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.
In that vein, Silver urges advisors to offer a menu of products that will tie clients to them more deeply: “The more products and solutions that advisors offer clients, the stickier the relationship.” This includes insurance or lines of credit.
In addition, Silver says advisors need to get a clear read on how much servicing their clients expect. Preferences will vary. Do they want quarterly meetings? Weekly e-mails? What’s the right balance?
Dr. Jack Singer, a sports psychologist who works with financial advisors, advocates “active, empathic listening.” Dr. Singer urges advisors to discover their clients’ fears and anxieties by listening to their concerns and then reflecting back on what they are saying — without judgment. “This basic skill is a differentiator,” he said. “It helps them see the advisor as a trusted partner.”
Advisors themselves need to acknowledge their limitations, both to themselves and clients. Dr. Singer notes advisors can’t control stock prices, but they can take charge of their core values. They can remain “centered and focused on these values” and, hence, will be better able to deal “with the slings and arrows of people’s disappointments.”
He also is a big believer in having proactive discussions to manage client expectations. Even when times are good, clients need to understand that tough markets will arrive sooner or later. Clients also should be reassured by the fact that there’s a plan in place to protect them during the next downturn.
Take heart. Even the pros have a hard time.
State Street Global Advisors reports that pension executives expect their managers to deliver returns of 10.9% per year for the next five years.
BlackRock Global says stocks will return just 5% per year for the next five years; fixed-income returns should be half that level. Former bond king Bill Gross says forget stocks and bonds entirely – buy land and gold.
Setting expectations begins with you. The advisor must frame the conversation so clients can set goals appropriate to the markets we now inhabit.