At the Met Gala, an annual fundraiser for the Metropolitan Museum’s Costume Institute in New York, and the ne plus ultra of society events, guests are strongly encouraged to dress in accordance with the exhibit theme. At the premiere of China: Through the Looking Glass, most attendees traipsed the Red Carpet in Far East-inspired gold, red, yellow, and chinoiserie-embroidered gowns. But there were a few renegades who wore only a few strategically-placed sequins and not much else. (Yes, that was you Beyoncé, J. Lo, and Kim Kardashian.) The gowns may have scored low on the chic-o-meter, but they made up for it in honesty: what you see is what you get. Maybe these Red Carpet rebels were onto something: transparency is trending. In fashion, and in finance.
Truth or dare
In July 2016, the second phase of the new Client Relationship Model (CRM2) was implemented by the Canadian Securities Administrators, an umbrella group for Canada’s provincial securities commissions. It requires greater transparency on the cost of advice from financial advisors. Changes include an obligation to show all direct and indirect charges and compensation, annual summaries, book values, and prescribed methodologies for reporting. Some financial advisors have been providing these for years but now all of them are required to do so.
The new transparency, especially around fees, is a “reality bites” experience for many clients. A recent survey of 1,000 Canadian investors showed that 31 per cent who work with an advisor believed they did not pay any fees whatsoever.
After the sticker shock subsides though, transparency allows investors to become better consumers of investment services. And, it challenges advisors to raise their games in terms of performance and meeting client needs. (Note that CRM does not address fiduciary responsibility.)
It’s tempting to point an accusing finger at advisors who burden their clients with costly mutual funds and high management fees, especially if what they do is not “active” investing but closet indexing. The new rules will certainly make it easier for clients to decide if they are getting their money’s worth. Yet, like any productive relationship, it’s a 2-way street. Clients need to look beyond fees and become more engaged in their own financial welfare.
3 ways to take charge of your client relationship
Here are 3 ways to be a better client:
First, remember that the investment industry is a for-profit industry. A broker, who used to work for Merrill Lynch, has said, “The amount of training I sat through to properly evaluate investment opportunities was almost non-existent relative to the training I got on how to sell them.”
Brokers are paid, not on the quality of advice they give out but only when that advice results in a sale. So unless an advisor, such as a fee-only portfolio manager, has a fiduciary duty to the client, ethical dilemmas arise. (That is not to say that brokers are less ethical than fee-only portfolio managers, only that they are not legally obligated to exercise duty-of-care by placing their client’s interests before their firms or their own.)
Second, your advisor cannot help you meet your financial goals unless you articulate them. Advisors are not psychologists or psychics. If you need a specific amount of income and can’t tolerate volatility in returns, it’s pointless to withhold that information. When circumstances change, such as a job loss or health issue, don’t wait for your advisor to check in, pick up the phone and tell her so she can make the appropriate changes to your investment plan.
Third, using the analogy of a physician-patient relationship, while a good physician should give the patient enough relevant facts to allow her to make an informed decision, no one is more motivated to get things right than the patient herself. So educate yourself on investment and personal finance basics so you can ask meaningful questions and make better decisions.
Funds for thought
Transparency may be necessary but it is not always pretty. (I could live without seeing Rihanna’s tattoos.) But, unlike see-thru dresses, when it comes to investing there is no such thing as Too-Much-Information (TMI).
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