Trust Me!

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Part 2 of our 3-Part series in which we discuss the power of TRUST, and how you can know who to trust in your life, and especially the relationships in your business life

Part 1: Time is the Stuff that Life is Made of
Part 2: Trust Me!
Part 3: Financial Advice: The Value Equation


 

“Trust is the glue of life. It’s the most essential ingredient in effective communication. It’s the foundational principle that holds all relationships.”
– Steven Covey

A Universal Truth

Do you really want to have a great quality of life?

There are certain Universal Truths or Laws of Nature which are important to understand and embrace if we wish to live a happy and fulfilled life. There are certain things which we must accept as being true and unchangeable, and our happiness is largely based upon our ability to accept these truths, and not live in denial or avoidance of them. Life is better when you choose to handle the truth.

One such Universal Truth is the Rule of 168, which states that there are only 168 hours in every week, for every human. No matter your age, how much money you make, how much power you accumulate, or how smart you are, there are no exceptions to this fact. You don’t get any more, but you do get to choose how you spend your 168 hours. The quality of your life is largely dependent upon that choice.

Most people would be best served to spend those 168 hours focused on those things that are absolutely critical to their happiness – like spending time with their family, developing their career or profession, exercising and taking care of their health, and spending time on leisure activities like travel and hobbies. For those who have the financial ability to do so, it is smart to pay someone else to do the things in life that are not on this list – things like mowing your grass, laundering your shirts, or cleaning your gutters – because these are all functions in your life which are important, but not critical to your happiness, and which can easily be delegated.

Personal financial management is a job that may be on this list as well. Done properly, the management of your wealth is a time consuming endeavor which requires years of experience and knowledge, but which you can easily pay someone else to do for you. Our last article [Part 1: Time is the Stuff that Life is Made of] suggested that the true Value of any wealth manager or financial advisor is to allow you to:

Delegate the management of your wealth to a highly capable advisor who you trust, so that you can free your time to spend on the things that are more important to you.

The Two Kinds of Trust

The cornerstone of this value promise is the phrase: a highly capable advisor who you trust, because it is impossible to feel truly confident in delegating your personal financial matters to someone, unless you feel the highest possible level of trust in that person.

Planning your financial future is clearly much different than mowing your front lawn. If you hire a landscaper and he screws up your lawn, just wait a couple of weeks and it will grow back. If your financial advisor makes a big mistake, or even worse violates your trust, your entire financial future could be at stake. This is why trust is so important. As Steven Covey suggests in the quote above, trust is the essential foundation of every human relationship, but when it comes to your financial advisor, a relationship of trust is the one ingredient that is absolutely necessary.

In my view, there are actually two different levels of trust to consider. A lot of people think of trust in the sense that “I know my advisor would never do anything to harm me”, that he or she would never knowingly cheat them or do them harm. I call this the “Madoff Test”…the belief that your advisor is not going to defraud you and run off with your money. While this level of trust is obviously very important, it sets a fairly low standard. Unfortunately, this is the standard that most clients use, and as a result they trust their advisors – just a little, but probably not enough.

There is a higher standard of trust, which is the trust that you should expect from an advisor who pledges to act as a fiduciary for you and your family. By definition, an advisor who commits to act as a fiduciary for you is bound to always act in your best interest, and will proactively do the things for you which have the greatest probability of advancing your success. My informal definition for this is that your advisor should handle your money and financial decisions as you would do for yourself, if you had the benefit of all of the same knowledge and experience he or she has.

The first definition of trust is that you trust that your advisor will never do the wrong thing for you. In the second definition, you trust your advisor will always do the right thing for you. These are not just two ways of saying the same thing, and there is a difference.

Financial Advisors as Fiduciaries

If you search the word “Fiduciary” on Wikipedia, you will find the following definition:

A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties. In a fiduciary relationship, one person, in a position of vulnerability, justifiably vests confidence, good faith, reliance, and trust in another whose aid, advice or protection is sought in some matter. In such a relation good conscience requires the fiduciary to act at all times for the sole benefit and interest of the one who trusts.

This is a perfect definition of the ideal relationship between a financial advisor and his or her client, which should ideally hinge on the client’s implicit trust that the advisor will, at all times, act solely in the best interest of the client.

Fortunately, most financial advisors are fiercely client-centric in their advice and their fees, and behave like fiduciaries for their clients. However, the financial services industry, and its various regulatory bodies, have employed a vague set of suitability guidelines and compensation schemes which have muddied the waters for many consumers, and have left room for potential conflicts of interest. It is not always clear to consumers that their advisor is acting as their fiduciary, and in particular, that their advisor’s financial interests are aligned with their own.

Fortunately for consumers, the financial services landscape is changing rapidly and in dramatic ways. In particular, there are two significant trends at work which are likely to make it much easier for consumers to feel highly confident in their trusting relationship with a financial advisor:

Trend #1: The Triangulation of Advice
In recent years, as the financial services industry has consolidated, several very large financial services companies have emerged, based on a service model which delivers several services from a single “Silo”: The combination of financial advice, custody and safekeeping of your assets, and delivery of products and services all delivered under one roof.

This model has worked quite well, as it has allowed big firms to create efficiency, scale, and profitability, while also offering consumers the promise of convenience. Big firms have the size and scale to do all three jobs quite well, and consumers can achieve “one stop shopping”, when your advisor works for the same firm which acts as custodian of your money, and produces many of the products and services you utilize.

However, the downside of this “single silo” model is that compensation arrangements can become less than clear, and conflicts of interest can result. In particular, when products and services are bundled with the delivery of advice, you may be uncertain how much in fees the firm is charging on the custody, products and services you use – and how much of that compensation is flowing to your financial advisor. As a result, you may be left unsure of whether your advisor is advocating the use of certain products and services because it is best for you, or because he and/or his firm makes more money that way.

Recently there has been significant growth in the population of advisors who are joining a trend we call “The Triangulation of Advice” and moving from being captive employees, to becoming independent advisors with no affiliation to any custodian, or product and service provider. In so doing, many advisors can now provide advice separate from where products are sourced and client assets are held in custody, and clients can access each function separately:

  1. Advice. As potential conflicts of interest are removed, clients can feel more confident in receiving advice that is 100% transparent, objective, and conflict free, from an advisor who is acting as your agent and fiduciary in selecting the most appropriate products and services, without any affiliation with any single financial institution.
  2. Custody. Decisions about where to hold your investment assets in custody can be made independently and objectively, as opposed to being forced to hold custody at your advisor’s firm.
  3. Products and Services. In this new model, and thanks to the advent of technology, clients and their advisors can now become “a client of Wall Street”. An independent fiduciary advisor is now in a position to seek the very best from every firm on Wall Street – from trading, to investment products, lending services, life insurance, etc – on your behalf.

By “Triangulating” these 3 critical areas of service delivery, many advisors are now in a position to act as a true fiduciary for you and your family, and to maximize the level of transparency, objectivity, and freedom from conflicts of interest which you require.

Trend #2: The Fiduciary Rule
One of the casualties of the financial crisis of 2008 was the public perception of the trustworthiness of Wall Street, and the financial services industry in general. As a result of that crisis in confidence, industry regulators and politicians have taken a keen interest in forcing the industry to become more client centered, and to eliminate conflicts of interest. The latest development in this area is that the Department of Labor recently announced a new set of regulations called “the Fiduciary Rule”, defining the fiduciary standard for providers of financial advice. The clear intention of this new rule is to ensure that the single motivator of a financial advisor’s advice is the best interests of her client.

In particular, these new regulations appear to target the compensation structures which are commonly used in the advice industry, and to remove potential conflicts of interest. Because there has historically been great variation in the way clients pay advisors for their services, it has been difficult to ascertain exactly what some advisors are charging because of how information is reported on client statements. Combine this with the fact that, historically financial product providers have used financial incentives to entice advisors to sell their product or service as long as it was “suitable*” for their client, it has been hard for clients to hold advisors accountable to the expectation that the advice given was in their best interests, and not motivated by an incentive to the advisor.

These new regulators appear to be forcing the industry to take yet another step away from the traditional “Brokerage” relationship, in which fees are not always transparent, and advisors are required to sell products which are “Suitable*” for their client, toward an advisory relationship, in which the advisor has a highly defined responsibility to act as a fiduciary, with the client’s best interest always at the forefront. In the words of DOL secretary Thomas Perez: “Putting customers first is no longer a marketing slogan – it’s the law”.

* Note on Definitions: Regulators have paid a great deal of attention to defining the differences between advisors selling products which are “suitable” for their clients, compared to providing advice which is “in the best interests” of their clients. Historically, many of the activities of Financial advisors have been held to a “suitability standard” by regulators, and have been required to only sell products which can reasonably be argued to be “suitable” to the client’s situation. However, there is some debate that what is “suitable” may not always by definition be in the “best interests” of the client. The fiduciary standard holds advisors to this higher standard to not only sell products which are suitable, but to also always act in their client’s best interest.

The Dawn of a New Era
Both of these developments – the “Triangulation of Advice”, as well as the advent of new regulations, should come as great news to any family who is seeking an objective, conflict-free relationship with a financial advisor they can truly trust. The financial advice industry is moving to a new era, in which advisors are more easily held accountable, client interests are to be made a priority, and consumers are empowered to understand the value of the services they are receiving. The regulations are an act of consumer advocacy that add another layer of expectations that clients will get the best possible advice from their advisor – setting a higher standard for advisors in serving their clients.

The Brady Rule

“Never announce that you are a knight, simply behave as one”
– Ethan Hawke from his book Rules for a Knight

These important industry trends are a wonderful step forward in helping families to establish a trusting relationship with a financial advisor – but is this enough? Just because regulations are forcing advisors to a more accountable standard, does that guarantee that all advisors will automatically act in their clients’ best interests, and be worthy of your complete trust? Unfortunately, the answer is probably not. Just because industry regulations compel advisors to act as a fiduciary for their clients, does not guarantee that all advisors will behave in a trustworthy manner. Although these new trends will help consumers to hold advisors accountable, they don’t eliminate every possible conflict of interest.

So how are you to know? What standard can you apply to make sure that your advisor is worthy of your trust? How can you find that rare advisor who has both the competence and trustworthy character to guide your family’s wealth planning? How can you find someone who will actually care as much as you do about your family’s financial well-being and quality of life?

The answer is: Observe whether she behaves in a trustworthy manner. In contrast to the “Fiduciary Rule”, I call this the “Brady Rule”:

A Super Performer
On February 1st, 2015, the New England Patriots played the Seattle Seahawks in one of the most entertaining, and closely contested Super Bowl games in recent history.  Late in the 4th quarter of that game, with only 6:52 left on the clock, the Patriots took possession of the ball deep in their own territory, losing 24-21. This was crunch time for the Pats: If they were able to mount a long scoring drive, the odds were they would win.  Turn the ball back over to Seattle, and the outlook was not good.

New England’s Hall of Fame quarterback Tom Brady stepped into the huddle to start the drive, and except for the players on the field that night, nobody really knows exactly what he said to his players when they took the field.  However, there is one thing I can guarantee he did not say. He didn’t have to take time to explain to his offensive linemen who he was, what his credentials are, and that he is Tom Brady, one of the winningest quarterbacks in history.  He didn’t need to tell them that they should do what he says because he has 3 Super Bowl rings and 2 Super Bowl MVP’s, and is the ultimate, last minute comeback player.  He didn’t have to announce his greatness to inspire confidence in his teammates – he just had to behave like a great quarterback, tell his troops what to do, and execute with greatness.  He didn’t have to explain that he is Tom Brady, he only had to be Tom Brady.

(By the way, Brady proceeded to lead his team down the field on a surgical, 9 play drive, culminating with his touchdown pass to Julian Edelman, helping to win his 4th Super Bowl ring.)

The lesson?  As Ethan Hawke suggests, those who are great in any field don’t need to explain or brag about why they are great.  They just act that way.  You can tell by a person’s behavior and demeanor if they are great at what they do – they just walk into a situation, act like a real pro, and operate at the highest standards.

This lesson can be helpful to remember when choosing or evaluating people to trust in your life as well.  You can judge a potential friend, business partner, CPA, lawyer, or financial advisor much more by the way he or she behaves, than by what he or she “announces” about him or herself.

This is particularly true in the financial services industry: for any family that plans to delegate the key decisions about their financial future to an advisor, trust is of utmost importance.  While there is no shortage of marketing messages out there from Wall Street firms that “announce” how trustworthy they and their advisors are, unfortunately not everyone in the industry “walks the talk” and behaves in a trustworthy manner.

So how are you to know? What standard can you apply to make sure that your advisor is worthy of your trust?  How can you find that rare advisor who has both the competence and trustworthy character to guide your family’s wealth planning?  How can you find someone who will actually care as much as you do about your family’s financial well-being and quality of life?

It’s simple: observe whether he or she behaves in a trustworthy manner.   Here are a couple of important ways you can tell if your advisor fits the bill:

Do they take their craft seriously?
Make note of how long they have been in practice, as well as any professional designations or other evidence that they take their profession seriously and are dedicated and committed to a lifetime of learning and staying current. Also note the kinds of services they provide and how client-centered they are.  At a minimum, be sure that they offer regular review meetings and accessible client contact. Many advisors limit the number of clients they work with in order to provide top quality attention and care. This is a great sign as well.

Are they focused on YOU?
A great advisor makes it ALL ABOUT YOU, so take note of the questions that your advisor asks.  I always chuckle when a personal finance magazine or web site scares you into thinking that you need to have a whole list of technical questions for prospective advisors.  The truth is that trustworthy professional advisors reveal more about themselves by the questions they ask you rather than how they answer the questions you ask them.  The best advisor is someone who wants to know all about YOU – your values, your goals, what is important to YOU — and is not shy about asking you. You should always walk away from a meeting with your advisor with a feeling that your relationship with him or her is all about you, a feeling reinforced by the questions directed to you.

A trustworthy and competent advisor who passes these tests is worth entrusting with all of your money.  Follow his or her financial advice completely.  Be grateful that you have found a lifetime partner in your family’s financial success, and then go out and use all that time you once spent worrying about your money to do the things that really matter.

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About the Author:

Erik is one of the co-founders of Concentus Wealth Advisors and currently serves as the Chief Executive Officer of the firm. With over 25 years of industry experience, Erik guides the firm’s overall strategy. After graduating from Amherst College in 1991, Erik spent a year working with Rittenhouse Capital Management, before joining Gerald in 1992. Erik currently holds his general securities registrations and insurance licenses, as well as CERTIFIED FINANCIAL PLANNER™ and Chartered Financial Consultant designations. In addition to his formal designations, Erik has appeared on CNBC’s Worldwide Exchange, Fox News’ America’s News HQ, Live Well’s Mary on Money, CN8’s Money Matters Today and The Real Estate Connection. In 2012, Erik was one of thirteen advisors named to Main Line Today’s Top Financial Advisors list. Erik lives in Bryn Mawr, PA with his wife and three children. He serves on the boards of the Philadelphia Chapter of the Salvation Army, Acting Without Boundaries (serving young people with disabilities) and The Holy Child School at Rosemont. In addition, he is on the financial advisory board of the Sisters of St. Francis in Media, PA.

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