Getting Clients / Keeping Clients

Among the casualties of recent market events has been the confidence of investors in their financial advisors and financial institutions. It’s not just that many clients believe that advisors and the investment industry over sold their ability to forecast market events. Even more serious, a growing number of investors today suspect that the advice to stay invested was influenced by their advisor’s desire to maximize compensation levels – in other words that their advisor put his or her interests ahead of theirs.

Not all clients suspect their advisors of a “heads I win, tails you lose” mindset – but the number who take this view is not trivial.

It’s essential that advisors address this growing skepticism. Today’s post comes from a U.S. practitioner, outlining a first step to rebuilding trust by borrowing from the medical profession to lay out an explicit code of conduct for financial advisors. 

A Modest Proposal for Wealth Managers: First Do No Harm

By Scott Welch,  Senior Managing Director, Investment Research & Strategy, Fortigent, LLC

In A Modest Proposal, written in 1729, the noted Anglo-Irish satirist Jonathan Swift suggested that the impoverished Irish could ease their economic troubles by selling their children as food. He went so far as to suggest that, “A young healthy child well nursed is, at a year old, a most delicious nourishing and wholesome food, whether stewed, roasted, baked, or boiled; and I make no doubt that it will equally serve in a fricassee, or a ragout.” (source: Wikipedia)

In today’s chaotic market environment, many wealth advisors find themselves impoverished as well – impoverished with respect to their clients’ trust.

Advisors survived the market collapse in 1987 following the systemic failure of “portfolio insurance”; they survived the market chaos of 1997-1998 following the “Asian Contagion” and the collapse of Long-Term Capital Management; and they even survived the research analysts’ scandal and the bursting of the tech and telecomm bubbles in the early 2000s.

But 2008 brought a collapse of the global markets, the destruction of trillions of dollars of personal net worth, the seeming failure of asset allocation and the diversification it preaches, the seeming failure of a long-practiced “buy-and-hold” investment philosophy and, perhaps worst of all, the moral failure of the repugnant scandals involving Bernie Madoff, Arthur Nadel, and Allen Stanford.

This “perfect storm” of events created a crisis of confidence among investors. Simply put, many investors no longer trust their wealth management professionals. Instead of addressing the long-term financial objectives of their clients, many advisors find themselves defending against the accusation, “Prove to me you are not Bernie.”

How does a wealth advisor defend against this assumed lack of integrity without sounding, well, defensive? Should they adopt a Swiftian solution and fricassee their junior analysts or turn their baby bankers into a “delicious ragout”?

Tempting perhaps but, fortunately, no.

One useful framework for addressing this issue is presented by industry consultant Charles Green (http://www.trustedadvisor.com/), who offers the following “trust formula”:

Trust = (Credibility + Reliability + Intimacy) / Self-Interest

From a wealth management perspective, this simple formula illustrates the detraction from trust created by industry-inherent conflicts of interest, such as selling proprietary products or the more insidious agent / fiduciary paradox – the conflict faced by all wealth managers who are

• Hired by their clients under an assumption that they will always act in the clients’ best interests, but
• Are paid and rewarded by their employer for bringing assets into their firm and/or selling revenue-generating product.

Building off of this framework, our modest proposal is for wealth advisors to go on a “trust offensive” and adopt as a standard part of their practices a wealth management version of the medical profession’s Hippocratic Oath.

One partial modern version of the Hippocratic Oath is as follows (source: Wikipedia):

1. I will teach medicine to the sons of my teacher;
2. I will practice and prescribe to the best of my ability for the good of my patients, and to try to avoid harming them;
3. I will never do deliberate harm to anyone for anyone else’s interest;
4. I will avoid violating the morals of my community;
5. I will not cut for stone, even for patients in whom disease is manifest; I will leave this operation to be performed by practitioners, specialists in this art [That is, I will not attempt to do things beyond my training and/or capability, but will instead bring in appropriate specialists]; and
6. I will keep the good of the patient as my highest priority.

Implement a quick “find and replace” of the word “patient” with the word “investor” or “client” and this simple oath serves as surprisingly powerful start to rebuilding client trust.

So what might a “Wealth Management Hippocratic Oath” look like? Here is our suggestion[1]:

1. We will fully educate and inform our clients with respect to what is in their investment portfolios, and why;
2. We will define for our clients precisely what our responsibilities are with respect to our wealth management relationship;
3. We accept full accountability and responsibility for the wealth management advice we provide;
4. We will acknowledge and explain to our clients any agent / fiduciary conflicts we have in serving our clients, and we will explain up-front how we will manage that conflict over the life of our relationships;
5. We agree up-front to full transparency and full disclosure in all aspects of our client relationships – including how we get paid and any and all conflicts of interest inherent to our relationship;
6. Our clients will always know how they are invested and where their assets are held.
7. We will agree with our clients up-front what constitutes a successful relationship, including clearly measurable objectives and metrics for evaluating progress toward those objectives;
8. We will define specifically the service model our clients can expect, including
   1. The team
   2. Services provided
   3. Deliverables
   4. Fee structure
   5. Communication frequency
9. We will act morally, ethically, and legally at all times;
10. We will never deliberately act against the wealth management interests of our clients, and we will keep our client’s wealth management “health” as our highest priority.

A Wealth Management Hippocratic Oath that addresses the collective issues of credibility, reliability, intimacy, and conflict will go a long way in creating a trusting, collaborative relationship between advisor and client.

No wealth advisor can control market performance, and no wealth advisor can control the behavior – moral or otherwise – of other professionals in the industry. But it is imperative that we acknowledge that the foundations of our client’s trust have been severely shaken by the events of the past year, and that we have serious rebuilding to do.

Our modest proposal for a wealth management “Hippocratic Oath” will not solve all that ails the industry. But a simple, clear, and comprehensive declaration to our clients that we know there is a problem, that we know we have work to do, and that we pledge to do everything in our power to build and maintain trust is an appropriate – and critical – first step.

About Fortigent:

Fortigent, LLC delivers a fully integrated and customizable business-to-business outsourced wealth management solution to banks, trust companies, and independent advisory firms. Services include an “open architecture” investment platform with particular expertise in alternative investments, a flexible unified managed account program, and consolidated wealth reporting. Fortigent’s web-based portal interface allows access to proposal and rebalancing tools, client portfolio reporting and accounting, as well as industry articles, research papers, and other practice management and business development resources.

This entry was posted on Thursday, March 19th, 2009 at 12:02 am and is filed under Insights. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.

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