Wednesday, August 12, 2009

The Seven Faces of Advice

Jim Parker, Regional Director, DFA Australia Limited

The global financial crisis and a series of recent scandals have turned a critical light on much of the investment industry and led to public questions about the role and value of financial advisors.

Against the backdrop of the worst market downturn in decades, many advisors report that they have struggled to enunciate their value proposition.

For those whose perceived their value to their clients as an ability to deliver positive investment returns year after year, irrespective of the state of markets, this existential crisis is understandable.

And for those who sell their expertise as consistently accurate forecasters, the self-doubts may have been even more corrosive.

But there is another group who understand that the value they bring is not dependent on the state of markets. Indeed, their value can be even more evident when markets are down and fear is running high.

The best of these advisors play multiple and nuanced roles with their clients, depending on the stage of the relationship, and are amply rewarded for the manifest skills they bring to the table.

While some may quibble over the exact characterisation, broadly these functions break down to seven important roles that evolve over time:

  1. The expert: Now, more than ever, investors need advisors who can provide client-centred expertise in assessing the state of their finances and developing risk-aware strategies to help them meet their goals.
  2. The independent voice: The global financial turmoil of the past two years has demonstrated the value of an independent and objective voice in a world full of product pushers and salespeople.
  3. The listener: The emotions triggered by financial upheaval are real. A good advisor will listen to client's fears, tease out the issues driving those feelings and provide practical long-term answers.
  4. The teacher: Getting clients beyond the fear-and-flight phase often is just a matter of teaching them about risk and return, the power of diversification, the importance of asset allocation and the virtue of discipline.
  5. The architect: Once these lessons are understood, the advisor becomes an architect, helping clients to build a long-term wealth management strategy that caters to their own risk appetites and lifetime goals.
  6. The coach: Even when the strategy is in place, doubts and fears will inevitably arise in the client's mind. The advisor at this point becomes a coach, reinforcing first principles and keeping the client on track.
  7. The guardian: Beyond these early experiences is a long-term role for the advisor as a kind of lighthouse keeper or guardian, scanning the horizon for issues that may affect the client and keeping them informed.

These are the seven faces of advice and, when properly applied, become testimony to the fact that the value of a good financial advisor extends well beyond the writing of a simple financial plan.

A prospective client may first seek out an advisor purely because of their role as an expert. But once those credentials are established, the main value of the advisor in the client's eyes may be their role as an independent voice.

Knowing the advisor is truly independent — and not a product salesperson — leads the client to trust the advisor as a listener or sounding board, as someone to whom they can unburden their greatest fears.

From this point, the listener can become the teacher, the architect, the coach and ultimately the guardian. These are all valuable roles in their own right and none is dependent on forces outside the control of the advisor, such as the state of the investment markets.

However you characterise these various roles, good financial advice ultimately is defined by the patient building of a long-term relationship founded on the values of trust and independence and knowledge and the recognition of our common humanity.

Now, how can you put a price on that?