What if you could get honest feedback from your clients (or ex-clients) on what they really think? Many advisors never get a chance to see that level of honesty. How could you use that information? Most conflicts with clients are avoidable if you know what to look for—but how will you know what to look for?
We dissected a client interview conducted by WealthManagement.com to highlight some of what their old advisor did wrong, and what another advisor got right. We also give suggestions on how you can avoid the same mistakes, as well as tips for recognizing trouble before you’re on the wrong side of an ACAT form.
Donna, 69-year-old retired executive, Hartford, CT
“I retired 10 years ago, but before that I worked for several multinationals as director of contracts in different divisions, and I handled my investments myself for decades. But doing it on my own was time-consuming.”
As a former executive and retiree, she is used to leading others and values her time. Advising retirees presents a unique set of challenges for even experienced advisors. Getting a client’s background will help adjust your strategies accordingly. Some clients want to do more of the driving, others prefer a more discretionary approach. Use their experience to direct your relationship.
“In 2001, I came into an inheritance. I had more cash and decided I didn’t want to be fooling around on my own.”
An inheritance or unexpected windfall can affect a client’s risk tolerance in unexpected ways. In situations like this, advisors may want to reassess risk and update a client’s goals based on the new circumstances.
“I interviewed several financial advisors whom I really liked, but as soon as they told me they made trades and then let you know about it afterward, I said, “I don’t think so.” I want an explanation of why you want to get into this investment now. I’m sorry; it’s my money.”
This is where the client’s experience as an executive comes into play. After an entire career of leading people and managing her investments herself, she wants to save time but has no desire to relinquish control.
She is not looking for someone to take her decision-making away. Being observant of a client’s background and asking the right questions from the beginning goes a long way in setting up the relationship for success.
That first meeting can have a profound impact on the relationship moving forward. Here are some tips on how to make the most out of the first meeting and questions to help steer the conversation.
“I would sit down with the advisor I ultimately chose four times a year for a couple of hours and we would go over the portfolio, the returns, what he was considering and why. He was older than me, had been doing this for a long time and I felt comfortable with him.
Over time, we did ok. There were those terrible years, 2007-2008, when I lost somewhere in the mid-20’s in my portfolio. That’s a lot of money to lose when you’re paying someone an assets under management fee. I started thinking that this guy should have been familiar enough with the financial markets to see what was coming. And it got me in the frame of mind: I could have lost this much money by myself.”
While the client thought her relationship with the advisor was fine, the reason a client fires their advisor is usually about one thing: client expectations.
Many investors would have been happy to lose only $25K in 2008. It’s not the size of the loss that matters, it’s the expectation. What defines a “devastating” loss is unique to the investor.
This client expects her advisor to assume all of the risk. While it’s very unfortunate for the advisor, it’s possible they may not have prepared the client properly for a downturn. Stress tests should be a standard part of the advisor toolkit to ensure clients know what is “normal” for their portfolio, in good times and bad.
When we focus on returns, we leave investors unprepared for the short term. Rather than ignore the downside risk in every portfolio, we created the 95% Probability Range that presents the range of potential losses and gains a portfolio may experience in a six-month period (yes, with 95% probability). While there's always that 5% we can't quantify (Black Swans, 2008, etc.), it's a much more accurate reflection of what investors can expect, and prepares them for any downturns within that range.
Having that level of predictability might have made a difference with this client.
“Gradually, I just came to think the fees were too high. Everything was fine when I was making a lot of money. But the market was variable. And I thought, “What am I getting for my money?“
Fun fact: when clients complain about fees, it’s almost never about the fees. A Vanguard study showed that clients who work with a good financial advisor will receive on average a 3% increase in the value of their portfolios each year. Advisors can more than cover their fees with performance, but are you communicating that value to your clients?
Check out “What Justifies the Cost of An Advisor?” for more insight on how to show your clients the long-term value you provide.
“In 2012, I decided it was time to make a change. Sometimes service professionals don’t really know what made a client leave. But I talked to the advisor, and he wished me luck.”
By not setting the right expectations at the very beginning, this relationship might have been doomed from the start. Should the advisor have fought harder for the relationship? Why or why not?
“The advisor used Schwab, and I contacted the local office with the intention of getting rid of all the managed accounts and using index funds and ETFs. But the manager I spoke to asked me: “Do you have any idea what the tax implications are going to be if you do this?” We ran some numbers, and I decided to get into something called Private Client.”
The advisor lost their client, but the custodian made a diligent effort to keep those assets and it paid off. Advisors, if a good client is on the verge of walking away, what can you do to save those assets and preserve the relationship? This article on how to rebuild lost relationships gives helpful advice on how to open the lines of communication again.
“Since then, we’ve transitioned a great deal of money to get out of the managed funds, always looking at the growth, tax and lifestyle implications. Because I’m retired, I need to take money out for living expenses. I have a non-IRA account, a traditional IRA and a Roth IRA.
I speak with [Schwab] about four times a year. The individual who manages my account is excellent and is located here. The portfolio manager and the rest are in Florida. That isn’t a problem; I can call them any time. We go over how the markets are doing and how my accounts are doing. Their office isn’t far from where I live, and I’ve been there a couple of times. But we do a lot over the phone, so I don’t have to deal with the traffic. That’s been my choice. About a week before we meet, they send me the financial plan with where my portfolio stands at that point in time and their recommendations, so I can review it, do research and have my questions prepared.”
The option to be close to their new advisor is appreciated, even if it’s not utilized. The key is accessibility and making sure that clients know you’re available when they need you.
“It’s still not cheap. I have friends who think I’m crazy. But you reach a point when you think maybe it’s not the smartest decision to do it yourself. Plus they’re very straightforward about the costs, and I don’t get charged for trades. Also, there are other services they provide that I wasn’t getting before. I can go to their website and find so much information and analysis. And their materials tend to be more sophisticated and detailed. They have all these tools I wouldn’t have access to on my own.”
Fees again. The difference is that the client is now justifying the cost of her advisor to others—what a turnaround!
An investment in technology that improves the client experience always pays off in the long run. One of the most important fintech developments of the past decade has been Client-Facing Technology—it helps clients understand their investments in no other way available. Communicating visually is one of the biggest advantages for advisors today.
Same fees, same client, and a vastly different outcome. How does your technology translate value?
Avoiding confrontation is natural, and many clients are hesitant to provide honest feedback for this reason. Advisors not only have to provide world-class service; they also have to be mind readers. That’s no easy feat.
Donna’s story may ring true for some advisors, but there are important lessons to gain.
- Research your client’s background and discuss if a hands-off or hands-on approach is more comfortable.
- Assess your client’s risk tolerance early and reassess as often as needed.
- Set clear expectations for portfolio performance and stress test as needed. When in doubt, stress test again.
- Invest in client-facing technology that communicates value to your client.