Following the publication of the April 24th New York Times article, “Taking the Time to Pick the Right Financial Advisor,” Aronson SpringReef received hundreds of calls and emails from readers across the country. Responding to our inbox and speaking with callers provided us a terrific opportunity to discover what’s truly on the mind of the public regarding its wealth management experience. While each story differed in the details, we found that many people were, in one form or another, asking the same two fundamental questions of clarity:
Given the frequency with which we encounter these concerns at Aronson SpringReef, we decided it would be valuable to address them in this month’s piece.
Whose Interest Comes First?
Based on our observations, many people are uncertain about the true intentions of their financial advisors. Between their all-too-frequent suggestions of proprietary products, tendency to focus on benefits over risk, and recurring end-of-the-month portfolio readjustment calls, there is an unsettling feeling that advisors seem to be serving their interests first – at the expense of the client’s financial safety and sense of trust.
We’ve written repeatedly about the fiduciary standard, which in its simplest form requires advisors to put a client’s interest first, act with diligence, disclose all relevant facts and avoid potential conflicts. Unfortunately, under current regulations, only about 11% of the 336,000 financial advisors in the United States are required to uphold this standard. The remaining 298,000 advisors work within the broker-dealer model which requires only that recommended investments be suitable for the client. As Cerulli Associates recently noted in their comprehensive quarterly research report, The Cerulli Edge, “the majority (63%) of investors working with wirehouse or regional broker-dealers believe their advisors are governed solely by a fiduciary standard, but advisors in these channels report that only 13% of their clients had “fiduciary-only” relationships.”1
There is certainly a wide gap between what investors expect from their advisors and how they’re actually being treated. This lack of clarity only serves to fuel the distrust so evident in our conversations over the last few weeks.
If you are fortunate enough to have an exceptional advisor, this is likely a less important issue. As we noted in the April edition of SpringReef Insights, exceptional advisors, “regardless of what their model requires, hold themselves to the core of the fiduciary standards. They come to work every day determined to do the best they possible can for their clients.”
If you find yourself questioning your advisor on this issue – like so many of the individuals with whom we’ve recently spoken – below is the fiduciary screen we use as part of our advisor due diligence process at Aronson SpringReef. While it doesn’t guarantee a trustworthy, client-focused advisor, using the screen is likely to improve communication with your advisor, drawing out areas of concern and allowing you to better determine just where his or her interests lie.
Determining Fiduciary Interest
Listed below are five core fiduciary principles established by Committee for the Fiduciary Standard:
a. Put the client’s best interests first;
b. Act with prudence – that is, with the skill, care, diligence and good judgment of a professional;
c. Do not mislead clients – provide conspicuous, full and fair disclosure of all important facts;
d. Avoid conflicts of interest;
e. Fully disclose and fairly manage, in the client’s favor, unavoidable conflicts.
1. Going forward in your work with this client, are you willing to commit to these principles in writing?
2. Given your firm and business model, please describe conflicts in (e) above and how you would mitigate them in dealings with this client.
What Am I Paying?
The second issue that surfaced continuously in our conversations was the matter of cost. Based on what we’ve seen, many people are confused regarding what their investment advice, execution and management actually costs.
The reason for the confusion is simple – pricing in the wealth management industry tends to lack clarity and consistency. It differs dramatically across firms and advisors, and in many cases, these differences defy any reasonable logic. When this variance in pricing is combined with a lack of consistent, clear communication to the client, confusion is inevitable. Not convinced? Just consider the recent, rather disturbing findings from Cerulli Associates, stating that “nearly two-thirds of investors believe they do not pay for financial services (i.e. they are complimentary), or are unsure of how their advisors are paid.” 1
At Aronson SpringReef, we have a strong view on competitive pricing based on asset levels and investment complexity, working on behalf of our clients to establish appropriate pricing for advisor-delivered products and services. While we may not be the appropriate party to drive the consistency of industry pricing, we do believe regulators should focus more on the clarity and disclosure of costs to clients.
In the interim, below is an overview of how we capture costs in our advisor due diligence process. While posing this question to your advisor won’t necessarily help you define appropriate pricing levels for your assets, it will certainly provide clarity regarding your wealth management costs.
Determining the Total Cost of Wealth Management Services
What are the total costs to this client for the products and services you provide? Please list and describe both the costs that result in compensation to you and the costs that accrue to your firm or other firms. Please include the total cost of ownership for all positions currently held by the client that were acquired through you or your firm (i.e. sales loads or upfront sales charges for products currently owned but purchased in prior years).
We understand that people who are satisfied with their financial advisors are less likely to contact us. As such, we recognize that the conversations we’ve had over the last month do not necessarily represent the opinions or concerns of the entire investing public.
However, given the frequency and intensity with which these issues are being raised, their message should not be ignored. The financial services industry needs to improve both its focus on the best interests of its clients and its communication regarding pricing. While we wait, we hope the guidance we’ve provided here will be helpful. Regrettably, for an industry so adept at describing what it wants you to know, one must question the lack of clarity about the critical things you need to know.
1 Cerulli Associates. The Cerulli Edge, Advisor Edition, 2nd Quarter, 2011.