Educating Prospects and Clients

As an advisor, and especially as a fiduciary, we find that education is one of our most important and valuable services, whether the prospects and clients realize it or not.  Why should we do this?

  • A certain amount of client education is inevitable as part of the planning and investment management process.
  • It is our responsibility as fiduciary.
  • It is in the advisor’s best interest as well.  How can a client fend off an unscrupulous sales pitch, if they have a minimum of knowledge?

Taleb, and more famously, Rumsfeld, pointed out that knowledge can be categorized at least 3 ways:  things you know, things you are aware that you don’t know, and the “unknown unknowns.”   This last part is where an advisor can provide very valuable service to clients.

As we begin the planning process, clients expect to hear about things they know are out of their realm.  If we are doing a good job in the initial meeting, we can educate the clients about what an advisor can and should do, so that even if they decide not to work with us (or vice versa,) they are in a better position to evaluate any other financial services provider.  We will be providing “unknown unknown” information much of the time, even at this stage.  This includes how a financial plan is put together, exactly what is included (not just an investment portfolio, but budgeting, determination of insurance needs, evaluation of mortgages and non-financial assets, incorporating changes through time, etc.), and how the legal relationships between us and the client work.  People just do not understand the differences between all the options of financial advice that is out there on the market, and the infuriatingly misleading advertising by those who are not fiduciaries only adds to the confusion.

It is vital for fiduciaries to make this point crystal clear;  anyone paying for financial services deserves a fiduciary level of care, and they need to understand it, or they are not likely to get it.  We include at minimum a reference to information from a professional or other third party.  Resources include:

These resources are often incomplete, or not simple enough for many clients, and so you frequently see advisors writing up their own explanations of the fiduciary standards and conflicts of interest.

Of course the client will receive a complete explanation of what services the advisor will provide, and at what compensation, by law.  We like to include information on any hidden or additional costs (fund fees, trading costs, etc.) so that clients know to ask any other advisor about these costs as well.  It is also important to list what services you will not be providing.  For instance, we will recommend insurance coverages, and we can recommend specific insurance brokers (be sure to discuss potential conflicts of interest here) if the client wants a recommendation, but we are not brokers or agents and do not sell insurance.  Another example would be to inform a client of all the types of insurances that might apply, and then discuss which ones do apply for that client, and which ones do not, and why.

The education continues through the planning process with the explanation of the advisor’s investing methodology.  Clients need to understand how and why we have selected the investments in the portfolio that we propose.   They also need to understand that we are always learning and seeking out new information.  This prevents disappointment when an investment inevitably experiences volatility (our portfolios are diversified, so something is always underperforming).  It also acts as a barrier to other financial product sales people who approach our clients.  Frequently, a client will forward a sales pitch to us, so that we can evaluate it and tell them how it fits in (or not) with the overall strategy of their portfolio.

This education process is a differentiation between a human advisor and a robo advisor.  Certainly, the robos can provide lots of educational material, but we can take clients through it in person, and see when the light goes on for each concept, maximizing the use of these people’s precious time.  We can also see when the client is losing focus, and redirect as needed.  Additionally, the level of information needed is not the same for each person.  Beware:  the client that doesn’t want to learn much is the client that is dissatisfied later with the things they didn’t learn about.

As the relationship continues, there are certain to be teachable moments.  Downturns always require support, to prevent panic selling.  When something “new” is being pushed from all directions, it’s a great time to go over that new thing in relationship to your investment philosophy and asset allocation.  As plans change, the revised plans will present opportunities for the client to learn more about the planning process, as well as the value of an advisor.

What are the drawbacks of client education?  We have found that some clients come to understand the philosophy and see the implementation, and think that they can do it themselves.  And maybe they can.  The good news in this situation is that even if you have a client that leaves because they learned “too much,” they remain on good terms.  There is continued relationship possible there, and they may discover that they don’t really have the time or interest, or have a major plan change, or for some other reason decide that the do it yourself approach wasn’t such a good idea after all.

To summarize specific learning points and when they are needed (these are in addition to the planning and legal documents):

  • Initial meeting, general consumer information.
    • What is a fiduciary?
    • What is in a complete financial plan?
    • How to select an advisor
  • Initial meeting, advisor specific information and general investing information
    • Details of advisor services – what is included and what is not, details of all fees
    • Advisor’s investment philosophy (overview)
    • Expectations for investments (broad and general)
  • After client and advisor decide to work together (planning meeting)
    • Advisor’s investment suggestions for the individual client
    • Expectations for specific portfolio(s)
    • Implementation details (rebalancing, reporting, billing, etc.)
  • Ongoing education
    • Teachable moments (downturns, flavor of the day)

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