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Home / Money / Personal Finance /  Opinion | You shouldn’t give or receive trust lightly

Trust lies at the heart of any successful long-term relationship. Yet, trust is not to be given or received lightly, but to be earned through delivering results over the long term. Further, the nature of trust in today’s online world is changing substantially.

A good example of these changes is a doctor-patient relationship. Earlier, the relationship operated purely on trust. One reason for this was the huge information asymmetry between the doctor and patient. A doctor was equipped with far more knowledge than the patient, leaving the patient vulnerable. Today, as information has become more broad-based, there is less information asymmetry. A patient can research extensively using online tools and question a doctor’s judgement. This has caused the implicit trust in that relationship to diminish. Trust between the doctor and patient deepens over time when the doctor shares his knowledge with the patient about his ailment, answers the patient’s questions, establishes that there is no conflict of interest, and involves the patient in determining the future course of treatment.

The situation is similar in a financial advisor-client relationship. Today, there is widespread information about financial concepts, products and their performance. Hence, when an advisor wishes to be trusted by his client or when a client bestows his trust on an advisor, they must invest the time and effort to understand the rationale behind the advice and its implications.

I believe trust is of two kinds—one where trust is given lightly, the onus of the financial decisions falls squarely on the planner and absolves the client of responsibility; and another where the adviser and client work collaboratively and constructively over a period of time to achieve financial goals.

In the first case, clients will transfer trust to the planner early on but will withdraw that trust at times of strife. They will adopt a “hands-off" approach while the going is good and “trust" the advisor to do his job well. But when the going gets tough, they will become “hands on" and “distrustful".

In the second approach, the client and advisor work together to establish a level of comfort with each other. They are both on the same page on the objectives of the plan, transparent about their working methodologies and clear that there are no conflicts of interest. Trust is not so much about an advisor being friendly and approachable as much as it is about him displaying fiduciary behaviour in all his actions, to always act in the client’s interest. It is the adviser’s job to add value by using his knowledge, expertise and skill to help clients make better financial decisions. Absence of fiduciary responsibility will lead to immediate trust deficit, when an advisor sacrifices his client’s well-being to promote his own.

An advisor’s role is to create a high-quality portfolio based on his understanding of the client’s goals and what it takes to meet those goals comfortably. Often, a part of a client’s portfolio is exposed to the market to meet long-term goals. If the risk in the portfolio is explained well and the client is briefed about the volatilities that the portfolio may experience, then market swings will not perturb the client as much. However, it is also true that an advisor can go wrong either in the assumptions he makes to create a plan, or in his selection of instruments. An honest advisor should admit and readily take responsibility for his mistakes. Owning up builds long-term trust and credibility.

No one cares more about their money than clients themselves. By merely trusting an advisor without understanding the soundness behind portfolio decisions, the client essentially transfers the effort of monitoring his portfolio to the advisor.

It is important for an advisor to establish the basis of trust in the relationship. The best relationships are set up if the client and advisor act as partners in the journey to help them reach their goals comfortably and clients take intellectual ownership of financial decisions. It is in these situations that the client and advisor can truly place their trust on each other. This partnership is important because if this relationship were to break in the future, the client must have a strong understanding of his portfolio and the instruments within to either manage the portfolio himself or to transition it to the next advisor.

Trust really boils down to transparency and honest disclosure from both parties. A client should be transparent about his fears, motives, commitment to goals, and his expectations from his advisor. An advisor should be transparent about his processes, motives, fees and his expectations of the client. Doing so would determine if there is a good fit between the two and empower both parties to have clear rules of engagement. This will augur well for a more productive and trusting relationship.

Priya Sunder is director & co-founder of PeakAlpha Investments

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