Articles About Client Trust & Communication

As financial advisors, we understand that one of the most important (and difficult) things we can do for our clients is help facilitate positive behavior change. And not just change that keeps clients from doing “bad” things (like selling at a market bottom), but also change that enables them to do “good” things (like saving more for retirement).

Unfortunately, behavior change is hard, but the good news is that the difficulty of enacting behavior change also means it is one of the most valuable things we can do as financial advisors. And the human-to-human connection – and the social commitments we feel – provide some powerful incentives to enact behavior change… which means financial advisors serving as an “accountability partner” to their clients have the potential to drive more successful behavior change than what clients can do on their own.

In this guest post, Derek Tharp – our Research Associate at Kitces.com, and a Ph.D. candidate in the financial planning program at Kansas State University – analyzes some existing research in the contexts of weight loss and alcoholism to explorer the power of the human-to-human connection in holding us more accountable (than we can be to ourselves alone) to accomplish our goals and behavior our behavior.

In other words, the unique power of the human-to-human connection means clients can achieve better behavior-change outcomes with a financial advisor than they may be able to achieve by themselves or through the use of technological tools. Because when a human is involved, we often have few options for totally avoiding the unfavorable perceptions we think others may have about us if we don’t follow through on our goals… which can be highly motivating. In the case of technology, while it may provide useful behavior change reminders… we can always just turn off the technology, and feel very little guilt. But it’s far harder to just “turn off” an existing relationship with another person.

Of course, this still doesn’t mean that enacting behavior change is easy. It is very difficult, but by acknowledging the social pressure that exists within an advisor-client relationship, we can use strategies – such as setting clear action items for clients based on “SMART” criteria, and encouraging clients to leverage social forces in contexts outside of the advisor-client relationship – to can help clients improve their financial well-being. Ultimately, we human beings are herd animals, and as financial advisors we should keep that in mind as we develop strategies to help clients achieve their financial goals!

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The Investment Policy Statement (IPS) is a staple of investment management and provides crucial guidance for (discretionary) investment managers about how to implement portfolio strategies on behalf of a client in times of uncertainty (when the client may not be there in person to help make the decision).

Yet the reality is that the concept of a “policy statement” transcends just the world of investments. Arguably, it can be effective across most domains of financial planning – not necessarily to establish a plan of action for the advisor in the absence of the client, but for the client today to establish a plan of action for handling an uncertain future. In this context, the “financial planning policy statement” is a form of choice architecture, narrowing future decisions in a manner that can help to eliminate the “bad” emotional choices from consideration.

Of course, it’s still necessary to establish appropriate financial planning policy statements in the first place, linking underlying client values and core beliefs to structured policies that are flexible enough to address future unknowns, yet specific enough to provide clear, actionable guidance when the time comes. Which means the financial planner needs both a means to discover and understand a client’s values and beliefs (not just the financial data), and the tools to formulate and test policies that might be recommended to the client.

Overall, though, this kind of “policy-based financial planning” approach actually has the potential to provide the crucial link between financial life planning and technical financial planning strategies, serving as a means to translate values and beliefs into structured policy statements that can be implemented with the client. At least, if financial planning software is ever improved to the point that such financial planning decision rules can be illustrated in the first place!

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For most financial advisors, the “ideal” client is one who simply delegates all decisions to the financial advisor. Delegator clients tend to allow the advisor to manage everything, and do so in a manner that lets the advisor’s expertise really shape the client’s financial outcomes.

Yet a new research study on delegation suggests that in reality, clients may not be delegating to advisors simply to let them deliver their expertise as efficiently as possible. Nor is it simply about delegating to save the time it would otherwise take to manage their own financial affairs. Instead, it turns out that the primary reason we delegate is so that we can absolve ourselves of the guilt and responsibility for a bad outcome. In other words, it’s all about having someone else to blame – i.e., the advisor.

However, from the advisor’s perspective, this is not necessarily a good thing. Because especially when it comes to managing a portfolio – or aiding clients with a goal that relies on market returns – the reality is that market outcomes, and the inevitable bear market that arises from time to time, is entirely outside the advisor’s control. And woe to the advisor who takes responsibility for bear markets they can’t necessarily avoid.

Of course, the reality is that the buck doesn’t have to stop with the financial advisor. In fact, whether it’s adopting a passive approach and blaming “the markets” themselves for the outcome, or hiring a third-party asset manager (whether as a mutual fund manager or a separately managed account) who can then be fired if results are poor, financial advisors have already adopted a wide range of approaches to avoid – or at least diffuse – the responsibility and blame for an unfortunate financial outcome.

Nonetheless, the reality remains that delegation may be less about finding expertise, and more about simply finding someone with the authority to accept blame and responsibility. Which suggests that financial advisors might even consider refining their marketing message, if the goal is to appeal to delegators, and recognizing the role we play in taking on at least some of the weight of responsibility. As long as the advisor remains cognizant of where to draw the line, to avoid being outright blamed, fired, or even sued, when the next bear market comes along!

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Many financial advisors are involved in providing financial education, from delivering a financial literacy course in schools, or lending our expertise to create financial education resources. An activity that for us is no doubt driven by seeing first-hand the damage that can be caused by financial illiteracy and making ignorant financial decisions.

Yet a recent meta-analysis of over 200 prior studies on financial literacy programs finds that providing long-term financial education is remarkably ineffective. In fact, the researchers found that interventions to improve financial literacy explain a statistically significant but practically irrelevant 0.1% of subsequent financial behaviors.

The problem appears to be driven primarily by the fact that, as with so much of our education, concepts and skills that we don’t use can quickly atrophy. Which means trying to make children financially literate when they’re in school may still result in them to grow up and struggle with financial illiteracy as adults.

So what’s the alternative? An approach called just-in-time training, which aims to provide financial education at its moment of maximal relevance and usefulness – when the financial decision itself arises, and the education can be immediately applied.

The caveat, though, is that the likely provider of financial education in such circumstances would be the financial services product provider, who may have an untenable conflict of interest against helping someone to become financially literate, if doing so might actually talk them out of buying the company’s product. Or alternatively, there’s a risk that the financial services company could frame the financial choices in a manner that “nudges” the consumer towards a not-necessarily-beneficial outcome.

Yet arguably, this may be a perfect role for financial advisors to fill, particularly as financial advice increasingly shifts from product sales to bona fide independent third-party advice. For instance, just as drug companies can market their products to consumers, but still have to recommend “consult a doctor before taking this drug”, so too might financial services product providers be required to direct consumers to consult an (independent) financial advisor before buying at least the more complex financial services products (while “robo-financial-education” technology solutions might help to step in for simpler product and financial decision education). And financial advisors can also help consumers navigate the often emotional and not-always-rational aspects of financial decision making as well.

Which raises the question: while financial advisors have historically supported financial literacy programs on a pro bono basis, should a key element of the financial planning business model include not only offering financial advice and helping consumers to evaluate their financial trade-offs and decisions, but also as a financial education provider of just-in-time training on key financial concepts as well?

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With the Department of Labor's fiduciary rule creating a push towards more levelized compensation, many insurance and investment product manufacturers are re-evaluating their commission structures, and a number of broker-dealers are re-evaluating their entire compensation structure as well. And a growing number of financial advisors are deciding that if the regulatory push is towards AUM (or retainer) fees, that they may as well just become (or join) a Registered Investment Adviser (RIA) directly. Which means in the coming year, there may be a surge of Series 65 exam takers.

And so in this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we discuss tips for financial advisors to get their Series 65 license, and what to expect when going to sit for the Series 65 exam.

The good news is that because the Series 65 exam is heavily focused on knowing the underlying laws and regulations that apply to investment advice, it is primarily an exam of memorizing and recalling information. Which means people who are "good at test taking" will find it relatively easy, and for everyone else, it's still a manageable challenge, as long as you put in the hours to study.

In fact, because the Series 65 exam is so popular, there are a number of providers who offer Series 65 study guide materials, practice exams, and other educational content to help pass the Series 65 exam. In practice, the most popular providers appear to be Kaplan's Series 65 live review and practice exams, along with TesTeachers, and for those looking for the most affordable option, consider Robert Walker's "Pass The 65" book (and supporting practice exam questions as well).

Notably, though, the reality is that the Series 65 ultimately qualifies investment advisers to give advice about how to invest a household's cumulative life savings... which arguably means a 3-hour licensing exam alone shouldn't really be sufficient in the first place, and that advisors who are serious about helping their clients should go further, pursuing professional designations like the CFP certification as well. Fortunately, those who do pursue a professional designation, including the CFP marks, the ChFC, and the CPA/PFS, along with the CIC or the CFA, can actually get a waiver to skip the Series 65 exam altogether (though it's still necessary to complete the rest of the requirements to join an RIA as an IAR!).

But the bottom line is that the Series 65 exam isn't really much harder than other common industry licensing exams, like the Series 6 or the state Life and Health license. Most will take 2-4 weeks to study, spending about 20-30 hours, and pass the exam with its required 72% passing grade. Just be certain to spend the time it takes to study and really learn the material!

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For most of the past several decades, getting started as a financial advisor meant "smiling and dialing", reading cold-calling scripts while sitting in a cubicle, trying to convince the person on the other end of the phone to buy something. The bad news is that cold calling was a brutal numbers game full of rejection. The "good" news was that at least young advisors didn't have to worry about age bias from their prospects, who couldn't see them and had no idea how old they were. But as financial advisors shift to actually giving face-to-face financial advice - and with the rise of the Do Not Call list - it has become an even greater challenge for young financial advisors to get credibility with prospective clients and overcome (young advisor) age bias.

And so in this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the steps that young advisors can take to overcome the inevitable age bias they will face in meeting with prospects and clients, particularly as the advisory industry increasing focuses on Baby Boomers (who in many cases are old enough to be a new advisor's parent or even grandparent!).

The first key to success is simply building confidence as a young financial advisor. Because if you're not confident that you can deliver value to your (older) clients, they won't be confident in you, either. For some, it might be enough to "fake it until you make it". For others, it's necessary to get certifications like the CFP marks, or even additional post-CFP designations, to really establish their credibility and find their confidence.

Second, recognize the impact of first impressions... and the ability you have to control it. How you dress, and the impression it gives, is something you can control. As is the way you communicate with clients by telephone or email before you meet with them. While you can't eliminate the fact that you're young, you can at least give the impression that you're an especially competency and well put together young man or woman!

Third, consider taking classes to build your skills of active listening and empathy. Because the truth is that clients won't really trust you, until they truly feel that they're being heard and understood. Doing that well is a skill that takes time and effort to develop.

But the bottom line is that if you're a young financial advisor struggling with age bias, it doesn't have to be crippling. Find what it takes for you to be confident in yourself, and do your best to manage the first impression that prospects and clients form of you... and if necessary, ask your mentors and senior financial advisors to support you and your credibility in front of clients as well!

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Financial advisor vs financial adviser vs financial planner vs financial consultant vs investment adviser or advisor. The financial services industry uses a remarkably wide range of labels to describe what are substantively similar job titles that are meant to convey the person is in the business of giving financial advice. But does it actually matter which label you use, or is it simply about individual preference?

In this week’s #OfficeHours with @MichaelKitces, my Tuesday 1PM EST broadcast via Periscope, we look at the question of why there's a distinction between financial advisor vs adviser, how the labels have evolved over time, and why it actually can matter which spelling you use, at least some circumstances.

Because the reality is that while most financial advisor labels are just thrown around for marketing purposes, the Investment Advisers Act of 1940 does actually define the terms RIA (registered investment adviser) and IAR (investment adviser representative), and those are spelled adviser with an E-R at the end. Because that's how Congress wrote it into the original law, nearly 75 years ago.

Of course, in the end whether an individual must actually register as an investment adviser or not is dictated by what he/she does, and whether that person is in the business of giving investment advice for compensation. If that's true, becoming an IAR of an RIA is a regulatory requirement, regardless of whether it says financial advisor vs financial planner on your business card.

Nonetheless, in today's environment, where advisor with an O-R seems to be the dominant spelling, arguably the decision to use financial adviser actually does connote some distinction - a sense of greater formality, perhaps, giving the Old English roots of the E-R spelling of the word. So while financial advisor vs adviser have the same dictionary definition, and regulators will ultimately judge you by what you do, you may still want to choose the spelling that fits with the kind of brand you want to communicate. But remember, any time you're actually writing out the definition of the acronyms RIA or IAR, use the adviser with an E-R spelling, because that's the way it's written in the law itself!

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