Again and again, the financial community makes no distinction between the do-it-yourself investor and those who would prefer to use an adviser. The truth is, most investors (two-thirds, according to many studies) yearn for a trusted adviser. Their quest, however, is often frustrated by a number of obstacles.
What’s in the way. Well, there here is no guide, no Zagat’s, of the "best and most trusted" advisers. Also, once in an adviser’s office, many investors do not know how to perform due diligence.
Sophisticated investors today hand a list of questions to prospective advisers before they hire anyone. One such list that recently circulated in an online community included these questions:
1. What do you stand for, that is, what are the top three values that guide all your business practices?
2. Transparency is important to me; can you show me exactly how you disclose fees and potential conflicts of interests?
3. We live in a global world; how do you capture a global view and put that to work for my investments?
4. How do you determine the target return for my overall portfolio?
5. How do you manage risk for me? How do you define risk? What reports can you show me that measure the risks I might take?
6. How do you access the best funds or smartest money managers? How do you provide evidence of their being the best?
7. How big do you want your firm to be? How many clients per adviser? Is size the enemy of performance for funds or money managers?
8. How do you ensure your technology is state of the art? Which client reports best illustrate the excellence of your technology?
9. What do you do to retain clients? Employees? What has been your record of retention, ie turnover, for the past five years?
10. What exactly should my expectations be when I employ you? What expectations do you have for clients like me?
11. How should we measure your advice? What are the quantitative metrics? What are the qualitative measures?
Another investor wrote a letter to an adviser before he hired him to be sure expectations were in alignment. “We see your firm as a ‘big picture’ investment adviser/strategist for our family investment portfolio,” the investor wrote. “We are looking for a hybrid between pure, fee-based ‘investment consulting’, and full-fledged, discretionary portfolio management. We are interested in a ‘collaborative management’ arrangement that allows us to have input in investment decisions and to work in partnership with your firm.”
Indeed, investors deserve to hear a clearer message from the financial community. In ads, for example, firms need to draw a more distinct line between advice and investment products. Firms such as BlackRock are currently running ads which appear to be a fresh voice amidst the clutter and are already changing the dialogue between adviser and investor.
For an adviser, three simple actions could make a world of difference for investors. Hand your prospective clients a list of due diligence questions and help them learn how to evaluate the answers they receive. Show what "mutually agreed-to expectations" might look like and exactly how you measure success together – one, three and five years out. And distinguish between investing for outcomes that matter in life and investing to beat the market.
Once the advisory community is clearer in its own communications, the industry will earn back its reputation. Investors can then choose to interview only the most appropriate firms. Once the investor is smarter, both the relationship and outcomes will improve. Let’s start on that road today!