Contrary to what intuition may lead you to believe, dissatisfaction with investment performance is not the leading cause for financial advisors losing clients and/or AUM.

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Morningstar conducted a study in 2023 in which hundreds of advisory clients who had recently fired their financial advisor were polled regarding the primary reason behind their decision—the results are quite surprising.

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1.      Lack of Quality Financial Services and Advice (32%)

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The number one reason among respondents for firing their financial advisor was dissatisfaction with the quality of financial services and advice. It is important to distinguish this response from dissatisfaction with the results of the financial services and advice (which will be addressed later).

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Although it may seem intuitive, it is worth noting that the primary reason why people hire financial advisors is really quite simple—people want peace of mind regarding their financial future. Financial advisors are meant to offer expert advice and services to help individuals and families navigate complex economies and financial situations to reach their goals.

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Unfortunately, the wealth management industry has become polluted with overused, basic, and generic investment strategies—and clients aren't happy about it. According to a McKinsey and Company report, 76% of advisory management clients feel frustrated by the lack of customization provided by their financial advisor.

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Even the most simple, rudimentary robo-advisor could suggest and execute a generic 60/40 buy-and-hold strategy. This traditional strategy takes very little effort and provides virtually zero personalization for the client. So, as low-cost index providers, robo-advisors, and self-directed management become more sophisticated and accessible, advisory clients are abandoning their financial advisors for these cheaper alternatives that provide essentially the same value and service.

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Ultimately, without a differentiating value proposition, advisors are struggling to distinguish themselves as an important, irreplaceable role in the client's life...and it's starting to cost advisors very dearly as wealth is beginning to transfer from Boomers and Gen X to the younger class of Millennials and Gen Z who demand technology-based personalization in nearly every aspect of their lives—including their finances.

 

2.      Lack of Quality Communication/Lack of Quality Relationship with Advisor (30%)

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To further solidify the importance of stellar communication skills as a financial advisor, you need look no further than the fact that an advisory client is more likely to fire their advisor over lack of proper communication, trust, and respect than they are over poor portfolio performance. This statistic truly puts it into perspective just how crucial it is to foster strong client relationships.

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As you all know, client communication is quite easy and rather enjoyable when the economy is strong and the markets are steadily climbing—the accounts are growing, the client is happy, and the relationship is solid. However, as anyone who has been an advisor for more than last week knows, this is not always the case. The markets can be unpredictable, volatile, and downright ruthless. Nevertheless, it is an advisor's duty to be available and prepared to communicate to their clients at all times—after all, it's only their life's savings in your hands.

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But I've heard tale (half-facetious, half-painstakingly true) of advisors hiding under their desks or faking an important meeting just to avoid a panicked client's call during a market sell-off. Now while this scene may be dramatized or exaggerated, the core essence is unavoidably true—no matter how good of a communicator or advisor you are, it can be extremely difficult to talk to a client when the market is in free fall and the accounts are taking massive losses or when a market segment spontaneously skyrockets and your client misses out on a huge rally.

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Unfortunately, rather than proactively addressing clients during these more volatile and unfavorable times, many advisors give vague or evasive answers to their clients or avoid communication altogether which demonstrates a lack of respect and preparedness. And that is exactly why nearly 1/3 of the respondents who fired their financial advisor chose to do so. Communication is key.

 

3. Unsatisfied with Investment Returns/Prefer to Manage Their Own Portfolio (21%)

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While dissatisfaction with the results of their investment performance didn't top the list as many would expect, it is clearly still a significant factor in clients terminating their relationship with their financial advisor. The reasoning is quite straightforward.

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If an individual wanted just to protect and maintain their current finances, a simple savings account at their local bank or a sock drawer would suffice. And for some people, it does. But not for individuals who hire a financial advisor. Previously mentioned, individuals hire financial advisors to provide peace of mind concerning their financial future. Usually, this entails building wealth for the purpose of raising a family, buying a home, retirement, legacy, etc. Regardless of the end goal, the common underlying objective is to build wealth.

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This is perhaps the most difficult client grievance to address because an advisor cannot guarantee returns because of both compliance reasons as well as an inability to predict the markets (despite what some predictive analytics technologies may want you to believe).

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While most clients are aware of the inherent risks and uncertainty of investing, they still have high expectations for an advisor to act in their capacity as an expert fiduciary to navigate and capitalize on dynamic market conditions to preserve and build wealth regardless of market conditions.

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This lack of confidence in advisors abilities (coupled with items 1 and 2), often times leads clients to believe they can do a better job managing their money themselves as evidenced by the drastic rise in self-directed management in recent years. This reflects abysmally on the perceived value of today's financial advisors.

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So, what can be done to avoid these common financial advisor pitfalls? 

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FINIAT offers a robust selection of financial technologies that are specifically designed to help advisors avoid these common client grievances and revive their value proposition.

 

1.      Solution to a Lack of Quality Financial Services and Advice

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FINIAT empowers advisors with the ability to offer premier quality of service and advice.

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Looking back at the first point, modern wealth management clients are desperately looking for and demanding more intentional, personalized investment solutions. According to Forbes, "70% of consumers say a company’s understanding of their personal needs influences their loyalty." Unfortunately, most advisors are restricted by time, resources, skill sets, and technology that leave them unable to meet client expectations. Instead, they resort to using the generic, lackluster "solutions" mentioned in the first segment.

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FINIAT technology is designed to bridge the gap between client expectations and advisor capabilities. Advisors can now bring a client's portfolio to life which positions the advisor in a crucial, value-centric role for the client. Through our centralized active portfolio management platform delivered through our firm's operational, interactive website, the advisor can customize each portfolio to a client's specific needs. Our proprietary algorithms continuously adjust the portfolio based on various risk metrics so the client is actively managed. FINIAT offers its advisory services to advisor who, in turn, have the option to select a pre-designed model from our offerings or construct one that customized based on a client's personalized risk profile. 

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Utilizing our platform, the advisor has an integrated experience of constructing, adjusting, and explaining model portfolios on a personalized level to clients. To further tailor this to each client, we have developed a novel solution to replicate, deconstruct, and run single-stock portfolios from an ETF (or group), optionally reducing the number of stock holdings drastically to a more manageable set of stocks.This level of personalization not only meets the client's unique needs but also helps advisors build stronger relationships and deeper engagement with clients which ensures each client feels valued and understood. This is crucial for maintaining long-term client relationships.

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FINIAT is not only enhancing the tools of today's financial advisors, but we are redefining what it means to be a valued, trusted advisor in the modern financial industry. By seamlessly blending sophisticated quant-driven strategies with intuitive, user-friendly interfaces, our technology empowers advisors to build a path of innovation with a story clients can easily understand. Our mission is to empower advisors so that they are not only recognized as facilitators but as crucial architects of financial well-being and success.

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2.     Solution to a Lack of Quality Relationship with Advisor/Lack of Quality Communication

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In an article on Investopedia, advisor Jason Laux is quoted saying "Clients can tolerate the ups and downs of the market, changing economic whirlwinds, and an erratic interest rate environment if, and only if, they feel that their advisor is monitoring the situation and keeping them informed. Just knowing a plan is in place and that they are being cared for will provide the reassurance needed to maintain and build a strong working financial relationship."

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While this may seem much easier said than done, FINIAT provides the tools and technology to make it done just as easily as it is said.

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We realize that the value in our strategies is directly linked to the advisor's ability to simply and clearly communicate them to a client. Our platform focuses not only on the sophisticated algorithms powering our strategies but also on making these strategies transparent and understandable for advisors and their clients. Leveraging our proprietary quantitative engine to generate powerful portfolio insights and talking points, we are able to help advisors differentiate themselves through clear communication of their strategies, enabling them to easily demonstrate their expertise and value to their clients.

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Simply put, FINIAT provides advisors with a complex and sophisticated plan of attack for any market condition that can be easily explained to a client. This exponentially strengthens the client-advisor relationship as the advisor now has the confidence to proactively communicate with their clients at any given moment knowing they have a viable, active plan in place at all times. No more hiding under the desk. On the other hand, the client is finally receiving the peace of mind they are seeking which builds trust and respect for the advisor.

 

This could ultimately lead to greater client retention rates, new referrals, additional assets pledged by existing clients, and the overall growth of the advisor's practice.

 

3. Solution to Dissatisfaction with Investment Returns/Preference to Manage Their Own Portfolio

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Back to the most difficult client grievance to mitigate—poor investment performance.

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FINIAT's technologies are unique from many modern fintech offerings because we are not relying on advanced predictive analytics to generate returns or hoping/claiming to be able to anticipate the market. No, instead, FINIAT leverages a proprietary quantitative engine that utilizes advanced algorithms to react to automated, real-time data inputs. There is no guessing or crystal ball involved in our processes.

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So, while like any other financial company, we cannot guarantee quantitative investment returns, we are more than confident in our ability to provide advisors with the qualitative solutions designed specifically to mitigate the top two client grievances. Our customized, reactive, active-management techniques will ensure quality service and advice while our custom-engineered portfolio insights will ease the tension of uncomfortable client conversations.

 

Together, these solutions will restore your value as an advisor and go a long way to quash the client belief that they could manage their money better themselves.

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If you're interested in learning more about FINIAT technologies and how your practice can benefit, schedule a demo on our calendar here or simply email info@finiat.com with your specific questions.

 

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Sources:

Chase Bank: Self-Directed Investing Sees Growth

Forbes: 50 Stats Showing the Power of Personalization

Investopedia: Why Clients Fire Financial Advisors

Morningstar: Why Do Investors "Break Up" with Their Financial Advisor?

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Disclaimer: This communication is furnished for informational purposes and is not to be construed as a solicitation. Information in this communication is derived from sources deemed reliable but cannot be guaranteed as to their accuracy. Past performance is not indicative of future results.

 

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© 2024 FINIAT LLC, a registered investment adviser. All rights reserved. FINIAT LLC.

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