Why do clients leave their advisor? What makes a client choose one advisor over another? Fortunately, there has been a great deal of research on the subject of human behavior. Unfortunately, the research contains a great deal of subjectivity.
However, I would argue that there is one chief reason a client leaves an advisor: The advisor failed to meet the client's expectations. Although seemingly simple, there's a complex set of factors that goes into how humans set and prioritize their expectations and how they judge when they’re not being met.
In my own RIA practice, I have decided to be more proactive with every prospect and existing client in discerning their expectations and meeting them, since doing so will make the advisor-client experience more enjoyable, and because a client whose expectations are met will be more likely to stay. According to ClientHeartbeat.com, provider of a cloud-based customer feedback system, a 2% improvement in client retention has the same effect as a 10% decrease in costs.
Defining Expectation; Measuring Retention
Let's begin by defining the actual term. Webster's defines “expectation” as “a belief that something will happen or is likely to happen.” While the definition is straightforward, do we grasp the role that expectations plays in our relationship with clients? Do we have a process that will enable us to deliver consistent, five-star service to meet those expectations and retain our clients? Let's look at how we measure client retention.
Every advisor has two common goals: to bring in new, good clients and to retain existing clients. Here's a formula I use to calculate my client retention rate:
((CE - CN) / CS) x 100
“CE” is the number of clients at the end of a given period. “CN” is the number of new clients acquired during the period, and “CS” is the number of clients at the start of the period.
For example, assuming you had 100 clients at the beginning of the period and lost five over a year's time, but gained eight new clients, your retention rate would be calculated as follows:
((103 - 8) / 100) x 100 = .95 or 95%
The key to retaining clients is meeting and exceeding their expectations.
How Expectations Are Formed and Their Types
The London-based Institute of Customer Service, a nonprofit organization that conducts customer service benchmarking and research, concludes that customer expectations are formed in four ways:
What people hear and see
What they read and what the organization tells them
What happens during the customer experience
What has happened to them in other customer service experiences
Remember, expectations are constantly evolving, so in judging an advisor's service, clients will compare their past experiences to their expectations. Because the clients’ expectations are the reference point from which all judgments are made, it is critical to gain a clear understanding of precisely what clients expect.
Expectations come in all shapes and sizes and vary from person to person, which is why some people are easier to please than others. Clients have expectations of their advisors in a number of areas, including portfolio performance; the method and frequency of the client-advisor interactions; the competence and general demeanor of the advisor; the confidentiality of the information disclosed during the relationship; the responsiveness of the advisor and so on. Hence, the advisor must clearly understand the clients’ expectations and develop a framework to exceed them. That said, not all expectations are reasonable. Let's discuss how to handle unreasonable expectations.
If you accept the theory that expectations are derived from past experience, what if the client's expectation is irrational? What if the client wants to invest in stocks but is unwilling to accept losses? First, we must realize that the client has adopted his expectations over time based on something he's read, heard or experienced. Because each individual has had different experiences and their capacity for reasoning varies, we sometimes find beliefs that are on their face illogical. Therefore, it's important to understand how people measure expectations.
The Internal Meter: Is Experience Really the Best Teacher?
Everyone has a series of internal meters, each of which performs a different function in forming a relationship. One meter may measure expectations, another measures trust, yet another aids in the decision-making process. Although expectations—including your clients’—are derived largely from experiences, this does not suggest they are always rational. Moreover, unless a person is exposed to contrary information, they are more likely to retain their original expectation, even if it's entirely unreasonable. This is one reason why it's important to question prospective clients about past advisory relationships.
For example, if the client has had an inordinate number of advisors, it could be a warning. Is this someone who is hard to please due to holding unrealistic expectations of their advisors? It's important to understand why the relationships were terminated before deciding if you want to work with this person.
Because experience plays such a significant role in developing expectations, is experience really the best teacher? I’d argue that the answer is no. Consider two typical client types.
Cautious Charlie lived during the Great Depression and developed what he considers a valid belief that stocks are dangerous and should be avoided at all times. This is easy to understand since it took 25 years for the Dow to return to its 1929 peak. Even though it is an extreme view, it is Charlie's view, and he won't change it unless he has good reason.
Gambling Gary, the antithesis of Cautious Charlie, began investing in his 401(k) in the early 1980s, which also happened to be the beginning of one of the greatest bull market runs in stock market history. Gary's experience taught him that while stocks may decline, they always bounce back quickly, so he's not worried about the riskiness of stocks.
Charlie and Gary hold very different views. Both views are correct in each client's mind, due to their differing experiences, so how could you change both Charlie's and Gary's expectations? It's a difficult task, and even more difficult if the experience that led to their investing worldview involved negative emotions such as fear or grief over a loss that they—or a close friend or family member—experienced, since negative emotions tend to embed deeper within our subconscious.
The Zone of Tolerance
Thus far, we’ve learned that everyone has an internal meter and experience isn't always the best teacher. We’ve also discussed the importance of understanding what clients expect. To explain how expectations vary, consider the following: When you dine at a five-star restaurant, you expect a fine meal in a pleasant atmosphere. If the waiter is rude or the food is cold and tasteless, you would be sorely disappointed. In fact, you may never return and you might even tell all your friends about it. However, if you were planning to eat at McDonald's, your expectations would be very different. So expectations are situational.
In terms of service, everyone has an expectation. How do people measure expectations? By the internal meter we mentioned earlier. Using research published in the winter 1993 Journal of the Academy of Marketing Science, three academics argued that every customer has a gauge that measures the level of service that they deem to be acceptable. Above that acceptability level is the level of service that the person desires. The territory in between the lower threshold (adequate) and the upper threshold (desired) is called the Zone of Tolerance.
As a situation grows in importance, the client's Zone of Tolerance may narrow, but if an advisor's service is in the Zone, it may go unnoticed, meaning that to the client it is neither good nor bad. However, if the client perceives that service has fallen below the lower boundary of the Zone, the minimum acceptable level, he or she will become frustrated and the relationship will be at risk. If the service is viewed as exceeding the upper boundary of the Zone, the client will be very pleased. Therefore, the Zone of Tolerance should be thought of as the minimum range of acceptable service. The goal should be to exceed the upper boundary.
Because clients are bombarded with external stimuli, their expectations are constantly being challenged. What would happen if one of your clients met with a competitor who convinced him that they could provide better service or better performance? If the difference is significant, and if your service has only been acceptable or below the Zone of Tolerance, he may well fire you. This is why it's critical to understand what your clients expect, make sure it's reasonable and work hard to exceed their expectations.
In general, clients are less knowledgeable about the financial markets than advisors. Because of this, the potential for unethical behavior exists. If an unscrupulous advisor persuaded your client using plausible sounding half-truths, since your client didn't spend years studying the financial markets, he would be unaware of the missing or inaccurate information. Hence, the client might accept the advisor's “story.” This is another reason communication is so vital. But there's more.
Client Expectations and the Brain
According to Wolfram Schultz, professor of neuroscience at Cambridge University in the U.K., when an individual receives a reward for any behavior, her brain releases dopamine. If the reward was unexpected, the dopamine release is greater than if the reward was expected. However, if a person was expecting a reward but didn't receive it, her dopamine levels would fall sharply, and the effect would be similar to physical pain.
When a client expects her advisor to return her phone call promptly and doesn't get that call, the client becomes frustrated and her dopamine levels fall.
Frustration is an unmet expectation and dopamine is the neurotransmitter of desire, which is closely tied to one's happiness. Individuals with recurring unmet expectations will be more frustrated and less happy due to lower dopamine levels in their brain.
Modifying Client Expectations
It's not unusual to find clients with unreasonable expectations. Identifying them is easy; changing them is another matter. Changing a person's expectations will depend on several factors such as her personality type, ability to trust, willingness to change, the length of time she's held the expectation and her age. In addition, we must be sensitive to clients who’ve had an unpleasant past experience with an advisor. I’ve had clients tell me how their former advisor seemed to look down on them as if they were unintelligent. Sometimes this occurs when an advisor confuses arrogance with confidence. Here's an incredibly important point: Clients need to know it's safe to open up and discuss deep feelings with you, in confidence, and without fear of judgment or humiliation.
An advisor must be empathetic, which is the ability to understand how someone feels and permits objectivity, whereas sympathy, which is sharing the same feeling as another, may cloud our judgment.
Here's the $1 million question: How do you change a person's expectations? You begin by asking a series of open-ended questions, following these four steps:
Try to understand how the expectation was formed by asking how the client developed that particular belief. People like to talk about themselves. This will show that you care what they think.
Validate the client's belief by saying something like, “If I had the same experience you’ve described, I would probably feel the same way.” Now he perceives that you are on his side of the table.
Ask the client if he's ever had a belief that has changed after being exposed to new information. This may be a little risky as it requires a yes or no answer, but it's important because you’re positioning him to accept, from his own experience, that he's changed a belief after being exposed to new information.
Provide the client with the new information and ask if it makes sense. If the new data clarifies the issue, then you’ve accomplished your mission. However, some issues pertaining to the financial markets are not firmly established and are only an opinion. In this case, be willing to present both sides of the issue and ask the client to keep an open mind. Most clients will appreciate the fact that you respect them enough to provide them with both sides of the argument.
Our clients have entrusted us with a great responsibility. Regardless of what your legal requirement to the client may be, all of us have an ethical responsibility—and the capacity—to treat others with respect. Therefore, whether you’re a broker or registered rep, or an investment advisor, clients need to be understood, respected and properly advised. A little extra dopamine wouldn't hurt, either.