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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?

Advisors on how they communicate with clients

When advisors were asked, “How important is understanding your clients’ feelings towards money?” 98% responded it was important or critical. When asked, “How would you rate your skills and confidence to accurately know your clients’ financial behavior?” only 23% responded “very confidently.”
When advisors were asked, “Is it the advisors’ role to make clients more confident and savvy investors?” 89% responded yes. When asked if it was a high priority in their practice (to make clients more confident and savvy investors), only 59% responded positively.

Consumers on education and advisors’ perceptions

When consumers were asked, “Is it your financial planner’s role to educate you to be a more confident and savvy investor?” 65% said yes. When asked, “Do you see a positive change as a result of the [advisor's] education?” only 25% of consumers said yes.
When consumers were asked, “How important is it that your advisor understands how you feel about your money?” 92% responded that it was important or very important. When asked, “How important a focus is understanding how you feel about your money in your current relationship with your advisor?” only 48% reported that it was a high priority.

How Advisors and Consumers Handle Risk



Four percent of clients would react negatively to the word “risk.” Twenty-nine percent of consumers said the word “risk” is a negative.
When asked, “Which best describes how most of your clients are reacting as a result of your communication and educational efforts?” 39% responded that clients are getting good value from advisors’ money management services. Only 22% of consumers responded that they are getting good value from their relationship with their advisor.
When asked if their clients are content with the investment management and communication they receive, 71% said yes. When asked how their advisor stacked up, 57% said their advisor falls short of their expectations.

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.”

Confidence Game

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, 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.

Risk-Averse Clients

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.

Playing It Safe

Closely related to social desirability of risk itself is the popularity of various investments. Investors generally feel better if they lose money with a popular or “safe” investment. Clients do not want to feel like they have bet on the losing team. Thus investors often settle for mediocre performance from funds of well-known companies instead of taking a chance on investments that are more sure in the objective sense but do not provide the comfort of a brand name, or the sense of being “trendy.” Clients must be encouraged to see the facts for what they are, instead of jumping on the bandwagon of the latest hot investment, or taking the safe way out with “blue-chip” stocks.

Another principle of risk is the desire to avoid accepting a loss, even if it means risking an even greater loss. An example is investors who hold onto losing stocks because they fear accepting their unrealized losses more than they value the prospect of freeing capital to pursue other opportunities. Clients must often be encouraged to accept losses and move on, instead of hanging on with ill-defined hopes to an investment that is clearly not going to regain its value.

Losses are so difficult to accept because pain is a much greater motivator than pleasure. The pleasure of gaining a given sum of money is generally only half as great as the pain of losing the same amount. So offering clients the chance to earn 10% on their money is only half as motivating as the desire to avoid losing 10% of their money. For this reason, fear is a greater motivator than greed. Clients fear embarrassment in front of significant others, lowered self-esteem, and facing the reality of the loss itself. These fears play a much greater role in their choice of investments than the desire for future gain. Advisors can help clients by showing them the positive side of risk. They can educate clients on the ways in which their lifestyle can actually improve, the types of goals they can achieve, and the needs they can fulfill by taking on risk. In other words, clients must be encouraged to take on necessary risk.

As investors improve their financial skills, their tolerance for risk and volatility rises. Education by advisors can help investors learn to become more confident and better able to tolerate swings in the market. While 89% of advisors believed that it was part of their role to help their clients become better investors and 59% made it a “high priority” in their practice, only 22% of consumers believed they had seen positive changes in this area as a result of education gained from their advisor.

Psychology Pays

Advisors are certainly trying to improve their clients’ level of financial education, but time spent in this area is not showing the desired results, even among the highly experienced advisors we surveyed. One of the possible causes for this problem is lack of psychological education of advisors, and lack of inclusion of psychologists on the advisory team. For example, the principles of subjective risk are well known among psychologists, but are not often taken into account by investment advisors. An increase in advisors’ communications skills and consultations with psychologists regarding the impact of psychological principles on money issues could be very helpful.

Part of the necessary education concerns personal psychological factors that influence client perceptions of investing. For example, a need for excessive control can derail a successful investment plan, as can inappropriate emotionality, low self-confidence, and financial impulsivity. While an investor may be very conservative and self-disciplined, and thus not prone to destructive losses tied to impulsivity, he or she may not invest appropriately due to a desire for excessive control. In the same vein, a client who reacts emotionally to financial matters may make illogical decisions about money, even after much contemplation. While not impulsive per se, this client is definitely not following a successful investment plan. Advisors must learn to deal with each of these investor types differently, working to support their strengths and decrease the impact of each type’s limitations.

Seventy-one percent of advisors believed that their clients were content with their investment management performance and communication skills, and 39% thought their clients believed they were getting good value with their money management services. On the other hand, 40% of consumers answered an emphatic “no” when asked if they were getting good value for their money management. Only six percent of advisors exceeded the consumers’ expectations, and 57% fell short of their expectations.

Individual investors are clearly not very satisfied with their advisors’ services. Clients expect advisors to understand their psychological needs, to help them manage risk, and, of course deliver superior investment performance. How can advisors achieve these goals? Eric Soiland, an advisor with Salomon Smith Barney in Walnut Creek, California, who participated in the survey, felt the disconnect may be due to “advisors not properly managing expectations from the beginning of the advisor-client relationship. Clients are more demanding today. Many simply may not be able to get by with offering good service. You need to offer exceptional service. Don’t just meet client expectations, strive to exceed expectations.”

One way to do this, of course, is to keep in close touch with clients. Planner Rogin, for example, sends a survey to clients every two years. “I learn a lot from doing this,” she says, “and find ways to increase my service in areas that matter for my clients.”

Increasing the level of service can get into the psychological factors that have been shown to be far more important to client satisfaction than mere investment performance. While some clients do confuse client satisfaction with portfolio performance, many are looking for a psychological edge to their money management. They are looking for someone to help them, not just with the objective aspects of investing, but with the “soft side” as well–the side of understanding their needs, desires, and temperaments.

Do You Understand?

Other research has demonstrated very similar results to those found with our recent sample. For example, a 1997 survey conducted by Financial Psychology Corporation on an entirely different group of investment advisors found very similar results. Ninety-two percent of advisors felt that understanding the psychological profile of their clients was important or critically important, and an overwhelming 89% believed that it was their role to make their clients more confident and savvy investors. However, only 16% of advisors with 16 or more years of experience believed that they understood their clients and could accurately predict their behavior with a superior level of confidence.

Throughout both studies, it is apparent that advisors have not been able to supply their clients with the education that they need to manage risk effectively or to satisfy their clients’ expectations. Clearly, a new approach and new tools are needed.

Applying psychological management techniques to the financial planning arena can help advisors to improve clients’ perceptions of their customer service. By developing their communication skills, advisors can better manage their clients’ perceptions of risk, educate their clients in an accessible way, and improve client satisfaction. Advisors can choose to improve their skills, use appropriate tools and services, or add a psychological advisor to their investment management team. By working in multi-disciplinary teams that include a psychological component, investment advisors can bring additional expertise to help their clients prosper. And that’s what it’s all about.