How do most clients choose their advisor?
A. By brand—whether the advisor is affiliated with a wirehouse, broker-dealer or independent RIA.
B. By standard of care—whether the advisor is subject to a suitability versus a fiduciary standard.
C. By whether the advisor is inspiring—is viewed by the investor as a leader and steward.
D. By compensation model—whether the advisor is compensated from commissions, asset-based fees or both.
E. By whether the advisor possesses certain designations.
You’re probably tempted to say that all the answers are correct, and to some extent they are. However, there is one that stands out from the rest.
Consider that survey after survey has revealed that the public cannot discern the differences between brokers and advisors; between a suitability standard and a fiduciary standard; between a basis point and a stolen base; or between CFAs and CFPs. Even when informed, investors don’t seem to care about the differences. We’ve also chewed up a lot of time, money and resources to advocate for the proposed uniform fiduciary standard of care. The reality is that no matter how proposed fiduciary standards are implemented, they’re not going to have any real impact on how investors choose their advisor.
The correct answer to the above question is “C”—the vast majority of clients who are looking for a long-term relationship with an advisor care only about one thing: Does the advisor inspire me? A broker who is charging commissions and does not hold a single professional designation can be as inspiring as a registered investment advisor who charges only an hourly fee and needs two lines on her business card to list her designations.
That’s not to say brand, standard of care, compensation model and designations (collectively referred to as “professional attributes”) are not important. They’re incredibly important—but more to the financial advisor than to the clients. Advisors want to feel like they’re part of a team, and certain professional attributes are what give financial advisors a sense of membership and community.
So what does it take to be an inspiring advisor? What are prospects looking for in an advisor? Three things: character, competence and courage. To be inspiring, there must be a balance, manifestation and continuum among all three elements. A shortfall or incongruence in any one of the three will send a client looking for a new advisor.
Character
Competence
Courage
Gen. Norman Schwarzkopf (West Point class of 1956) is known for the famous quote, “Leadership is a potent combination of strategy and character. But if you must be without one, be without strategy.”
Character defines who you are, how you act and how you respond to positive and negative events. It is the primary determinant for how you will treat others. You are not born with character—it is a learned behavior shaped by habits. You can’t regulate a change in character, acquire a new character through a series of mergers or acquisitions, disguise a flawed character with a new marketing or branding campaign or change the disingenuous character of a company by having employees sign a “pledge of integrity.”
When I started writing about fiduciary responsibility 27 years ago, I melded industry best practices with legal and regulatory requirements to define the term “fiduciary.” In turn, “fiduciary” was soon recognized as a way of defining the moral character of an advisor (see the figure below). Today, it appears that fiduciary is going to be relegated to a de minimis legal term. For this reason, we have begun to separate the two tiers of what formed the old fiduciary standard. Moving forward, the lower tier will be defined as a legally substantiated fiduciary standard, and the upper tier will be defined as a stewardship standard. Of the two tiers, the stewardship standard will define the higher professional standard of care (see Figure 1).
Our profession is in trouble. We continue to see an erosion of the public’s trust and a steady stream of news stories about fallen industry leaders. In the second annual ethics survey of the financial services industry conducted by the law firm of Labaton Sucharow, the firm reported the following results:
1. Thirty-nine percent of respondents reported that their competitors are likely to have engaged in illegal or unethical activity in order to be successful;
2. Twenty-three percent of the respondents reported that they had observed wrongdoing in the work place firsthand;
3. Only 30% of respondents feel that the SEC effectively deters, investigates and prosecutes misconduct. And only 29% feel that way about Finra;
4. Twenty-eight percent feel that their organization does not put the interests of clients first; and
5. Thirty-six percent of the respondents with less than 10 years of experience believe they will have to engage in misconduct in order to get ahead.
We must do more to promote the concept of good character—being of high moral and ethical standards—and discharge those who don’t measure up. Advisors of good character, no matter what standard of care they are subject to, will continue to seek the best ways to serve the interests of their clients. Conversely, advisors of questionable character will seek to serve their own self-interest, no matter what the standard to which they’re subject.
You can’t regulate character, but you can regulate competence. We can define the minimum education and experience requirements for one to serve as an advisor. Unfortunately, the requirements have been set too low; barbers and beauticians have higher education and training requirements. (Perhaps that’s why many investors report that they get better financial advice from their barbers than their advisors!)
Competence is a melding of education and experience. We can test and measure whether an advisor is competent; we can’t do the same with character. Using an iceberg as an analogy, we see competence above the waterline. Character, which has far more impact on a client relationship than competence, is invisible below the waterline.
With regard to a uniform fiduciary standard, we should not attempt to paint every advisor with a fiduciary brush. Nor should we make the mistake of thinking that an advisor who has passed a written examination on fiduciary responsibility is willing and competent to judge wisely and objectively (to be of good character). We should not attempt to make a fiduciary standard uniform. To the contrary, “fiduciary” should be a standard awarded only to those advisors who have demonstrated good character and professional competence.
Winston Churchill is the source of many of the quotes we use in our training at West Point. One of my favorites: “Courage is rightly considered the foremost of the virtues, for upon it, all others depend.”
Most of the men and women I meet in our industry are of good character and are committed to lifelong learning and honing the skills of the profession. However, with regard to being courageous, I think we have a significant shortfall.
There is now a famous quote circulating through leadership circles: “The standard you walk by is the standard you accept.” The quote is from a commanding general of the Australian army, who was criticizing his troops for inappropriate behavior—those involved with the unethical behavior, as well as those who knew of the behavior and did nothing about it.
How many times this month have you turned a blind eye—walked by—unethical or illegal behavior?
Courage also means being honest about the nature of your work. Churchill also said, “Each night before I go to bed, I try myself by court-martial to see if I have done something really effective during the day—I don’t mean merely pawing the ground, anyone can go through the motions, but something really effective.”
If you have never considered yourself as a leader in the lives of your clients, it’s going to take courage to get comfortable with that concept. There is awesome responsibility when you take on a leadership role, and you have to work at it every single day. Leadership denotes responsibility—in its breadth and scope. Such responsibility dwarfs azfiduciary standard of care.
In summary, leadership is the ability to inspire others. In the financial services industry, those financial advisors who succeed over the long term have learned how to inspire clients, staff, peers and service providers. There is a continuum of character, competence and courage. No matter how or when you connect with an inspiring advisor, you’ll find a consistency between what they say and what they do, and they do it 24/7. Inspiring advisors have made the conscious decision to be leaders and stewards in the lives of their clients.
Donald B. Trone, GFS, is the president of the newly constituted Leadership Center for Investment Stewards, and is the founder and CEO/Chief Ethos Officer of 3ethos. He is the former director of the Institute for Leadership at the U.S. Coast Guard Academy; founder of the Foundation for Fiduciary Studies; and the principal founder of fi360.