Graham Bentley: Chickens or pigs? Clients’ involvement in the advice process

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Martina Navratilova once described ‘involvement’ versus ‘commitment’ as being like ham and eggs – the chicken is involved, but the pig is committed.

The degree to which clients are ‘involved’ in the financial advice process may vary, but they are certainly committed – it is their money at risk. This begs the question as to the parameters of advice. I have heard advisers say “My clients trust me and do what I tell them to do” – in isolation, this is direction, not advice.

Alternatively, you may believe that an adviser’s role is rather more to inform clients about any factors that might affect their decision-making, such as economic outlook, relative merits of product wrappers or tax mitigation strategies. That implies the presentation of choice – the laying out of options, with the onus on the client to decide.

In my book that isn’t advice either. It is verging on guidance, wherein lies a fundamentally important point – neither of those broad definitions of advice included the word ‘recommendation’.

Guidance is advice without accountability. Note I don’t use the word ‘responsibility’ – that is merely authority to act. It has no sense of consequence or come-back; no risk to the practitioner. Financial advice requires a recommendation and accountability. Both client and adviser need to be committed.

However, that should not preclude clients being given choices and making decisions. Given the plethora of financial products available, I find it hard to believe that clients’ objectives can be achieved through only one option – unless of course the adviser believes (or is so instructed) that price is the final filter through which any recommendation must pass.

Clients with low authority (i.e. little knowledge and experience) are likely to want less involvement in the decision-making process, for example regarding asset allocation or fund selection. However, they may have preferences that require recognition, e.g. regarding social responsibility or ethical concerns. At product level, there are decisions to be made – Isa versus personal pension contributions, a model portfolio versus a multi-asset fund. They may even have personal, idiosyncratic preferences that need to be accounted for.

Fee budget is a key criterion in the decision-making process. Advisers may have to use a TCO tool to present alternative combinations of fees, via lower platform fee plus active management or passive plus DFM fee, or guided architecture, and presenting the pros and cons of each. And yes, the client may say “Well what do you think?” at which point a recommendation is presented and accountability crystallises.

Some clients may believe they possess more authority than the adviser might recognise. While there is a whole industry devoted to quasi-psychological analysis of personalities, notably aimed at the ‘close that sale’ community, there is plenty of evidence to suggest that some characteristics of personality motivate a client to focus on detail, rather than the abstract, and vice versa. This behaviour may appear irrational on the surface, but it may simply be the client’s nature.

Then there are some people who may be described as plain ‘know-it-alls’. They may have an inflated opinion of their own investment skills and some sensitivity is required here. This underlines the need for advisers to exhibit relationship management skills, to recognise the subtle difference between advice and counselling. There is a cliché that certain professions are more ‘difficult’ to deal with, due to their irritating habit of asking challenging questions.

A major feature of the suitability process is the degree to which clients may want to direct the adviser’s deliberations, potentially away from the ’ready-made’ solution or centralised investment proposition that conveniences the adviser, and toward a preference that doesn’t. All of these nuances will need to be reflected in a suitability report, and here more care is needed.

There is a burgeoning industry in the manufacture of suitability ’templates’ in the paraplanning community. Reasons for recommendations (and even the recommendations themselves) are pre-populated. This habit ignores the involvement of the client in the decision making process – frankly if you think every client gets a bespoke service, the least you can do is to spend the time to write a bespoke report.

Next week – Need for review

Graham Bentley is managing director at gbi2