The low-return environment is the talk of the town. What’s an advisor to do?
I talked to a few of the top experts in the field, who gave me some great hands-on advice on how to manage client expectations.
Obviously, advisors need to prep clients for low returns. More importantly, they need to give clients compelling measures to use for judging the performance of their advisors. Some advisors regularly review the typical performance of the stock and bond markets with clients, as well as that of Treasuries and CDs. Now, it’s time to frame how clients will assess your work.
Michael Silver, co-founder of Focus Partners — a New Jersey-based coaching and consulting firm — says the “goal should be to forge a relationship-based, not a performance-based, business.”
This is becoming easier to do. With the advent of passive investing and robo-advisors, the financial community has been incentivized to step up its game beyond pure returns. In fact, returns are typically halfway down the list of the top 10 factors that prompt clients to leave their advisors, Silver says.
Michael Kitces, partner and director of research at the $1.8 billion-Pinnacle Advisory Group, uses the Morningstar term “gamma” to describe value-added services. Gamma might include financial-planning advice, tax-management strategies, and estate or education planning; it could mean highlighting insights of behavioral finance to prevent clients from making bad decisions.
“It’s about adding value to everything around the portfolio itself,” according to Kitces. This approach is competitive — advisors are increasingly taking on credentials like the CFP and CPWA to add gamma.
It’s also the smartest move you can make. “Advisors that pitch themselves as [someone who is] ramping up returns and lowering costs will lose clients to anyone willing to undercut them,” Kitces notes. Or if they promise “alpha,” clients may say “sayonara” when returns disappoint, which is not unlikely in this environment.