How Would You Define a “Trusted Adviser”?

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The Department of Labor (DOL) Fiduciary Rule is officially in a transition period. The official start date has been pushed back to January 1, 2018. The rule applies to financial advice given on retirement plans. Financial advisers must be held to the level of a fiduciary, both legally and ethically, when advising on any retirement plan.

How does the DOL define a fiduciary?

The DOL’s definition of a fiduciary requires advisers act in the best interests of their clients, and to put their clients’ interests above their own. This definition means advisers must disclose any potential conflict of interest and all fees and commissions must be clearly disclosed in dollar form to clients.

Fiduciary vs. Suitability Standard

The rule is being implemented to protect consumers receiving investment advice about retirement plans through their employer and all IRAs. Many investors do not know the difference between the fiduciary standard and the suitability standard. The suitability standard requires advice be based on financial objectives, income level and age of the client. Anyone advising under this standard is not required to disclose conflicts of interest or fees and commissions if the recommendation is suitable. Once the DOL rule is implemented, the changes should bring some clarity for the investor. An investor should be able to get competent advice based on their best interest and not have to wonder if their adviser is “pushing a product”. It is a matter of trust.

Merriam-Webster defines trust as “assured reliance on the character, ability, strength, or truth of someone or something.” The DOL apparently felt the consumer was not getting this from the financial services industry. There are probably many providers in the industry who believe they are trusted advisers to their clients. Trust is an aspect of a relationship that is earned and based on the belief that someone can be relied on to live up to expectations. When we trust someone, it means we have a relatively high, but not necessarily perfect, assurance that he or she will meet our expectations. No doubt there are some clients who had this level of trust in their adviser even though their adviser may not have been acting in a fiduciary capacity.

What is a trusted adviser?

The most important aspect of someone serving in the role of a trusted adviser is to put clients’ needs first. It is easier to open yourself up with this level of confidence in an adviser, but getting to this level is no small task. To trust an adviser means we believe that the likelihood is extremely good of the adviser delivering on what he or she said. A client extending trust has confidence that the adviser will live up to the understandings that have been established in the relationship. When the adviser consistently delivers on or exceeds what is expected, including stated, implied, or assumed commitments, he or she is thought of as dependable and therefore usually trustworthy.

Trusted advisers are those who reach the pinnacle of credibility and reliability in their client relationships. They incorporate all the respect and confidence granted to an influential resource, and they are also considered an integral part of the client’s ongoing decision-making process. The client typically maintains an open dialogue with the adviser rather than waiting until a change-related problem arises to call in the expert. This kind of access is often associated with a likeability factor or personal chemistry that adds to the trust element in the relationship.

Trusted advisers go beyond meeting a client’s explicit and obvious needs by developing a deeper understanding of their personality. Through active listening and asking the right questions, they can help clients make better decisions up front rather than problem solving after bad decisions are made. Getting under the surface to the implicit needs demonstrates genuine interest in a client’s well-being and uncovers true motivations. This kind of intentional engagement is the first step in building trust.

Vanguard developed its Advisor’s Alpha concept in 2001 as a means of placing a value on good decision-making. The most recent update[1] in 2016 gives an example of where a trusted adviser can help his or her clients make good decisions. Periods of severe market downturns or during euphoria entice an investor’s fear or greed. This could cause the investor to abandon a well thought out financial plan. Vanguard’s analysis placed an annual value of 1.5% on this type of behavioral coaching.

Wade Pfau, professor of Retirement Income at The American College, says[2] that a trusted adviser adds value in many ways that are hard to quantify. A household that loses the person who primarily handles financial decisions is particularly vulnerable. Many investors do not understand tax efficiency strategies or how to most effectively withdraw funds from retirement savings. Developing a strong relationship with a trusted adviser can help prepare in both regards.

The DOL rule is a step in the right direction, but the government cannot legislate integrity. Investors should look for an adviser that will act as a fiduciary always, not just when advising on a retirement account. Trust must be earned. Does the adviser live up to your expectations and dependably deliver on what he or she says they are going to do? It’s important to find a trusted adviser who can help you make good financial decisions today and into the future.

See our blog post “Is Your Adviser Worthy of Your Trust” for our list of 10 questions to ask.

Rick’s Tips:

  • The DOL fiduciary rule only applies to advice on retirement plans.
  • An adviser can earn trust by consistently delivering on expectations.
  • Trusted advisers can help their clients make better financial decisions.

[1] Putting a value on your value: Quantifying Vanguard Advisor’s Alpha.    September 2016

[2] The Value of Financial Advice.  Wade D. Pfau, Ph.D., CFA, July 21, 2015

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