First Do No Harm
Senior Managing Director
Investment Research & Strategy
Fortigent, LLC
March 17, 2009
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In A Modest Proposal, written in 1729, the noted Anglo-Irish satirist Jonathan Swift suggested that the impoverished Irish could ease their economic troubles by selling their children as food. He went so far as to suggest that, “A young healthy child well nursed is, at a year old, a most delicious nourishing and wholesome food, whether stewed, roasted, baked, or boiled; and I make no doubt that it will equally serve in a fricassee, or a ragout.”
In today’s chaotic market environment, many wealth advisors find themselves impoverished as well – impoverished with respect to their clients’ trust.
Advisors survived the market collapse in 1987 following the systemic failure of “portfolio insurance”; they survived the market chaos of 1997-1998 following the “Asian Contagion” and the collapse of Long-Term Capital Management; and they even survived the research analysts’ scandal and the bursting of the tech and telecomm bubbles in the early 2000s.
But 2008 brought a collapse of the global markets, the destruction of trillions of dollars of personal net worth, the failure of asset allocation and the diversification it preaches and, perhaps worst of all, the moral failure of the repugnant scandals involving Bernie Madoff, Arthur Nadel, and Allen Stanford.
Advisors were left questioning their long-practiced “buy-and-hold” investment philosophy
This “perfect storm” of events created a crisis of confidence among investors. Many investors no longer trust their wealth management professionals. Instead of addressing the long-term financial objectives of their clients, many advisors find themselves defending against the accusation, “Prove to me you are not Bernie.”
How does a wealth advisor demonstrate their integrity without sounding, well, defensive? Should they adopt a Swiftian solution and fricassee their junior analysts or turn their baby bankers into a “delicious ragout”?
Tempting perhaps but, fortunately, no.
One useful framework for addressing this issue is presented by industry consultant Charles Green, who offers the following “trust formula”:
Trust = (Credibility + Reliability + Intimacy) / Self-Interest
From a wealth management perspective, this simple formula illustrates the loss of trust created by industry-inherent conflicts of interest, such as selling proprietary products or the more insidious agent / fiduciary paradox – the conflict faced by all wealth managers who are
- Hired by their clients under an assumption that they will always act in their clients’ best interests, but
- Are paid and rewarded by their employer for bringing assets into their firm and/or selling revenue-generating products.
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