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.