Change is hard. Humans like patterns, routines, and familiarity. This is especially true when dealing with sensitive issues like financial affairs. We rely on people we trust, but sometimes it’s apparent the relationship is not working out.
CFA Institute surveyed retail investors around the globe to find out what investors want from their investment advisors (we will focus on the U.S. results). Please see the link directly below to access the study.
From Trust to Loyalty: What Investors Want
About the survey...
Who? Investment clients 25+ years old with assets of at least $100,000
How Many? 502 U.S. retail investment clients
How? 15-minute online survey
When? Data collection occurred October 19th - November 11th 2015
The results address two important questions:
Why investment clients fire their respective advisors?
What’s important to clients in a professional advisory relationship?
Top Reasons Clients Fire their Advisor
Source: CFA Institute
The above graph shows that underperformance, increases in fees, data/confidentiality breach, and lack of communication/responsiveness as the top reasons why clients leave their investment manager.
Underperformance- There is a common practice within our industry to de-emphasize investment performance to clients. The evidence (and common sense) would suggest investment results should be a top priority.
Increases in fees- Never underestimate the pressure public companies face to maximize revenue from each client. If you're receiving a fee discount from your current manager, know they will likely raise your fee to a "normal" schedule eventually.
Data/confidentiality breach- As we move to a more digital world, cyber-security will be top of mind for institutions and clients alike.
Lack of communication/responsiveness- If your advisor goes dark for long stretches or fails to provide timely responses, it might be time for a change.
What's Important to Clients?
Source: CFA Institute
The above graph shows that transparency (bolded), open communication, performance standards, and data security are most important to investment clients.
Across the results, it is apparent transparency reigns supreme. The below guidelines will help improve the transparency in your advisory relationship by knowing what questions to ask.
Fully discloses fees and other costs + Clearly explains all fees before costs are charged- Get a breakdown of the fees in writing i.e. what goes to the financial advisor, what goes to the third-party managers (mutual funds or outsourced models), trading costs, financial planning fees, etc.
Forthright about disclosing and managing conflicts of interest- Human behavior is driven by incentives. Does your advisor get extra commission for selling certain products (mutual funds, proprietary funds, annuities)? Is your advisor under pressure to hit a sales goal or quota?
Provides investment reports that are easy to understand + Portfolio positioning - In our opinion, performance reporting is the biggest shadow game the industry plays. It shouldn't take a special request to see performance. Nor should grossof fee returns be standard practice. Clients should have a sense of how much risk their advisor is taking to generate returns and understand what's driving performance.