Market View From the Top
from Spicers CEO Gordon Noble-Campbell
Rebuilding Trust and Confidence
29 March 2010
In 2008, the world’s financial markets experienced one of the most severe periods of dislocation ever – it was a year in which a series of genuinely unprecedented events created extraordinary levels of monetary loss, destruction of trust, and erosion of confidence in the financial engine of our society.
A March 2009 survey by the Boston Consulting Group, a global management consultancy, revealed that only 22 per cent of US consumers said that they trust investment advisers to protect their assets. Kilian Berz, a Boston Consulting Group partner and managing director noted that, ‘Trust has been fundamentally broken, and confidence is much lower than it was.’
I’m not surprised.
What will act as a catalyst for re-generating trust and confidence in financial advice?
Charles Green, a US-based adviser, created the ‘trust equation’, which serves as a helpful starting point in identifying what went wrong, and what will be required to make things right for the future. Green defines trust as:
Trust = C + R + I
S
| where: |
C = |
credibility (‘I can trust what s/he says …’) |
| |
R = |
reliability (‘I can trust that s/he’ll do …’) |
| |
I = |
intimacy (‘I can trust talking with him/her about …’), and |
| |
S = |
self-orientation (‘I can trust that s/he’s focused on me …’). |
Green suggests that of these factors, S is the most important given that it drives the motive of the relationship, with high self-orientation being equated by clients with insincerity, a lack of caring and deviousness. In the equation, the higher the level of S, the lower the level of client trust overall.
Our local regulators are working to ensure that the S-factor is materially reduced through a new framework of compliance and governance which is intended to grow and maintain the trust and confidence of financial advice clients.
However, for trust and confidence to be restored in the financial advisory profession, more will be required than simply a set of new laws and regulations. While regulation does ‘… aim to deliver better systems, controls and risk management in firms, better intelligence for law enforcement, fewer crooks and facilitators in the system’, it will not prevent financial errors of judgement being perpetrated, either knowingly or unwittingly.
Humility, honesty and altruism – in my view, are some of the crucial bedrock attributes of a professional financial advice relationship, regardless of the times. To this end, advisers need to intuitively accept the responsibility for demonstrating honesty, humility and altruism in their dealings with clients at all times. To achieve this requires a business infrastructure, process and compliance framework which transcends the person of the adviser, but which in turn underpins the trust and confidence the financial advice relationship requires. It sounds boring, but as we have seen, there are no short cuts.
Trust and confidence can be influenced by personality, but should never be reliant on it as the sole basis for a financial relationship. Rather, our new regulatory environment for the provision of professional financial advice in New Zealand will serve as a much more substantial foundation upon which investor trust and confidence can be re-built over time.
On this foundation, the qualities of honesty, humility and altruism, as demonstrated by professional financial advisers, will serve as important pillars underpinning the delivery of advice. Central to this is the degree to which expert knowledge is shared in such a way to increase the level of client empowerment and accountability in investment decision making. For example, a rule of thumb I’ve generally applied in my own investing history is to avoid any investment opportunity where I cannot understand how the forecast returns are generated.
In such cases, the advice I’ve sought has aimed to clarify any uncertainty in this regard and ensure that any decision I subsequently take is made on an informed basis. While I trust the advice I receive, the investment decision is mine, and I undertake it with the benefit of knowledge and understanding.
Advice relationships where the responsibility for decisions is not shared, i.e. where the client abrogates responsibility for any decision or where the adviser insists on recommendations being implemented without debate, are over. Such relationships have demonstrated enormous potential to result in total and permanent loss of investment capital as opposed to achievement of the financial outcomes desired.
Financial relationships are necessarily predicated on trust and confidence – the absence of either of these attributes results in relationships that are short-term, shallow and ultimately unfulfilling for all parties involved. Trust and confidence are two core attributes that must be present in all professional financial advice interactions, both in terms of client relationships and also day-to-day business activities. This is more than just a timely aspiration; it is the bottom line of exercising a fiduciary duty of care. In essence, a financial advisory business must put its clients’ interests first.
Only in this way will trust and confidence become the sustainable foundation of mutual success for both financial advisers and their clients.
If you have any questions around this article, please contact us at any time.
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