It is time to win back investors’ trust

To say that financial advisers face an uphill battle in regaining the trust and confidence of the investing public is a serious understatement.

Not since the Great Depression or the period of stagflation in the early 1970s has an economic recovery been undermined by so much pessimism. Although every downturn is followed by a period of anxiety and uncertainty, this environment is exceptional because the recession was so brutal and because it struck so close to home for many investors, both figuratively and literally.

Today, many Americans are still coping with unemployment and living in homes that are worth far less than they paid for them.

Rightly or wrongly, even more Americans — thanks to the Bernard Madoff con and the alleged Ponzi scheme perpetrated by R. Allen Stanford — harbor deep feelings of doubt and suspicion of all things related to financial services, including financial advisers.

According to Hearts and Wallets’ Quantitative Panel 2010, nearly 60% of 4,000 mid- and late-career investors 28 to 64 said getting ripped off by their advisers is their biggest fear. Likewise, almost half of the surveyed investors near or in retirement are afraid of being cheated by their financial professionals.

As a result of this mistrust, more investors are defining themselves as “self-directed.”

Indeed, 54% of the respondents identified themselves as self-directed investors, up from 29% two years ago. Similarly, 38% of pre- and post-retirees said that they are self-directed, up from 36% in 2008.

In the face of such findings, it is tempting to wax poetic about the inherent unfairness of labeling tens of thousands of good and honest advisers as untrustworthy because of the malicious deeds of a relative handful. But let’s face it — investors have grown tired of the “one bad apple” argument and no longer buy it.

The more prudent course of action is to accept that investors no longer trust advisers, and begin taking steps to turn that around.

The groundwork for that endeavor is already being laid.

The board members of the Certified Financial Planner Board of Standards Inc., for example, last week approved plans to raise the annual fee that certificants are charged by 80% in order to fund a $9 million consumer advertising campaign aimed at promoting the profession and highlighting the CFP designation.

The Financial Planning Association in January will step up its efforts to promote a fiduciary standard of care among advisers.

More important, however, are the actions that individual advisers can and should be doing to regain clients’ trust.

First, above all else, put the client’s interests first. Second, disclose and manage all conflicts of interests, and always act with due care and in utmost good faith.

Finally, learn to police yourselves.

Train wrecks invite gawkers, so it is important to identify and stop advisers who play fast and loose with rules and regulations. If the practices of a particular adviser raise suspicion, bring it to the attention of a regulator right away.

If your concerns fall on deaf ears raise them again and again.

Be a pest, a gadfly.

Remember, regaining investor trust and confidence is infinitely more difficult than losing it.