Trust is the glue of life. It’s the most essential ingredient in effective communication. It’s the foundational principle that holds all relationships.
– Steven Covey
I find incredible wisdom in this quote from Steven Covey, and the fact that trust is the essential foundation of every human relationship. As I was watching the coverage of the Republican convention last night, this reality really hit home for me. Time after time the various pundits and commentators on the broadcast made the point that the upcoming presidential election in November is likely to boil down to just one thing – which candidate do Americans trust more? Unfortunately, there appear to be trust issues on both sides of the aisle this year, but it seems that the candidate who can best convince people of his or her trustworthiness will earn the position as the leader of the free world.
This got me thinking about the concept of trust, and in particular how it relates to my profession – the financial services industry. For most people, the ability to have trusting relationships in any area of life is really important. However, when it comes to your financial advisor, or the institution you choose to handle your money, a relationship of trust is of paramount importance. It is the one ingredient that is absolutely necessary to working successfully with an advisor or a firm who would hope to manage your money for you.
As I thought about this, it occurred to me that there are actually 2 different levels of trust. A lot of people think of trust in the sense that “I know my advisor would never do anything to harm me”. In other words, they know that they are working with someone who would never do something to knowingly cheat them or do them wrong. I call this the “Madoff Test” – the knowledge that your advisor or money manager is not going to run off with your money. While this level of trust is obviously very important, it sets a fairly low bar. Unfortunately, this is the standard that most clients use, and as a result they trust their advisors – just a little, but probably not enough.
There is a higher standard of trust, which is the trust that you should expect from an advisor who pledges to act as a fiduciary for you and your family. By definition, an advisor who commits to act as a fiduciary for you is bound to always act in your best interest. My informal definition for this is that your advisor should handle your money and financial decisions as you would do for yourself, if you had the benefit of all of the same knowledge and experience he or she has.
The first definition of trust is that you trust your advisor never to do the wrong thing for you. In the second definition, you trust your advisor always to do the right thing for you. These are not just two ways of saying the same thing, and there is a difference.
For anyone who follows the financial services industry, there has been a great deal of disruption in our industry about the debate over whether financial advisors should be legally held to a “fiduciary standard”. Recent regulations have passed in Washington which appear to be moving our profession in this direction, and there may come a day soon when all financial advisors will be legally bound to this standard, which is a welcome development. In the meantime, as the candidates in Washington battle it out over who is more trustworthy, perhaps now is a good time to revisit the issue of trust in your advisory relationship to make sure it meets your standards. Is the person managing your money trying to not do the wrong thing, or are they always trying to do the right thing? (Hint: they should be trying to do the second one like we do)