Financial advisor transparency is not on its way — it is already here.Whether it is the free tools and services available on the Investor Watchdog website (which I founded), the data aggregation services of Brightscope — if it sticks to its guns when it responds to outspoken critics of its Advisor Pages (See: BrightScope’s huge advisor database is first search-engine friendly way to connect consumers, advisors) or other firms offering this service, investors finally have easy access to the information they need to evaluate potential advisors and monitor current advisors. See: Third-party advisor review sites vie for attention from investors and advisors.
The best advisors can only benefit from this new transparency. They have nothing to hide so investors will continue to buy the services they are selling.
On the other hand, transparency will be a nightmare for advisors that have a lot to hide. In my opinion, that group includes a high percentage of advisors who sell investment products for commissions who work for big Wall Street firms that have quantity of sales as much as quality of product in mind when they build huge distribution systems to sell their investment and insurance products. See: Should I dump my securities licenses?.
Shiny glass houses
Now that transparency is here, investors will have to figure out how to use it to protect their financial interests. That will take time, but online transparency tools will expedite their learning curves. Plus, the media will write stories about transparency because it is newsworthy.
High-quality advisors will also benefit when they learn how to use transparency to create competitive advantage.
Who are these advisors? They are professionals who have years of pertinent experience. They are CFAs, CFPs and CIMAs. They are RIAs and IARs who provide financial advice and services for fees. They have clean compliance records. They provide sound advice with no conflicts of interest. They put investor interests ahead of their own. And, they deliver competitive results for reasonable amounts of risk and expense.
In my opinion, 10% of the 700,000 licensed, registered advisors and representatives in the U.S. meet most of these criteria.
It stands to reason the 10% will flourish, even more than they have already. The other 90% will have a tougher time selling financial products to investors who have easy access to data that describes their experience, ethics, compensation and other criteria they usually prefer to omit in their sales pitches. Misrepresentation will also be exposed when sales claims are replaced with factual information.
What are the advisors who withhold information up against? Investors will be armed with reports that help them evaluate the competence and trustworthiness of financial advisors. Think of it as a Carfax for advisors. Plus, the reports will be investor-friendly, unlike the data that resides on the FINRA website. The bottom-line is investor risk of selecting advisors with the best personalities and sales pitches versus advisors with the best qualifications and integrity will be greatly reduced.
Show your hand
You do not have to wait for investors to figure out the benefits of transparency on their own. You should become an advocate of transparency and then integrate it into your marketing practices.
This means you introduce transparency to investors and practice it by providing investors with the information they need to select you because you have the best qualifications.
A transparent approach, when you market financial advice and services, will require you to provide specific types of information about you or show investors where they find the information. Transparency focuses on several criteria that impact your relationship with investors.
• RIA or IAR — Explain how this registration enables you to provide financial advice and services for fees. Add how your registrations make you a financial fiduciary who is held to the highest ethical standards in the financial services industry. See: What is the value proposition of a financial advisor — and how is a budding RIA culture upping the ante?.
• Credentials — Describe how experience, education, and certifications combine to produce the expertise you use to help investors achieve their financial goals. See: What exactly is an RIA?.
• CRD or IARD — Provide this number and show investors how to access your compliance record at FINRA/BrokerCheck.
• Performance — Describe the type of performance investors can expect from your advice and services. Do not provide a track record unless it is GIPS compliant and audited by an independent third party.
• Reports — Show prospective clients your performance, risk and expense reports. Add a tutorial that explains the terminology and methodology that is used in the reports.
• Risk & Expense — Describe how you manage investment risk and limit expenses to maximize your clients’ “net” rates of return. See: Why smart diversification and risk management are your best friends.
• Code of Ethics — Provide a document that describes your ethical treatment of clients, how you avoid conflicts of interest, and how investor interests always come first.
• Custodian — Make sure the investors know you use the services of a brand name custodian that has physical possession of the investors’ assets. Your contact with investor assets is limited to your fees. Think of this as the Madoff disclosure.
Get out in front
I recommend you develop a handout that contains this information, plus anything else you believe will help investors select the advisor with the best qualifications (that would be you). Your handout should also recommend investors obtain this same information from every advisor they talk to.
You may even want to provide a questionnaire they can use to obtain the data or refer them to a website. You have nothing to hide. Use it to create competitive advantage. Your competitors have a lot to hide. Transparency will help you win new clients. Your challenge is to turn it into a business practice that protects investors and benefits you.
_Jack Waymire is the author of Who’s Watching Your Money? and the founder of _ Paladin Registryan online service that matches investors to pre-screened financial planners, investment advisors and money managers and of the websiteInvestor Watchdog.