Putting Your Clients’ Interests First

We can all agree that putting a client’s interests first is important for long-term practice success. It's not only a regulatory responsibility for many advisors, but it’s also good business practice and the right thing to do. Yet, advisors often fall short of delivering on this key advice attribute and, perhaps more troublingly, clients don’t trust them to do so.

According to J.D. Power’s Financial Advisor Satisfaction Study, nearly 40% of clients can’t say with certainty their advisors’ recommendations are focused on what’s best for them. That’s a staggering number. This statistic is striking and concerning on several fronts, including its impact on client advocacy and loyalty, potential regulatory implications, and the ongoing erosion of the financial advice industry's reputation.

And it raises the question: Why is it so difficult for advisors to do what they know would benefit everyone and what most are required to do?

In his book, Seeking Virtue in Finance: Contributing to Society in a Conflicted Industry, Yale professor J.C. de Swaan provides interesting insight on the issue. He argues there is a confluence of industry dynamics that tilts the advisor-client relationship away from the client’s best interests, creating an environment of “pervasive conflicts of interest.” Product complexity and opacity, information asymmetry, a conflicted incentive system and inherent human biases all contribute to a structural imbalance favoring advisors at the expense of clients.

Whether clients or their advisors recognize it, there exists a fundamental disparity in knowledge, power and incentives that largely benefits the advisor. This creates a corresponding imbalance in disclosure, vulnerability, and trust, which can put the client at a disadvantage.

Even with the democratization of financial information, the opacity of financial products and the financial planning process itself make it difficult for clients to fully understand their options. In short, clients find themselves in a position where they must depend on and have confidence in the advisor's intentions and expertise. This unequal power dynamic renders clients susceptible to any misaligned intentions on the part of the advisor.

Another factor contributing to this power imbalance is the common physician-patient client engagement model used by most advisors. While this model is often seen as more client-focused, it places a significant burden on the advisor to act in the client's best interests. The advisor takes the lead in the entire process, guides the discovery phase and formulates recommendations, sometimes without providing a full explanation of the why, what and how. While clients make the ultimate decisions on their actions, the advisor is primarily responsible for most of the choices throughout the process, leaving the client with the task of selecting which recommendation to pursue.

This can create a slippery slope for even the best-intentioned advisors as numerous behavioral biases can chip away at the best-interest proposition. And, of course, such an environment provides fertile ground for advisors with less-than-honorable intentions to thrive.

Advice-Centric Client Engagement

Solving this requires a different approach—a collaborative, co-creative client engagement model which inverts the power dynamic between advisors and clients, giving clients the knowledge and power to make well-informed decisions.

This advice-centric approach focuses on:

• Employing an advisory process where the advisor’s fundamental role is to equip the client with the key diagnostic, process and critical thinking skills needed to make well-informed decisions.
• Leveraging the full extent of the advisor’s knowledge and expertise across the process.
• Tapping into a client’s self-knowledge and understanding of what is important to them.
• Guiding the client through self-discovery, assessment of goals and development of viable action plans.
• Illuminating the way and intervening as needed to help clients make knowledgeable, thoughtful and highly personal decisions that are in their best interests.
• Providing full transparency on the advisor’s thinking including the why, what, and how of their recommendations.

When advisors embrace this approach with clients, it places the decision-making authority squarely in the hands of those with the most vested interest—the clients themselves. It also serves as a powerful mechanism to create the deep, long-lasting, and productive relationships that lead to extraordinary practice success.

Time to Act

Advisors are at a critical juncture. J.D. Power's sobering statistics, which indicate just 14% of clients experience an ideal advisory relationship, underscore the industry's need for transformation. The prevailing model, characterized by conflicts of interest and a power dynamic that disadvantages clients, is no longer sustainable. McKinsey Insights' findings further accentuate the challenges of achieving organic growth for most advisors.

To rewrite this narrative and chart a course towards a brighter future, advisors must wholeheartedly embrace an advice-centric approach. The opportunity is ripe for them to reshape their practices and align themselves closely with their clients' best interests. By doing so, they not only ensure their clients' long-term success but also take significant steps towards securing their own prosperous futures. The path to lasting success begins with a genuine commitment to providing exceptional advice and service, setting the stage for a mutually beneficial journey ahead.