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Facing disconnect between investor wants, advisor deeds

Strong investment returns in an investor's portfolio used to be all that mattered for an investment advisor. Boy, have things changed.

Yes, strong returns are still hugely important, but those alone are not enough for investment management professionals to earn investors' trust and loyalty. The minute your performance turns, investors will drop you like a hot brick if you have not earned their trust on a range of other issues that matter more than ever.

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If you are an investment manager, what should worry you most of all — according to a new study by CFA Institute and Edelman Berland titled "From Trust to Loyalty: What Investors Want" (to download, click here) — is the huge gap between what investors say they want and what the investment management industry is delivering.

CFA Institute looked deeper into what investors want from their investment advisors and what actions will help investment advisors build loyalty with investors. The study asked about 26 key issues, including "fee transparency" — how much investors are paying and what they are paying for — and its importance when picking and keeping an investment manager. What really stood out was the finding that transparency ranks above investment returns in terms of importance to investors.

What is particularly troubling, and should serve as a wake-up call to financial professionals, is that the industry is performing miserably, in terms of explanation and execution, for seven of the top issues most important to investors overall, including protecting a portfolio from losses and fee disclosure.

Many advisors reading this might think, "That can't possibly be my firm." Think again, since it's apparent that self-awareness is not a strong suit overall of the investment management business.

"Given its importance to the lives and futures of millions of savers, the profession of investment management should lead not settle."

According to the 3,800 financial professionals responding to the survey, clearly explaining all fees and costs before they are charged to a client is the No. 1 most important thing you can do. Investors want regular, clear communications about fees and upfront conversations about conflicts of interest.

The biggest gaps between investor expectations and what they receive relate to fees and performance; clients want fees that are structured to align their interests, are well disclosed and fairly reflect the value they are getting from their investment firms.

When asked how well the industry is delivering on this element, more than half responded negatively, revealing a 30 percent gap between importance and execution. Of the other six things most important to investors, such as charging fees that reflect the value a customer gets from the relationship and forthrightly disclosing and managing conflicts of interests, the gap between importance and delivery continued to be at or near 30 percent.

As an industry, we have a convenient way of passing things like this off as inevitable. It is chalked up to the same old Wall Street vs. Main Street distrust and the perpetual suspicion of people who deal with money.

At some level, however, we know there are serious fault lines in our industry. As professionals, if we fail to recognize them and work with the same energy we bring to investing to try and resolve our shortcomings, we fail — both as professionals and in delivering value to a society of savers and retirees.

You might ask yourself what we are good for. It is not a far-fetched notion for any of us in this industry, no matter how good advisors believe themselves to be, to take stock and recalibrate.

How? Through higher levels of transparency, enhanced efforts to communicate strategies and fees and a true sensitivity to the needs of the client. Seldom have we seen such great disconnect between an industry that feels it is adequately serving clients and the very different reality that a customer experiences.

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Given its importance to the lives and futures of millions of savers, the profession of investment management should lead not settle.

It's essential for those in the investment industry to take steps today that not only strengthen client relationships but also help advance the investment management profession at a critical time in its evolution.

— By Kurt N. Schacht, a chartered financial analyst and managing director of Standards and Advocacy at CFA Institute