Communication is one of the most difficult aspects of an investment advisor’s job. Advisors must not only help clients to invest their money, but also encourage them to manage the subjective aspects of risk, teach them to be more savvy and confident investors, and promote the bonding that leads to good advisor-client relationships. In order to achieve client satisfaction, advisors must present technical information in a way that is both accurate and understandable. They must listen to and respond to their clients’ concerns.
As part of this process, understanding clients’ perspectives is incredibly important. What do clients want most from their advisors? How can advisors provide the most value to clients? How do consumers view attempts to educate them to become better investors? How do advisors manage their clients’ perceptions of risk?
To answer these key questions, Financial Psychology Corporation (FPC) teamed up with Investment Advisor this fall to conduct an exclusive survey of advisors nationwide via e-mail and the Web. In addition, FPC conducted a mirror study of individual investors. Seven hundred and seventy-three advisors and 130 investors took part in the study, answering mirror-image questions about their attitudes toward risk, level of financial education, and overall satisfaction with the client-advisor relationship.
What we found was unsettling, to say the least: A distinct communications gap exists between advisors and the investing public. It’s clear that advisors play a critical role in educating their clients about money and investing. And our survey indicates that individual investors and advisors do agree on the importance of the advisor’s understanding of a client’s attitudes about money. Indeed, nearly all of the advisors, 98%, viewed understanding their clients’ feelings toward money as important or critically important. Similarly, 92% of consumers felt that it was important or very important that their advisor understand their feelings about money.
However, many individual investors felt a lack of understanding on the part of their advisors. While 48% believed that understanding how they felt about money was a high priority for their a
|Are Advisors and Clients in Sync?|
dvisors, 38% believed that it was a moderate priority and 16% felt that it was a low priority. An overwhelming majority, 69%, wanted understanding their feelings about money to be more of a focus in their relationship with their advisor. “I wonder,” asked one survey participant, Ellen Rogin, a CFP and CPA with Strategic Financial Designs in Northfield, Illinois, “if the bad stock market has people feeling like they are paying and not seeing an increase in their assets.”
Advisors who value understanding their clients’ emotions may not be communicating this priority adequately to their clients. Although a whopping 81% of advisors were confident or very confident that they could predict their clients’ satisfaction with their services and their clients’ investment behavior, the results of our survey show otherwise.
The answers from the advisor poll came from a bunch of seasoned pros. Of those responding to our e-mailed requests for participation, 42% said they had more than 16 years of experience in the field. Fully 63% classified themselves as financial planners, rather than stockbrokers, with many involved in investment management, insurance, and consulting. A significant percentage of the advisors, 40%, is paid on a fees-plus-commission basis; 27% are fee-only and about the same number, 26%, work on a commission-only basis. A small minority is paid on a salary or salary plus commission. Most of the advisors say they consult with individuals, couples, and families. On the whole, they are a well-rounded group of advisors who formed a representative sample of the financial advisor marketplace.
The individual investors we studied responded to a survey conducted on Financial Psychology’s Web site, www.financialpsychology.com. While they were not clients of the investment advisors we surveyed, 81% of the individual investors surveyed used the services of an investment advisor. The consumers were not novice investors: 68% had been investing for over five years, with 38% investing for five to fifteen years, and 30% investing for over 16 years. Longevity of the investors’ current advisor-client relationship varied greatly, with 23% working with their advisor for less than one year, 45% for 1 to 5 years, and 31% for more than five years.
One subject that concerned investors and advisors alike was risk. This is always a tremendous issue in financial planning, but is all the more important in these days of terrorism, war, and a Nasdaq boom gone bust. Many of the investment products sold by advisors contain a significant element of risk, and when the stock market dives or the yield on a bond fund drops, communication between advisors and clients takes on a special significance.
We found that advisors are much more comfortable with risk than their clients. Nearly all of the advisors (96%) had neutral or positive reactions to the word “risk,” while clients were dramatically more risk-averse. Fully 31% of the consumers had negative reactions to the word “risk,” 53% were neutral, and not even one respondent indicated a positive reaction. Although advisors were correct in noting that their clients were far more risk-averse than themselves, they considerably miscalculated the degree of their clients’ aversion to risk.
Advisors in our survey believed that their clients would react negatively to the word “risk” 63% of the time, almost twice as often as the individual investors believed that they would (31%). Moreover, nearly a third of consumers thought that their advisor was not accurate in measuring their level of risk, with 60% viewing their advisor as only fairly accurate. In our data, advisors overestimated individual investors’ risk aversion. Advisors therefore might not be providing enough encouragement to clients to bear greater risk in their investments in order to achieve greater rewards.
Fully 58% of advisors believed that experience and education had combined to decrease their negative reactions to risk in their investments. However, advisors are not communicating these advantages to their clients, who were overwhelmingly risk-averse. One significant reason for this finding may be a result of the difference between objective and subjective risk. While advisors have been skillful in affecting their clients’ perceptions of objective risk, the risk of actual loss from an investment, they have not been as skillful in decreasing clients’ perceptions of subjective risk, the personally felt fear of loss.
Understanding of psychological principles can help advisors to better understand their clients’ subjective interpretations of risk. The first important principle of subjective risk is the impact of dramatic events. People are fascinated by dramatic events. Many people have a fear of flying in airplanes, although the risk of dying in a car crash is much higher than the risk of dying in an aviation disaster. In the same way, terrorist events, market crashes, economic disasters, and depressions capture the imagination of investors much more than a generalized slowdown of productivity or the insidious threat of inflation. People act to avoid well-publicized risks, rather than to avoid actual risks that are less dramatic and glamorous. Educating clients about the more dangerous but less publicized risks of investing is an invaluable service advisors can provide.
A second important principle of subjective risk is the social desirability of risk in our culture. In American society, we value people who face risk. We mythologize the Horatio Alger and the John Wayne–the one who takes risks, defies all odds, and wins. Because risk is a socially desirable trait, people overestimate their comfort level with risk. Clients need to know that choosing investments based on their actual degree of desired risk will result in better investment choices than chasing after some socially sanctioned degree of risk that is inappropriate for their temperament or lifestyle.