What Makes a Great Financial Advisor?

I have a one-word answer to that question: An advisor must be trustworthy. You want to know, without question, that your advisor has the expertise and commitment to look out for your interests.

The Dodd-Frank Act, passed two years ago on July 21, was intended to increase the integrity of the financial services industry. Yet, in the last few months alone, we’ve read about J.P. Morgan’s $6 billion loss as a result of the “London Whale” trades, The New York Times’ expose on J.P. Morgan’s campaign to push high-priced proprietary products, and Barclays’ problem with their manipulation of LIBOR. And, importantly for individual investors, the Securities & Exchange Commission has failed to fully complete what I see as its responsibility under Dodd-Frank — that is, to enact a universal fiduciary standard requiring that broker act as fiduciaries when providing investment advice.

It’s not surprising, then, that a recent article on AdvisorOne reported that the law firm Labaton Sucharow’s survey of 500 senior executives in the United States and England found that 24% of the respondents believe financial services professionals need to engage in unethical or illegal conduct in order to be successful.

It strikes me that, in such a distrusting and unsettled investment environment, it must be difficult for consumers to find a financial advisor they can trust. As you’ve heard me say before, working with an advisor you can trust begins with finding a fiduciary, someone like Bernhardt Wealth Management, who always puts your needs first. However, a recent post on the Fiduciary 360 blog questions whether the investing public really understands the fiduciary standard. Although a TD Ameritrade survey found that the fiduciary distinction is the number one reason clients choose an advisor, another study by Sullivan/Northstar found that 40% of investors are confused by the word “fiduciary,” even more than they are by financial jargon such as “dollar cost averaging” (38%).

Obviously, operating as a fiduciary is the only way advisors should deliver financial advice. Investors need objective guidance from an advisor who sits on the same side of the table and is required by law to put their interests first. But, I wonder if there is a simpler way to communicate exactly what serving as a fiduciary means?

In building a professional client-advisor relationship, there are six core characteristics — the “Six Cs” — a trusted advisor should have. Investors should consider each of the following characteristics when they interview advisors:

  • Character. It can’t be said too many times that you need an advisor you can trust, someone who acts with complete integrity, loyalty, and transparency and avoids all conflicts of interest to put you first in all situations. That’s the definition of a fiduciary. And there’s nothing too complicated about having your finances managed with complete integrity, right?
  • Chemistry. Maybe you’ve seen those commercials where it’s clear in 30 seconds that it’s time for the speed daters to move on and keep searching. In a sense, working with an advisor is no different from any of your other relationships. We have to click. Let’s face it, some of our conversations can get pretty personal, so you have to be comfortable sharing your hopes and dreams, as well as your fears.
  • Caring. Make no mistake, it is impossible to provide effective financial advice unless you really know — and care about — your clients. Advisors should ask questions about their clients’ lives and apply that information to what they assess about their risk tolerance, goals, and investment horizon. Simply put, the advisor’s knowledge of a client’s current circumstances and future aspirations serves as the foundation for both a successful portfolio and a trusting, long-term relationship.
  • Competence. Investors have more information at their fingertips than ever before, but they may lack the discipline and perspective to craft and manage an investment plan. As your trusted advisors, my team provides the knowledge and insight necessary to chart a course for clients — as well as the discipline necessary to stay invested when markets get choppy. Moving away from the nautical metaphors, I recently heard an advisor’s role compared to a pedestrian bridge over an eight-lane highway. Yes, it’s possible to cross those lanes of traffic on your own, but getting to your destination will be a little more harrowing (and less certain!) than if you cross safely over a pedestrian bridge.
  • Cost effective. Financial advisors use a number of different compensation models and that likely confuses consumers looking to compare apples with apples. Consumers must understand exactly how they are paying for advice and whether that advice is truly independent. Bear in mind that advisors who earn their living by commission may have an incentive to sell you particular products. The client-advisor relationships at Bernhardt Wealth Management are not transactional, but relationship-driven. We seek to add value for clients on a range of financial issues, well beyond selecting investments.
  • Consultative. There are three components to an effective, consultative relationship. First, we work together with clients in an open and honest partnership to solve their problems. Second, our clients have the benefit of working with my expansive professional network, a talented team of trusted advisors who can offer specific expertise and objective counsel. Third, the collaborative approach doesn’t need to be limited to professionals. Although many times one spouse is the point person when it comes to finances, it’s imperative that both partners understand and share in the management of the household finances. What’s more, many of our clients also bring their children into the planning sessions. Even very young children can learn something about managing the household’s finances.

If you have a family member or colleague who is considering working with an advisor for the first time, please feel free to share this newsletter. As you know, in general, people who invest without the advice and help of an advisor often take on risks they do not need to shoulder. They gamble on hot individual stocks and get swept along by the opinions of a media-fed crowd. They withdraw from the market at a time when opportunity flourishes. They fail to rebalance fluctuating portfolios to their original asset allocations, don’t make portfolio adjustments for their changing risk tolerance or new circumstances, and allow their returns to be eaten up by unnecessary costs and tax liabilities. And, sadly, a pervasive mistrust of the financial services industry is stopping these investors from getting the help they need.

In closing, because trust is a two-way street, we want to thank our clients for their commitment to the trusting relationship we enjoy. You have taught us much about how to sustain solid, productive relationships over time. We hope that, like us, you view the trusting bond we’ve established as the foundation for the successful collaboration that enables us to take meaningful steps toward meeting your goals.

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