Overloaded with information, clients tune out before
important points are made.
Over 30 years ago you were not required by law to
wear a seat belt when driving or as a passenger in a car. We know now,
however, that fastening your seat belt is the life or death difference
for thousands every year. There is a seat belt law in every state of
the union, where tickets and fines are issued for those not complying.
Good legislation, good regulation.
As I sit on what feels like my 30th flight this year, I listen as the airline's automated recording drones on about how I insert the metal flap into the buckle, pull the strap to tighten closely around my waist. I'm a bit distracted. The voice continues and now I hear how I should open the seat belt buckle by pulling back on the metal portion. I wonder is there anyone in the United States over the age of three who does not know how to buckle and unbuckle a seat belt? I doubt it! Thirty years ago maybe; today... ridiculous! Yet, on every flight, every day, from every city, we will hear the same exact refrain millions of times. Why should you care? There are many reasons I could cite why this is more important than it may first appear, but let me focus on one reason that is near and dear to you as a financial advisor, and it has nothing to do with air travel. In fact, I would argue it highlights one the most troubling and overlooked trends affecting our industry and your practice today. Before I do, I would like to first stick with FAA required safety announcements.
As an educated, intelligent individual who prides yourself on the ability to listen to your clients, who probably has taken a 100 or more flights in your lifetime, hearing the safety announcements each and every time, can you recall the nine pieces of information that are critical to your personal safety? It only took approximately two minutes and 40 seconds of your attention. Can you name all nine?
I tried a little informal survey of my own. I asked 14 people on my flight where the spare life rafts are kept. You remember, don't you? You have heard it 100 times. These folks all heard it in the past 20 minutes. Where are those extra life rafts? No one could tell me where the life rafts were. Amazing!
I believe there is a very simple reason for this, and there is research to prove it. Because you have heard it a hundred times and the location of the life raft is given to you at the end of an almost three-minute recording, and most importantly, it follows what your brain tells you is unremarkable information, you stop listening. Specifically, because the airline wasted 30 seconds (yes, I timed it) telling you how to buckle and unbuckle your seat belt, your brain shut down (sort of). In the shuffle of conveying nine important safety regulations, they wasted almost 20% of the airtime to tell you how to buckle up. Hmmmm...
As advisors we have a responsibility to our clients that goes beyond just managing their investments. Part of that responsibility is to make sure that they are informed and understand the roles, responsibilities, risks and opportunities when they engage your services. I submit that the worst way to communicate that information is to pile a stack of paperwork in front of them to sign, or to drone on for an interminable amount of time explaining these important items. We as an industry have arrived at a somewhat absurd point. It is not just diminished returns, but rather negative returns. More has become less! In an effort to have better disclosure, greater transparency and more client protection, we have put forth so much information that our clients are less likely to read and hear the disclosures than ever before.
Before I speak to the hand our regulators have had in this, let look me inwards first!
In the 20 years I have been in this industry, I have observed many good advisors who go through the traumatizing experience of arbitration or worse. In some instances, mistakes were made. In other cases, it is the cynically driven litigious environment. However, in most instances there is a genuine misunderstanding. Typically, the advisor is positive of the information transmitted and the correctness of his/her behavior; the client doesn't always remember it quite that way. Is the client conveniently forgetting, or is their something else at play here? Most advisors take it personally. "I've worked with that client for 15 years, I can't believe..." The client will say, "I never really understood what my advisor was doing. I trusted him/her to take care of it." They don't specifically remember being told about a particular cost, conflict or risk ... Are we willing to ask ourselves if we did a good job communicating? We definitely told the client about those costs and risks, but did the client hear it? Speaking of which, do you remember where the life raft is yet?
A proposal originating with the SEC last February (Release No. 33-8544) began to develop a point-of-sale disclosure document to outline the costs and conflicts of interest in virtually every type of transaction. The SEC also published sample forms for comment. The point-of-sale proposal was inspired, in part, by the work of NASD's Mutual Fund Task Force Report, which analyzed mutual fund portfolio transaction costs, particularly "soft dollar" services and disclosure. The task force developed a point-of-sale document called the Profile-Plus. This disclosure document, released in March 2005, differed substantially from the SEC's proposed format. The NASD then submitted the Profile-Plus and a comment letter to the SEC. In addition to the NASD's letter, the SEC received 7,700 additional comment letters. The SEC has been reconsidering the proposal since that time. I understand that the reproposal of the point-of-sale disclosure rule is expected later this summer.
The motive for this effort is for what I believe to be a correct assertion: Clients were in fact not aware of how certain individuals were being paid directly or otherwise, nor of potential conflicts. Anyone who would attack this effort for the reason of avoiding transparency in our industry is not a friend of mine. I would, however, take exception to the reason some give for clients being unaware-it is not because they do not have the information, or that we as an industry are hiding anything from them. Au contraire! The information is everywhere, in a redundant repetitive fashion. The vast majority of advisors today, fee- based or commission, disclose all conflicts, costs and risks to their clients. Every client gets their ADV Part II, prospectus, confirm statement, EOI, annuity disclosure, etc. The problem is they are not paying attention. So no matter how well intended a new effort on disclosure is, or how well researched and written, or whether delivered electronically, on paper or verbally, you aren't going to accomplish the task at hand until you deal with the problem. We have to get past how to use a seat buckle in less than 30 seconds, or we'll never get to the life raft.
So as our colleagues in Washington prepare new disclosure forms, I urge them to address this dilemma and ensure that whatever new methodology and forms are developed, they are clear and concise and bring better understanding to the client. I hope they take this opportunity to review and replace unnecessary, distracting, repetitive and costly disclosures that are burdening our industry and doing almost nothing to protect clients. Good disclosure is good business. Too much disclosure is deafening and no one hears or reads it.
Finally, each of you should think long and hard about how well your clients understand your responsibilities and your compensation. This is no less important whether it's a fee or a commission. Is your explanation clear and concise? Are they listening? It may be the only way out of an unhealthy cycle of more disclosure that creates less awareness. Put aside all the paperwork for a moment and just tell them. And most importantly, make sure they listen. Don't be so sure that just because you said it before they heard you...
By the way, in case you are still wondering about the life rafts, they are in the overhead compartment in the front and/or the rear of the plane. But of course you knew that already. You've heard it a 100 times before.
Mark Goldberg is former president of Royal Alliance Associates, one of the nation's largest broker-dealers and a division of AIG Advisor Group.