More On Legal & Compliancefrom The Advisor's Professional Library
- Nothing but the Best Execution Along with the many other fiduciary obligations owed by RIAs, firms owe a duty to seek best execution of clients transactions. If they fail to do, RIAs violate Section 206 of the Investment Advisers Act.
- Client Commission Practices and Soft Dollars RIAs should always evaluate whether the products and services they receive from broker-dealers are appropriate. The SEC suggested that an RIAs failure to stay within the scope of the Section 28(e) safe harbor may violate the advisors fiduciary duty to clients, so RIAs must evaluate their soft dollar relationships on a regular basis to ensure they are disclosed properly and that they do not negatively impact the best execution of clients transactions.
In the first part of the post, we looked at the Sullivan/Northstar results on fees. In this part, we'll look at the results on fiduciary, as well as whether or not a focus on fees and fiduciary is bad marketing.
In the same manner that "fee-based" was negative in the results of the study, doen by the brand engagement firm Sullivan and the market research consultancy Northstar Research Partners, "fiduciary" was just downright confusing. In fact, its 40% "confusing" response rate made it the second most confusing word or phrase of the study, just behind "life stage" at 41% and more confusing than "dollar cost averaging" at only 38%, as well as other common (but apparently confusing) planning words like "concentrated" (35%) and "legacy" (33%).
That the fiduciary concept is confusing for the public probably isn't entirely news—many studies in recent years, including especially the RAND study, as well as the ongoing struggles of both the industry and the media to explain the value and importance of the fiduciary duty—speaks to the lack of consumer understanding about what the fuss for "fiduciary" is really all about.
But the fact that it's actually one of the most confusing words we can use—in a world where most people don't like industry jargon and language they don't understand—implies that frequently talking about fiduciary could actually reduce trust with prospective clients, who are more likely to find you uncomfortable and untrustworthy for using jargon and talking over their heads, rather than being more trustworthy by virtue of your fiduciary duty.
And of course, in many situations, we as professionals then proceed to make the situation worse by trying to explain fiduciary, which as I've noted previously on this blog usually comes out less like explaining to the prospective client why you are good, and more like explaining why everyone else is bad... even though most people are clear that they don't like to work with professionals who bash their competition.
Ultimately, what the Sullivan/Northstar research suggests is that actually using words and phrases like "fee-based" (or ostensibly "fee-only") and "fiduciary" are actually less likely to garner clients than not using them, especially given how salient it makes the cost of financial planning. That's not to say that you'll never get a client by mentioning those terms. But it does mean that you're actually setting yourself up for trouble by leading with words and phrases that are viewed with negativity and confusion... giving you a hole you have to dig yourself out of before you even get started.
And of course, if these words and phrases are prominent on your website, it's entirely possible that the client who got referred to you or found you through the internet took one look at your website with all its negative and confusing words and decided to move on without calling you at all. In other words, using language referring to the fact that you charge fees and are a fiduciary may be yet another way that planners lose clients before even meeting them once, without ever being aware that the prospective client was lost.
The point here is not to say that charging fees or operating on a fee model is a bad way to deliver services to clients, nor is it to imply that you shouldn't be a fiduciary. As I've written in the past, the only way advice should ever be delivered is as a fiduciary, period. But the decision about how to operate your business model is a separate matter from how best to market and communicate your value to clients.
From the client's perspective, what matters in the end is not how you're compensated, or the standards you're held to, but the way those realities affect the client. Simply put, prospective clients care about the WIIFM—"What's In It For Me"—message in your marketing and value proposition. And like it or not, "Hey you have the privilege of paying me fees while I use fancy legal terms you don't understand" is not a particularly compelling WIIFM message, to put it mildly.
And perhaps more importantly, in the end your clients will refer you because of the outcomes they enjoyed, not because of how you explained you were compensated or the legal standard to which you were held. In other words, acting like a fiduciary paid via fees that has managed or avoided conflicts of interest to deliver superior results to clients still matters far more than just talking about it, anyway. But even that only matters if your prospective referrals aren't turned off by the negative and confusing jargon on your website.
So what do you think? If you were in your client's shoes, without familiarity of the financial services industry, what would you really think of paying fees or working with a "fiduciary" for advice? Do you have positive feelings about other businesses where you pay fees? Do the other professionals you trust even talk about being fiduciaries, or do they just act like one instead?