Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
After nearly 30 years of consulting with advisors, representing one-person shops, broker-dealer reps and multi-billion dollar wealth-management practices, there is one question every advisor should hope their clients ask. But too often they are ill-equipped to answer it.
I’ll reveal that question in a moment. First, however, let’s look at why this is so important.
As advisors strive to differentiate themselves amongst what has become a commoditized marketplace for financial advice and services, it has become increasingly important to cultivate loyal and happy clients. Clearly, acquiring new clients is essential to growth, however, it’s the retention of those clients that creates stability and long-term equity.
Advisors typically have many “Newton’s first law” clients – those who remain simply due to inertia until moved by an outside force better known as a competitor. Other clients may be of the “Nomad” variety – fickle and vulnerable to seeking a new advisor due to isolated service issues or underperformance.
In December of 2013, PriceMetrix, a research firm providing practice management analytics for advisors, published a popular and detailed analysis of the characteristics of both advisors and clients that drive client retention.
There is clearly no shortage of articles, white papers and blogs detailing top strategies advisors can employ to facilitate client retention and satisfaction. However, what is often missing is the answer to this question: How do you know if any of these strategies are working?
Clients often tell advisors how much they love their statements, appreciate their responsiveness and how pleased they are with their portfolios performance. All nice things to hear, but is there a metric that indicates whether an advisor truly has a loyal client through good times and bad?
Here is that key question that every advisor should hope they are asked by their clients:
Would you consider being named as the successor trustee in my trust if something happens to me?
It’s hard to imagine a better way a client could demonstrate their ultimate loyalty than asking their advisor to fulfill this role. That would elevate the advisor to the role of “alpha position” in the financial services jungle.
Even more critical is how the advisor responds. Let’s take a look at two popular options:
Yes, I would be honored
Although tempting, this exposes the advisor to several potentially damaging issues:
- Acting in both the role of trustee and advisor will likely create a conflict of interest. For example, would the advisor be compelled to fire themselves or their firm for poor performance? Who would determine if their fees are reasonable? Does the advisor have insurance that covers the trustee role? And, do they have the expertise and understanding to administer and interpret the trust provisions?
- In 2009 the SEC adopted custody-rule amendments stating that advisory firms acting as trustees will be subject to surprise audits at the firm’s expense. Are you prepared for this?
- Many broker-dealer and wirehouse platforms explicitly prevent their advisors from acting as a trustee unless it is per the request of a family member.
No (for any of the previous reasons), but thanks for considering me.
This answer avoids the concerns above, but leaves the advisor vulnerable to future heartbreaks:
- Often, the client will be steered to a traditional bank-trust company that routinely provides trustee services while also managing the assets of the trust. Consequently, should the bank ever accept the trustee role, the advisor will likely lose the account.
- The client selects a family member or close friend. In addition to typically being underqualified to act as trustee, they will frequently fire the advisor and try to manage the assets themselves or hire their own preferred advisor.
- The client may seek out other providers to fulfill the role and unduly expose the advisor to competitors.
Now let’s take a look at the answer every advisor should be prepared to give:
No (for any of the previous reasons), but thanks for considering me. May I suggest considering an independent corporate trustee that will allow me to continue managing the assets after your incapacity or death?
This response paves the way for several extremely beneficial outcomes:
- Avoids all compliance, regulatory, fiduciary, and ethical challenges associated with being a trustee.
- Further enhances the advisors “alpha position” in client’s circle of advice providers.
- Positions the advisor to also recommend a preferred estate-planning attorney for drafting of documents.
- Allows the advisor to participate in the consultation with the proposed trust company, attorney, and client.
- Ensures the advisor’s long-term role in managing assets for the client and their beneficiaries
This solution is now possible given the dynamic changes to trust laws since the early 1990s, which enhanced the ability of corporate trustees to bifurcate the management of trust assets from the traditional administrative duties required of the trustee. Advisors have a plethora of choices when it comes to partnering with an advisor-friendly, unbundled corporate trustee. Without establishing a preferred partnership with one of these providers, the advisor will be forced into selecting one of the first two responses and all the ensuing misery and disappointment likely to follow.
Mike Flinn is vice president and national sales manager for BOK Financial Advisor Trust Services. As a founding member of one of the original “advisor friendly” independent trust companies in 1991, and widely considered a pioneer in this rapidly expanding arena, he consults with advisors in the strategies and questions necessary to engage clients in the successor-trustee dialogue. During his career, he has enabled advisors to capture and manage over $5 billion in new trust assets.
Read more articles by Mike Flinn
