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Practice Management > Marketing and Communications > Client Retention

The Real Reasons Clients Pay Advisors

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What You Need to Know

  • Successful advisors provide useful knowledge and help clients avoid mistakes.
  • Be aware of each client's knowledge level and state of mind.
  • Presenting your value to prospects and new clients is best done with examples tailored to the investor.

The obvious consensus is that the client is convinced that they’re better off with the advisor than without! This is the fundamental reason that clients pay their advisor despite the fact that lower-cost or zero-cost alternatives are available.

Being better off with the advisor is not about the advisor; rather, it is all about the client. Having seen volumes of material that describe why a client should use an advisor, I can tell you there is scarcely a note about how to make the client better off. 

So how does the advisor make the client better off?

There are two principles that underlie successful advisors, and success is achieved by articulating these principles clearly. The first principle is to provide useful knowledge that the client does not have. The second is to avoid client mistakes. 

Useful Knowledge

Useful knowledge can be a change in approach, the solution to a problem or an opportunity. The advisor must therefore develop a repertoire of techniques, strategies, facts and sources that can be tailored to each client. If the advisor does any less, the client may be better off on their own. 

Applying this principle may appear simpler with an uninformed client, but this is not the case. More often than not, the uninformed client does not know what they don’t know and therefore has little appreciation of new knowledge.

In addition to being knowledgeable, the advisor must be skilled at assessing the client’s knowledge base and communicating effectively at that level. The client’s knowledge base is not a simple order, but a random assembly of facts and falsehoods derived from experience. This makes the advisor’s job a difficult one since no two clients are exactly alike.

The ability to provide useful knowledge is demonstrated before the advisor is engaged, and then continuously during the relationship.

In direct contradiction with the usual practice of describing the advisor’s process to clients, it is far more effective to describe the ways in which the client can expect to be better off by relying on the advisor’s principles. 

Useful Knowledge Examples

Bringing useful knowledge to the client will:

  • Provide strategies that directly address the investor’s expressed concerns.
  • Provide explanations that answer the investor’s specific questions.
  • Render a professional opinion on specific assets held or being contemplated.
  • Render an opinion on current investment strategy.
  • Introduce security classes that are unfamiliar to the investor but may apply to their situation.
  • Provide different strategies to achieve the investor’s goals, needs and time horizons.
  • Recommend strategies to maximize protection while retaining potential return.
  • Recommend strategies that may minimize the investor’s tax burden.
  • Provide a personalized financial plan that encompasses the needs and obligations of the investor and the investor’s family. 

Avoiding Mistakes

The ability to avoid mistakes is described before and demonstrated immediately after the advisor is engaged. Upon engagement, the areas of interest to the client are examined in relation to the client’s situation and expressed desires and concerns. This often reveals potential contradictions or improvements.

Ongoing monitoring reveals mistakes or misalignments that develop from changes in the client or changes in the marketplace.

Examples of Avoiding Mistakes

Avoiding mistakes requires the advisor to be aware of the investor’s state of mind and the changes that occur in response to both personal and external factors. Such an awareness is achieved through a high degree of trust of the investor in the advisor and a proactive effort by the advisor.

The detection of the change in the investor’s state of mind is the greatest challenge, but not the only one. The second challenge is what to do about it. The prudent course of action with an anxious client requires the advisor to blend empathy with the investor and the probabilities of market conditions. If the investor is euphoric and wants to take high risks, the advisor’s role is to dampen the euphoria and moderate the risk.

Avoiding mistakes can yield enormous savings for the client, but this is difficult for the advisor to do.

Presenting the Principles

Useful knowledge is applicable to prospects and new clients. Presenting this value proposition is best done with examples tailored to the investor. After gathering as much information about the prospect/client as reasonable, the advisor prepares a menu of applicable suggestions to illustrate the advisor’s ability to make the client better off.

This highly personalized presentation enables the prospect/client to immediately recognize the value the advisor brings. On the other hand, the advisor should not fear that the client will “steal” their knowledge and then not engage the advisor. This fear is often expressed but has little validity in practice. Some reasons that the fear of intellectual property theft is overstated in the case of advisors are:

  • Details. The presentation generally lacks the specifics of how to take advantage of the opportunity. An investor is far more likely to ask the advisor to act on their behalf.
  • Interest. Most investors are not primarily investors. Their focus is on other matters, so they are unlikely to undertake a new and unfamiliar activity.
  • Fear of failure. Only highly confident investors will even consider or attempt to experiment with large portions of their assets.
  • No one to blame. Most investors answer to someone else, such as a spouse, family member or business partner. In all cases, investors need someone else to blame for things going wrong.

Mistakes that have been avoided in the past serve to remind clients of the advisor’s value. This is most effectively done as a retrospective that shows what would have occurred if a specific mistake had been made. Such a retrospective is appropriate for an annual review or other extended time period.

The effect of such a retrospective is to further deepen the relationship with the client.

Compliance Issues

Making promises to clients will undoubtedly run afoul of compliance policies, but such promises are not necessary to demonstrate that a client is better off with the advisor. Expectations can be set in terms of the client’s desires and aspirations that show why the client is better off.

Developing such language will depend on whether the advisor is acting as a fiduciary or not. If the advisor is acting as a fiduciary, the useful knowledge is framed as a recommendation. For non-fiduciary advisors, the useful knowledge is presented as solutions to the client’s needs and desires.

Compensation Discussion

If and when the client challenges the advisor’s compensation method or rates, the matter is easily handled by describing the useful knowledge provided, and for current clients, the mistakes that have been avoided.

Lou Harvey is president and CEO of Dalbar, a Boston-based financial services market research company.


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