products, especially if there are more simple and inexpensive types of investments that are readily available and that are expected to perform equally well.

The most important question is, are there alternatives available that provide similar benefits, but that do without features that are not needed or desired?

5) Documentation: how we stay on our agreed-upon path. Ideally, your initial plan will include an Investment Policy Statement. This document provides support if you feel emotions are swaying the client away from your original plan.

Further, point out that you keep notes on all conversations and the reasons for decisions that are made.

6) Compliance: behind the scenes. Even though describing your compliance process will not exactly rivet the attention of the client or prospect, several issues will undoubtedly get their attention.

Security and privacy are concerns for just about everyone. If you can demonstrate privacy controls in some way, you will get their interest. What role do passwords play? Who has access to client information, and how is it protected?

And, while custody is not an expected topic, self-custody was at the core for two of the biggest recent scams, Ponzi schemes perpetrated by Bernard Madoff and Kenneth Starr. If you have a separate custodian arrangement, point it out as part of your responsibility to the client.

Client’s responsibility

Once you have outlined and explained your responsibilities as an advisor, it is the client’s turn. Ask him or her to commit to providing a full picture of all parts of their finances and to keep you informed of any significant changes.

Take advantage of the opportunity

On the surface, fiduciary responsibility might appear to be simple and straightforward. However, it is not yet clearly defined legally, and we know that, even for those who understand the issue, a range of interpretations can exist.

Nonetheless, in today’s financial climate, the advisor who adheres to a set of standards, who is able to integrate those standards throughout his/her business and to communicate them clearly, is positioned to secure more and better clients and to enjoy stronger long-term relationships with them.

Two years ago, clients stayed the course because they were frozen in place, afraid to make a decision. Now people have had a chance to adjust to a changed economy and to assess the performance of their financial advisors. Those clients who have recovered some or all of the market’s losses are relatively content. But now there is more money in motion as the discontented are looking for someone new. Be ready when some of that new money comes your way.

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* Envestnet survey of 86 financial advisors as of 3/16/10, quoted in a presentation, The Fiduciary Standard: What it Means, 6/29/2010.

** This is a central concept throughout all Nick Murray’s publications. For example, see Nick Murray, Behavioral Investment Counseling, (The Nick Murray Company, Inc., 2008), page 29.

*** Quantitative Analysis of Investor Behavior, Dalbar, Inc., 2006, page 22.

 

This article is provided for informational and educational purposes only. It is not intended as and should not be used to provide investment advice and is not an offer to sell a security or a solicitation of an offer, or a recommendation, to buy a security. All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Investment decisions should always be made based on the investor's specific financial needs and objectives, goals, time horizon, and risk tolerance. The statements contained herein are based solely upon the opinions of Envestnet. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Neither Envestnet nor its representatives render tax, accounting or legal advice. Past performance is not a guarantee of future results.

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