Client service will differentiate you better than fees or fiduciary

Two new studies reinforce what I have been telling financial advisors for some time – clients are more interested in the service you provide and how you get paid or what legal standard of care you must provide. Service can differentiate you much more effectively than fee-only and the fiduciary standard.

A survey conducted by Cerulli Associates revealed that about twice as many clients prefer paying commissions to fees. About half of the 7,800 households surveyed preferred paying commissions, 27% referred the fee based on assets, about 18% say they prefer retainer fees and 8% said they opt for an hourly fee structure. About 33% of the investors surveyed said they didn't know how they pay for the investment advice they receive.

The study also reveals that 63% of clients of the largest broker-dealers surveyed said they believe their financial advisors were held to a fiduciary standard of care. This confusion appeared in another recent survey as well.  According to a JD Power and Associates survey released last week, 85% of the 4,200 clients of full service brokers surveyed say they have never heard of, or don't understand the difference between, the suitability and fiduciary standards.

While they did not understand the regulatory issue we have all been debating for the last few years, they have a very clear idea of what they want from their advisors - service.

“While higher levels of satisfaction are generally associated with clients in fiduciary relationships…placing more focus on key best practices in client management…achieves satisfaction levels on par with satisfaction among investors in a fiduciary relationship” said David Lo, director of investment services at J.D. Power and Associates. According to Lo, key best practices of client service include (in order of importance):

• Clearly communicating reasons for investment performance
• Clearly explaining how fees are charged
• Proactive advisor contact regarding new products and services or accounts four times in the past 12 months
• Returning client calls/inquiries within the same business day
• Reviewing or developing a strategic plan within the past 12 months
• Providing a written financial plan
• Discussing risk tolerance changes and incorporating into plan where appropriate in the past 12 months

If you want to stand out from your competition and win clients, find out from them what they believe is most valuable in an advisory relationship and focus on delivering it to them.

Checklists: A Critical Tool for the Investment Fiduciary

Under most scenarios, a checklist is a good idea as part of a financial advisor's investment management process.  If you are serving as an investment fiduciary, a checklist is critical.  (And, if you are an investment advisor, you are a fiduciary.)  It may not be much of a stretch to say the investment advisor cannot fulfill fiduciary responsibilities without one.

Whether the fiduciary duty has been fulfilled cannot be evaluated by the outcome.  Markets do unpredictable things.  A good process can yield poor results if the market moves against you.  A competent fiduciary, then, must be evaluated on process.

Whether an investment advisor fulfilled those duties can only be confirmed by reviewing policies and verifying procedures.  Are the rules by which the investments are selected prudent and appropriate for the client?  If so, do the corresponding procedures effectively carry out those policies?  Then - and this is key - can you confirm the procedures were carried out?  A checklist can prove it.

Critical points of client assessment or steps in the process can be marked or initialed, documenting performance.  Not only will this assure that a financial advisor doesn't miss any critical steps, it can also serve as proof if it is later claimed that the fiduciary breached his duty.

One good example I have seen frequently, especially since the end of 2008, is a failure to update an Investment Policy Statement when there is a change in client circumstances.  When the market got volatile, many clients reconsidered their tolerance for risk.  Investment advisors responded by changing their portfolios to accommodate the new circumstances.  Reviews we conducted, however, revealed that many had failed to update the Investment Policy Statement, making it appear as though the portfolios were not invested appropriately.  Big deal?  Well, sort of.  If the client demanded a vastly more conservative portfolio, only to watch their accounts be left behind when the market subsequently rocketed back up 70% or so, they might complain their financial advisor caused them to miss a significant recovery.  The opposite would be much worse:  If the client was persuaded to gradually increase the risk in their portfolio as the market went up 70%, triggering a change in asset allocation, and we later experience another October 2008 - March 2009, the liability would be significantly greater.

A simple list "What to do when changing a client risk profile" could include items like a follow up letter for discussions of risk and the reminder to update and get signed a new IPS.

Much of the industry is moving toward a fiduciary standard.  Updating your client procedures with the judicious use of the right checklists will help make sure your practice keeps current.