Practice Management

Explaining your value as a broker

Confusion over fiduciary standard calls for a frank discussion with clients about what you do

Oct 10, 2010 @ 12:01 am

By Yuval Bar-Or

With so much lobbying and political posturing yet to unfold, it's unclear whether a universal fiduciary standard of care will be imposed for all providers of financial advice.

Brokers can sidestep much of the noise by recognizing that once the dust settles, they will either be a fiduciary or not. Any discussion with clients, therefore, must center on how brokers can add value either way.

The conversation ultimately is not about fiduciary duty; it's about adding value under full disclosure and appropriate expectations. Some investors will want — and expect — fiduciary duty. Others may accept a non-fiduciary relationship, but only if they fully understand and accept the implications.

A primary reason brokers are under fire and being pushed toward a fiduciary duty is that many clients still don't understand the basis of the broker-client relationship. By default, investors tend to assume that the fiduciary standard applies. A sudden realization that this assumption is incorrect leads them to feel betrayed.

Establishing correct expectations from the onset is key to a respectful and successful relationship. In brokers' discussions with clients, they must establish transparency and explain firmly that they are not fiduciaries. Brokers don't need to apologize for it, unless they are aware of some act of commission or omission on their part that does need to be addressed openly. Acknowledging and validating the client's fears and resentments can be constructive ways to open up a line of communication. During their conversation with the client, brokers should consider explaining why and how they and/or their company are different from those who have attracted negative attention.

In some sense, the toughest part of the conversation with a client about fiduciary duty is the preparation for the conversation. As someone providing financial advice, a broker first must do some soul-searching and have a meaningful discussion with fellow employees. Specifically, an adviser who is not a fiduciary must come up with honest answers to the following questions:

• Where do I add value for my clients?

• Is my execution more reliable than others'?

• Are my commissions lower?

• Has my advice created value for clients by beating appropriate benchmarks?

• Is my value-add adjusted for the correct level of risk taken?

• Is the value-add calculated on an after-commission basis?

• How consistently have I been able to maintain and deliver value?

• Are there any non-financial benefits I provide to clients? Have I been a source of stability and comfort during times of upheaval; have I been a voice of reason? Do clients recognize my contributions on this front?

Since experience has taught investors to be skeptical, be prepared to back up any assertions you make.

For an adviser who already is a fiduciary, it's easy to establish that you have the client's best interests at heart. The client will, however, want to hear that you are competent and able to add value.

Those who are not fiduciaries are in a more challenging position. They still must convince the client they can add value but also must get past market-trauma-induced suspicions. For the foreseeable future, being a non-fiduciary will mean an uphill battle for the hearts and minds of clients.

To thrive under these conditions, representatives must be open about their roles.

First, they must outline very clearly where their duties and responsibilities begin and end. Once the fiduciary issue has been dealt with openly, they must establish how they add value for the client. As long as the client fully understands the rep's role and perspective, he or she can make enlightened decisions.

Don't expect to dispel all suspicion in a single conversation. Trust must be earned in the best of circumstances, and trust is much harder to regain than it is to establish.

Many investors have suffered serious losses. Brokers who behave with genuine empathy go a long way toward establishing their sincerity. But some investors have been scarred so deeply that no matter how sincere, open or talented a broker is, an investor may refuse to accept any explanation or suggestion.

The conversation about fiduciary duty is not just about defining a legal distinction. It's as much about setting expectations and demonstrating how and where an adviser adds value.

Yuval Bar-Or is president and founder of The Light Brigade LLC and is an adjunct professor of finance at the Johns Hopkins Carey Business School.

For archived columns, go to InvestmentNews.com/practicemanagement.

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