“Trust is the glue of life. It’s the most essential ingredient in effective communication. It’s the foundational principle that holds all relationships.”
– Steven Covey
Can You Handle The Truth?
Do you really want to have a great quality of life?
Certain universal truths are important to understand and embrace if we wish to live a happy and fulfilled life. We must accept certain things as being true and unchangeable. Our happiness is primarily based upon our ability to accept these truths and not live in denial or avoidance of them. As Jack Nicholson told us in the movie A Few Good Men, life is better when you choose to handle the truth.
One such universal truth is the Rule of 168, which states that there are only 168 hours in each week for every human. No matter your age, how much money you make, how much power you accumulate, or how smart you are. There are no exceptions to this fact. You never get any more than 168 hours, but you do get to choose how you spend your time, and the quality of your life is largely dependent upon your choice.
Most people would be best to spend those 168 hours focused on what is important to their happiness — spending time with their family, developing their career, exercising, taking care of their health, travel, and hobbies. Moreover, for those who have the financial ability to do so, it is smart to pay someone else to do the things in life that are not on this list —mowing your grass, laundering your shirts, or cleaning your gutters. Although these are functions in your life that need to be done, they are not critical to your happiness and can easily be delegated.
Personal financial management is a job that may be on this list as well. Done properly, the management of your wealth is a time-consuming endeavor that requires years of experience and knowledge, but which you can easily pay someone else to do for you. The true value of having a financial advisor is to allow you to delegate the management of your wealth to a highly capable advisor who you trust so that you have free time for the things that are more important to you.
The Two Kinds of Trust
The cornerstone of this value promise is the phrase: a highly capable advisor Who You Trust; because it is impossible to feel truly confident in delegating your financial matters to someone unless you feel the highest possible level of trust in that person.
Planning your financial future is much different than mowing your front lawn. If you hire a landscaper and he messes up your lawn, just wait a couple of weeks, and it will grow back. If your financial advisor makes a big mistake or violates your trust, your entire financial future could be at stake. Therefore, trust is so important. As Steven Covey suggests in the quote above, trust is the essential foundation of every human relationship, but when it comes to your financial advisor, a relationship of trust is necessary.
In our view, there are two different levels of trust to consider. A lot of people look at trust in the sense that they think, “I know my advisor would never do anything to harm me,” that he or she would never knowingly cheat them. We call this the “Madoff Test” because it represents the minimum belief that your advisor is not going to defraud you and run off with your money, as Bernie Madoff famously did to so many investors. While this level of trust is obviously important, it sets a low standard. Unfortunately, this is the standard that most people use, and as a result, they trust their advisors — just a little, but probably not enough.
There is a higher standard of trust, which is the trust that you should expect from an advisor who pledges to act as a fiduciary for you and your family. An advisor who commits to acting as a fiduciary for you is bound to always act in your best interest and proactively do the things for you that have the greatest probability of advancing your success. A fiduciary advisor should handle your money and financial decisions as you would do for yourself if you had the benefit of all of the same knowledge and experience, they have.
The first definition of trust is that you trust your advisor will Never Do The Wrong Thing For You. In the second definition, you trust your advisor will Always Do The Right Thing For You. These are not just two ways of saying the same thing, and there is a difference.
Financial Advisors as Fiduciaries
If you search the word “fiduciary” on Wikipedia, you will find the following definition:
A Fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties. In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence, good faith, reliance, and trust in another whose aid, advice or protection is sought in some matter. In such a relation, good conscience requires the fiduciary to act at all times for the sole benefit and interest of the one who trusts.
This sums up the ideal relationship between a financial advisor and their client, which should ideally hinge on the client’s implicit trust that the advisor will always act solely in the client’s best interest.
Fortunately, most financial advisors are fiercely client-centric and behave like fiduciaries for their clients. However, the financial services industry, and its various regulatory bodies, have employed a vague set of suitability guidelines and compensation schemes which have muddied the waters for many consumers and have left room for potential conflicts of interest. It’s not always clear to consumers that their advisor is acting as their fiduciary, and, that their advisor’s financial interests are aligned with their own.
Fortunately for consumers, the financial services landscape is changing rapidly and in dramatic ways. There are two significant trends at work that are likely to make it much easier for consumers to feel highly confident in their trusting relationship with a financial advisor.
Trend #1: The Triangulation of Advice
In recent years, as the financial services industry has consolidated, several very large financial services companies have emerged. These companies follow a service model that delivers several services from a “single silo,” which combines financial advice, custody, and safekeeping of your assets, and delivery of products and services.
This model has worked quite well, as it has allowed big firms to create efficiency, scale, and profitability, while also offering consumers the promise of convenience. Big firms have the size and scale to do all three jobs well, and consumers can achieve “one stop shopping” when their advisor works for the same firm and acts as custodian of their money to produce many of the products and services available.
However, the downside of this “single silo” model is that compensation arrangements can become murky. When products and services are bundled with the delivery of advice, you may be uncertain how much in fees the firm is charging on the custody, products, and services you use and how much of that compensation is flowing to your financial advisor. As a result, you may be left unsure of whether your advisor is advocating the use of certain products and services because it is best for you, or because their firm makes more money that way.
Recently there has been significant growth in the population of advisors joining a trend we call “The Triangulation of Advice” and moving from being captive employees, to becoming independent advisors with no affiliation to any custodian or product and service provider. In doing so, many advisors can now provide advice separate from where products are sourced, and client assets are held in custody, and clients can access each function separately.
- Advice. As potential conflicts of interest are removed, clients can feel more confident in receiving advice that is 100% transparent, objective, and conflict-free from an advisor who is acting as your fiduciary in selecting the most appropriate products and services, without any affiliation with any single financial institution.
- Custody. Decisions about where to hold your investment assets for safekeeping can be made independently and objectively, as opposed to being forced to hold custody at your advisor’s firm.
- Products And Services. In this new model, and thanks to the advent of technology, clients and their advisors can now become “a client of Wall Street.” An independent fiduciary advisor is now able to seek the very best from every firm on Wall Street – from trading to investment products, lending services, life insurance, etc. – on your behalf.
By “Triangulating” these three critical areas of service delivery, many advisors are now able to act as a true fiduciary for families and maximize transparency, objectivity, and freedom from conflicts of interests.
Trend #2: A new Regulatory Focus
One of the casualties of the financial crisis of 2008 was the public perception of the trustworthiness of Wall Street and the financial services industry in general. As a result of that crisis in confidence, industry regulators and politicians have taken a keen interest in leading the industry to become more client-centered and to eliminate conflicts of interest. The regulators intend to do everything possible to ensure that the single motivator of a financial advisor’s advice is in the best interests of their clients.
Regulators have targeted the compensation structures, which are commonly used in the advice industry in order to identify potential conflicts of interest. Because there has historically been great variation in the way clients pay advisors for their services, it has been difficult to ascertain exactly what some advisors are charging because of how information is reported on client statements. Combine this with the fact that, historically, financial product providers have used financial incentives to entice advisors to sell their product or service if it was “suitable” for their client. It has been hard for clients to hold advisors accountable to the expectation that the advice given was in their best interests and not motivated by an incentive to the advisor.
Regulators are encouraging advice providers to take yet another step away from the traditional brokerage relationship, in which fees are not always transparent, and advisors are required to sell products that are “suitable” for their clients, toward an advisory relationship, in which the advisor has a highly defined responsibility to act as a fiduciary, with the client’s best interest always at the forefront.
The Dawn of a New Era
Both developments – the “Triangulation of Advice” and the advent of new regulations, should come as great news to any family who is seeking an objective, conflict-free relationship with a financial advisor they can truly trust. The financial advice industry is moving to a new era in which advisors are more easily held accountable, client interests are to be made a priority, and consumers are empowered to understand the value of the services they are receiving. These two trends suggest a movement toward greater consumer advocacy and add another layer of expectations that clients will get the best possible advice from their advisor — setting a higher standard for advisors.
Actions, Not Words
“Never announce that you are a knight; simply behave as one.”
– Ethan Hawke from his book Rules for a Knight
These important industry trends are a wonderful step forward in helping families establish a trusting relationship with a financial advisor — but is this enough? Just because regulators are forcing advisors to a more accountable standard, does that guarantee that all advisors will automatically act in their clients’ best interests and be worthy of their complete trust? Will these trends guarantee that all advisors will behave in a trustworthy manner? Unfortunately, the answer is probably no. Although these new trends will help consumers hold advisors accountable, they don’t eliminate every possible conflict of interest.
So, what standard can you apply to make sure that your advisor is worthy of your trust? How can you find that rare advisor who has both the competence and trustworthy character to guide your family’s wealth planning? How can you find someone who will care as much as you do about your family’s financial well-being and quality of life?
The answer is: Observe whether the advisor Behaves In A Trustworthy Manner.
As Ethan Hawke suggests, those who are great in any field don’t need to explain or brag about why they are great. They just act that way. You can tell by a person’s behavior and demeanor if they are great at what they do; they just walk into a situation, act like a real pro, and operate at the highest standards.
This lesson can be helpful to remember when evaluating people to trust in your life as well. You can judge a potential friend, business partner, CPA, lawyer, or financial advisor much more by the way he or she behaves, than by what he or she “announces” about him or herself.
This is particularly true in the financial services industry: for any family that plans to delegate the key decisions about their financial future to an advisor, trust is of utmost importance. While there is no shortage of marketing messages out there from Wall Street firms that “announce” how trustworthy they and their advisors are, unfortunately, not everyone in the industry “walks the walk” and behaves in a trustworthy manner.
Here are a couple of important ways you can tell if your advisor fits the bill:
Do they take their craft seriously?
Make a note of how long they have been in practice, as well as any professional designations or other evidence that shows they take their profession seriously and are committed to a lifetime of learning. Also, note the kinds of services they provide and how client-centered they are. At a minimum, be sure that they offer regular review meetings and accessible client contact.
Do they work from a Standard of Care?
In order to deal with the unknown risks and opportunities presented by your wealth, a more refined advisory approach is required to address this complexity in a systematic and consistent fashion.
Our team at Concentus Wealth Advisors has developed a client service model based on a consistent Standard of Care for holistic wealth management. We follow the concept of medical treatment standards, such as when a doctor says your child is due for a tetanus shot or when you turn 50 and are told you need a colonoscopy. Such standards are based on research and experience across many patients rather than the opinion of a single doctor.
Unlike in medicine, there is no industry-wide Standard of Care for investment advice or holistic wealth management, which is a shortcoming for many advisory firms — even those with the expertise to work with wealthier families. However, over many years and working with hundreds of families, our firm has developed an experienced professional point of view about many wealth management topics, which we have formed into our own Standard of Care.
By defining our professional point of view on a variety of planning topics and organizing it into a checklist, we help our clients navigate their wealth planning challenges and opportunities, like an airline pilot navigates a cross-country flight, ensuring they receive the highest Standard of Care available to live their one life the best way they can.
Are they focused on YOU?
A great advisor makes it ALL ABOUT YOU, so take note of the questions that your advisor asks. I always chuckle when a personal finance magazine or website scares you into thinking that you need to have a whole list of technical questions for prospective advisors. The truth is that trustworthy professional advisors reveal more about themselves by The Questions They Ask You, Rather Than How They Answer The Questions You Ask Them. The best advisor is someone who wants to know all about YOU — your values, your goals, what is important to YOU — and is not shy about asking you. You should walk away from a meeting with your advisor with a feeling that your relationship with him or her is all about you, a feeling reinforced by the questions directed to you.
Do they provide you PRESCRIPTION or only INFORMATION?
Medicine is a noble profession, and most physicians are bright, well trained, and totally committed to a patient’s well-being. Our healthcare system attracts some of the highest-quality people.
However, if I had a family member experiencing a significant health crisis and I was faced with difficult treatment decisions, I would not be satisfied with only a “good” doctor.
I would want a doctor who is willing to take a different approach. A “great” doctor who would lay out the treatment options with the pros, cons, and statistics and carefully answer my questions. But before asking for the decision, a great doctor would add a final piece of information: “If this were my family member, I would do [procedure] because [reason].”
I don’t want a doctor who is content to simply provide information. I want someone with the courage to advise. When faced with a decision fraught with uncertainty with significant consequences, this courage makes all the difference in the world.
Wealth management clients face the same situation as patients’ families do, just in a different area of life. You must make decisions in conditions of uncertainty that have significant consequences. “Should we increase or decrease the risk in the portfolio? Should we invest in a long-term care insurance policy that we may never use? Do we have enough life insurance? Can we afford this house, this car, this vacation? Do we really need to get those documents drawn up or updated? Are our kids mature enough to start managing real money?” This list goes on, and each question has a potential consequence that could meaningfully affect your family, sometimes across generations.
All financial advisors provide information, offer recommendations, and explain the risks and benefits of investment decisions to their clients. Good advisors expand their scope of engagement beyond just investment advice and provide details about a variety of wealth-management decisions. These advisors understand that most of their clients don’t know all the issues they’re facing in their financial lives, so good advisors offer a robust and expanded education to clients so that informed decisions can be made.
Great advisors go beyond providing information. They have the courage to advise in order to improve the likelihood of positive financial outcomes across a wide range of decisions. Like great doctors, their advice comes from a well-informed and professional point of view. When they advise, great advisors provide prescriptions for the client to follow, not just options for the client to consider: “At this stage of your life, I believe it’s important for you to do [action] because [reason].”
The difference between a good advisor and a great advisor comes down to having the courage and conviction to advise, not just provide information.
An advisor who passes these tests is worth entrusting with all of your money. Follow his or her financial advice completely. Be grateful that you have found a lifetime partner in your family’s financial success, and then go out and use all that time you once spent worrying about your money, to do the things that really matter.
In a world that’s awash with so many voice offering information, courage of conviction stands out. For more information about designing your own wealth planning checklist, call us at 610-994-9192, or visit here to learn more about our proprietary “WealthTrak Navigator” checklist tool.
Leave A Comment