From the May 2009 issue of Investment Advisor • Subscribe!

May 1, 2009

Soapbox: A Modest Proposal for Wealth Managers

In "A Modest Proposal," written in 1729, the noted Anglo-Irish satirist Jonathan Swift suggested that the impoverished Irish could ease their economic troubles by selling their children as food. In today's chaotic market environment, many wealth advisors find themselves impoverished with respect to their clients' trust.

Advisors survived previous crises in the markets and the economy, but 2008 brought a collapse of the global markets, the destruction of trillions of dollars of personal net worth, the seeming failure of asset allocation and the "buy-and-hold" investment philosophy and, perhaps worst of all, the moral failure of the repugnant scandals involving Bernie Madoff, Arthur Nadel, and Allen Stanford.

These events created a crisis of confidence among investors: many no longer trust their wealth management professionals. Instead of addressing the long-term financial objectives of their clients, many advisors find themselves defending against the accusation, "Prove to me you are not Bernie."

How does a wealth advisor defend against this assumed lack of integrity without sounding, well, defensive? Should they adopt a Swiftian solution and fricassee their junior analysts or turn their baby bankers into a "delicious ragout"?

Tempting, perhaps, but fortunately, no.

One useful framework for addressing this issue is presented by industry consultant Charles Green, who offers the following "trust formula":

Trust = (Credibility + Reliability + Intimacy) / Self-Interest.

From a wealth management perspective, this simple formula illustrates the detraction from trust created by industry-inherent conflicts of interest.

Building off this framework, our modest proposal is for wealth advisors to go on a "trust offensive" and adopt a wealth management version of the medical profession's Hippocratic Oath.

1. We will fully educate and inform our clients with respect to what is in their investment portfolios, and why;

2. We will define for our clients precisely what our responsibilities are with respect to our wealth management relationship;

3. We accept full accountability and responsibility for the wealth management advice we provide;

4. We will acknowledge and explain to our clients any agent / fiduciary conflicts we have in serving our clients, and we will explain up-front how we will manage that conflict over the life of our relationships;

5. We agree up-front to full transparency and full disclosure in all aspects of our client relationships--including how we get paid and any and all conflicts of interest inherent to our relationship;

6. Our clients will always know how they are invested and where their assets are held.

7. We will agree with our clients up-front what constitutes a successful relationship, including clearly measurable objectives and metrics for evaluating progress toward those objectives;

8. We will define specifically the service model our clients can expect, including

a. The team; services provided; deliverables; fee structure, candommunication frequency

9. We will act morally, ethically, and legally at all times;

10. We will never deliberately act against the wealth management interests of our clients, and we will keep our client's wealth management "health" as our highest priority.

A Wealth Management Hippocratic Oath that addresses the collective issues of credibility, reliability, intimacy, and conflict will go a long way in creating a trusting, collaborative relationship between advisor and client.

Our modest proposal for a wealth management "Hippocratic Oath" will not solve all that ails the industry. But a simple, clear, and comprehensive declaration to our clients that we know there is a problem, that we know we have work to do, and that we pledge to do everything in our power to build and maintain trust is an appropriate--and critical--first step.

Scott Welch, CIMA

Senior Managing Director

Fortigent, LLC

Rockville, Maryland

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