Over the past months, during the various webinars that I did, I have been asked this same question several times: How does Providend ensure that our client advisers always do the right thing for clients? I answered that there are three ways we do it. Firstly, by our compensation structure (we are fee-only, and our client advisers are salary-based). Secondly, we have an institutionalised advisory and investment management process and thirdly, by building a strong firm’s culture.
As I have previously shared my opinions in this column a few months ago on how the compensation structure of advisory firms and their representatives will affect conflict of interest in advice, in this article, I will focus on the importance of institutionalising advisory and investment management process as well as building the culture of an advisory firm.
Institutionalising Advisory and Investment Management Process
Many financial advisory companies are a collection of agencies run by individual managers with their representatives. These representatives (reps) are self-employed and are responsible to find clients, provide insurance, investment, estate planning, do the investment management, the administration, service their clients and even perform marketing activities all on their own. Their managers earn an overriding commission for providing trainings, motivation, compliance oversight. The companies mainly provide compliance support, obtain distribution agreements with insurers as well as investment platforms so that their reps can recommend insurance and investment products from these insurers as well as the platforms. The company also provides technology support, office administration, and office space which actually the reps and their managers have to pay for since they are self-employed and running their individual advisory businesses. In a way, they are renting the workstations from the company.
Some advisory firms provide investment support including investment trainings, delivering market outlooks and building theoretical portfolios. Except for a few companies, most do not perform investment management centrally. Even then, there is no compulsion for their reps to use these portfolios. The reps can also decide on the products they want to sell to their clients. In a nutshell, reps view their companies as a platform for them to do their business. To them, the clients are theirs and they can leave their company anytime for another, bringing along their clients and in most instances, the commissions due to them as well.
Because the process is not institutionalised, plenty of issues can arise. For example, if there are 100 reps in the company and each rep has say, 300 clients, there will be a total of 30,000 clients in the company. Since every rep can decide their own planning philosophy, methodology, assumptions, portfolio asset allocations and products, it is very difficult for the company to ensure that every advice dished out to each of the 30,000 clients are consistent.
In the area of investment management, during difficult markets, the advisory firm will find it difficult to know what actions to take for clients because there is no consistency in asset allocation and product decisions and firms may not even know the rationale of each rep when making those decisions. In such cases, the firm will then have to leave it to their reps to take the appropriate actions, if any. However, a rep cannot be an expert in every area of advisory and investments and still have the time to do the sales, marketing and administration themselves. Something will have to give.
While the company can ensure compliance, compliance is a hygiene factor whereas consistency in the quality of advice is the differentiating factor. If a company cannot standardise how advice is given and how investments are managed, it cannot define what is quality and what you cannot define, you cannot supervise and measure.
Succession is another issue. If a rep decides to leave the business or retire, what will this mean for the clients if the new rep who takes over has an entirely different planning approach and investment philosophy?
At Providend, our advisory process is institutionalised and investment management is centralised. Every client adviser must use the same planning methodology based on the same philosophy. Everyone must follow the planning norms written in the adviser’s planning guide. Every client’s investment portfolio is centrally managed by the investment team. Client advisers are also not allowed to make product recommendations based on their preference; these are decided by specialists in the Solutions and Investment teams. Therefore, if the same client consults with three different client advisers and tells them exactly the same thing, they will walk out with the same wealth management plan and recommendations. And if a client adviser leaves or retires, another client adviser will be able to take over the clients’ file seamlessly. This is our way of ensuring consistent advisory quality.
Building a Strong Firm’s Culture
If the compensation structure and institutionalisation of advisory and investment management represent the hardware of an advisory firm, its culture serves as the software.
There are four layers in an organisational culture:
- Values – Written principles that an organisation wants to live out.
- Beliefs – These can be discerned in how people discuss the issues the company faces.
- Behaviours – Day-to-day conduct in which an organization operates and is visible to both people inside and outside the organisation.
- Paradigms – The set of assumptions held in common and often taken for granted in a firm.
For us, these four layers of culture are defined by our core values (how we should live) and the corporate purpose statement (what we are living for). When you speak to anyone at Providend, they can articulate our culture because we consistently communicate and reinforce it. This includes discussions during the recruitment process, staff orientation, company retreats, and townhall meetings. We organise activities that allow us to tangibly live out our culture on a daily basis. We recognised people who embody our culture. Conversations in advisory chatgroups and in the office are always about how to better solution clients’ needs, technical subjects and doing the right thing for clients. Discussions about sales awards or titles are considered out of place.
Management guru Peter Drucker once said that “culture eats strategy for breakfast.” While a well-structured compensation structure may mitigate conflict of interest and an institutionalised practice can control quality of advice, a strong culture is the driving force when no one is watching. You need to be in a community that believes in doing the right thing for clients, knows exactly what the right thing is, have people who will hold you accountable and be celebrated when the right thing is done.
Why do I write about this? I have spent a long time educating the public on personal finance through various channels. However, after more than two decades, I realised that having knowledge does not necessarily translate into the right actions. For most people, they will need a trusted adviser who will help them act on the knowledge obtained. If you are on a lookout for an adviser, I hope the above information provides you with practical handles on how to find one.
The writer, Christopher Tan, is Chief Executive Officer of Providend Ltd, Southeast Asia’s first fee-only comprehensive wealth advisory firm and author of the book “Money Wisdom: Simple Truths for Financial Wellness“.
The edited version of this article has been published in The Business Times on 23rd October 2023.
For more related resources, check out:
1. Mitigating the Conflicts of Interest in the Financial Advisory Industry
2. The Secrets of a Strong Providend Culture
3. S2E28: Banks vs IFA Firms vs Providend: How Are We Different?
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