Dear financial industry,
I grew up in war torn Zimbabwe and dreamed of becoming a financial whiz in the U.S. In the almost 30 years that I have worked in this profession, I have been fortunate beyond words. But I have also watched our once great industry steadily atrophy.
According to a recently released study by the National Association of Retirement Plan Participants, trust in financial institutions has dropped to a new low of 8%. And it's not just the large institutions who are in the dog house. A 2015 consumer opinion survey by the CFP Board found only 25% of consumers believe that financial advisers act in consumers' best interests. People are disillusioned, and they think we win even if our clients lose. The sad irony is that people don't trust us, yet we live in a world where they need our help more than ever. I've been thinking a lot about what it will take to get us all on the right track.
1. Let's start by getting comfortable telling people the uncomfortable truths.
We make great commercials. If only our clients could live the lives we show in them: beautiful people, worry free and retired on a winery or playing with their children or grandchildren at the beach. Unlike the pharmaceutical commercials, we don't add the disclosures, “Your life will almost certainly not be this carefree.” Consumers are not stupid. They have lived a life full of hard work and challenge, and they know there will be setbacks.
It's time we told them the truth. We don't really know where the market will be a year from now; we can't be certain which stock will beat the market; and we don't know if they will actually live according to the financial plan we designed (in fact, they almost certainly won't). People have learned how to invest with their company's 401(k). Individuals now have cheaper ways of investing than working with a dedicated human adviser. So why do they need us?
Because we aren't fortune tellers, we are actually disciplinarians. One hundred percent of our value comes from applying discipline to a chaotic and unpredictable financial life. In a world with no pensions, measly yields on bonds, high volatility markets, soaring health care and education costs and ever expanding life expectancy, there will be many setbacks. We earn our fees by helping people reach lofty, but reasonable goals and ensuring discipline beats out emotion when they have those unexpected surprises.
2. We have to help clients with what really matters.
If we don't understand what really matters about money for our clients, how can they ever feel we place their interests first? As long as so many of us focus solely on investing, we are ignoring what people really care about: their financial lives and how they are going to unfold.
Of course we need to ensure our clients are in the right investments, but we also have to deliver financial advice that is relevant to their entire lives. We have to openly charge for our fiduciary guidance. As long as we charge only for investing, clients will not understand the value of the time we commit to helping them with financial planning and guidance. Our real value is not in trying to outperform the market, it's in helping people avoid mistakes.
We should measure, track and benchmark people's entire financial lives the way we do with their investments. We have to give people clarity about the consequences of their choices in a dynamic way.
3. We have to simplify.
We have developed cheaper and more efficient ways for individuals to invest with mutual funds and ETFs that give everyone the ability to have a diversified portfolio. But innovation has led to an overflow of investment products and added complexity in pricing. Non-professional investors are overwhelmed. People might nod knowingly, but so many don't really understand what they own, how it works or what they pay.
We have to help our clients become more fluent in the language of their financial lives. We have to modernize our systems and make them current with what consumers receive from every other industry they interact with. Working with a financial firm should be as enjoyable as going to Starbucks and as intuitive as using Netflix. We have to use technology and gamification to make financial decisions easier for our clients to understand and implement. Our process needs to engage clients in helping them take control of their financial lives with clarity and confidence.
CHANGE IS HARD BUT NECESSARY
When I was a kid, we literally had no money, and I assumed it was the answer to everything. More is better, right? The truth is much more complicated. These days, some see the end of financial advice as we know it. I agree, but that doesn't mean it's the end of financial advisers. There is a wave of innovation occurring that is unlike anything our industry has ever experienced.
It couldn't be happening at a better time. Our country is mired in debt, safety nets are collapsing, market returns are unpredictable and yields are impossibly low. People have to take care of themselves now more than ever. We human advisers have a responsibility to help people in this uncertain world because we have knowledge, discipline and empathy.
Joe John Duran, CFA