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Financial Advisors Suffer Trust Deficit
Unless financial experts prove value of their advice to investors, and are ready to be held accountable, they stand to lose relevance
ONE long-standing debate in financial services business is about Do-it-Yourself (DIY) versus seeking professional help in managing wealth. Does it make sense to be DIY investors? Why should investors use advisors?
There are two primary reasons why DIY is a better choice: First, no one cares for your money as much as you do. Second, you cannot abdicate responsibility for your personal wealth. If these preferences are to be aligned with engagement of a financial advisor, you need to do two things: First, establish that decisions are being made in your interest. Second, clarify how much of the responsibility is specifically being borne by advisor, and how he can be held accountable. Trust gap that exists between financial advisors and investors today arises from the advisors' inability to establish to investor that they are taking care of his money , as if it were their own. If this fundamental fiduciary relationship is not established and nurtured, investors will continue to toy with DIY, even though inefficient.
The typical arguments for not choosing DIY, but engaging an advisor, centre around time, expertise, process, discipline and professionalism. These are all not insurmountable hurdles. At the same time, DIY is not easy to do. There is a limited amount of time, and investors might find it worthwhile to pursue their chosen professions and other interests, rather than allocate time to managing their finances. Without a deep and sustained interest in money matters, managing wealth may not get the time it needs.
Expertise does not come easy , but for someone with determination, it is not too tough to acquire. Finance is some part math, some part economics and a good dose of plain common sense. Every profession creates its set of jargon and complexity , so it takes some effort to sift through and get one's bearings.
Process and discipline are personal qualities. Not everyone can bring them to bear on managing personal finances. Managing wealth requires a good amount of initial effort to set things up and an on-going review to keep it going. Some investors who have developed a keen interest in finance and manage personal finances as a serious second line of interest, have been able to do a decent job of it. That most cannot or prefer not to be DIY investors, presents host of opportunity for professional financial advice.
Financial advisors assume that the limitations investors face in managing personal wealth are reason enough to seek expert advice. But they fail to showcase qualities needed to manage investors' money . Many advisors do not see investment in knowledge, expertise, systems and processes as requisites to be in the advisory business.
To provide a viable option to DIY, it is important that investors see financial advisors as professionals. A professional is one who is willing to state, in unambiguous terms, the services that he would offer. He sets the correct expectation for his services, indicating what he would do and be accountable for. He reports, informs and communicates transparently how his advice has added value. In delivering these services, the professional subjects himself to a code of conduct. Trust can be earned only from behaviour that is transparent, fair, consistent and dependable. The financial services profession, including banks, brokers and independent advisors, has done precious little to establish these credentials.
The focus of discussion in the financial services industry is on how tough it is to make money. It is about how the business model is not working, or has been disrupted by regulation. There is no thought leadership to develop the financial advisory as a viable alternative to DIY. While we have associations of mutual funds, insurance agents and financial advisors, we still do not have a self-regulatory body for advisors that sets standards and imposes a code of conduct and ethics, and penalises wrongful conduct. I have seen advisor associations mushroom across cities, after regulatory changes impacted the business model of the profession. I have seen institutional advisors coming together to discuss their business interests. But I am yet to see any of these associations prescribe minimum standards for professional competence, code of conduct and ethics or the will to engage in healthy advocacy for fee-based financial advice. The trust deficit therefore remains to be bridged.
Investors do not see expertise they are willing to pay for, or sustained performance that comes from skill and competence, or consistent communication and behaviour that cements faith. Those who continue to engage with financial service professionals mostly remain transactional in orientation or as guarded and suspecting customers. They harm their own wealth in the process, but have no viable alternative except poorly implemented DIY.
How can we change this? First, there should be a clear, concise and transparent communication of the value proposition. Advisors are unable to articulate what their proposition to the investor is. If they decide, they can position themselves as professionals who deliver absolute returns from asset allocations that are tuned to the investor's goals, with a defined downside risk. Second, they should acquire professional qualifications and subject themselves to a code of conduct that sets the base for competent, ethical and fair dealings.
Incompetent advisors, who are unwilling to communicate what they can or cannot do, and refuse to be transparent about their charges fail this test. Third, advisors should be willing to showcase their expertise, in terms of how their advice worked and why . This requires independent research, advocacy, disclosure standards and reporting. They should stop expecting product manufacturers to do all this for them.
Technological solutions that remove inefficiencies in DIY have already begun to provide a viable alternative. Unless advisors bring value proposition together, they may quickly lose ground.
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