Today's Advisory Career

Financial Trust in a Post-Fiduciary World

The value of transparency

by Kyle Ryan, CFP

Mr. Ryan is Executive Vice President of Advisory Services at Personal Capital Financial. He was named to the 2014 InvestmentNews 40 under 40 list for his contributions to the financial advisory industry. He has previously held senior positions at Merrill Lynch and Fisher Investments.

As advisors, it’s our responsibility to help investors understand the benefits of putting their money to work in a smart, strategic way, and to work with them to put together a personalized plan that will help them achieve their financial goals – but we can’t do either of these things without first earning their trust.

Despite some bad actors in the financial advice profession making headlines for betraying the trust of their clients, consumers still generally believe in financial advisors. A recent Personal Capital survey found that Americans trust their financial advisors more than other professionals. While 68% of Americans think a car salesman is likely to take advantage of a consumer, only 30% think a financial advisor has bad intentions. In fact, respondents ranked politicians, lawyers, and real estate agents as more likely to take advantage of consumers than financial advisors. While that’s a promising start, we can do better.

Trust has increased slightly since the survey was conducted in 2017, when 32% of Americans reported believing a financial advisor was likely to take advantage of them. That slight uptick in trust may have something to do with clients’ satisfaction in their portfolio performance as the longest bull market in history rages into its 10th year, so it’s important to remember that the tide can turn back at any time.

Building Trust

When performance is strong, advisors have a unique opportunity to have proactive conversations with clients about their futures. This is the time to build trust by developing a deep understanding of a client’s hopes and fears, explaining the paths they can take to meet their goals and analyzing the obstacles they’ll have to overcome along the way. When emotions are heightened during the next inevitable bear market, it will be too late to lay the foundation of trust. But the consequences will come quickly if you haven’t.

Don’t forget – investors have options. The survey uncovered interesting revelations about which financial planners Americans are most likely to trust with their money. Respondents indicated they would most trust a Registered Investment Advisor with their investable assets (28%), followed by a big bank/brokerage firm (21%), a local advisory company (14%) and an online platform or mobile application that offers financial advice (8%). If a client is uncomfortable or skeptical of a specific advisor or investment decision, there are plenty of other places to look.

As more and more types of money management options pop up every day, switching to a new advisor can be a daunting task for investors. People who have lost trust in their old advisor won’t be so quick to put their faith in a new one. When trying to bring on a client like this, the best approach is to make the process as straightforward as possible. Clearly explain your fee structure, advisory style, and investment strategy up front so you can align with potential clients and confirm that you’re a good match.

While fees are important, most clients don’t make decisions based on fees alone. Many will be comfortable paying a little bit more for a higher level of service if they approve of you and your firm’s investment philosophy and believe that you’re being transparent about what you charge.

Despite the reported trust gap, research has found that investors are more loyal to their individual advisors than the financial institutions that employ them. Seventy-one percent of investors surveyed indicated they would switch institutions with their financial advisor if he or she changed companies after a scandal. In what some may find a surprising twist, Millennials proved to be the most loyal, with 80% indicating their willingness to follow their advisors to a new institution, versus Gen X at 70%, and Baby Boomers at 66%.

Despite the reported trust gap, research has found that investors are more loyal to their individual advisors than the financial institutions that employ them. Seventy-one percent of investors surveyed indicated they would switch institutions with their financial advisor if he or she changed companies after a scandal

This loyalty speaks volumes about the value of transparent and honest financial advice, and highlights the reality that clients and potential clients are able to separate an individual advisor from the brand of his or her firm. Like clients, you have a choice as well. Don’t forget that if you’re not comfortable with your firm’s mandates or the pressure to rack up fees, you can find a new, more like-minded institution to work for.

By offering financial advice with a higher ethical standard, we can create client evangelists. As with all client service businesses, the best way to attract new clients is through the referrals of current happy clients. How often do you ask a friend or family member for a babysitter, a dentist, or a trainer recommendation? When it comes to financial advice, Americans trust financial advisors the most (47 percent) followed by family members (32 percent) and close friends (22 percent). That number could, and should, be even higher.

We need to stop and ask ourselves periodically if our work and our behaviors are worthy of clients’ loyalty, trust, and referrals. The easiest way to evaluate if you’re conducting yourself in a manner worthy of referrals is by putting yourself in a client’s shoes and imagining what you would do in a difficult scenario.

Think of a client with an elderly parent who may be getting taken advantage of in one way or another, or a client with young adult children looking to start investing in an IRA. Would your clients feel comfortable having their parents shift their life savings to you? Would they encourage their children to turn to you when they’re looking for their first financial advisor?? These are just two of the hundreds of situations in which creating client evangelists can lead to additional business.

Rebuilding Trust: The Path Forward

Just last month, the Securities and Exchange Commission announced that 79 investment advisory firms had come forward to return more than $125 million to clients as part of the agency’s crackdown on advisors selling high fee mutual funds and failing to disclose fees.

Meanwhile, industry advocates are leading the charge in sponsoring state-level fiduciary standards. One recent proposal required investment advisors to present clients with a simple, digestible one-page fee table to provide potential clients. Even if this isn’t enacted into regulation, there is an opportunity for advisors to consider creating their own version of this document to share with clients.

While it’s great that public officials are starting to do more to fight for the average investor, doing just enough to stay on the right side of the regulators is hardly enough to earn your clients’ trust. As organizations and individual leaders attempt to ignite the changes our industry so desperately needs, we should take it upon ourselves to offer, trustworthy financial advice that is in the best interest of our clients. Investors are getting smarter about conflicts and hidden fees as technology brings increased transparency to the industry – and they’re demanding more from the advisors they hire. In this new world, putting your clients first is not only the right thing to do, it’s critical to attracting the clients you need to build your business. ◊


Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital Corporation. Personal Capital Advisors Corporation is a registered investment advisor with the Securities Exchange Commission (“SEC”). SEC registration does not imply a certain level of skill or training.