The name of the proposed policy says it all: Regulation Best Interest. The fact that the Securities & Exchange Commission feels compelled to push the financial services industry to do a better job of looking out for clients is a sorry state of affairs. A June 5 vote on the regulation is likely the first salvo in a battle to cease a baffling set of conflicts of interest that continue to sully the industry’s reputation.
In its most recent annual survey, the University of Chicago Business School found that only 28 percent of Americans trust our nation’s financial system. For banks, that figure rose to a still-weak 41 percent. Put differently, most Americans mistrust financial services firms.
“Many of my clients have had bad experiences with the industry,” says Allan Roth, founder of investment management firm Wealth Logic, adding that “too often, we act like a sales vocation and not a profession.”
Industry complaints revolve around incomplete information about products being promoted, excessive churning of custodial trading accounts, unrealistic expectations about portfolio returns, and most of all, high fees.
Robo-advisors have done an effective job of extolling the merits of very low-cost portfolio management and have made a clear dent in industry market share. In fact, by 2025, these automated investing platforms may snag $16 trillion in assets, according to Deloitte. That’s nearly triple the asset base in place for industry titan BlackRock Inc.
To be sure, the automated investing features of robo-advising don’t really measure up to the more comprehensive gains that come from full-service financial advice. Northwestern Mutual surveys consumers each year and in 2018 found that:
- Nearly 7 in 10 (67%) Americans who use a financial advisor believe they have clarity on how much to spend now and save for later compared to less than half (44%) of those without an advisor
- More than half (54%) of those with an advisor feel very financially secure. Only a fraction of people (21%) without an advisor said the same.
- More than 7 in 10 people with an advisor said their plan has been created to endure market cycles --- compared to less than a third of those without an advisor (29%).
So if advisors offer up such clear and important value to clients, what can they do to improve their reputation with new and existing clients?
Helping clients gain more confidence about their financial choices and investment decisions is a good start. Too often, advisors fail to take enough time to educate clients, whether it’s through written materials, one-on-one meetings, or seminars.
Many advisors likely feel they are too busy to engage in this level of customer service. However, failure to win the trust and confidence of clients is a key reason behind their decision to take their advisory relationship elsewhere.
On a similar level, taking too long to respond to a client that has contacted an advisor can give the impression that the relationship is not a high priority. Wealth Logic’s Roth adds that “it’s important for advisors to patiently listen to their client’s concerns, rather than be in a hurry to get off the phone.”
Concerns about excessive trading (churning) and other self-serving moves are already being addressed by regulators. The upcoming revised version of the Fiduciary Rule, and the SEC’s Best Interest regs noted earlier, combined with greater consumer awareness should help reduce the problem.
And the Certified Financial Planner (CFP) Board of Standards, Inc. will be doing its part. On October 1, a new mandate will go into effect that requires all CFP®s to be true fiduciaries to their clients – at all times. The new Code of Ethics and Standards of Conduct will require that all CFP®s “place the interests of the client above the interests of the CFP® professional and the CFP® professional’s firm.”
The decade-long bull market has helped many advisors avoid the topic of fees. Paying asset management fees of one percent or more has been easy to downplay when stock markets have been posting double-digit gains. But what happens when the market turns south? High fee levels will merely magnify losses then.
That makes this a good time for advisors to regularly bring home the value they are providing in terms of comprehensive planning, and not just wealth management. For example, risk mitigation and capital preservation strategies are emerging as clear points of discussion for advisors and their clients these days. And effective portfolio planning can make them heroes when the next downturn comes and investment balances have fallen less steeply than the broader market.
The times are surely changing. Gone are the days when advisors attracted clients merely on the promise of market-beating stock and fund picking. In many respects, delivering Alpha is no longer the key selling point for clients. Instead, they want high levels of customer care, the elimination of excessive or non-transparent fees, and a clearly-stated set of policies that ensure the advisor is working in the client’s best interest.
The shift portends a better reputation for the advisory business as a whole, and for advisors, a much greater chance of retaining clients that may be thinking about taking their business elsewhere.
David Sterman, CFP, is President of New Paltz, NY-based Huguenot Financial Planning