Four Steps to Restore Investor Trust, and Build Your Wealth Management Firm

Many investors have been thrown into a role they didn't seek and are unprepared for. How advisors can help them and mitigate firm risk at the same time

As investors continue to have a very low level of trust in the financial system, according to a new study, wealth managers who want to see their firms grow and thrive again will have to take four steps or risk further diminution of their wealth management businesses.

The Chicago Booth/Kellogg School “Financial Trust Index” reported on Jan. 24 that investor “trust in the financial system” lingers at 26%, up from 20% from two years ago, in January 2009, the heart of the visible financial crisis. The fact that 74% of investors distrust the financial system two years later poses a real risk to the viability of financial services firms large and small, as well as their clients’ retirement goals and other investment plans. It is crucial that investor trust be regained. But how?

Part of the issue at hand is that not every individual wants to invest. But with the demise of the 5% insured bank savings account and the proliferation of the defined contribution retirement plan and IRAs, most individuals are investors whether they want to be or not. The investment playing field is complex and nowhere near level—there is a gap in knowledge between investor and intermediary that cannot reasonably be closed. This underscores the need for good advice and increases the risk that if investors don’t receive advice that’s in their best interest, they won’t be financially equipped to retire. It’s a poignant note to investors’ distrust of the financial system.

Wealth Managers will have to take steps with legislators, regulators, colleagues and their own firms to help restore investor confidence in the capital markets:

1)  Get Congress to fully fund the Securities and Exchange Commission (SEC)—or better yet, make the agency self-funded like other financial regulators. Either of these choices won’t cost taxpayers a cent, but will help investors regain trust in the capital markets, something that is sorely lacking—and for good reasons.

The SEC raises millions—in some years hundreds of millions of dollars—more than Congress appropriates to it each year. Congress in December froze SEC funding at 2010 levels until March and now there’s a move to decrease it to 2008 levels. If funding issues continue, the SEC has said it will have to lay off, potentially, 600 staffers, something that won’t help investors regain confidence in investing. It may have to pitch all registered investment advisor (RIA) oversight to FINRA or a new self-regulatory organization. While the lack of SEC oversight might make some giddy at first blush, remember, some entity will be appointed to supervise RIAs. What entity do you want that to be? Do you want RIA oversight to remain” principles based” rather than “rules based” as brokers are regulated? For RIAs, according to the SEC’s “Study on Enhancing Investment Adviser Examinations” there are three recommendations, one of which is FINRA oversight.

The evisceration of the SEC throws your firm at risk, as investors remain on the sidelines, which won’t help you—or your firm. See AdvisorOne’s “With Lack of Funding, Congress is Pulling the Rug Out From Mary Schapiro” and an editorial in The New York Times, “Running on Empty at the SEC,” for more about this. In addition, a group of prominent securities lawyers (including a former SEC Commissioner and several former senior SEC officers) sent a letter to Congress pointing to the “critical” funding situation at the SEC.

2)  Prevail upon non-fiduciary Wall Street intermediaries who provide “advice;” banks and wirehouses, insurance companies and broker-dealers (BDs), to step up to the authentic fiduciary standard for advice. This does not mean there’s no room for pure salespeople on Wall Street. But don’t label sales as advice. Sales is sales. Advice is advice. Title these roles appropriately, disclose all costs to the investor and then investors will have a real choice as to whether they want to work with a salesperson or an advisor. As TD Ameritrade Institutional President Tom Bradley said on Thursday at a Webcast panel discussion of the SEC’s Study on Investment Advisers and Broker-Dealers, “Get rid of incidental advice.” Firms that embrace this will be able to gather more assets under management, resulting in steadier revenue flows and better advice for clients—leading over the long term to more assets, and helping to fend off a retirement crisis in the U.S.

3)  Prevail upon the SEC to make its staff’s recommendation for an authentic fiduciary standard the reality for advice. Tell the SEC not to allow any business model to disclose away real fiduciary duty to clients who get advice. Tell the SEC to dump “incidental advice” and retain, with appropriate funding, (Congress must help here), RIA examinations and enforcement.

4)  Be your client’s advocate. If you are a registered investment advisor now and a fiduciary, get training in best practices, prudent process, Investment theory, managing conflicts in the client’s favor and managing client costs. Building a real relationship of trust is the best long-term business plan you can have, and really the only way investors will come back to the investment business.

Taking these steps will help mitigate the risks wealth managers face now, and help restore investor confidence in you and the financial system.

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