By Morey Stettner
Service, fees and performance expectations are all potential hot spots
When you hire a financial adviser, the relationship unfolds in stages. After the initial meeting, you start to open up more about your goals and values- and what money means to you. Ideally, you grow to trust your adviser and perhaps even become friends over time.
But sometimes, the adviser-client relationship hits speed bumps – or worse. Conflicts erupt. Misunderstandings abound, resulting in angry clients and frustrated advisers.
While there are many reasons why conflicts can rupture the relationship, common problems are relatively easy to spot early on. Personalities clash. Expectations differ. Poor communication breeds distrust.
“One of the biggest issues in the adviser-client relationship is centered around servicing,” said Melissa Caro, a New York-based certified financial planner who recently launched My Retirement Network, a digital-media firm that provides financial-planning content.
Advisers should always tell new clients what to expect. They should disclose all their fees, how many times they will meet per year and the promised scope of work. All this information should be summarized in writing. The document is often called a client service agreement or consulting engagement agreement.
“At the start of the relationship, expectations seem reasonable for both parties,” Caro said. “But even if the adviser lays out expectations upfront and servicing details, life happens” and anxious clients might seek frequent handholding throughout the year.
This can pose problems for advisers, especially solo practitioners, who sell their time. Clients who want too much access can prove more trouble than they’re worth. “Most clients won’t be overly demanding,” Caro said. But if they’re chronic worriers, they may seek reassurance from their adviser amid every bout of market volatility.
For consumers, the best way to avoid this conflict is to hire an adviser who has a highly trained, honest and professional support staff. “Having one or two additional team members who develop strong relationships with the client ensures their needs are consistently met,” Caro said. It also frees advisers to manage their workday more effectively.
Advisers can also stop this conflict from boiling over by preempting it. Alerting clients about timely financial topics in informative emails can address their concerns so that they don’t call the office. “It’s anticipating the questions that clients will have and answering them proactively,” Caro said.
Before hiring a fee-based adviser, make sure you’re aware of their commission pay structure and how it works.
Another common conflict involves a client’s confusion or misconception about how their adviser is paid. If a client suspects that an adviser’s recommendations are driven – at least in part – by generating more fees, trust can erode.
“When an adviser is incentivized by their company to push certain products, the client can feel they are being unnecessarily sold something or pushed to do something that may not be in their best interest, even if it might be,” said Sean Williams, a certified financial planner in Concord, N.C.
The solution is to hire an adviser who is a fiduciary. This means the adviser must put the client’s interest first, seeking the best price and terms for financial transactions. In helping you make investment decisions, these advisers must disclose any potential conflicts of interest and not use your assets for their own benefit.
“The easiest way to eliminate that perception of conflict of interest is to use a fee-only adviser that doesn’t receive compensation for selling investment or insurance products,” Williams said.
Some fee-only advisers take a fiduciary oath in which they affirm their commitment to adhere to the fiduciary ethic. The Committee for the Fiduciary Standard has a sample of this oath, and advisers may sign the oath and promote it on their firm’s website.
Fee-only advisers are paid solely by clients, often via a flat fee or charging a percentage of assets under management. By contrast, fee-based advisers can earn commissions for selling certain investment and insurance products.
Both can be fiduciaries, although fee-based advisers rarely are. Before hiring a fee-based adviser, make sure you’re aware of their commission pay structure and how it works.
Some financial planners tell prospective clients: “Don’t hire me if you expect that I’ll beat the market consistently.”
Because the adviser-client relationship revolves around money, conflicts can erupt over the loss of it. If your investments underperform, it’s tempting to blame your adviser.
That’s why some financial planners tell prospective clients: “Don’t hire me if you expect that I’ll beat the market consistently.” They know that in any given quarter or year, their client’s portfolio might lag behind the returns of benchmark stock-market indexes such as the S&P 500 SPX.
Avoid potential conflict by viewing your adviser as a resource to help you reach your financial goals, not a market-beating guru. Expert advice will help you plan for the future, but no one can predict it.
More: Will a big firm managing your money boost your odds of financial success?
Plus: You get a surprise bill that’s incorrect or unfair. Is it OK not to pay it?
-Morey Stettner
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
11-23-24 1002ET
Copyright (c) 2024 Dow Jones & Company, Inc.
