A vigorous debate has raged over the past couple of years about whether regulators should require financial advisors to operate strictly in clients’ best interests — however, in his latest letter to the industry, Ian Russell, president and CEO of the Investment Industry Association of Canada (IIAC) suggests that clients are increasingly demanding this standard of care themselves.
In general, the industry has resisted the suggestion that regulators impose a statutory duty on advisors to put clients’ interests first. Yet, Russell observes in his latest letter that firms will have to start ensuring that clients come first if they are to meet the evolving demands of investors who have been transformed by the experience of the financial crisis, the shifting experience of retirement, and changing demographics.
“Adjusting to changing client attitudes, changing regulations, changing client demographics and an ageing advisor force requires leadership at the top,” he says. “The most important change for firms to achieve is one of culture, including a commitment to putting the client first and an ability to convince clients of this.”
Advisors must demonstrate their value to clients by ensuring they understand clients’ goals, develop credible plans to achieve those goals, and properly monitor their progress toward them, he suggests. “Advisors and firms must also be fully transparent regarding the services provided and their fees,” he says.
Ensuring both transparency and client priority is a job that starts at the top of the industry, Russell suggests. “The firm’s values and culture are set at the top of the house — and the leadership must demonstrate commitment to its objectives to ensure they permeate the entire firm and reach its clients,” he says.
While there has been some pressure from regulators to move in the direction of greater transparency and prioritizing clients’ interests, Russell notes that client expectations are trending in this direction as investors have been fundamentally transformed by the financial crisis, causing some to question the basic wisdom of investing, and undermining trust in the financial industry among others.
A shift in investor psychology
A shift in investor psychology
This shift in investor psychology was highlighted at the annual SIFMA Private Client Conference in New York last month, Russell reports. “As markets have returned to greater normalcy, investors have not,” he observes, with clients remaining risk averse and insisting on holding greater quantities of cash than in the past.
At the same time, baby boomer clients have become less focused on financial goals and more on life goals, he notes. And those goals themselves have changed. In the past, retirement planning “was about accumulating sufficient savings to have the income to fund the relatively short period between formal retirement and death,” he notes. Now, however, long life spans mean that retirement can last 30 years or more, and go through various different phases along the way that “have complex implications for adequate retirement savings,” Russell says.
“This investor questioning of the fundamental tenets of investing, and the complexities of retirement decisions have forced advisors to adapt to the changing psychology and the related client demands and preferences,” he says.
The resulting challenges include an information overload on both clients and advisors. “The importance of interpreting and explaining relevant information, particularly in the context of the financial strategy is critical,” he notes.
Advisors also have to strive to stay relevant as clients focus less on financial performance and more on other non-financial life goals, he suggests. “Advisors must spend more time on client priorities, speak the language of the client to encourage effective dialogue, and maintain a constant focus on aligning with the client’s value proposition.”
“Advisors must go beyond the pure financial equation, and recognize that delivering good advice is a key to making their clients’ lives better. If clients are convinced of this proposition, the advisor-client relationship will deepen,” he says.
And, at the same time, Russell notes that firms must also be prepared to deal with the demands from future generations of prospective clients, the so-called GenXers and Millennials, that have been somewhat ignored by the industry to date. While they have already accumulated significant wealth, they are fundamentally different from the baby boomer generation, he notes.
“They exhibit greater skepticism of the financial business, having experienced the recent financial crisis first-hand and the subsequent well-publicized scandals, a surprisingly conservative attitude to the markets (half the assets of the Millennials is in cash), higher expectations of service and different channels of communications,” he reports.
Meeting all of these evolving demands is going to require that clients come first, better aligning advisor and dealer interests with clients’ interests, and improving transparency too. In other words, clients may yet push the industry in the direction that regulators have been contemplating.