Are You a Customer or a Client?

One of the most important things to know about your financial relationship is whether you are a customer or a client. The differences may be subtle or obvious, but understanding them and feeling confident in the role you have accepted is vital in determining the quality of your financial future. As a customer, you are pitched to, or persuaded to buy. As a client you are advised. ‘K’nowledge and ‘R’esponsibility align differently in the two dynamics as illustrated below:


In the sales transaction (on the left in the figure above), the Salesman has greater Knowledge about the product or service while the Customer is Responsible for deciding if it adequately solves his or her problem. In financial services transactions, the Broker is responsible only for ensuring that the Customer is suited for the investment product, not that the product is necessarily in his or her best interest. And, most often, consideration of the merits of the product can often become so focused on the product and its attributes, that little or no consideration is given to whether the product aligns well with the customer’s total financial picture.

In the advice transaction (on the right above), the Advisor/Fiduciary is generally more Knowledgeable and Responsible. He or she is required to give advice that is in his or her client’s best interest and free from any conflict of interest that is not disclosed. This relationship can only work well when Responsibility is shared by the client in full and open partnership. When the client adequately shares information about his or her goals, priorities, risk preferences, and any other material circumstances, the advisor is better informed to provide optimal advice.

The obvious problem with the broker/sales model is that advice or counsel becomes transactional and as transactions increase, the broker’s pay increases, usually to the detriment of his customer. The transaction/commission structure makes it difficult for any professional to do the right thing for his customers when his compensation, maybe even his livelihood, is conditioned upon the number and size of products he sells in a day, week, or month. Yesterday’s Wall Street Journal demonstrates just how big and far-reaching the problem is:

“Regulators and prosecutors have been investigating whether Bank X pushed employees too hard to meet sales goals while failing to do enough to prevent questionable behavior. Bank X, like other banks, has pushed cross-selling of multiple products to its customers to bolster sales and profitability at a time when both have been under pressure from a sluggish economy and super low interest rates. Many banks encourage their customers to buy more than one financial product—cross selling—but Bank X has been more upfront about how much it does. Bank X publishes in quarterly reports by division how many products it sells to its customers, on average. Some current and former employees say they have met several times a day with colleagues to discuss sales goals, and many branch employees receive bonuses related to meeting or exceeding goals.”

Earlier this year, the U.S. Department of Labor expanded the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA) in which broker-dealers, investment advisers, insurance agents, plan consultants and other intermediaries are treated as fiduciaries to ERISA plans and individual retirement accounts (IRAs). The changes will have deep and far-reaching effects on the financial services industry and its customers and clients, hopefully for the better.

In the words of the Department of Labor (from their website): “While many advisers do act in their customers’ best interest, not everyone is legally obligated to do so and some do not. Many investment professionals, consultants, brokers, insurance agents and other advisers operate within compensation structures that are misaligned with their customers’ interests and often create strong incentives to steer customers into particular investment products. These conflicts of interest do not always have to be disclosed and advisers have limited liability under federal pension law for any harms resulting from the advice they provide to plan sponsors and retirement investors. These harms include the loss of billions of dollars a year for retirement investors in the form of eroded plan and IRA investment results, often after rollovers out of ERISA-protected plans and into IRAs.”

If you work with a fee-only Registered Investment Advisor, like Beacon Wealthcare, you are already where the government wants all investors to be – quite simply, where their interests come before the self-interests and profits of their financial service providers. But just as importantly, responsibility rests equally with clients as with their advisors in an ideal financial relationship. Advisors must understand the goals, priorities, and resources of their clients in order to plan for them to confidently achieve their important goals. No one hits a target that does not exist.