For outsiders peering into the financial advisory, it’s common to assume that the primary of determinant of client satisfaction and length of a relationship with an advisor is the advisor’s proficiency in generating strong returns.
In reality, investment management acumen, or lack thereof, isn’t the biggest reason clients reduce or eliminate relationships with an advisor. Actually, various research and studies suggest performance-driven factors and returns are surprisingly low on the list of reasons why clients fire advisors.
Due to the fact that we live in a results-driven world, advisors may be apt to think the biggest reason clients depart is substandard portfolio performance. Understandable as that line of thinking is, it reveals the point that advisors likely missed the bigger picture. Translation: There are reasons why clients leave and the good news these issues are addressable. Remember, an ounce of prevention is worth a pound of cure.
Without further ado, let’s explore why clients fire advisors.
It’s Mostly About Quality (And Costs)
“Quality over quantity” is an overused phrase, but advisors ought not be dismissive of it because data confirm clients are concerned about quality and that extends beyond portfolio performance.
Morningstar recently polled 184 investors that fired advisors with just 11% saying they did so due to dissatisfaction with investment returns. However, nearly triple that amount said they left their advisor to quality of advice and quality of services.
“Clients don’t want an advisor who makes them feel like a number, so take the time to show that you see them as a person. A goal-setting exercise, like this master list, can help you and your clients delve deeper into what they want and need,” notes Morningstar’s Danielle Labotka. “But this isn’t where the work ends. Clients will struggle to understand the value of your advice if they cannot see how it connects back to the goals they are working toward, so revisit these goals and how they align with their financial plan in your ongoing conversations.”
Another 21%, or nearly double the size of the returns group, said they waved good-bye to an advisor due to the quality of the relationship. Mastering soft skills and elements of psychology are effective avenues for advisors looking to up the quality of their client relationships.
Not surprisingly, there’s also the matter of costs with 17% of those surveyed by Morningstar saying cost of services drove them out the door. Again, that’s well in excess of the 11% that said they left an advisor over investment performance.
“Research from our team shows clients and advisors tend to have a mismatch between what they think the value of a financial advisor is. You should be able to communicate to clients not only how you provide the value they are looking for but also provide the value they may not even be aware of,” adds Labotka.
Setting Reasonable Return Expectations
Obviously, the matter of investment performance is a sensitive one. Clients demand excellence on this front, but advisors cannot see the future. Nor should they make grandiose promises that are hard to keep. If anything, it’s better to under-promise and over-deliver.
“When establishing a relationship with a new client, clarify the value of taking the long view when investing,” concludes Labotka. “Some clients may benefit from reminders about the value of keeping their expectations on returns in check, but if you are consistently finding a client is only interested in immediate returns, remember it is OK to consider releasing them as a client.”
Good starting points can include illustrating to clients long-term performances of bond and equity markets or, if applicable, noting that your firm deploys model portfolios.