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.