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Financial Planning > Trusts and Estates > Trust Planning

A Test of Trust

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It seems that each passing day brings more bad economic news: a softening job market; weak retail sales; deepening bank troubles; record foreclosures; a shaky stock market. Much of these troubles emanate from the collapse of real estate; as its gloom ripples across the economy, the chain reaction was bound to extend even to the financial advisory world.

Our cover story (“Caveat Vendor”) addresses a specific case, fraught with legal implications, of financial advisors embroiled in the mortgage crisis. Some advisors reaching for yield were investing their clients’ money in collateralized mortgage obligations. But brokers were generally not given good product; the tranches with good collateral went to institutional investors and the weaker collateral went to the retail side.

This raises a lot of questions: Where does the buck stop at the firms where such products were approved? How aware was the sales force of the potential risks in these products?

Regardless of the poor performance in the executive suites, as far as your clients are concerned, the buck stops with you alone. (Well, perhaps not when litigation or arbitration is involved.) Ultimately, the advisor must vet products, resisting investment vehicles with funky names like “inverse floaters” absent a deep knowledge of their risks and benefits.

Though smaller in scale, this is reminiscent of the tech and Internet bubble of the ’90s, when very little due diligence went into investments whose names seemed to bear so much promise. Remember, at that time Wall Street mucky mucks embraced those investments, though not always in their private e-mail communications.

The lessons of the CMO flop, and indeed of all such blow-ups, is that sellers have a tremendous responsibility to stand behind the quality of their product. The product seller and buyer do not stand on an equal footing. The seller has — or should have — a superior knowledge of the product.

The flip side of this responsibility however is the incalculable and intangible benefit that accrues to an advisor. I am referring to the layers of trust that are implicit in all your client relationships. Selling rotten investments is obviously corrosive of trust, but everything you do right for each of your clients builds that store of value.

And that is so important at times like this when the pace of bad economic news is on the rise. Because that trust you have, built from your first steps into this difficult job, will accompany you in ever larger proportions until such time as you pull down your shingle.

The retail advisory business has so far remained mostly insulated from the economic crisis. Broker recruiters still report an active recruitment market, so this is no prediction of doom. Rather, it is a reminder that the more responsible you are in your business, the more deeply you can draw from the trust you’ve been storing. These tougher times are a test of that trust.

Robert [email protected]


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