Portfolio Perspective

What actions help make a financial advisor trustworthy?

Key Points
  • Factors related to trust, such as referrals or reputation, are key reasons investors choose a particular financial advisor.
  • As robo-advisor ranks swell, it's more important than ever for financial advisors to distinguish themselves and their skill sets.
  • A presence on sites such as Facebook and Twitter makes advisors easy to find and enables quick and frequent responses.

The first question on any potential client's mind about an advisor is: "Can I trust you?"

"Trust-related factors — such as referrals, reputation, experience and relationships — are the leading reasons why investors begin their relationships with their primary financial services providers," according to the authors of a recent study by Cerulli Associates.

But when clients refer an advisor to their friends, do they merely say the advisor is "nice" or "smart"? Or do they know what objective factors to cite to illustrate the advisor's trustworthiness?

A sense of trust is a primary factor motivating the decision to begin a financial relationship.
Stígur Már Karlsson | Musketeer | Getty Images

Several advisors shared the objective actions they take to engender client trust.

"Clients have some unspoken questions," said Kathleen Roth, certified financial planner with Waterstone Financial Services. "Can I trust you? Are you committed? Is this a calling or a job? Do you care about me?"

She described how some of her activities answer these questions.

"The way we present information — for example, using Mind Maps — shows them that we're listening, we're truly trying to understand, we're providing insights, and we're empowering the client," Roth said. "They can say, 'My advisor makes sure I understand completely.'"

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Waterstone holds many events that signal to clients that the firm cares about them, she added. "They could be around non-financial life-related issues or just social time," Roth said. "We get to know our clients on a social level.

"We provide a social outlet that lets them know that we are real people, too."

How an advisor views the work transmits to the client, Roth said. "If it's your life's work, I think they know it," she said. "They trust that you will be there for them over time."

With the growing popularity of robo-advisors, there are even more reasons for advisors to differentiate themselves in terms of trust, said Winnie Sun, managing director and founding partner of Sun Group Wealth Partners.

"Nowadays, more than ever, potential clients are vetting us online," she said. "The key thing is [to] be very generous with information; it's important to be answering [unasked] questions."

Social media engenders trust, Sun said, because it provides accessibility on the client's terms. Having a presence on sites such as Facebook and Twitter makes the advisor easy to find and enables quick and frequent responses.

"Online, you can watch me and see how I respond and interact with people," she said. "People can see 'she's giving me something for free.'"

There is a wave of emotions that prospects go through. It comforts them to see that we make commitments and deliver.
Andy Seth
founding partner of LotusGroup Advisors

Another benefit of an online presence is the unspoken credibility of being quoted in a publication or recognized with industry awards, Sun said.

If an existing client is happy, it reflects — among other things — that your initial and continual communications are well received, she said. A comprehensive communication plan should include a written financial plan, a mapped-out investment plan, a scheduled-out communication plan and an ongoing daily social media plan, "reminding clients of who we are and what we do."

For his part, Andy Seth, founding partner of LotusGroup Advisors, said that "advisors can be formulaic about building trust."

Building blocks for trust

Educate your clients first. Teach them about the value of your services to help them link their financial decisions with their value systems.

Be as transparent as possible. Sharing fee structures, educational and employment background and your own values and goals helps clients feel comfortable and know what to expect from you.

Don't overpromise. Avoid the risk of under-delivering.

Stay involved. A good advisor/client relationship has similar qualities to a good friendship. Be readily available for meetings and client phone calls, sending regular personalized emails and hosting client events

Listen. Let clients know you understand and empathize with them before offering a solution to their needs.

Provide next steps. When an advisor has a planning process in place, clients know what to expect at each step of the way. This helps simplify the process for them and can ease feelings of uncertainty and stress.

— Source: Kevin J. Meehan, CFP, regional president at Wealth Enhancement Group

Seth subscribes to the so-called "Trust Equation," which states that "trust equals credibility plus reliability plus intimacy, divided by self-interest." He explained how he interprets the variables in his practice:

  • Credibility: "This can refer to demonstrable items such as professional certifications or civic leadership and engagement," Seth said. "Community involvement shows that I help people on my own for free."
  • Reliability: "There is a wave of emotions that prospects go through," he noted. "It comforts them to see that we make commitments and deliver."
  • Intimacy: "The more you show intimacy — for example, sharing your interest in social causes — the more they respond in kind," Seth said. "Understand that [in the advising relationship] you're asking them to be more vulnerable than you."
  • Self-interest: "This needs to be low," he advised. "The worst self-interest is conflict of interest. For example, how do you respond if the client takes funds from the portfolio to buy real estate?"

Seth advises advisors, "Demonstrate how high your numerators are and how low your denominator is, and you've built high trust."

— By Deborah Nason, special to CNBC.com