OVER the past months, during the various webinars that I conducted, I have been asked this same question several times: How does my firm ensure that our client advisers always do the right thing for their clients?
There are three ways we do it.
First, by our compensation structure – we are fee-only, and our client advisers are paid salaries. Second, we have an institutionalised advisory and investment management process and third, by building a strong culture.
A few months ago, I wrote about how the compensation structure of advisory firms and their representatives will affect conflicts of interest in giving advice. In this column, I will focus on the importance of institutionalising advisory and investment management processes, as well as building the culture of an advisory firm.
Institutionalisation of advisory and investment management
Many financial advisory (FA) companies are a collection of agencies run by individual managers with their representatives (reps). These reps are self-employed and are responsible for finding their own clients, provide insurance, investment, estate planning and investment management advice, as well as administer accounts and service their clients, and even perform marketing activities all on their own.
Above the reps are managers who earn overriding commissions; they provide training, motivation and compliance oversight. The companies mainly provide compliance support, and obtain distribution agreements with insurers as well as investment platforms so that their reps can recommend insurance and investment products from these insurers as well as the platforms.
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The company provides technology support, office administration as well as office space which the reps and their managers have to pay for since they are all self-employed and run individual advisory businesses. Some advisory firms provide investment support such as training, delivering market outlooks and building model portfolios. Except for a few companies, most do not perform investment management centrally.
Even then, there is no compulsion for their reps to use these portfolios. The reps can also decide on the products they want to sell to their clients. In a nutshell, reps look at their companies as a platform to do their business. They believe the clients are theirs, and they can leave their company anytime for another, taking along their clients and in most instances, the commissions due to them as well.
Because the process is not institutionalised, there will be plenty of issues. If there are 100 reps in the company and each rep has say, 300 clients, there will be 30,000 clients. Because the reps can decide their own planning philosophy, methodology, assumptions and select their own portfolio asset allocations and products, it is very difficult for the company to ensure that the advice for 30,000 clients is consistent.
When markets are challenging, the advisory firm will find it difficult to know what actions to take for clients because there is little consistency in asset allocation and product decisions. Firms may not even know the rationale of each rep regarding the decisions. The firm will then have to leave it to their reps to take the appropriate actions, if any.
But a rep cannot be an expert in every advisory area, and still have the time to do the sales, marketing and admin themselves. Something will have to give. While the company can ensure compliance, compliance is a hygiene factor whereas consistency in the quality of advice is the differentiating factor.
If a company cannot standardise how advice is given and how investments are managed, it cannot define what is quality; what you cannot define, you cannot supervise and measure.
Succession is another issue. If a rep decide to leave the business or retire, what will this mean for the clients if the new rep who takes over has an entirely different planning approach and investment philosophy? Our advisory process is institutionalised, and investment management is centralised.
Every client adviser must use the same planning methodology based on the same philosophy. Everyone must follow the planning norms written in the adviser’s planning guide. Every client’s investment portfolio is centrally managed by the investment team. Client advisers are also not allowed to make product recommendations based on their preferences. Recommendations are decided by specialists in the solutions and investment team.
So if the same client sees three different client advisers, they will tell him exactly the same thing and he will receive the same wealth management plan and recommendations. If a client adviser leaves or retires, another client adviser is able to take over the clients’ files easily. This is our way of ensuring consistent advisory quality.
Building a strong company culture
If the compensation structure and institutionalisation of advisory and investment management are the hardware of an advisory firm, its culture is the software. There are four layers in an organisational culture.
- Values – what is written down that an organisation seeks to live out.
- Beliefs – which can be discerned in how people talk about issues a company faces.
- Behaviours – the day-to-day ways in which an organisation operates, and are visible to people outside and inside the company.
- Paradigms – the set of assumptions held in common and often taken for granted in a company.
For us, these four layers of culture are defined in our core values (how we should live) and the corporate purpose statement (what we are living for). Anyone in Providend would be able to tell you exactly what our culture is, because we talk about it all the time – at recruitment stage, during staff orientation, company retreats and town halls.
We organise activities that allow us to tangibly live out our culture on a daily basis. We recognise people when they live it out. Conversations in advisory chat groups and in the office are always about how to better address clients’ needs and doing about the right thing for clients.
Management guru Peter Drucker said that culture eats strategy alive for breakfast. A well-structured compensation structure may mitigate conflict of interest. An institutionalised practice can control the quality of advice. But without a strong culture, nothing happens, especially when no one is watching.
You need to be in a community that believes in doing the right thing for clients; knows exactly what is the right thing to do; have people who hold you accountable; and be celebrated when the right thing is done.
Why do I write about this? I have spent a long time educating the public on personal finance through various channels. But after more than two decades, I realise that having knowledge does not necessarily translate into the right actions. Most people need a trusted adviser who will help them act on the knowledge obtained.
If you are looking for an adviser, I hope the above will give you practical information on how to find one.
The writer is chief executive of Providend, South-east Asia’s first fee-only comprehensive wealth advisory firm
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