“Incompetence should not be rewarded with blind loyalty” (Lord Varys, Game of Thrones)
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. If everything is disclosed, this can be absolutely 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.
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.
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. 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.
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.
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