Nearly every financial and wealth adviser speaks of the importance of putting clients’ interest above all else. The words roll off the tongue. It is much harder, however, to back up those words with consistent, meaningful actions.
In a blog from last October listing questions to ask when searching for a financial adviser, I highlighted that professional advisory firms should take a planning-first approach (rather than fast-forward to product recommendations); invest in professional grade software to support diligent wealth planning and portfolio management; and avoid taking on too many clients.
Those are key factors in assessing financial and wealth management firms. Truly professional client-centric advisory firms also exhibit the following behaviours – some of which are best evaluated after becoming a client.
Set honest expectations
It is easy to talk a big game – throwing around the potential for big returns – when trying to make a sale. But unrealistic sales pitches do clients no favour.
I met with two former business owners a decade ago that wanted assurance that they could grow the wealth they worked so hard to accumulate without risking the permanent loss of capital. Given their shared conservatism, I laid out my reasoning for why they should expect no more than about 5 per cent a year (net of all costs). They then pulled out a printout listing exchange-traded fund returns; highlighting a real estate investment trust ETF sporting a trailing five-year return of about 15 per cent a year. “Why are you talking about 5 per cent returns when REITs are making 15 per cent?” they asked. My explanation seemed well received, but we never saw them again.
I could have told them what they wanted to hear to win the business. Instead, I gave them my honest outlook based on the level of safety they desired. Incidentally, that REIT ETF produced 7-per-cent annual returns since that meeting – quite good but a far cry from the 15 per cent annually they wanted someone to promise them. And the conservative portfolio we had proposed to these former business partners exceeded my 2012 expectations by two percentage points a year (not 10).
When you want the peace of mind of avoiding permanent losses of capital, the goal should be to take enough risk to achieve your goals – not swing for the fences.
Provide cost transparency before requiring a commitment
Too often, advisory firms quote only their headline advisory fee in proposals. This makes a good first impression because it seems low given that this is only part of the total cost that clients will bear. I wrote about this many years ago. Advisory firms who claim to be client-centric, however, will not only put their best foot forward in terms of costs; but they will be transparent about “all-in costs” – not just their advisory fee – before asking for a commitment from clients. Firms that are more transparent can look costly on the surface relative to competitors that are not as forthcoming in proposals.
Produce reports that inform, not overwhelm
Many advisory firms drop a thick report (or long PDF) in front of clients to show off the “rigour” of their analysis. It is also common for such reports to be padded with product fact sheets to make it look more impressive – sometimes showing only favourable performance metrics. These firms and individuals would stop this silly practice if they were rewarded for informing clients and for giving them the best advice possible. But when the focus is to make a sale, the actions reflect the motivation.
All forms of client reporting – such as a financial plan, and regular investment reporting – should be designed with a purpose of better informing the client. Rather than simply meeting the minimum regulatory requirements or for good optics, client-centric advisory firms aim to create the most meaningful reporting possible; and never stop working to improve it.
Answer questions thoughtfully
Before and after becoming clients, individuals understandably have many questions. Client-centric wealth management firms address all such questions clearly, directly, and thoughtfully. And they answer the question(s) asked (rather than those the firm wants to answer). Most importantly, an adviser should never make their clients feel regretful or uncomfortable for simply asking questions.
I am troubled by the number of times I have heard friends and clients speak of advisers (or former advisers) having yelled at or humiliated them simply for asking routine questions or when requesting more information. There is no excuse for this kind of response.
Treat clients as you wish to be treated
Our clients are the ones who took the risk to build their wealth; and they are the ones assuming the investment risk when taking our advice. Accordingly, we owe clients no less than to treat them in the same way that each of us would want to be treated if we were the client. This simple but powerful perspective touches every aspect of how a wealth management business conducts itself – in front of clients and behind the scenes. And it is critical to creating a true professional, client-centric firm that embraces a fiduciary mindset.
Dan Hallett is vice-president of research and principal at Highview Financial Group