Three levels of trust when choosing an adviser

In Would you pay for financial advice? I had mentioned how two specific surveys reveal that investors are not averse to paying for advice, but lay tremendous importance on trust.

Larissa Fernand, 5/11/2014


Last year, the CFA Institute & Edelman Investor Trust Study polled investors 1,604 retail and 500 institutional investors across the U.S., U.K., Hong Kong, Canada and Australia. When asked what was most important when making a decision to hire an investment manager, 52% cited either “trusted to act in my best interest” or “commitment to ethical conduct” as the most vital parameters.

The ability to achieve high returns was most important to just 17%, while the least rated was the amount/structure of fees (7%).

This year, Morningstar U.K. conducted a similar survey. More than half the respondents cited “trust” as the primary factor when choosing an adviser. Cost came third on the list followed by past investment returns.

These surveys throw some important light on the investor-adviser relationship. While all along many have been of the opinion that investors are reluctant to pay for advice, the truth is that the bulk of investors are not averse to it. They are actually open to paying for advice, if they can trust the person who is responsible for that advice. After all, it is daunting to trust your money and financial future with a stranger.

According to Margaret Franklin, a CFA based in Toronto and vice-chair of the CFA Institute board of governors, trust is an indispensable quality in anyone we depend on to help us conduct the most important parts of our lives. She expressed her views on Morningstar Canada’s website, an excerpt of which is reproduced below.

There are no two ways about it: the degree to which you can trust an adviser will make or break the relationship. All successful relationships between an adviser and an investor will feature three levels of trust.

First, consider the adviser’s competence. You should obviously look for an adviser who is experienced and knowledgeable and who can help you make difficult financial decisions. But how can you separate the wheat from the chaff? First, it is important to ensure alignment between the education and credentials of your adviser, and your goals and preferences. You want to ensure commitment and competence in the areas of investing that are important to you.

A second level of trust is related to the adviser’s ethical conduct and reputation. Some clients may look favourably on advisers who are associated with well-known companies, whether local, regional or national. Others will look for strong connections to the community, whether through a shared social, religious or educational background. Most commonly, clients will ask friends and associates for referrals.

A third level is the empathy and maturity shown by the adviser. Sometimes called "relationship competence," this is a critical part of the relationship. It is founded on the trust that you can share personal information with your adviser and have confidence that he or she will handle the information appropriately. It helps to share a set of values and compatible personal styles.

We are not undermining the other factors, such as the asset-allocation strategy and selection of investments, and how these will help achieve their investment objectives. But the latter fall into place only if the relationship between the investor and the adviser is built on a solid foundation of trust.


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