Finding balance as a financial advisor

Like most MBA students in the 80s, I was certain that I was destined to become a stock broker. So you can imagine my anticipation when I landed a part time job at the most prestigious firm at the time and my boss told me that he would explain the true essence of the stock brokerage business. He explained that I should not be fooled by the suits. He was actually running a hair dresser shop where each chair had a fixed cost that the broker had to cover with fees. He had this daily routine where he asked all the brokers at the end of the trading day how much they had earned. We all knew what was expected of us and the silence when we had to confess that we had not earned our chair was chilly. I felt the same chilly sensation several years later when I interviewed an advisor for a major retail bank. The interviewee explained that the new legislation on investor protection had her to dodge sales orders from clients. The fear of being incompliant had her to perform an exhaustive customer profiling each time she was to execute any order on behalf of her clients. The purpose of this blog post is not to ridicule any of the individuals or companies but to illustrate the challenges in finding the right balance with several conflicting interests on financial advisors. I will argue that we have added new dimensions to the balance act when we consider the evolvement of legislations and the increased advisory content in different customer channels.

New legislations are disruptive. Pwc performed a survey last year where they asked top management at financial institutions in Europe on their preparations to the MiFID II directive. The legislation is a sequel to MiFID (Market in Financial Instruments Directive). The sequel builds on the framework established in MiFID I to classify clients so it is really interesting to note that the biggest concern expressed in the survey is the Investor protection issue (see chart below).

When MiFID was enforced, all financial institutions rushed to develop risk surveys so that they could classify their clients on what financial products were suitable to their risk appetite and understanding of the financial markets. It is evident that this fit assessment (“Passandebedömning”) has to be revisited to ensure compliance with the revised legislations. But I hope that institutions will take the opportunity to challenge their customer profiling process to ensure its effectiveness by asking themselves some basic questions:

  • What is the purpose with the risk profiling? Ensuring compliance or streamlining the advisory process?
  • Should the risk appetite be defined per client or for each of the client’s investment purposes/portfolios?
  • Are the client expectations managed properly?
  • Is the MiFID classification “Retail Clients” adequate or is a more granular approach needed?

Advisory services are not restrained to relationship managers in the branch any longer. Many of the banks have designated and certified advisors in the contact centers to ensure that their multichannel customers get qualified advice on complex products at all times. The fact that the advisory relationship is divided between individuals is driving the need for improved internal efficiency. The information on the risk profile, fit assessment and previous discussions with the customer has to be available to all advisors. The challenge is not in gathering the information in a CRM system but presenting it in an efficient manner so that advisors that do not know the client can offer advice without having to browse the documentation from previous sessions.

To summarize, it is getting harder for advisors to find the appropriate balance to serve as trusted advisors. New legislation and the emergence of multichannel advisory services are adding the dimension of effectiveness and efficiency to the awkward balance act of an advisor as presented in the picture below:

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