Are advisors merely salespeople who view their clients as “fee machines,” as many have claimed? Clients with this view will always be weary of their advisors. From a litigator’s point of view, what leads to lawsuits is client mistrust and suspicion, even if the money lost in the account was as a result of market fluctuations and not because of any breach by the advisor.
All eyes are then on the advisor when a client loses money, alleging that there’s an inherent conflict of interest in the manner in which advisors are compensated. A suggested solution is to outlaw commissions and trailer fees and insist on fee for service. But what about Mr. and Mrs. Smith, who have a relatively small account and buy and hold for the long term? If the regulators mandate fee-based accounts, the Smiths may be worse off. Furthermore, isn’t it generally better for clients to have more choices rather than less? If the client is engaged in the process and the advisor is transparent with solutions, alternatives and the costs associated, isn’t that best for the client?
However, the view at the moment is that there should be mandated standards, reflected in more regulation, mandatory documents to deliver to the clients and more forms to sign. Is this a solution to the problem when clients have no patience for paperwork and often don’t even rip open the envelopes when they receive mail from their dealers? Will clients find they are being better serviced with less options, more mail to open and more forms to sign?
There is no shortage of lawyers, highly experienced compliance officers, regulators, dealers and advisors weighing in on the issue with the brightest minds expressing supportable, strong opinions; but there is no “right” answer; so, until then, advisors need to ask themselves these questions:
- Do your clients trust you?
- What do you do to establish and maintain that trust?
- Is it true that if clients believe that you have their best interest at heart they are less likely to sue you, even if they think something has gone wrong?
- If clients’ expectations have been managed, do you think they will be less likely to sue?
- If you are transparent about the sum of fees charged to clients, do you think clients will be less likely to sue?
I believe the answer to all of these questions is Yes. So, what do you do to ensure that you act, and the client understands that you are acting, in their best interests, their expectations are managed and you are transparent with fees? Clear, concise communication with a supporting paper trail is the answer.
Glen Gowland, head of Bank of Nova Scotia’s private client group, got it right when he said: “I do not apologize for charging for advice. But a client should know what they’re paying for, they should be able to understand how much they are paying for that, and then be able to measure, “Did I get good value for what I paid?”
So, you need to ensure that you leave the acronyms at the office and communicate clearly, both verbally and in writing, with clients to ensure that you are, and can prove that you were transparent with them and encouraged them to make choices that are in their best interests. That’s the roadmap to building your business with trust.