THE VALUE OF FINANCIAL ADVICE
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The ability to provide impartial advice to concerned, often harried clients is a critical feature of the financial advisor profession. But Michael Callahan writes that in today's market it has to be more than just an intangible, wishy-washy element of your practice - it must be demonstrated through specific, measurable steps .
Sound financial advice is not about beating the market. It's not about outperforming neighbours or co-workers. And it's certainly not about finding the mutual fund with the lowest MER.
It's about helping clients realize their goals. It's about them being able to put the kids through university and enjoy a comfortable retirement. It's about passing the family business to the next generation. It's about achieving financial independence.
As advisors, it's your job to help clients establish plans for the realization of those goals, while avoiding costly mistakes along the way.
The past year has no doubt been a rough ride for investors.
From an all-time high of about 15,073 in June 2008, the TSX reached astonishing lows in 2009. Bottoming out in the neighbourhood of 7,567 in March 2009, the market had essentially been cut in half. While a market rally characterized the latter half of the year, people are still nursing their losses - and paying careful attention to value.
"We're in an environment of dramatically heightened scepticism," says Dan Richards, founder and president of Strategic Imperatives. 'This has caused many investors to question what they're getting for what they're paying."
It's about helping clients realize their goals. It's about them being able to put the kids through university and enjoy a comfortable retirement. It's about passing the family business to the next generation. It's about achieving financial independence.
As advisors, it's your job to help clients establish plans for the realization of those goals, while avoiding costly mistakes along the way.
The past year has no doubt been a rough ride for investors.
From an all-time high of about 15,073 in June 2008, the TSX reached astonishing lows in 2009. Bottoming out in the neighbourhood of 7,567 in March 2009, the market had essentially been cut in half. While a market rally characterized the latter half of the year, people are still nursing their losses - and paying careful attention to value.
"We're in an environment of dramatically heightened scepticism," says Dan Richards, founder and president of Strategic Imperatives. 'This has caused many investors to question what they're getting for what they're paying."
The Cost of Advice
It's no wonder, then, that fees are a hot topic with investors these days. Just about everywhere we look, we see literature suggesting that individuals would be better off managing their financial affairs on their own. The idea is that, with access to numerous online brokerage accounts and virtually limitless sources of information, individuals can take matters into their own hands and save themselves the cost of dealing with an advisor.
Many investors have done just that, by subscribing to a do-it-yourself philosophy and investing in no-load, and no-advice, type products. They didn't feel the need for any professional advice and therefore didn't pay for it. But these days, many of those same investors are no doubt having second thoughts perhaps finding out the hard way that they aren't properly equipped to manage their own investment plans after all. A 50 per cent drop in the stock market has a funny way of doing that.
"While it is important to be mindful of fees, what's not always in the investors' best interest is trying to find the cheapest products, or cheapest delivery of those products;' says Jerry Witteveen, CFP, financial advisor and branch owner of Val core Planning Solutions (Manulife Securities Incorporated). "It's important that clients focus not solely on cost, but also on what they're getting in return."
Indeed, price by itself can never be the issue. The cost of working with an advisor really only becomes an issue to the extent that ~he value of dealing with that advisor is in question. But determming value isn't always easy: transparency of fees is a chronic problem in our industry. While it's important that clients understand the fees they're paying, unfortunately, this is not always the case.
"Most new clients that we meet have no idea how their existing advisor gets compensated;' notes Heather MacDonald, CFP, CSA, and financial advisor with Valcore Planning Solutions. "Even more alarming is the fact that many are under the impression that some products with embedded fees are free. It is in the industry's, advisor's and client's best interests that everyone has a clear understanding of what fees are charged. This way, an accurate comparison can be made of the services being delivered by the institution or the advisor."
Witteveen and MacDonald run their business with a team approach. "Fees can be a sensitive topic, but we strive for a high quality of service and frequent client contact. We are certainly not shy to discuss our fee structure with clients - what fees in particular are charged and what the client receives in return for those fees," adds MacDonald.
Many investors have done just that, by subscribing to a do-it-yourself philosophy and investing in no-load, and no-advice, type products. They didn't feel the need for any professional advice and therefore didn't pay for it. But these days, many of those same investors are no doubt having second thoughts perhaps finding out the hard way that they aren't properly equipped to manage their own investment plans after all. A 50 per cent drop in the stock market has a funny way of doing that.
"While it is important to be mindful of fees, what's not always in the investors' best interest is trying to find the cheapest products, or cheapest delivery of those products;' says Jerry Witteveen, CFP, financial advisor and branch owner of Val core Planning Solutions (Manulife Securities Incorporated). "It's important that clients focus not solely on cost, but also on what they're getting in return."
Indeed, price by itself can never be the issue. The cost of working with an advisor really only becomes an issue to the extent that ~he value of dealing with that advisor is in question. But determming value isn't always easy: transparency of fees is a chronic problem in our industry. While it's important that clients understand the fees they're paying, unfortunately, this is not always the case.
"Most new clients that we meet have no idea how their existing advisor gets compensated;' notes Heather MacDonald, CFP, CSA, and financial advisor with Valcore Planning Solutions. "Even more alarming is the fact that many are under the impression that some products with embedded fees are free. It is in the industry's, advisor's and client's best interests that everyone has a clear understanding of what fees are charged. This way, an accurate comparison can be made of the services being delivered by the institution or the advisor."
Witteveen and MacDonald run their business with a team approach. "Fees can be a sensitive topic, but we strive for a high quality of service and frequent client contact. We are certainly not shy to discuss our fee structure with clients - what fees in particular are charged and what the client receives in return for those fees," adds MacDonald.
Demonstrating Value
While it's true that most individual investors would be better off working with a trusted financial advisor, not all will come to this conclusion. And simply talking to clients about the value of our advice is just not good enough. "We I).eed to demonstrate that value:' says Richards. "Advisors need to realize we're in the 'show me' environment. Make them see the work, and make them see the value of that work. We need to be as specific and as concrete as possible. Case studies and examples are a great way for advisors to demonstrate value to clients."
For example, instead of talking to a prospective client about the merits of financial planning, advisors can provide an illustration - a sample financial plan for a fictitious client highlighting the features and benefits of the planning process. Or when it comes to client contact, instead of saying "we'll talk on a regular basis:' advisors can establish a schedule, put it in writing and stick to it.
According to Richards, those are all great ideas, but unfortunately the reality is that not every advisor follows through. It's imperative that advisors offer services they can actually deliver. You wouldn't want to hold yourself out as an expert in business succession planning if you simply lack the knowledge or tools to do it effectively. Advisors need to set realistic expectations of the services they can provide.
"Let's recognize that certain things are often talked about more than they're done," says Richards. "For example, many advisors call themselves financial planners, but really don't do a lot of planning. This is unfortunate, but it's a reality of our industry."
A client service agreement (CSA) is an excellent tool to help advisors offer a more concrete value proposition. The CSA is where advisors layout, in writing, their commitment to clients. Serving as somewhat of a contract, a CSA can help advisors clarify exactly what they offer, and at what cost, thereby managing expectations for both the advisor and the client (see sidebar).
"We're in a world where everyone is focused on value," adds Richards. ''And whether we like it or not, we have to demonstrate that value." This is especially true in difficult times, like the current roller-coaster-like stock market environment. Clients need to feel they're in good care, that they're receiving adequate value for the fees they're paying and that the advisor-client relationship is a fair one.
Industry designations, such as the CFP and the CLU, can help strengthen an advisor's credibility. Outside the industry, however, the meaning of such acronyms is easily lost.
As Witteveen demonstrates, advisors can further deepen client relationships by taking a proactive approach. "I think the recent news of fraud and criminal activity in the financial services sector shows the importance of ensuring advisors have professional credentials," he says. "This demonstrates not only education, but also-the regulatory framework that comes with carrying a designation, proper credentials and licences."
Witteveen's team sent an email to clients addressing recent scandals. In addition, he showed his clients how to find out the licensing status of advisors, their firm, if any complaints had been made against them and if they are currently in good standing.
"Even though clients weren't questioning us, we knew they must have questions about what they were hearing in the media. Clients really appreciated that information coming direct from us;' adds Witteveen.
Professional Expertise
The financial services industry is becoming increasingly complex in terms of laws, rules and regulations. In fact, the landscape can change so quickly, it is challenging for even the most seasoned advisors to stay on top. Vast amounts of information from government departments, regulatory bodies and from within the industry itself cross our desks every day.
Complicating matters further, the density of products is ever more complex, making it harder for investors to understand exactly what they're buying. Investments such as mortgage-backed securities, asset-backed commercial paper, hedge funds, credit default swaps and funds of funds can prove very confusing, even for experienced investors. This can cause a great deal of confusion to advisors and clients alike.
Complicating matters further, the density of products is ever more complex, making it harder for investors to understand exactly what they're buying. Investments such as mortgage-backed securities, asset-backed commercial paper, hedge funds, credit default swaps and funds of funds can prove very confusing, even for experienced investors. This can cause a great deal of confusion to advisors and clients alike.
It is important that clients have a professional to help decipher, research and analyze information on their behalf. Advisors have the resources to bring fresh ideas to clients and help clarify details that were previously unclear.
"As full-service securities brokers, the product shelf of mutual funds, ETFs, closed-end offerings, stocks and new issues through capital markets is staggering. We have a responsibility to be sure that any product we place in a client account is appropriate," says MacDonald. To that end, she has organized a product review committee in her office. "We pool our resources. This avoids duplication of research and due diligence, and combines advisors opinions and experience with different products and companies."
For example, recent budget announcements, such as the new income splitting arrangements or the details of tax-free savings accounts and registered disability savings plans, contain a lot of important information potentially impacting clients' finances. Professional advisors have an obligation to perform their own due diligence, thereby ensuring appropriate plans are structured within their clients' best interest.
Witteveen notes that this is especially important for clients running their own businesses.
"The business owners know their own industry and how to be successful in it," he says. "They then depend on us to help preserve, protect and grow the wealth they have built. It's important that we review any appropriate financial planning strategies to ensure the financial security of our clients, their families and their companies."
Witteveen's practice focuses on bu'siness owners and their families. He notes the importance of working with a knowledgeable advisor: ''A trusted advisor can help implement complex tax, investment, succession and estate planning strategies. These strategies often involve the services of other professionals, such as accountants and lawyers. We can help quarterback that process, thereby ensuring everyone is working toward the same goal."
"As full-service securities brokers, the product shelf of mutual funds, ETFs, closed-end offerings, stocks and new issues through capital markets is staggering. We have a responsibility to be sure that any product we place in a client account is appropriate," says MacDonald. To that end, she has organized a product review committee in her office. "We pool our resources. This avoids duplication of research and due diligence, and combines advisors opinions and experience with different products and companies."
It is important that clients have a professional to help decipher, research and analyze information on their behalf. Advisors have the resources to bring fresh ideas to clients and help clarify details that were previously unclear. For example, recent budget announcements, such as the new income splitting arrangements or the details of tax-free savings accounts and registered disability savings plans, contain a lot of important information potentially impacting clients' finances. Professional advisors have an obligation to perform their own due diligence, thereby ensuring appropriate plans are structured within their clients' best interest.
Witteveen notes that this is especially important for clients running their own businesses.
"The business owners know their own industry and how to be successful in it," he says. "They then depend on us to help preserve, protect and grow the wealth they have built. It's important that we review any appropriate financial planning strategies to ensure the financial security of our clients, their families and their companies."
Witteveen's practice focuses on bu'siness owners and their families. He notes the importance of working with a knowledgeable advisor: ''A trusted advisor can help implement complex tax, investment, succession and estate planning strategies. These strategies often involve the services of other professionals, such as accountants and lawyers. We can help quarterback that process, thereby ensuring everyone is working toward the same goal."
A Behavioural Coach
Working with clients to help define goals, and ultimately implementing plans for the realization of those goals, is no doubt one of the most important ways advisors add value for their clients. However, getting clients on the right track is one thing, keeping them on track is something entirely different.
Market volatility can make any investor uneasy. Preventing clients from making hasty, emotional investment decisions is a critical part of an advisor's job. But that's sometimes easier said than done. Often times, clients will want to give in to their emotions and abandon their long-term strategy. They may want to grab onto the latest trend in an up market or wait on the sidelines in cash during a down market.
According to MacDonald, a comprehensive financial plan is one tool advisors can use to help curb emotional behaviour. "We work hard to get to know our clients well and make all financial decisions in the context of their financial plan. When a properly developed plan is in place, and portfolios are built with specific goals and pre-determined timelines, both the client and advisor are less susceptible to making emotional decisions." But as MacDonald points out, this does not mean buy, hold and forget. It does, however, allow the advisor to manage a client's portfolio in accordance with long-term goals as opposed to short-term market fluctuations.
Of course, a financial plan by itself is not the remedy to irrational investment decisions. There must be human interaction, and advisors can act as a behavioural coach, working with clients to help manage behaviour and stay on track. In this sense, many clients will have far better investment success, with far less stress, under the direction of a trusted, knowledgeable advisor. But this is not to suggest that clients should be left in the dark either.
Market volatility can make any investor uneasy. Preventing clients from making hasty, emotional investment decisions is a critical part of an advisor's job. But that's sometimes easier said than done. Often times, clients will want to give in to their emotions and abandon their long-term strategy. They may want to grab onto the latest trend in an up market or wait on the sidelines in cash during a down market.
According to MacDonald, a comprehensive financial plan is one tool advisors can use to help curb emotional behaviour. "We work hard to get to know our clients well and make all financial decisions in the context of their financial plan. When a properly developed plan is in place, and portfolios are built with specific goals and pre-determined timelines, both the client and advisor are less susceptible to making emotional decisions." But as MacDonald points out, this does not mean buy, hold and forget. It does, however, allow the advisor to manage a client's portfolio in accordance with long-term goals as opposed to short-term market fluctuations.
Of course, a financial plan by itself is not the remedy to irrational investment decisions. There must be human interaction, and advisors can act as a behavioural coach, working with clients to help manage behaviour and stay on track. In this sense, many clients will have far better investment success, with far less stress, under the direction of a trusted, knowledgeable advisor. But this is not to suggest that clients should be left in the dark either.
"We have a lot of clients who are very involved in the investment decisions that go into building their portfolios," says Witteveen. He notes that in some cases, clients like to do research on their own and may even bring some new ideas to the table. In the end, however, it's essential that clients have a professional advisor help them make important investment decisions and maintain confidence in those decisions through good times and bad.
The Bottom LineThere is no end to the new investmen ideas and complex planning strategies available to investors. Most individuals, however, lack the time and expertise to develop, and the temperament and discipline to maintain a successful lifetime financial and investment plan. This is where professional advice is required.
"These are tough times and when ir comes to managing client relationships we really need to be holding our clients' hands" concludes Richards.
Unfortunately, clients don't always come to this realization. Advisors need to reach out and demonstrate to clients the value they provide. Email and newsletters are a good starting point, but advisors really need to find some form of face-to-face contact.
This is where it comes down to focus. There will always be lots of things to do and lots to cover in client meetings. One of those things has to be communicating the value of dealing with the advisor.
Disclaimer:
The opinions expressed by Jerry Witteveen and Heather MacDonald may not necessarily reflect those of Manulife Securities Incorporated.
Michael Callahan
Forum Magazine
Advocis
January 2010
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