Wharton and State Street Global Advisors recently published a special report, “Bridging the Trust Divide: The Financial Advisor-Client Relationship”, an insightful look into issues surrounding trust and fees, which is here summarized.
Over the last 15 years, the financial advice business has experienced a (commonly called) paradigm shift from pushing investment products with opaque, hidden and/or complex fees to offering consultative services with straightforward fee structures. This report examines how advisors can:
- Strengthen relationships by engendering trust.
- Best communicate their value to clients.
- Successfully discuss fees with clients.
It’s all about trust. The foundation of the advisor-client relationship, the report explores trust at three levels:
- Technical competence/know how
- Ethical conduct and character.
- Trust in empathic skills and maturity.
This might not be a Eureka moment for many advisors, but what the surveys in this report uncover is that there’s a substantial disconnect in these three levels of trust between the client’s and the advisor’s perceptions. For instance, there’s a sizable gap between the value clients place on expertise and the value advisors place on it, and a similar disconnect between how well clients think their advisors are doing as compared to the advisors’ much higher opinion of their performance.
Getting on the same perceptional page with your clients is a given, but what might not be so clear is Richard Marston’s bottom line advice. Marston, a professor of finance at Wharton, believes that, increasingly, the value of financial advice has more to do with the “softer” advisory elements (personal counseling and instruction) than managing the money: “The advisor has to understand the logic behind the advice and work the argument through with the client so that client really understands it.”
And what has the most damaging effect on trust and the advisors effectiveness with clients? An unsupportive staff. Only 15 to 20% of the average client’s time is spent with the financial advisor – the rest is with the advisor’s assistant and support staff. These people have a big impact, for better or worse.
Next up in the report is the sensitive topic of fees.
Fees are often fuzzy. The fuzzier they remain, the more the potential damage to trust. Though advisors often skirt the issue of fees, the evidence suggests that most clients aren’t as concerned about the absolute levels of the fees, but their clarity and transparency. People want to know what’s going on.
The lack of fee transparency has made advisors more vulnerable than they realize, says Mitch Anthony, a consultant to the industry. He says, “No matter how much you think you realize the level of distrust over fees, we underestimate it.”
The winners, says Marston, the Wharton professor, are either advisors who offer custom service or cheaper, almost automated solutions. The losers are those who haven’t adapted to a world divided between providers of higher-fee, custom-tailored service and inexpensive solutions geared for the mass market.
The shift to a fee-only model has its challenges when it comes to articulating the value proposition. Investors are becoming wiser and they know that the pitch that you’ll choose better asset managers has little value when it’s known that the majority of actively-managed funds under perform the index.
The better approach, Marston insists, is to incorporate two services into the value proposition. The first is to understand and communicate to clients that the advisor creates substantial value by getting clients into a portfolio and keeping them invested through different market cycles, thus keeping them from reflexively reacting to shifts in the market on a behavioral basis. The second is to alert clients of the potential mistakes they may be making within self-directed portions of their portfolios, where most do not rebalance their portfolios relative to shifts in the market, or risk tolerance related to age.
And along the way, to recognize that what the client really needs, and appreciates is to incorporate the personal with the financial.
Read the entire Special Report here.