Advisors face a significant risk that is rarely written about or discussed in public forums and that is an alarming percentage of clients do not fully understand what their advisor does, in enough specificity to be useful to either party.
I have conducted formal and informal interviews of investors over the past two years, and approximately 80% of the time investors who have an advisor cannot speak with clarity on what their advisor does as a professional. Normally the feedback I receive from investors starts with not being able to share if their advisor is a financial planner, or asset manager or performs both functions as the third option. Even if the investor can define their advisor at this high level, investors often can’t get more granular on their advisors’ specialty, focus, unique skills and the list goes on. Even more shocking, is this lack of understanding is equally shared by those with significant means that have had the same advisor for many years, as with those with lesser incomes or portfolios. This realization is not limited to my own experiences. Many research reports, including the well-known Rand Report illustrates investors are missing basic understanding of the financial landscape.
So why is this a problem for an advisor? First, when the markets turn south, some percentage of an advisors’ clients will blame them for the downturn. A subset of these clients, as happened in 2008, will terminate the relationship and seek another advisor, or worse, decide to be completely self-directed. An investor that does not understand their professional is far more likely to terminate a relationship versus one that has a clear understanding.
Second, when clients do not fully understand their advisors, they do not engage meaning they do not share all the aspects of their life that they otherwise would. They “hide” assets, other accounts, do not share news about their lives and many other data points that helps the advisor perform a better service. Usually, this sooner or later equates to more business for the advisor.
Third, a client that does not fully grasp what an advisor is or does, makes the advisor far, far less referable. If a client cannot confidently give your two-minute elevator pitch with precision to others, how can they refer friends to you? The answer is they cannot. Clients interact with hundreds of people per month and given that most Americans do not have an advisor, it is no surprise that clients do not send as many referrals as they otherwise could to advisors.
Given the above, what should an advisor do to find out what the true understanding level is of their client base? First, try to put aside any ego and immediate reaction that your clients understand you, because the odds are against it. Second, engage an outside firm that knows financial services to help you with surveying your clients. An outside firm will reduce the chances of bias in the survey and hiring an expert will yield better results. The survey should be very well thought out and crafted to both get at the truth, without creating issues with your clients. Finally, hard code this concept in your client onboarding process so that new clients fully understand what you do and as important, what you do not do for a living. Every advisors goal should be to reduce the ignorance level of their clients. The advisor will have a better business for it, and the investor will be better off as well.