The fiduciary advisor is considered the gold standard in financial advice. Even though the DOL’s Fiduciary Rule is probably dead, and the SEC’s replacement has yet to be finalized, we think the cat’s already out of the bag and the Best Interest Economy is here to stay—regardless of who eventually enforces such a rule.
The numbers don’t lie—fee-based revenue has for the first time taken the majority and is trending upward. Firms large and small have contributed significant resources to meet compliance with the DOL’s rule, which is one reason we don’t think the gold standard is going anywhere. One of the significant changes to come from the rule was the pride advisors took in being fiduciaries, and the dollars major advisory firms have invested in advertising their fiduciary status.
Being a fiduciary has become a selling point, but is it enough to just call yourself a fiduciary? In an industry where there’s often an overload of information, rather than a shortage, advisors not only have to say why they’re a fiduciary, they have to set themselves apart from every other fiduciary out there.
Here are five good fiduciary habits you can implement today to prove to clients you’ve got their backs (and their best interests) at heart
Don’t Take On the Wrong Amount of Risk
Not all risk is created equal, and great fiduciaries know it. Between risk tolerance, risk capacity, and the risk that lies within a proposed or active portfolio, the risk conversation hasn’t traditionally been a simple one. Does the risk a client can stomach jibe with the risk they need to take in order to reach their goals? Fiduciaries are able to simultaneously set clear expectations about short term risk and empower their clients to invest for the long-term. Fiduciaries don’t take on the wrong amount of risk because they know exactly how much is necessary to keep their clients invested right.
Great advisors keep “risk” from becoming a four-letter word by using the Risk Number® to align all types of risk with clients quantitatively. No more stereotyping investors with words like of “aggressive” or “moderately conservative.” Clients can be sure they’re getting a customized portfolio strategy based on science, not subjective semantics.
Be Cruel To Be Kind
When a client’s wishes and an advisor’s expertise collides, who calls the shots? Advisors get into this industry to build long-term client relationships, so “being cruel” seems counter-intuitive. However, it’s truly the kindest thing for an advisor to do, especially when a client’s investments are at stake. Fiduciaries always have a client’s best interest as their top priority, and that means not always being their cheerleader. The hard work comes from telling a client, “I know this stock seems exciting, but we need to take a step back.”
For some clients, the allure of speculation is just too tempting. We’ve heard horror stories of clients coming into a quarterly meeting talking about the next big IPO. We don’t believe that a volatile IPO is necessarily the enemy, but we do believe that emotional, reactionary investing is. This pits the advisor squarely between the obligation to serve the investor’s wishes and the duty to act in their best interest. Do they have the risk capacity to tackle a new adventure? How do we even know?
Fiduciaries aren’t afraid to have tough conversations and develop the skills to deliver bad news with grace and common sense. A good fiduciary habit is brushing up on ways to improve communications and standing up for a client’s best interest, even when that means disagreeing.
Test, Test, and Test Again
Stress tests are a tool that fiduciaries utilize time and time again, and one of the most effective ways to demonstrate cause and effect for clients. The ability to make a plan, put it to the test, and present the results without overwhelming a client is a hallmark of a great advisor. Stress tests are a preferred way to answer the seemingly endless “what if” questions clients ask, and a fiduciary isn’t afraid of the scrutiny.
Market data should be accessible and easy to utilize, and fiduciaries should be able to test as many data points as necessary to make sure their clients are invested right. We created Scenarios for the data-driven advisor. With Scenarios, you can run any of your client’s portfolios through a market timeline, and compare them to just the right benchmark to make your point. String specific market events together to create a portfolio narrative that settles the question once and for all... “Why is the market beating my portfolio?” It’s stress-testing to the next level.
Take Yourself Out of the Investment
One of the most common advisor mistakes is anchoring clients to their own risk tolerance, and many advisors aren’t even aware they’re doing it! Everyone’s risk tolerance is unique and advisors may build portfolios attuned to their own risk needs. What happens is that an advisor thinks the portfolio is meeting expectations while the client is feeling uncomfortable. This is because the portfolio is designed for the advisor’s comfort level, not the client’s.
Fiduciaries remove themselves from the portfolio process and focus on their clients as individuals. Giving this level of personalized service means that client’s feel secure that they’re getting the best advice possible, designed with their unique goals in mind.
Think of Generational Wealth
Wealth doesn’t just belong to a client—it often extends generationally, as well. Treating the client like an individual is only one part of managing their wealth. Are they business owners? Are they passing their assets to their children? Do they have a spouse? Does your client expect inheritances from relatives in the future? Getting a holistic perspective of your client’s generational wealth makes sure that assets stay not only in the family but the firm as well.
Fiduciaries understand that having a relationship with a client’s extended family ensures that assets stay where they belong. It’s widely known that we’re in the midst of the biggest wealth transfer in history as baby boomers transfer nearly $30 trillion in assets over the next 30 years. The bad news? Most of these young investors plan on firing their parents’ advisors. Another study discovered that 70% of women leave their advisor within a year of being widowed.
Fiduciaries look after their client’s wealth from beginning to end. They’re not only considering how wealth affects a client’s estate, they’re looking at the health of the advisory firm as well. An excellent fiduciary habit is taking an interest in a client’s network and assessing their needs. It’s not an unusual circumstance to have a high-net-worth client with a low-net-worth child. Good fiduciaries think beyond the present.
Investors look to fiduciaries for their unbiased and trusted opinion, and we believe that with the technology available there’s no better time to be a financial advisor. Fiduciaries are the gold standard in our industry, and it’s essential to adopt habits that encourage confidence in your clients. By adopting these fiduciary habits into your firm, we believe your clients will have better expectations, more confidence in their investments, and more trust in you as their fiduciary.
Not using Riskalyze quite yet? We’d love to show you how over 20,000 advisors are empowering their clients to invest fearlessly with the Risk Number. Sign up for a personal demo and see for yourself.