June 17th, 2011
Econintersect: GEI News reported in December about the debate between those that support a fiduciary responsibility for those dealing with the investing public (in short a planning function) and those that support a suitability responsibility (essentially a salesman's function). GEI editor John Lounsbury has written two Op Eds discussing these differences. Now Marlene Satter has reported at Advisor One on a survey by J.D. Power and Associates that found 85% of full-service customers don’t know the difference between the two standards. Follow up:
Follow up:It seems inconceivable that only 15% of customers of financial firms don't know the difference between service standards that essentially could be used to define the difference between car salesmen and efficient personal transportation advisors. But it is possibly related primarily to the failure of full service financial firms to adequately explain those differences.
From the Advisor One article:
David Lo, director of investment services at J.D. Power and Associates, said of the findings, “While higher levels of satisfaction are generally associated with clients in fiduciary relationships, legislating all advisors to this standard carries an unintended consequence of additional compliance oversight, which could translate into significantly higher costs—likely to ultimately be passed back to investors.”
Lo instead suggested another approach: “Placing more focus on key best practices in client management empowers advisors with more actionable direction and achieves satisfaction levels on par with satisfaction among investors in a fiduciary relationship—844 vs. 841, respectively.”
What are those key best practices? Lo lists, in order of importance, the following:
- Clearly communicating reasons for investment performance
- Clearly explaining how fees are charged
- Proactive advisor contact regarding new products and services or accounts four times in the past 12 months
- Returning client calls/inquiries within the same business day
- Reviewing or developing a strategic plan within the past 12 months
- Providing a written financial plan
- Discussing risk tolerance changes and incorporating into plan where appropriate in the past 12 months.
Editor's note: In other words, Lo is recommending that the used car saleman do almost everything that the efficient transportation planner would do. The one thing that Lo's recommendation doesn't cover is the requirement that the car sold satisfies the client's best interests. If taking the bus is in the client's best interest, a loaded Cadillac can still be sold.