How Tim Hatton and other advisors are turning their ethical approach into a marketing advantage.
Maybe you can fool most of the people all the time. But no one was going to fool long-time Motorola Vice President Mark Poulsen last year when he started shopping for an advisor to help him invest lump-sum withdrawals from his retirement plan. He started his career auditing Motorola's books 31 years ago and deftly made his way through the financial analysis and accounting departments before taking over as vice president of the electronic giant's finance division.
"I have a pretty good understanding of numbers," the soft-spoken Poulsen says modestly. That might seem evident to anyone who spent three minutes talking to him about his professional life and planning needs.
But maybe most of the brokers Poulsen interviewed in his three months of what he calls "research and elimination" thought they were just plain smarter than him. Instead of asking the finance executive what he wanted and needed and what risk he'd be willing to take on to get those results, they spent their time overinflating projected investment returns and hiding their fees, he says.
"Some of them really overpromised," he recalls. "They were using these big projections, saying 'Wow, over the next ten years, you're money will triple.' I've been in this business for three decades, and I know what those kinds of promises really mean."
Today, Poulsen says he feels lucky he began his search with Phoenix-based investment advisor Tim Hatton, whom he subsequently hired. Hatton armed the prospective client with his firm's five-step investment process and a list of pointed, pertinent questions, and told him to go out and shop the relevant brokers in the Phoenix area.
"I was looking for processes," Poulsen says. "I want to know what people are doing and what they're charging." Hatton's procedures and his effort to create a wholly transparent process satisfied the veteran finance executive.
"I'm happy when I hear a client is talking to Merrill Lynch and Morgan Stanley," says Hatton, who manages $125 million for 180 clients at his firm, Hatton Consulting. "I'm happy because I know I'm going to win."
An advocate of independent advice since leaving Morgan Stanley to open his own advisory firm in 1997-the first year, he says, that technology allowed him to deliver the services he believes investors deserve-Hatton is the author of The New Fiduciary Standard: The 27 Prudent Investment Practices for Financial Advisors, Trustees and Plan Sponsors (Bloomberg, 2005)
"Look, I know this education process is taking place one investor at a time," Hatton admits of the upfront time he spends with prospects and clients explaining what he does and how it differs from what brokers do. "But I'm not going to leave it up to the SEC (Securities and Exchange Commission) and broker-dealers, who want us all to drink fuzzy water. I take the time to really educate clients. It creates a transparent process for them so everyone knows what will happen, what decisions are made and that compensation needs to be clearly disclosed in writing."
All over the country, a small but growing force of fiercely independent investment advisors is beginning to delight in their ability to successfully separate themselves from their vast field of competitors (19,000 advisors and 600,000 brokers, at last count) by using one forceful advantage: their client-centric ethics.
Increasingly, advisors like Hatton are all too happy to show clients that what they're being told by competitors just isn't true. Armed with client presentations, side-by-side comparisons, checklists and Web site materials, these advisors are actively encouraging clients to aggressively comparison shop for their advice options.
Savvy advisors are also providing investors with a list of questions they can ask to explore the investment returns they're promised, the process competitors will use to achieve those returns and a precise disclosure of all fees and conflicts of interest. One of the marketing pieces that Hatton gives to investors, Why Choose Hatton Consulting-highlights the following points, which he says really resonate with investors:
Low fees: They will be up to a percentage point or more lower than major brokerage firms. Additionally, the funds they use have smaller fees than most of the major mutual funds.
Independence: Hatton Consulting is an independent investment advisory service. Having no affiliation with a major brokerage house, we are free to survey investment vehicles and select the best opportunities for clients.
Accountability: As a registered financial advisor, Hatton has certain fiduciary responsibilities that must be adhered to. These are much stricter standards than those required of a typical advisor/broker at a major Wall Street firm.
Once disdainful of anything that smacked of marketing-after all, many advisors have been growing their bottom lines by 20% or more annually for years-even veteran investment advisors have started playing up their strengths and competitors' weaknesses by explaining precisely what they're going to do for clients and what it will cost, and then delivering.
The advantages of a client-centric practice are clear. But advisors are also being driven, in part, by chagrin over the SEC's passage this year of the so-called Merrill rule. The rule permanently exempted brokers from advisor standards and regulations (namely, fiduciary duty), provided they classify the advice they offer clients as "incidental."
Seasoned advisor Paula Hogan, who hung out her planner's shingle shortly after graduating from Harvard University more than 20 years ago, started pointing out differences between "us and them (meaning advisors and brokers)" in her last two annual reports. "Now I tell clients that the most differentiating question you can ask the financial professionals they're talking to is, 'How are you regulated?'" says Hogan. "I started doing this about six months ago, seeing as clients can't tell one of us from the other. I say if you're talking to a registered investment advisor, they're regulated by the Securities and Exchange Commission or the state. They're obligated to put the investor's interests first and disclose their sources of compensation. If on the other hand, they're regulated by the NASD (National Association of Securities Dealers), that's fine, but you're talking to a salesperson and advice is incidental to what they do."
It's at this point that clients often have what Hogan says is their ah-ha moment. "They say, 'You mean advice isn't even secondary to what brokers do, it's incidental?' The SEC has given the big brokerage industry the right to use the word advice, and they have ad budgets of millions. "We don't have those budgets and we can't use testimonials," says Hogan.
Instead, Hogan is armed with a moral compass that plays itself out in ways that have become meaningful to investors. For instance, like other advisors we interviewed for this article, she requires that all clients have comprehensive financial planning so she can use actual client goals and risk tolerance to guide her investment plans. A fee-only advisor, she also fully discloses her fee structure in writing so there are no surprises. "As an advisor, you have to role-model being comfortable talking about money. I never want them to be confused," she says.
Experts, including ethicists and academics, say advisors like Hatton and Hogan are at the vanguard of a movement to turn financial planning into a profession, a transformation that consumers are beginning to demand of the adolescent industry in the aftermath of too many costly corporate and financial scandals.
"We've come to the point in the 21st century where people realize they can't trust the management of any company to people who don't see themselves as governed by a set of professional standards," says Dr. Robert Kennedy, professor of management at the University of St. Thomas in Minneapolis. Kennedy has written about conscience and control in corporate America and published extensively on the ethical lessons Enron should teach investors and companies.
"Advisors who have such standards have a definite marketing advantage, just as the Hippocratic Oath was a marketing advantage for doctors when it was created 2,500 years ago," says Kennedy. It only makes sense that advisors are trumpeting their fiduciary preeminence today. "It's not meaningful if no one knows about it," he adds.
Don Trone, president of the Foundation for Fiduciary Studies, says: "Investors don't want business as usual from Wall Street or Main Street and they're looking to our industry to respond with a higher standard of care."
Trone also directs the foundation's sister organization, the Center for Fiduciary Studies, which is the country's first full-time fiduciary training facility. To date the center has trained 1,500 advisors, and recently licensed its accreditation programs to Cannon Financial and Virginia Commonwealth University. Trone believes that the number of accredited fiduciaries may double to 3,000 in the next year, which may be very good news for investors.
Why? It will likely light a fire under all areas of the industry. Using fiduciary standards gives investors a report card for evaluating performance, how their goals are being met and the fees they're paying.
Such straightforward analysis gives advisors like Hatton another advantage. He says he gets to point out "gross underperformance" when it occurs in the wirehouse funds and wrap programs prospects sometimes have in their portfolios. "What I've done is say to clients, 'OK, let's keep score.' I'll monitor the performance of their wirehouse accounts, and we'll find it's horrible," Hatton says.
To hammer that point home, Hatton issued a challenge to the presidents of all the major wirehouses two years ago. He asked them to put up their 25 best portfolios to see if even half of them could equal their relevant benchmarks. "If they did, I offered to write a check to their charity of choice for $10,000. I didn't have one taker," says Hatton, a former broker with Morgan Stanley. "In fact, I only got one response, from Morgan Stanley, whose president said he appreciated the offer, but valued his client's privacy so he couldn't compete. I wasn't asking for client names," Hatton says.
Tracy Jackson, president of Jackson Financial Management in Newport Beach, Calif., also stresses his ethical procedures and independence to prospective clients. He says that he sees his fair share of investors who have been, let's say, underserved at wirehouses. "I saw one gentleman recently who started with $1.5 million. Sadly, he wound up with just $550,000 after a wirehouse broker repeatedly put him in the next wave of hot sector funds. The broker knew very little about the client and none of the trading or investment management was tied to the investor's objectives, cash flow needs or even his tax situation. I see this over and over and over again," says Jackson, whose firm, an affiliate of FSC Securities, manages $400 million.
If a client comes in with a good portfolio, "We'll point that out, too," says Jackson, who requires all clients to undergo comprehensive financial planning. "It's the only way I can make sure I'm doing what's right. I have to be able to sleep at night," he adds.
Alan Goldfarb uses a brochure that contrasts what his Dallas-based firm, Weaver and Tidwell Financial Advisors, will do for clients and what brokers and pure money managers do. "All the terms are interchangeable, so we think it's important to explain we have independence, flexibility and added responsibility to the client."
Goldfarb, who manages $185 million, also has begun targeting executives who used The Big Four accounting firms for financial planning-another market created for independent advisors by the unscrupulous behavior of competitors. Recent federal legislation seeking to keep auditors from getting too cozy with the executives they were supposed to be auditing barred the accounting firms from doing personal planning work for executives.
"Total independence has an attractive aura. We're building a campaign to target this market, which we already do some work for," says Goldfarb, who has been educating advisors and others on their ethical responsibilities for more than a decade. He's been director of the M.B.A. program in personal finance at the University of Dallas, where he also teaches, since 1986. He's currently teaching accountants what their fiduciary responsibilities are if they put on a trustee's hat.
He'll be chairman of the CFP Board of Professional Review next year, after serving on the board for four years. A long-time arbitrator for both the NASD and the American Arbitration Association, Goldfarb says hearing cases against brokers has helped him learn from other's shortcomings. "I started my firm in 1975 and have never had a client problem or regulatory problem."
One reason why? "We do comprehensive planning. It's hard to do investment management without knowing what your clients need," says Goldfarb, who along with Hatton has earned the Accredited Investment Fiduciary (AIF) designation from the Center for Fiduciary Studies.
That's something the brokerage industry may be starting to think hard about-some think they are having real second thoughts-as it gears up to start telling clients in January, thanks to the broker-exemption rule, that brokers don't have to do know their clients well enough to be fiduciaries.