Financial Advisors

Investors Need To Ask The Right Questions, Still

The time-tested axiom “there is no such thing as a dumb question” certainly pertains to wealth management relationships: Too many investors don’t ask the right questions, rely on gut instincts, or fail to read the fine print when it comes to their relationship with a financial professional.

Recent proprietary research conducted for CFA Institute among high net worth investors (those with investable assets of $1 million and up) in the U.S. and Canada yielded some fascinating insights. The respondents said their single largest challenge with selecting a private wealth manager is knowing the right questions to ask.

While this may seem surprising for a demographic generally considered to be financially literate, our research found that only 65 percent of the HNW investors we surveyed said they consider themselves “savvy investors.” Thus, the need for sage advice from a wealth management professional to support investors who seek to realize their ambitions.

But where to start? What are the right questions to ask?

I always start with the most fundamental question of all: whose interests come first? Ask any potential private wealth manager if he or she operates as a fiduciary, meaning she has the obligation to put the client’s interests first.

The matter of fiduciary responsibility has been debated among the financial services industry and its regulators for decades. In 2016, the U.S. Department of Labor proposed regulations to prod the industry forward, but a change in administration and a court ruling led to a pivot that allowed the Securities and Exchange Commission to seize the lead role.

That prompted a change of course: new leadership at the SEC dialed back a fiduciary objective in favor of a “best interest” approach, and with new rulemaking announced this week, investors are still susceptible to having great difficulty in understanding conflicts of interest with those who offer advice.

I won’t digress here to get into the arcane elements of the rulemaking debate. After all, the end investor ultimately holds all the commercial power to the extent that they realize that they can choose among different advice business models with different standards of conduct.  But investors need to know enough to ask the right question about their advisor’s willingness to commit to keeping client interests foremost.

Some observers suggest that increasing financial literacy will solve this problem. Yet while a noble goal, financial literacy is not a panacea. After all, a patient cannot and should not be expected to have the same level of knowledge as one’s physician. We must be able trust our doctors to deliver on their expertise. We can and should ask questions, but at the end of the conversation, we trust the doctor to suggest the same course of action that she would recommend for a family member.

It should be the same for the financial adviser. The client cannot and should not be expected to become an expert on every single financial product or investing strategy. High net worth investors, in particular, have complex needs, and a well-trained, ethical financial professional should be relied upon to give unbiased advice and chart a prudent plan to translate dreams and aspirations to realities.

Our research also illuminated a shift in the mindset of investors when it comes to partnering with a financial professional: investors want more than financial products and asset-allocation advice. They seek the counsel of someone who can play an enhanced role in their lives to help them meet their goals.

Committing to acting in clients’ best interests without asterisks or small print is the necessary precondition for the quality of relationship that pays off for both advisors and clients in a relationship with earned trust as its foundation. If the rules of the road won’t make it easier for clients to find the advisor that best aligns with their interests in that desired larger role in their lives, then the profession needs to step up and help individuals know enough to ask the right questions.

Amidst continuing legislative and regulatory skirmishes, it’s time to sharpen how advisors describe their commitment to robust fiduciary accountabilities so that prospects and clients make informed choices. CFA Institute is not alone among professional bodies in devoting resources to informing investors about the right questions to ask, and we’ll continue to uphold the highest standards of practice – even when regulations don’t keep pace.

Bob Dannhauser, CFA, is Global Head of Private Wealth Management for CFA Institute

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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Bob Dannhauser

Bob Dannhauser, CFA is Global Head of Private Wealth Management for CFA Institute, based in New York City. He is responsible for leading strategy and professional development content for wealth management practitioners, and is a frequent speaker and writer on a wide variety of industry topics. Before assuming his current role, Bob managed CFA Institute's global capital markets policy group, with responsibility for thought leadership and policy commentary and analysis globally. Prior to joining CFA Institute in 2008, Bob held a variety of sales and client portfolio management roles with several prominent investment management firms. He is the former chair of the CFA New York Sustainable Investment Committee, and earned the Financial Risk Manager and Chartered Alternative Investment Analyst designations in addition to the Chartered Financial Analyst designation. Bob has a MBA from Cornell University, a MPH in Health Policy from Rutgers University, and a BA from the George Washington University.

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