Part of my duties as director of research for Buckingham Asset Management and BAM Advisor Services involves talking with registered investment advisor firms across the country about the right ways to serve their clients. I'm frequently asked how to deal with a wide range of client fears. Fortunately, addressing most clients' biggest fear is actually simple, but it requires you to rise to the challenge.
I came across a study recently that said the No. 1 fear that mid- to late-career investors had was getting ripped off by their advisor, with nearly 60% of those respondents placing this fear at the top. The numbers weren't much better for those around retirement age, with about half of respondents being afraid of getting cheated.
I find that depressing and sad. Of course, it's not too surprising either, with scam artists and Ponzi schemers such as Bernie Madoff, Allen Stanford and Philip Barry making headlines. It reminds me of what Dan Solin wrote in his excellent book Does Your Broker Owe You Money?:
For the broker to truly look after your interests while at the same time earning the best living possible is like trying to ride a horse in both directions at the same time... The bottom line in all of this is that your broker is not your friend, and your broker is not necessarily looking out for your best interest. The first conflict, of course, is that many brokers are still compensated through sales commissions. The more they sell, the more they earn. The more they recommend that you invest in products that pay a high commission, the more they earn. But their earnings are your costs. And ... costs are one of your portfolio's worst enemies.
These fears are causing investors to look deeper than ever at their relationships with their advisors. Fortunately, there are two main ways you can make sure you are always on your clients' side and that they know they can trust you.
The first is to embrace passive investing as the superior investing strategy. If you've read my blog Wise Investing on MoneyWatch.com or any of my books, you know that I am a passionate defender of passive investing. The mountains of academic evidence clearly demonstrate that passive investing gives investors the best chance of achieving their financial goals.
But it is so much more than that. By going the passive investing route, life becomes simpler for you and your clients. The focus shifts away from worrying about what the market is doing and toward spending more time with family and friends, enjoying hobbies and volunteering in areas where your passion lies. Leading your clients to passive investing can literally mean improving their quality of life. And how many of your clients would be unhappy with an advisor who can accomplish this?
The second way is to ensure your interests and business affairs are aligned with your clients' interests. The following are 11 commitments I make to all my clients, and you would advise others to do the same--in writing.
Act In The Best Interest Of The Client
Any advice and recommendations provided should be in the client's best interest. Period. Not because RIA firms are legally obligated to (although we are). Not because it works well as a business model (it does). Simply because it is right. Each of the remaining goals align with this first and foremost guiding principle.
Follow A Fiduciary Duty Standard Of Care
Pursuant to the Investment Advisers Act of 1940, each advisor should follow a fiduciary duty standard of care. This is the highest legal duty of care for a client's welfare, in contrast to the less stringent "suitability standard."
Deliver Attentive, Individualized Service
Each client deserves a high level of personal attention. Get to know each client and learn what is important to him or her. Developing personalized insight is key to providing appropriate advice and service.
Build Customized, Integrated Investment Plans
Every investment plan should be integrated into the client's unique strategy; personal situation; and willingness, ability and need to accept market risk. These plans are formalized within a written Investment Policy Statement to ensure consistent adherence.
Achieve Goals And Experience Long-Term Success Through Strategic Advice
All advice should be goal-oriented, whether the goals are imminent or long term. Your job is to evaluate and make recommendations for achieving these goals, as well as to fit each independent objective into the context of achieving an overall investment plan.
Offer A Team For Each Client
Each client benefits from a team of professionals. Using in-house expertise or carefully selected alliances as warranted, you should offer a range of resources to help clients make sound investment decisions.
Focus On Professional Advice, Not On Products
Be client-centric, and focus on delivering sound advice and targeted solutions. The only incentive you should have in offering particular solutions is whether the client's best interest will be served.
Align Fee Structure With Clients' Best Interests
Fee-only investment management allows you to align your interests with your clients' and helps you meet your fiduciary obligation as an RIA firm.
Practice Full Disclosure And Seek Transparent Costs
Every potential conflict of interest as well as any costs incurred should be fully disclosed and clearly explained. Give answers in plain English, with whatever level of detail the client seeks.
Take Advantage Of Academic Research
While your advice should be straightforward and understandable, it should also be based on the latest, peer-reviewed academic evidence. In addition to seeking broad global diversification according to the tenets of Modern Portfolio Theory, help the client with his or her appropriate asset location between taxable versus tax-advantaged accounts.
Practice What We Preach
Invest your personal assets according to the same set of investment principles, and use the same or comparable securities that you recommend to your clients.
Larry Swedroe is principal and director of research for The Buckingham Family of Financial Services, which includes Buckingham Asset Management (www.investmentadvisornow.com) and BAM Advisor Services (www.bamadvisorservices.com). He has authored or co-authored nine books, including The Only Guide to a Winning Investment Strategy You'll Ever Need.