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COVID-19’s Impact on the Advisor-Client Relationship

By Chris Sonzogni

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Illustration of Covid virus next to Main Street and Wall Street signs (Photos: Shutterstock; compilation: Chris Nicholls/ALM)

While the profession has been resilient in the face of financial downturns and headwinds, the wealth management industry is in the midst of a shift that will define the way that advisors run their practice even after the pandemic fades. 

In this analysis, we take a deeper dive into two key trends that will shape the advisory profession in the years to come, including changes to the ways that consumers discover financial advisors and shifting preferences in how they receive financial advice. 

Transformation 

The advisory business is built on community. Most advisors’ clients live within driving distance; and business development efforts reflect this: networking events, seminars, centers of influence and even referral networks are predominantly local. 

While larger firms have found success in disintermediating advice and delivering portfolio management remotely, most advisors have stuck with what works: developing and strengthening local relationships. 

While many advisors have invested in their online and social media profiles, the bulk of financial advisors have typically focused on local, event-based marketing to grow their businesses. 

Advisors aren’t the only ones driving this trend. As recently as 2015, only 20% to 30% of investors were open to working with an advisor virtually. While the internet has disrupted many industries, the financial advice industry has been slow to adapt to changing times. 

As the coronavirus arrived in the United States in March 2020, advisors experienced what Microsoft CEO Satya Nandella referred to as “two years’ worth of digital transformation in two months.” 

Widely mandated lockdowns and self-enforced social distancing hurt advisors’ ability to grow their businesses through in-person channels. Travel limitations and fear of contagion meant that not only were some investors unable to meet in person, but fewer were willing to take the risk of doing so. 

Fortunately, most financial services companies were able to quickly transition to a remote-first model. Eight in 10 advisors surveyed by professional organization LIMRA reported being optimistic about their ability to service clients remotely during the pandemic.

While some advisors have returned to the office, few report a return to business as usual. And while some states have fully reopened, many people are still hesitant to leave their homes for non-essential activities. 

Though this may fluctuate as the pandemic continues, it’s likely that a significant portion of investors may hesitate to embrace traditional in-person advisor marketing, even if they’re able to do so. 

Searching for Advice 

For those looking to buy goods and services online, one destination consistently ranks highest for both research and initiating a purchase: Google.

Due to the nature of the relationship and the trust involved, financial advisor-client relationships have historically taken a different route. The activities that drive new business for advisors — community involvement, networking, developing centers of influence and local volunteering, as well as referrals — have historically begun offline.

Since consumers take more time to research and choose a financial advisor, they frequently visit seven or more sites to conduct research on financial services purchases. While online search hasn’t been the primary discovery channel for financial advisors, investors have still used the search engine to conduct due diligence on their potential advisor choices. 

The coronavirus turned that trend on its head. The virus’ emergence in the U.S. drove two major changes. First, most investors began to limit their social interactions, either due to fear of contagion or shelter-in-place restrictions. Second, global markets fell precipitously, and financial stress reached its highest point since the 2008 financial crisis. 

Investors responded as expected: those who had a financial advisor reached out to them in record numbers. Those who did not turned to the internet. 

Chart of Google Searches for Financial Advisors Source: Google Trends

The above chart shows how frequently a given term is searched on Google. The figure compares the frequency of a given search term relative to the site’s total search volume. 

During the first six months of the coronavirus in the U.S., the relative frequency of user searches for the term “financial advisor” increased 17% compared to 2019’s average. With people confined to their homes and facing uncertainty, the need for financial advice has never been greater. The only difference is how it’s delivered. 

An Emerging Digital Divide 

While it’s clear that investors are using search to accommodate their short-term need of finding a financial advisor, what happens when the threat of infection from the coronavirus fades? 

It’s likely that some in-person prospecting will reemerge. A set of investors will still want to meet their advisors via referrals, seminars or in-person networking. However, it’s unlikely that in-person prospecting will be as effective for most advisors as in the past. 

There are two reasons for this shift. The first is demographic. Younger generations are now beginning to earn and inherit substantial wealth. By 2030, Generations X and Y will surpass Baby Boomers in terms of holding the most wealth in the country. 

And younger investors prefer that advisors incorporate technology into their practices: 53% of millennials would seek out a new advisor if their current advisor wasn’t utilizing satisfactory technology, while only 29% of Baby Boomers reported the same. 

Chart showing generational wealth, 2015-2030 Source: Fidelity Investments

While virtual tools were growing in popularity before the coronavirus crisis, consumer adoption was slower, especially across generations. The coronavirus has dramatically accelerated those trends. 

Record numbers of consumers now utilize digital channels to access entertainment, grocery and banking services for the first time. It’s likely that substantially more young investors will prioritize technology in their advisory relationships in the future. 

Second, those newfound habits are likely to stick, no matter the investors’ age. Three quarters of consumers who use a digital channel for the first time are likely to continue doing so, even once things return to normal.

This is the second “peak moment” that is likely to reinvent advisor prospecting. In addition to shifting their discovery behaviors online, consumers of all ages have grown more comfortable replacing in-person interaction with virtual. 

While this most clearly holds true for office work, with more than 60% of Americans working from home during the pandemic, one of the most striking shifts to digital has been that of location-dependent social events and services. 

NYTimes chart on Telehealth use in 2020Source: New York Times , 4/7/20.

We can look to telehealth services for potential lessons. Before the pandemic, the public was slow to adopt the technology. Despite heavy marketing and implementation by health groups and insurance companies, analysts in 2019 projected that about 36 million telehealth visits would be conducted in 2020. 

The coronavirus changed the calculus. Telehealth solved a number of issues immediately.

Not only did telemedicine provide an option for individuals hesitant to visit their physicians for non-coronavirus illnesses for fear of getting sick, but it helped hard-hit hospitals bridge staffing shortages, preserve personal protective equipment and leverage asymptomatic but quarantined staff. 

Telehealth services experienced rapid adoption by stressed health systems and are now here to stay. Analysts predict that remote visits may well surpass one billion this year. 

Use of telehealth in 2020 chart from Commonwealth Fund Source:  Commonwealth Fund 

Nearly three-quarters of Americans are interested in telehealth now. Rather than a simple stopgap, remote health services will likely be a fundamental piece of the health care experience moving forward. It is estimated that about one in four health care office visits may be delivered virtually after the pandemic.

Back to the wealth management space: Pre-pandemic, while investors conducted some financial transactions, such as bill payment, online, as many as two-thirds of investors preferred to meet with their advisors in-person. 

Today, investors are signaling that they’re not only comfortable discovering an advisor online, but also maintaining a relationship virtually.

A review of the data from SmartAsset’s advisor-matching tool shows a 27% increase in investors’ willingness to work remotely. Whereas before the pandemic, less than half of investors were comfortable working with a remote advisor, today more than 63% are willing to do so. 

chart on percent of investors willing to work remotely from SmartAsset Source: SmartAsset internal data, 2020

The Virtual Advice Opportunity 

The consumer shift to digital offers advisors an opportunity to improve the client experience by moving some meetings virtual, which saves time on client servicing while responding to changing consumer preferences. 

As with telemedicine, virtual advice is likely to remain a component of the advisor-client relationship in the future and will be a key element to advisors’ success. As of July 2020, 80% of top-performing firms were set up to offer virtual client meetings and screen sharing.

Advisors who do not pivot their practices could risk not only remaining competitive, but losing existing business. According to Broadridge, 77% of advisors reported that they lost business as a result of not having the right technology to interact with clients. Of advisors that lost business, the average was one-fifth of their book value.

Surveys show the correlation between fast-growing firms and those that integrate more tech into advisor workflows. Historically, advisory firms have been quick to invest in solutions that optimize investment, portfolio and compliance processes and less so relationship management and business development. As many as 40% of advisors may not be using customer relationship management (CRM) software.

In order to remain competitive, firms’ investment in software that supports virtual relationship building can’t begin and end with video conferencing.

Advisors will need to be able to support a remote client at multiple touch points, from onboarding to monthly reporting. Firms will even need to have a virtual solution for ancillary activities, like appreciation events, that improve client retention and help to develop a firm’s brand. 

But even more than improving existing relationships, investors’ comfort with virtual advice offers an opportunity to advisors to reimagine their practice. Historically, the highest density of firms has been in urban areas due to their greater density of high net worth individuals and higher average incomes. 

Advisors who open their practices to virtual clients have the opportunity to expand their potential client base while still managing assets for local constituents. In fact, investors in major coastal cities – with large populations and densities of high net worth individuals – are even more open to working remotely. 

bar chart on investors working remotely in 2020 from SmartAsset Source: SmartAsset, internal data, 2020

Embracing technology will also help advisors provide better service to clients who still prefer a traditional advising model by helping to free up advisor time for client servicing. Consulting firm Cerulli found that advisors who are “heavy technology users” have 24% more time for practice management activities.

Keep in mind that advisors’ comfort with virtual meetings isn’t only a boon for their individual firms. Investors now have more access and choice than ever. 

Individuals can now find an advisor whose niche focus, investment philosophy or personality meets their needs specifically, rather than being tied to the choices dictated by the physical proximity of their advisor’s office. 

Notably, firms that pursue a virtual strategy will need to be more aggressive in their marketing, especially in markets where they do not have a physical presence. 

While locally focused firms have the benefit of not only word-of-mouth referrals, but also individual advisors’ reputations in the community, remote-first firms may need to centralize their marketing efforts and develop a brand that is recognizable to prospective clients. 

More than ever, a firm’s reputation and brand can be the key to convincing prospects to agree to the first conversation with an advisor. 

Prospecting in the Post-COVID Era 

Lockdown-induced boredom and the rise of commission-free trading platforms has driven what Dan Egan, of Betterment, calls “entertainment investing,” with retail investors turning to the markets in droves. On peak days, retail investor orders may comprise as much as 25% of trading volume.

But even more than piling into risky investments, retail investors have been clamoring for safe investments and professional advice. In the first half of 2020, retail investors were largely net buyers of less risky assets. And despite volatility, the first half of the year saw record ETF inflows, with investors turning to diversified products even in times of stress.

ETF asset flows Chart from Fidelity and BlackRock Source: BlackRock/Fidelity 

We’ve seen a shift in the type of consumer who is looking for advice during the pandemic. Following the market turbulence at the beginning of the year, more DIY investors, or those who had never before worked with an advisor, used our platform to find a financial advisor. 

Advisors have expressed that those prospects tended to be confident in their investment choices during the 10-year bull market, but realized that they may need more guidance in the face of increased volatility. 

If the recent market volatility continues through the fall (as has historically been the norm), those investors will likely continue to seek out professional advice.

SmartAssets chart on invested assets Source: SmartAsset internal data, 2020

The rosy outlook for continued growth is supported by the overwhelming interest that SmartAsset has seen from prospects since the start of the pandemic. 

Since March, the platform has seen a 59% increase in investors seeking referrals to financial advisors, as measured by total assets referred, even as average investable assets per consumer remained steady. In July, we referred more than $15 billion in client assets to advisors, a record for the platform. 

While the future is always uncertain, advisors who prime their practice to engage with investors — whose perspectives are defined by the pandemic and our recovery from it — should experience the most new business growth and continued success.

***

Chris Sonzogni is the director of Advisor Marketing at SmartAsset, where he helps financial advisors build meaningful relationships with prospective clients. 

Previously, Sonzogni helped financial firms develop their consumer and investor-facing brands, both as the lead on Investopedia’s custom content team and as an in-house marketer at PGIM Fixed Income and AllianceBernstein.

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