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There is a trust deficit in financial services these days. All the major opinion surveys find that consumers are lacking in trust when it comes to financial institutions and financial advisors. And while statistically, trust increases when they’re asked about their advisor, the industry as a whole must enhance its trustworthiness with the buying public.

How can financial advisors achieve this goal? By committing themselves to being a true professional, especially regarding ethics, compliance, and personal responsibility. Let’s explain each of these items in further detail.

Ethics: This involves always having your heart in the right place. Being ethical means you conduct yourself based on exemplary values such as client loyalty, fair dealing, openness, and quality. It means doing what’s right even when no one is watching. Here are some of the things ethical advisors do:

  • Protect and promote their clients’ best interests, even if it doesn’t serve their own financial interests.
  • Being transparent about their background, professional training, and business practices.
  • Engaging in fact-based selling based on skillful matching of client needs with available solutions.
  • Always being realistic about the possible results of buying a financial product and the potential risks.
  • Safeguarding client confidentiality even when third parties might press for information access.
  • Avoiding deceptive advertising practices that confuse prospects or create fear or doubt.
  • Not selling outside their expertise area just to make more money.
  • Committing themselves to the latest business practices and investment/insurance strategies in order to avoid unforced errors.

Compliance: Obviously, we could add many other items to the ethics list. But the point is this: Being ethical comes from the inside, from the heart. It is values driven, not law-driven.

It also represents a value-add to compliance, which is largely rules-based. So what compliance principles should advisors follow in order to accelerate trust building with consumers? Following are some of the major ones:

  • Follow the product training, carrier appointment, and continuing-education requirements in their state.
  • Adhere to NAIC and FINRA advertising standards, based on their license type.
  • Avoid certain “hot-button” words in sales interviews such as “account” and “deposits” when discussing life insurance and/or annuities.
  • Don’t call prospects who are on the national Do Not Call Registry or relevant state registry.
  • Only buy leads from direct-marketing companies who follow all applicable laws and regulations.
  • Get approvals from their compliance departments before using homegrown solicitation materials.
  • Avoid pursuing professional designations that lack legitimate educational content.
  • Only recommend products that comply with relevant suitability requirements, especially when dealing with senior clients.
  • Complete all required forms when replacing an existing life insurance policy or annuity.
  • Hold themselves out only as insurance sales professionals unless they have the appropriate education and/or license to support claims they are securities representatives or investment advisors.
  • Follow all rules regarding the use of life insurance illustrations.
  • Never give a prospect anything of financial value in return for a commitment to do business.

Personal responsibility: Financial advisors who behave ethically and who comply with the law not only have a leg up competing with other advisors, they also are better able to prevent mistakes that lead to costly, potentially career-ending, E&O insurance disputes. So if you take away nothing else from this article, let it be this: Doing business with your heart (ethics) and your head (compliance) will keep you safe in today’s litigious business. But even the most ethical and compliant advisors can make mistakes—and get hit with nasty legal judgments when they lose in court. This is where personal responsibility comes in.

Financial advisors should accept that one day they, too, might get sued. And that the ethical response to such an event is to protect their practices —their livelihoods—against legal claims, while also making clients whole when their error or omission financially harms a client. In both cases, buying E&O insurance is a necessary solution.

At the end of the day, protecting your business AND owning your mistakes are two sides of the same coin. E&O insurance can help you achieve both if you buy it before you need it. And one last thing. Being fully insured, not just with E&O insurance, but also with other forms of business insurance, is a great way to communicate to prospects and clients that you’re a professional. It shows that you are dedicated to being in business for the long haul and that you have owned up to your responsibilities.

So don’t hesitate to tell your prospects  you are fully insured in the event something goes wrong. There’s no need to get into the details of your E&O insurance because you don’t want to plant ideas. But do explain that you practice what you preach by purchasing insurance  that assures you will be able to serve your clients for years to come.

In summary, don’t let the industry’s anemic trust numbers get you down. Instead, focus on what you alone control . . . your own ethics, compliance, and personal responsibility. If you strive to excel in all three areas, you WILL build trust quickly. You can trust us on that!

Serving rich clients isn’t a panacea. Bud Fox, the neophyte broker in the classic film “Wall Street,” learned this the hard way.

Remember the film’s Shakespearean plot? Fox (Charlie Sheen), an ambitious junior trader, decides to win corporate raider Gorden Gekko (Michael Douglas) as a client. Gekko, ruthless and slick, brushes him off, but Fox persists, offering Gekko inside information about the struggling Bluestar Airlines. Fox gleaned this tidbit from his father (Martin Sheen), a maintenance foreman at the company. Impressed with Fox’s potential, Gekko taps him as a trader . . . and so begins the hero’s preordained rise and fall.

Soon, Fox willingly conspires with Gekko in securities fraud. And why not? The rewards—the big corner office, the opulent apartment, and the beautiful girl (Darryl Hannah)—are amazing. But when Gekko threatens to break up Bluestar, hurting his father and friends, Fox redeems himself, but not before losing everything, including his self-respect.

Wall Street’s plot is pure Shakespeare. But life imitates art, according to social psychologists who study wealth’s impact on human behavior. In fact, their research suggests that as people’s wealth and status increase, their tendency to bend or break the rules in their own favor increases in tandem.

Case in point: researchers observing a four-way intersection recorded the make and model of drivers’ cars and their driving behavior. They found that people in the most expensive cars were four times more likely to cut off other drivers than those driving more modest vehicles, and three times more likely not to grant the right of way to pedestrians in the crosswalk.

In another experiment in the study, researchers asked participants to imagine themselves as being rich or poor. Researchers then offered them candy from a jar ostensibly belonging to children in the lab next door. The rich participants grabbed more candy than the poor ones.

Five other experiments confirmed the same pattern, writes Paul Piff, a doctoral student at UC Berkeley and lead author of the study. Rich people are more likely to believe that the pursuit of self-interest is a good and moral thing.

We lack the space to debate the virtue of that belief, but consider this: The highly affluent didn’t get rich by accident. They focused relentlessly on their needs and goals, not the ethical or legal constraints of others. So if a rich client asks you to do something wrong, don’t expect the person to worry about you losing your license, going to jail, ruining your reputation, or getting fired. As an ethical advisor, those are your concerns, and you owe it to yourself to make the principled decision.

As you weigh how to balance a wealthy client’s requests with your own values, consider these pointers:

  • Remind yourself of the “real you.” What was important to you before you tasted the benefits of working in the affluent market? Is that person still inside you?
  • Compare the financial rewards of your current situation with the intangible benefits of acting with integrity. Which do you think are more sustainable and satisfying?
  • If you have children, think about whether your conduct would make them proud of you.
  • Finally, consider the feasibility of walking away from an unethical client, hopefully replacing the revenue with clients whose values track your own.

Because as Bud Fox discovered at the end of Wall Street, no gravy train is worth the ensuing ethical train wreck and potential errors-and-omissions insurance nightmare. And losing the respect of those you love is the worst damage of all.

For more information on ethical sales practices, please visit the National Ethics Association’s Ethics Center. For more information on affordable errors and omissions insurance for low-risk financial advisors, visit E&OforLess.com.

If client trust is the nutrient that builds healthy financial-services careers, then conflicts of interest are the poison that kills them. Financial manufacturers have given lip service to this truism for decades, as have distributors. But the profits that come from conflicts are hard to deny in practice. However, with the fiduciary standard looming on the horizon for securities and insurance producers, advisors will be under greater pressure to better manage their conflicts—or put their careers in jeopardy.

Scare mongering, you say? Then consider these four points:

First, in October 2013, FINRA released its Report on Conflicts of Interest based on a survey of firm and representative conflict-management best practices. The report reviewed three types of systems the industry uses to minimize conflict: enterprise oriented, product manufacturing and distribution driven, and compensation related. Although FINRA said companies and advisors had made progress on all three fronts, it also called on them to do more. It even made a not-so-veiled threat: “If firms make inadequate progress generally,” it said, “FINRA will evaluate whether conflicts-focused rulemaking is necessary to enhance investor protection.”

Second, the SEC announced its enforcement unit will be focusing on conflicts of interest in 2015. According to news reports, the agency will spotlight several key issues, including undisclosed outside business activities and undisclosed bias toward proprietary products and investments. “Only through complete and timely disclosure can advisors, as fiduciaries, discharge their obligation to put their clients’ and investors’ interests ahead of their own,” said Enforcement Asset Management Unit Co-Chief Julie Riewe at an industry event.

Third, the Obama Administration recently gave the Department of Labor the permission to go ahead with rewriting its fiduciary standard for financial advisors involved with ERISA-governed retirement plans. Experts say this will likely have a big impact on commissions paid when clients roll over their 401 (k) or other pension assets into an IRA upon retiring or switching jobs. In justifying his decision, the President said that “conflicted advice” generates returns that are about 1 percentage point lower each year. Since IRA assets currently amount to $1.7 trillion, the aggregate annual cost of conflicted advice is roughly $17 billion per year. Although some have disputed this figure, the President’s fiduciary advocacy has put industry conflicts on stark display, increasing pressure on companies and advisors to respond.

Fourth, financial journalists are writing more frequently about the industry’s dueling standards of care (suitability vs. fiduciary) and about how consumers can avoid inherent conflicts in each model. For example, a Wall Street Journal article entitled, “New Financial Advisor? Check Out Fees and Conflicts,” cautions people to probe an advisor’s fiduciary status at the outset. The reporter, Peter Finch, cautioned readers to probe hard for underlying conflicts of interests. For example, he said an advisor might push mortgage refinancing in order to make more funds available for investing, not to save his client money. Or an advisor might recommend a particular brokerage firm for transactions in order to get referrals to new clients.

Put the pieces together and the conclusion is hard to deny. Consumers will soon prefer working with advisors who bring less conflict baggage. And financial professionals will feel greater pressure to become fiduciaries and to be more transparent about their conflicts, while hopefully reducing their errors-and-omissions insurance exposure. Are you ready for this new environment? If not, you’ll have to do two things rather quickly. First, become more aware of the potential conflicts in your business model and second, become more skillful at balancing and disclosing those competing interests.

For example, if you hold a securities license, you’ll need to become more careful about managing the following issues:

  • Engaging in outside business activities that give you an incentive to recommend a transaction that benefits you, but hurts your client.
  • Offering or accepting a gift or entertainment that colors your business judgment.
  • Advising a client to purchase a proprietary or preferred third-party product because your compensation is higher for such products, even though net returns might suffer.
  • Pushing mutual funds over individual stocks because you get paid more to sell mutual funds.
  • Avoiding index or exchange-traded funds because they pay you less than fully loaded products, even though studies suggest such vehicles are more affordable and tax efficient.
  • Selling securities your firm is underwriting to people for whom those securities are unsuitable.
  • Favoring equity investments over fixed-income products because product manufacturers generate more fees from the former and are willing to provide higher sales incentives, even though a client’s risk tolerance suggests a need for the latter.
  • Giving greater emphasis to a certain product type because you are nearing a compensation-plan threshold that will increase your total payout, again with no consideration of client suitability.

Advisors with insurance licenses face many of the same conflicts, as well as others such as:

  • Agreeing to become the designated beneficiary of an insurance policy you sold to a client, even though you have no insurable interest in the person’s life.
  • Becoming a collateral assignee of a policy or contract owned by anyone other than a close family member.
  • Becoming a trustee of a trust that owns a policy insuring someone other than your close family member.
  • Holding power of attorney over a client’s property, especially if it includes a life insurance policy or annuity you sold the person.
  • Lending money to a customer or borrowing money from a customer.

As for balancing and disclosing conflicts, always force yourself to consider the client impact. When pondering an action that appears to benefit you more than the client, always ask yourself these questions:

  • How will the client feel if he finds out you benefited from the transaction at his expense? Will he feel victimized? Might he pursue legal remedies?
  • What will self-dealing do to your perceived credibility? By favoring your own interests, will you permanently damage your ability to serve the client?
  • Will your action pose errors-and-omissions risk to your business? Are you adequately insured against such risks?
  • Finally, will an aggrieved client take her complaint online, thereby harming your professional reputation in perpetuity?

Hopefully, pondering these questions will persuade you to more effectively handle your conflicts of interest. Equally important is fully disclosing them. This is a key SEC requirement for investment advisors, who typically publish conflict disclosures on their web sites. But SEC-registered advisors shouldn’t just provide web boilerplate and call it a day. They should also discuss conflicts with clients to make sure they understand their fiduciary commitment.

For advisors with insurance licenses, perhaps it’s time to adopt a fiduciary mindset of their own, even though it is not yet required, and to increase disclosures and client discussions accordingly.

Bottom line, with heightened focus on conflicts of interest, why keep giving prospects a reason to mistrust you or worse, sue you? At the end of the day, if you want to build a healthy financial-services business that attracts new clients and retains existing ones, pills that poison trust are bad medicine, indeed.

For more information on ethical sales practices, please visit the National Ethics Association’s Ethics Center. For more information on affordable errors and omissions insurance for low-risk financial advisors, visit E&OforLess.com.

Are human financial advisors engaged in a life-or-death struggle with Internet-based investment services, also known as “robo-advisors”? If you read the industry trade press, you’d be hard-pressed not to draw that conclusion. “Will Financial Advisors Become Obsolete,” asks one article. “Robo-Advisors Expanding Rapidly,” warns another. “Eliminate the Robo Threat,” commands a third. If you derive a significant portion of your income from investment strategy development and management, should you be worried about this trend? Yes . . . and no.

Yes, because the robo-advisors have clearly been on a tear of late. According to Clara Shih, CEO and Founder of Hearsay Social, online investment providers have raised some $82 million in venture capital in the last two years. And they’ve amassed more than $2 billion in assets under management. One of the leading services, Wealthfront, achieved its first $1 billion in AUM in about two-and-a-half years, something it took discount-broker Charles Schwab roughly six years to accomplish. Wealthfront currently has $1.8 billion in assets under management.

Based on the robo-advisors sales trajectory alone, traditional financial advisors should be concerned. But the numbers aren’t the main issue; it’s the reasons for the growth that should give advisors pause. And there are three of them:

First, robo-advisors have a strong value proposition. They are great proponents of simple, convenient, low-cost, and technology-savvy investing for people who have better things to do.

Second, the marketplace is receptive to their offerings. It’s no accident that robo-advisors are most popular among Millenial investors. In their 20s and 30s, these consumers have grown up with the Internet and have no or little patience for traditional salespeople or sales hype. Just give them a user-friendly interface on a laptop or mobile phone, and they’re ready to invest. If you plan on remaining in the business, losing these customers to online platforms is a stinging blow.

Third, automated investment services may outpace human investment managers due a number of factors, including:

  • Tax-aware asset allocations
  • Automatic rebalancing
  • Optimal allocation
  • Tax-loss harvesting
  • Cost advantage of investing in passively managed index funds

According to Wealthfront, these advantages add up to an estimated additional return of 4.6 percent, assuming a $100,000 investment over 20 years in a U.S. mutual fund.

Since robo-advisors in their purest form lack human salespeople, they must rely on their websites to tell their stories. They appear to do a superb job at this. For instance, take a look at Wealthfront’s site. The large home page visual features an animated GIF of a Millenial keying data into her smart phone. Superimposed on the visual is the following text: “Clients trust Wealthfront to manage over $1.9 billion of their assets.” Scrolling further down, the company encourages visitors to “be an investor” using its “sophisticated investment management & advice, without the hassle, high fees, or high account minimums.”

Then comes a performance chart, which spells out in great detail the incremental advantages discussed earlier. Next comes a discussion of its investment team, which includes Burton G. Malkiel, author of the classic investment guide “A Random Walk Down Wall Street” and Charles Ellis, author of “Winning the Loser’s Game: Timeless Strategies for Successful Investing.” The company then touts its low fees, saying it will manage a $100,000 portfolio for less than $20 a month, making sure that key tasks that many investors overlook—such as rebalancing or tax harvesting—get done on a timely basis.

The website sales pitch ends with a review of Wealthfront’s six investment features and photos of 16 Silicon Valley employees—all in the Millenial sweet spot—who have entrusted their money to Wealthfront.

Drilling down further into the site, you discover the company’s helpful investment-education content, along with its clearly written disclosures. Our overall impression? That Wealthfront is professional, client-driven, and careful to do business by the book. In fact, after spending about 15 minutes on the site, one NEA staffer was about ready to open an account and send in a check for $5,000, an account size that requires no investment-management fees (they don’t kick in until an account exceeds $10,000).

But would the staffer have sent in anything more than that? No, and the reason why is the same reason advisors shouldn’t overreact to the robo-advisor threat: the ethics card.

As alluded to earlier, robo-advisors appear to be careful to comply with SEC investment advisor regulations. So we’re not suggesting they are unethical. What we are saying is this: If ethics is the domain of thought that deals with the right way to behave (or invest), then robo-advisors may be ill-equipped to be ethical.

For example, a robo-advisor can’t tell a consumer he’s misguided for panicking during a market correction and converting all his holdings into cash. Or if he’s spending too much money on fine German cameras and optics. Nor can a robo-advisor guide a consumer who’s uncertain whether to invest $50,000 in her retirement fund or the same amount in her daughter’s 529 college savings plan.

Similarly, a robo-advisor will be hard-pressed to tell a consumer if he should reduce his credit-card debt before investing online. And clients looking for help converting their investment portfolio into a safe and secure retirement-income stream should definitely look elsewhere than a robo-advisor. And let’s not forget people who need advice about buying long-term care, who need estate-planning guidance, or who want information on high-quality, noncancellable disability insurance policy.

Then there’s the accountability factor. We all know that most people won’t willingly buy life insurance because they’d rather not contemplate their own demise. They need a human advisor to poke and prod them into doing the right thing. The same is true for people who have difficulty making and sticking with an expense budget. They need someone to remind them that profligate spending will have a large negative impact many years from now. And consumers who indulge in destructive behaviors such as speculative investing or Internet gambling need someone to deliver a pointed wake-up call before they lose everything they have.

In short, automated investment platforms lack the ability to guide clients on the right way to manage their finances because they are the product of software engineering and algorithms, not hard-won product expertise, street smarts, and ethical wisdom.

Thus, if you are a financial advisor who’s concerned about your future in this technology-driven marketplace, don’t be. Always remember that you have something that the robo-advisors will never have—the ability to detect worry on a human face, fear in a client’s voice, and confusion in a person’s eyes and to respond with reassurance, compassion, and integrity. Not only do these qualities serve your clients well, they serve your business well by preventing errors-and-omissions insurance claims.

By the same token, you don’t want to ignore the advance of the robo-advisors. Experts suggest adding financial-planning services that don’t lend themselves to commoditization and ramping up the “high-touch” support you provide to clients. Most important, don’t try to compete on the robo-advisors’ terms (automation, low cost, etc.). Stress your ability to assess complex problems and deliver highly customized solutions, all with an ethical human touch. That’s a card you can (and must) play—and we’re sure it’s a winning one.

For more information on affordable errors and omissions insurance for low-risk financial advisors, please visit E&OforLess.com. For more information on ethical business practices, visit the National Ethics Association’s Ethics Center.