Loyalty is a powerful concept that elicits an emotional response. If you’re ‘loyal’, it means that you believe in trust and the idea of building and maintaining a long-term relationship. It’s a good thing, right?
In the world of financial advice, loyalty is a little more complicated. Many advisors are aligned with specific investment houses; sometimes they’re even aligned with certain funds. This is obviously beneficial to the advisor, who no doubt receives income in the form of fees for referring clients to those funds. If everything is disclosed, this might even be fine for the client, especially if the client shares the same loyalty to the investment house in question.
But loyalty by an advisor towards a certain investment company might also introduce a conflict of interest. There’s no way that the ‘loyal’ advisor is giving unbiased advice to their clients, who might be better off invested in other funds from other providers.
Sometimes, the loyalty bias is driven entirely by the client! The advisor might suggest a variety of funds from different providers, but the client will be blinkered by loyalty to one in particular and end up with an undiversified portfolio that lacks balance.
The even bigger question
Indeed, loyalty is a double-edged sword. It’s too complex a topic to say outright whether it’s a good or bad thing – it depends on a person’s financial circumstances and their goals, as well as their relationship with their advisor.
If anything, the loyalty topic raises an even more important question about the value of financial advice in general. If you’re an advisor, this is the big question… The one you should be asking yourself all the time to remind yourself why you do what you do. If you’re a client, you should be asking the same question – and hopefully your advisor will be able to answer it!
Advisors add value
In the past, a financial advisor’s value was largely based on their ability to ‘beat the market’. Professional advice was promoted in this way and it’s something that many investors still expect. But it’s an unrealistic expectation, as anyone working with modern funds will realise. Times have changed, markets have changed and advice has changed – yet the ‘returns-first’ perception remains.
A survey conducted by the investment research firm Morningstar revealed that the interpersonal side of advice, which includes bespoke service and behavioural coaching, is actually the most valuable aspect of professional advice, even if clients don’t realise it. This is where the true value lies, and it’s something our industry needs to articulate better. The best advisors are able to integrate all spheres of a client’s financial life: goal-based planning, behavioural management, estate planning, intergenerational wealth management, risk management, the list goes on… They should even be able to offer friendship and emotional support during difficult moments.
Which brings us back to loyalty…
As soon as you come to terms with the idea that your financial planner or an investment house should be more like a highly specialised life coach instead of simply gunning for the best returns, then the issue of loyalty becomes simple: Your advisor should be loyal to you!
Loyalty means that your advisor should meet with you at least once a year, or more often if you have a complex portfolio. It means that your financial goals must always be front and centre and your long-term success must be the advisor’s highest priority. It means your advisor should be brave enough to make changes to your financial plan as your life changes and your goals evolve. And it means talking frankly about value: Your advisor should disclose all fees and all relationships with fund managers and investment houses, and they should explain exactly how they’re going to improve your life.
Because at the end of the day, that’s the only kind of loyalty that matters.
Disclaimer: The information provided herein should not be used or relied on as professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your professional adviser for specific and detailed advice.