Family Office Exchange, a provider of advice and guidance to ultra-wealthy families, and U.S. Trust Corp., a New York banking company that caters to the wealthy and whose fund family has been touched by scandal, have developed a set of tools to help investors identify and deal with conflicts of interest among investment advisers.
Sara Hamilton, the chief executive officer of the Chicago company that calls itself Fox, for short, said, "The challenge was to make it easier for an investor to determine where there was a conflict." It was seen as most helpful to offer clients a set of questions that would address any conflict of interest, she said.
Though the tools were developed for the high-net-worth market segment, they are available to all investors and advisers, said Loraine Tsavaris, a managing director and the head of the family wealth group at U.S. Trust. A questionnaire that can guide investors through the selection of an adviser and identify potential conflicts of interest, a proposal for adviser performance standards, and a classification system to help investors understand issues that include compensation incentives are among the tools jointly developed.
At a Fox Thought Leaders Roundtable in Chicago last month, wealth advisers including investment managers, fiduciaries, and brokers identified four main indicators of conflicts of interest between an adviser and client: lack of alignment of interests, lack of effective disclosure, preferential treatment, undisclosed financial incentives.
Conflicts of interest and trust are growing concerns among high-net-worth investors, Ms. Tsavaris said. U.S. Trust's 2004 affluent-investor survey found 95% of respondents reporting that trustworthiness was the most important factor in their selection of a financial adviser, she said.
"The good guys like playing by the rules, are not afraid of the rules," said Ms. Tsavaris, regarding the likelihood of more financial institutions adopting these tools.
Last year, Charles Schwab Corp., which bought U.S. Trust in 2000, revealed that the Securities and Exchange Commission and New York Attorney General Eliot Spitzer were investigating allegations of market timing in Excelsior Funds, the fund family operated by U.S. Trust. Schwab said it fired two junior employees who had deleted e-mails related to the incidents.
Ms. Hamilton agreed that trust is crucial in the wealth management sector, as well as with investors in general. She said she was surprised, though, that 95% of affluent investors cited trust as the most important issue in selecting advisers. "You wouldn't have found that four years ago," she said.
When Fox asked its clients what they would most like to know about their financial institution - how much advisers are paid, who is on the other side of the transaction, or whether there are any limitations on the advice that can be given - clients overwhelmingly wanted to know how much advisers are paid, Ms. Hamilton said.
U.S. Trust and Fox, which both serve clients with more than $50 million of liquid assets, chose conflict of interest as the topic for the October roundtable because "the concept of trustworthiness is on the minds of these individuals," said Ms. Tsavaris.
She said Fox and U.S. Trust "had the joint goal of getting affluent individuals to ask the right questions to get the right information."
Asked whether these tools should be used by other banks, Ms. Tsavaris said, "All financial advisers should be willing to have, willing to answer these types of questions." Banks and advisers will "hear from wealth owners more and more" on the topic of trust, Ms. Hamilton added.
U.S. Trust is a wealth management company that provides planning, investment management, fiduciary, and private banking services; it had $104 billion of assets under management at Sept. 30.
Fox and U.S. Trust now plan to do a year-long study of risk management, Ms. Hamilton said, because assessing family risk is a topic of interest among its clients.
