Education underpins transparency underpins trust

by Abdur-Rehman Mangera | 29,Oct,2024 | Bryte, Personal Financial Planning, Q4 2024

George Brown

Trust, usually underpinned by transparency, is a key pillar of good relationships. This is especially true in the relationship between a financial services provider and their clients. Education has an important role to play in this relationship too, and it does not always get its rightful share of coverage.

Financial advisers operate in an environment where clients rely heavily on their knowledge and expertise to help them to set goals, manage their wealth and navigate complex financial systems. An added complexity is that sometimes a financial adviser’s interests do not align perfectly with those of their clients, such as when the sale of certain products is incentivised.

 

The fiduciary responsibility of advisers in South Africa means they are legally required to act in a client’s best interest, but sometimes this misalignment of interests causes a conflict. Transparency is a key tool to negotiate this complexity.

Basic transparency refers to the openness and clarity with which financial advisers communicate with their clients. This includes avoiding jargon, explaining products and processes in plain language, detailing costs, disclosing potential conflicts of interest, providing clear information about risks, and being upfront about any limitations in their scope of knowledge or services. Full transparency goes above and beyond this to encompass giving a client full sight of all the information about any recommendation and educating them about alternatives.

Not merely transactional

Full transparency might mean the client chooses an alternative, meaning the adviser doesn’t make a sale. The adviser can, however, be comforted by the fact that their honesty and openness will build trust. Clients tend to feel more confident when they believe that the advice they are receiving is not merely transactional but, rather, is tailored to their long-term financial well-being. This is particularly true in this industry where commissions and bonuses have been known to inform behaviour in the past.

Transparency around fees and commissions remains a contentious issue in financial services. Many have asked why the need for secrecy if all parties in the industry are simply acting in the best interests of clients even when it denies them short-term gains. There are those who argue that advisers should be 100% transparent about how the various compensation structures work, notably when they potentially influence product recommendations.

Full disclosure of all fees, commissions and any potential conflicts of interest is honourable in theory but very complex in practice. On the one hand, it is argued that openly discussing financial incentives allows clients to make informed decisions about whether their adviser’s recommendations are truly in their best interest. On the other hand, there are those who say that for clients to understand what the different compensation structures mean for them requires a level of expertise that most of them don’t have. Sharing too much information with clients can be counter-productive if it becomes confusing, confronting even. Why pay an adviser if you have to grapple with all these facts and formulas, they might reasonably ask.

An expert financial adviser should be able to skilfully navigate this complexity on a case-by-case basis. The bottom line is that if a client wants to know how their adviser is paid and understands how that might influence the recommendations they make, they should be allowed access to this information. Ideally, they will also be given some guidance around making sense of it. Many clients will not ask again once they have interrogated it once; many will never ask.

Trust is a two-way street

Explaining the pros and cons of a variety of products and solutions, rather than presenting a single recommendation, can help clients to understand which solution would be a better match for them and their financial goals. Also, the more informed a client is, the easier it should be to persuade them to act in their best interests – an outcome that is best for everyone involved.

No one likes to be told a subject is too complex for them, and being told that ignorance is bliss (or in our best interests) usually adds insult to injury. When a client feels that their adviser is committed to improving their knowledge and financial literacy, they are more likely to believe they are working in their best interest.

It is important to keep it in mind that trust is a two-way street. It can be difficult to trust a client enough to give them all the information and believe that, with enough information and guidance, they will make the best choice. But it is their money, after all.

Understanding what is happening with their investments is a key aspect of taking responsibility for their financial future, which is what everyone should ideally be doing. Being totally in the dark about what is happening to your life savings is far from ideal, no matter how good or dedicated you believe your service providers to be. That relationship might change or break down at any time. Ignorance and blind trust make people vulnerable to unscrupulous players. History is littered with examples of people who were schooled in blind trust by trustworthy types only to find themselves at the mercy of more unscrupulous people later.

Knowledge is the basis of good decision-making. Education can help clients to protect themselves against making bad decisions. It can also solve many of the issues that erode clients’ confidence in their advisers. Knowledge is not only power, it is the bedrock of trust.

Take a long-term view

Just as the financial services industry asks clients to be patient and take a long-term view so should the advisory community keep eyes fixed on the long-term. This is best done by investing in long-term relationships, even to the detriment of short-term gains. Clients will be more inclined to stay with an adviser who demonstrates a commitment to informing and empowering them. Taking a patient, long-term approach to the relationship will help to align the adviser’s goals with those of the client. A long-term view will pay dividends (as we tell our clients).

It is also imperative that everyone in the industry keeps themselves ‘educated’, too. Keeping up to date and informed on changes in regulation as well as trends in the wider industry in South Africa and around the globe is important. In particular, helping clients understand new regulation is key to building trust in the financial services sector as a whole.

This is crucial in South Africa’s fast-changing financial services environment. A deep and up-to-date understanding of current regulation will discourage box-ticking and focusing on scorecards, rather than engaging with the spirit and intention of the laws, particularly around transformation. Staying informed and keeping clients informed will go a long way to reinforcing trust.

Even if the interests of clients and their various service providers aren’t always perfectly aligned, we need to remember that as an industry, we have nothing without our clients. We are all in it together.

Abdur-Rehman Mangera
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