Too Big To Fail. Bailouts and inflated bonuses. Bernie Madoff.
Stunning events and revelations in the months immediately following the 2008 financial crisis severely tarnished the financial industrys reputation on Main Street. In the years since, building and maintaining client trust has been a much more serious challenge for financial advisors than it was prior to the Great Recession. Even though the most brilliant minds in the financial world were blindsided by the worldwide collapse, steep declines in the value of their assets have led even sophisticated investors to ask their advisors, Isnt it your job to help me avoid things like this?
Fortunately, market gains over the last few years have helped offset the negativity. Still, the general public and investors have remained wary of the industry:
In 2012, only 28% of households reported that financial firms look out for their best interests (Cerulli Associates).
In 2014, 48% of respondents to a global survey expressed trust in the financial industry in general, and slightly fewer (46%) said they trust investment managers and financial advisors in particular (Edelman).
However, 72% of engaged clients report having a high level of trust in their advisor (Advisor Impact).
While distrust of the financial services industry among the general public is still pervasive, individual advisors can overcome this perception with their clients. According to Advisor Impacts Economics of Loyalty study (2013), investor trust is most highly concentrated at the individual advisor level.
To secure their clients trust, advisors should focus on two key objectives. The first is to construct portfolios that are truly diversified and in that way address the type of market risks and volatility that keep investors up at night. And the second is to establish and maintain strong personal relationships with those selfsame clients based on knowledgeable, holistic, and transparent advice. In order to succeed at both, advisors must thoroughly understand their clients underlying financial and life goals. Only then can they develop a financial plan that meets a clients needs and present it in a way that gains the clients trust.
While advisors have long recognized the importance of diversification across asset classes, traditional strategies, which generally seek longer term exposures to various asset classes as they seek to benefit from the tailwinds of rising markets, were insufficient to protect portfolios in 2008. Wary of another global meltdown, clients want assurance that their advisor is doing everything possible to prepare their portfolios for unpredictable markets. They want affirmation that history will not repeat itself or that if it does, their assets will still be protected. For advisors seeking to build trust, helping clients understand the strategies they use to reduce portfolio volatility goes a long way.
The following example illustrates how volatility can impact results:
Experienced portfolio managers who use active asset allocation strategies adjust portfolios in response to economic and market developments. They know that over time asset allocation is the most important determinant of portfolio risk and return. Studies suggest that asset allocation, including market participation, is responsible for more than 90 percent of the variance in portfolio performance. (Brinson, Hood & Beebower, Financial Analysts Journal, 1986 and Brinson, Singer & Beebower, Financial Analysts Journal, 1991).
Flexible asset allocation strategies allow for wide-ranging allocation decisionssuch as moving completely out of an asset class or choosing non-traditional investmentsto take advantage of opportunities and avoid risks across market environments. Combining this strategy with a more traditional approach can yield returns similar to those of a traditional-only portfolio, but with significantly less volatility.
Demonstrating the benefit of such a strategy can bolster investor confidenceprovided it is part of an investment plan that fits the clients individual goals and needs. For example, accumulation and distribution portfolios need to be constructed and managed differently. Likewise, the number of years until retirement and the clients asset level should significantly influence portfolio composition.
While obviously important, most clients are looking to their advisors for more than just competitive portfolio performance. What they are really seeking is peace of mind, and by helping them better understand their financial situations and the markets, advisors can engage with them and help provide this.
Engaged clients are the most loyal and more likely to serve as advisor advocates by providing referrals. They are also much more likely to trust their advisors with a greater portion of their assets. The Advisor Impact study finds that 44% of engaged clients trust their advisors with 75% or more of their assets, compared with only 22% for less engaged or complacent clients.
Advisors can build stronger relationships by adopting a holistic approach to client engagement and creating an environment where advisors can have rich, meaningful discussions with clients across a broad range of issues. Establishing a financial plan that addresses the big picture, based on the clients desire for a more meaningful life, builds trust by demonstrating the tremendous value an advisor can add by helping to articulate and document a vision for the clients financial future. Advisors who provide clients with a sense of control and clarity will enjoy stronger relationships.
In order to guide them through the complex decisions that comprise financial life, advisors should take into account client personalities, savings, personal histories, aspirations and desire to live a purpose-filled life. It is also critical to address any confusion or concerns about financial markets and risk-taking. Sometimes clients will overtly express these doubts, but often it falls to the advisor to recognize that a client feels uncertain or apprehensive. Advisors who maintain close relationships can more readily address these unspoken reservations, putting clients at ease and increasing their level of trust in the relationship.
To expand that trust, advisors can take several steps to deepen their client engagements, including:
- Ensuring a good fit between the advisor and the client in terms of personality, preferred communication methods and other soft factors.
- Collecting client feedback on their needs and expectations regarding their relationship with their advisor.
- Providing a service agreement that clearly defines the level of service a client can expect and then reviewing that agreement annually with clients.
- Keeping a clients other professional advisors (such as attorneys and accountants) looped in and aligned with the clients long-term financial plan.
Although the publics trust in the financial services industry remains shaky, advisors have the opportunity to overcome negative perceptions one-on-one with their own clients. By developing and articulating a portfolio strategy that can weather market changes, while cultivating close personal relationships, advisors can make great strides towards restoring investor confidence.
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