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Webinar: What do clients look for in a financial adviser?

24 July 2017 | Webinars

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Donald Bennyhoff, senior investment strategist at Vanguard, spoke about some of the findings of an extensive US survey that asked clients what they most valued in a financial adviser.

Thanks everyone for joining us today; I do appreciate the opportunity to give you a little bit of a preview of some of the research we've been doing with, we essentially surveyed about four thousand investors and asked them all sorts of questions about how do you choose an adviser, and how does an adviser build trust with you and some of our last research will be on what sort of behavioural coaching do advisers and investors value and integrate into their practices?

It's a multi-faceted research project; as a result of some of the newer stuff which we have in this presentation I'm going to spend a little bit more time on that, and we should probably cover this material in about fifteen or twenty minutes and hopefully leave plenty of time for questions.

But there is some work already established at the beginning that we already have research papers on, so I'm going to cover those a bit more quickly and at a higher level since those that are more interested in delving into the topics have some tangible research at hand to help them deal with it.

We've been looking at this topic about advisers' practice, how clients are evolving themselves, the industry is evolving, certainly globally we've seen a lot of changes, but our work on this dates back almost a decade to our original Adviser’s Alpha work, which was based on our experience as advisers and our own practice and how we explained our value proposition to clients as fee-based, which was a different model for compensating for advice than they were accustomed to in the transaction-based world.

Adviser’s Alpha is essentially a service centric model, which catches some people by surprise because we're all investment professionals. But importantly it reframes the benchmark for what the value of an adviser could be; one that's much more oriented towards the service that they can provide, the behavioural coaching that they can provide and maybe doesn't ignore, but certainly de-emphasises maybe the investment management aspects.

It doesn't mean we're not investment professionals as we'll explain later on, but what it does mean that when we're looking at how to explain our value proposition, we found much more success by trying to help people understand that the value of an adviser is often in helping the investor do better than they would do on their own, not just from trying to outperform a policy portfolio or a benchmark like the markets.

The popularity of Adviser’s Alpha I think has been because it's so intuitive; many, we're not the first people to actually think about this in this way, but really the traditional value proposition for many advisers has been to emphasise the outperformance that they might bring to the table. What a client asks well why would I work with you, the answer is often well I hope you get better performance.

The question is better performance compared to what? Being in the market is probably not necessarily going to be your best benchmark for success; it has extremely high hurdles; it requires tremendous alpha after fees, frictional costs like transactions, [Bid F] spread, taxes, and risk, and we want to look for an example of how difficult it could be.

I think all you have to do is look for the actively managed world; the active fund managers have a very difficult time trying to beat this similar benchmark, their returns for their category, and they have far less obstacles than the typical adviser, where we have to integrate not only the clients' investment goals and objectives and risk tolerance and all the various dynamics in their relationship.

Actively managed funds and fund managers don't have any of that to worry about; they don't have to worry about taxes more often than not and they don't really manage money for a particular investor, they manage it at a particular style or based on the perspectives that says here's how I plan to invest, and the investors choose them. So they have far fewer hurdles compared to the average adviser and adviser relationship and they have a very low track record for success.

As you can see certainly with cash flows out there in actively managed world, failure to deliver on that promised outperformance usually results in lower asset retention and in today's world that's beginning to evolve, to emphasised fee and fee-based advise, asset retention and asset gathering are really paramount.

Our Adviser’s Alpha framework emphasises more reliable benefits of a professional relationship, not necessarily the investment performance or investment expertise that we all bring to the table.

On this slide we have actually taken the next step; the next phase of our research was to try and quantify some of the tools that a typical adviser can bring to the typical relationship. And there are a number of them; for the sake of time I won't focus on all of them, but I will talk at a high level about the nature of the seven that we've picked out; these are not exhaustive, there are certainly many more that an adviser can bring to a specific client circumstance, but we wanted to try and do what we could do to try and measure it objectively and in a typical or a general relationship, these are the tools that we felt appear most, or the opportunities appear most commonly.

I will kind of look at the first six and the last one a little differently; so we know about the advent of robo-competition and that's where we would be the first to say that if you look at the first six of these, helping investors build a broadly diversified portfolio and asset allocation, helping them invest their portfolios cost-effectively and rebalance it; helping them draw down from their portfolio effectively in retirement.

Things like that are commonly automated services, and so if you're hankering on those as your main value proposition, it's going to be more difficult in the future, mainly because these are the same services that the robo-advisers are able to use technology to deliver at a far lower cost than most advisers are charging. So these essentially have become almost table stakes or a commodifier's service model; that's not to say that we shouldn't do these, but these are what we should be doing at a minimum.

And then just to focus on that last one, this is where our research is taking us; in terms of the differentiation between the first six and the last seven is you. Behavioural coaching tends to be most effective when delivered in a relationship between an advisor and a client as opposed to a client getting necessarily prompts from emails or tweets or other things that just don't involve that interaction with another individual.

It's also as you can see from the right column, what we believe is our biggest opportunity to add that potential value, and this is actually quite understated in my opinion because some of these periods of time, these challenges in advised relationship, where maybe fear or greed are taking over the market and the clients are most likely to embrace some sort of change to the portfolio, change for change's sake, not necessarily for the betterment of their returns or the risk policy, and these can really result in wealth destruction rather than creation.

These behavioural coaching opportunities are where we personally believe an adviser has the greatest opportunity to add value. And as I mentioned, if you are more interested in delving a little more deeply into the topic, you can certainly contact us and we can put the research paper in your hands to add some of that detail.

Okay, so let's move onto some of the newer content; we're going to talk about, we mentioned earlier that we have been seeing this evolution in the industry; Leo mentioned it in the open about the emphasis on lower fees and transparency that's a global phenomenon. Some areas like RDR and the Future of Financial Advice would be a similar circumstance in Australia; Canada is mulling over similar propositions where investors should be compensating advisers through advice-based fees rather than transaction-based compensation, for the obvious reasons.

But the emphasis is that we believe that it's going to result in a focus on relationship management, not portfolio management; this is key. We know we all consider ourselves to be investment professionals, and I'm certainly not here to condemn anyone for thinking as much; I'm a CFA Charter Holder myself. But we need to appreciate where we can use our knowledge and experience to do the most good for our clients.

I would argue as a CFA Charter Holder, competing against other CFA Charter Holders and professional managers with similar skills and technologies is not necessarily going to yield the best results for my client. It might make me feel better to feel like I'm competing, but it's not necessarily going to lead to the outcome that I desire for my client.

On the other hand I do believe that behavioural coaching and relationship management can add double value to the relationship and the key point here is that these things take time; so they take time to deliver and it also takes time to build that relationship. And time is an asset; it's one of those things that we need to recognise; so we all know how limited our time is and we need to start thinking about how we're spending that time, and asking ourselves is it being spent or are we investing it?

If you're spending time doing research into the next great Apple or Amazon, looking at the next great Fund Manager, that may not yield the fruits that you hope, and may not be time well invested, whereas I would argue that the time invested in the relationship will yield a more reliable outcome for both you and the client.

Again just to finish on this emphasis; we're not saying that investors shouldn't be viewed as an investment professional, but we do say that probably the time would be better spent with the client as opposed to trying to be a professional investor themselves.

And so the one aspect of this concept of relationship management I think is most often confused is that it's not customer service; we don't mean that at all; that simplifies it to such a great degree that it would be sort of an insult to all of us. What we're actually saying is that it's not customer service, but we should think about it as business development and prospecting.

It should be understood that the relationship is a key component of what we mentioned at the beginning in terms of asset gathering and asset retention; it's a key driver of client satisfaction and a key driver of referrals, and we're going to talk a little bit more about that in a second.

But when we think about how we're investing our time, we should actually be thinking about helping our clients and what we can do to help our clients better understand that we're interested in them as people, not as portfolios. So there are certain things that you can do, particularly if you're already fee-based, that really yield a better use of that time.

For example one of the things that we did routinely would be to pick up the phone on maybe one of those days when you get a disruption in the market; it could be Brexit, it could be Fukushima, it could be the US election here in November. These things kind of stir the media and the media tend to stir emotions in the market place and we know that from experience, that our clients get affected by that.

How many times do you routinely pick up the phone or an email just to touch base with a client just to say hey, how are you doing? It has nothing to do with the portfolio, and it sends an incredible message that you're interested in them as a person; so think about the return on your time. Sometimes it's not actually quantifiable in the traditional sense, but maybe the return on your time is trust and confidence and loyalty, and ultimately referrals; let's talk about that. So if someone has their phone not on mute, if you could mute it that would be appreciated.

Let's move on to our research; so as I mentioned we surveyed about four thousand investors, not specifically Vanguard investors, although there were some in the mix, and we asked them a lot of questions. And what we found was when we asked them how they found their current adviser, most of them found them through a referral, which shouldn't be really shocking.

That's why so many people in the industry emphasise referrals and trying to figure out how to be better at retaining referrals from their client base. And traditionally, and I know from my experience, if you wanted to improve your number of referrals, the first thing you thought of was I've got to figure out maybe my referral sources, you know, if I had a better source of referrals, that would be better for my referrals overall.

We asked that question; so we asked them given the source of your referral, what impact did it have on you selecting an adviser? And as you can see, again not a great epiphany, you know, a referral from an immediate family member certainly carried the most weight; nearly eighty percent of investors were selecting an adviser because they were referred by a family member.

But then we looked at some of these other sources and I think again some of these things are what we would traditionally fall back on, oh maybe I'll look at trying to turn to an accountant or another professional that deals with investment or has some sort of interaction with my client, a friend, colleagues, things through the community.

And as you can see, they all had pretty high numbers; the range was actually quite narrow for the more common referral sources, and I think that's actually the epiphany to me. The epiphany wasn't that the referral source affected the selection of adviser, but that there was not really much of a difference between the best and worst – the range is only between about seventy and eighty percent. To me that sounded a completely different message and we'll pass that along to you, that it's not the source of the referral, but getting referred in the first place that matters.

What can we do to get referred more often? And the answer is trust; when we looked at what motivated people to provide a referral, the clients who self-described themselves as having low trust, mid trust or high trust in their adviser, these were the answers. Ninety-four percent of investors with high trust referred were likely or extremely likely to offer a referral; that's tremendous.

To me that's still not the epiphany; the epiphany here is that look at the difference between investors that had high trust in their adviser and mid trust in their adviser; it's nearly double, more than double. So that tells me it's not about just gaining some trust; it's about gaining high trust. Again, high trust takes a lot of concerted effort; it takes time, and that's where it needs to be our focus; we're not trying to just get some trust, or get our clients to trust us a little or somewhat; we need to have them understand they trust us a significant amount, have high trust in us.

That will provide our referrals, which is our asset gathering and asset growth, and then the flip side is that there are also the investors that are least likely to switch advisers, so there's our asset retention.

The other aspect I thought that was interesting that we will include here was that so many things are out of our control as an investment professional, and returns are certainly one of them. And that the investors with high trust were actually more like to stay with the adviser beyond reasons of just investment returns. So they actually were giving us a longer leash because the relationship was actually helping with the asset retention even if the market or the returns weren't.

One aspect I think we need to understand is that trust is complicated; an informal poll that I conducted over a period of about six or eight months, I asked friends and family and professionals I worked with who came into contact with, how do you define trust?

And what you found is really to prominent answers; the first was sort of a more ethical answer; they'll act in my best interests. The second was more functional; they'll do what they say they're going to do. Very few people actually answered with the tone that's the emotional, that I trust someone and it allows me to sleep better at night; it was very different; it was very kind of eye-opening because when we asked the investors in our survey which component of trust mattered the most, as you can see fifty-three percent said the emotional one mattered.

This is another reason why we need to spend time getting to know our clients, getting to know their family, having them trust us enough to allow us to get to know their family; very critical points.

I'll skip over this slide for the sake of time and go right to the conclusion so that we can get to your questions, but I think that given what we have seen, we need to operate slightly differently. We know that some of it's going to be dictated for us, that we're going to be operating under probably a lot more oversight and regulation based on higher ethical standards. I think actually most advisers I meet already operate under a higher standard, but it's about getting all investors and the regulators and advisers on the same page of what that means.

We do think that it's going to be dominated by behavioural coaches and relationship managers. I don't think that investors are going to embrace the allure of somebody saying I can get you better performance, similar to what we've seen in the growth of indexing versus active funds. So many active funds charge more and they promise more, but they've kind of had more time delivering on it and we don't mean to knock asset managers; Vanguard offers a lot of actively managed funds ourselves. Now we believe in the value of active management, but we understand the challenges and so if we're going to be fair about things, we do understand that it's probably a relationship business rather than a portfolio business.

And clients want us to be responsive; they want us to be trustworthy; that takes time, and trust is important because if you really want to grow your assets and retain them, trust is the gatekeeper for that. And again just that further emphasis on that return on time, that there's something that you should do every single day is figure out how you're investing your time; if you're just spending it, you're probably wasting a tremendous opportunity.

With the behavioural coaching for example, can you give us some ideas of where and how that occurs and also the extent to which, is it going to be concentrated in a particular event or is it something that happens week to week, day to day, month to month?

Behavioural coaching is sort of a short hand for our relationship management. I think it does maybe focus on the two parts of the relationship that are people-centric. Most people tend to be more emotional than rational, especially when it comes to their finances. One advantage of working with an adviser is that you can kind of put, you have almost an emotional circuit breaker as part of the equation to help stand between clients and the button.

In today's world, a lot of people can manage their portfolios themselves through electronic platforms and the like. If they see the headlines in the news for example, a lot of times they can be affected emotionally; the people in the media have a tendency to talk to investors as if they know them. And investors take it that way, that they need to be doing something because things are different therefore they should be doing something different.

The coaching aspect I think is the other important aspect of the player, and that's the adviser in the relationship. So if we understand that the behavioural aspect of being a person is that you can be affected by headlines, the coaching opportunity for an adviser can be let's talk about this so that we can understand; we built your investment portfolio based on your financial plan, your investment policy statement; that was all about you.

That was about what you said was important; your time horizon, your feeling about risk and the like; it wasn't build arbitrarily; we didn't just buy a whole bunch of five-star or favourite funds or stocks; it was actually built very discreetly around your circumstance, so let's not abandon it just because the headlines change.

Now the headlines and the media, the US election or Brexit as examples, they're changes in the headlines and the media, but they're not really changes in the headlines that matter most to investors, which should be headlines of their lives. So if a client has a circumstance where they have a child, that they're looking to purchase a first home or pay for college, or they have retirement looming in the immediate horizon; those might be reasons to change the portfolio, but that's because they're changes in the client's headlines, not the media headlines.

Behavioural coaching is sort of that relationship aspect where the adviser can integrate themselves into the client's circumstances, their lives, work on their behalf, and what the clients understand and make sure that the client built that trust in them so that the adviser and the client relationship can actually be more effective.

How do you help your client to build up good habits; so regular contributions, for example? And another point, what kind of milestones might you look for from year to year?

One of the things about behavioural coaching we believe in is that it needs to be proactive; too many people think it's a reaction to the Brexits and US elections. If we want to encourage our investors to be better than the emotional creatures that we see more often, we need to be proactive, and so we emphasise proactive behavioural coaching. That is sort of helping people understand what they're doing and why; the reason that you are a good contributor and you save routinely and you save significantly is that the market is a partnership.

Essentially investors provide the capital, the markets are there to provide the return on the capital; it's not free, it comes with risk and that risk sometimes creates uncertainty and that's where the opportunity for behavioural coaching arises. So what we need to do is we need to jump ahead and help our clients understand that their role in their success, or their future success as investors, is going to be to help with the contribution aspect of it.

The other aspect is going to be the investment and the important aspect is going to be retaining sort of the commitment to the portfolio over time; time builds wealth. So part of that is going to be that ongoing nature that you mentioned Leo; it's certainly there are going to be individual circumstances that kind of arise unexpectedly, but if you've been proactive about these and helping people understand the reason we're diversifying and using asset allocation, is because we know something's going to happen, we just don't know what it will be and when.

When that arises, you can say remember we had this conversation at the beginning or some time in the past; so that you can use that as your anchor to kind of keep them from going astray based on whatever the environment is.

On the latter point, on the terms of what can be your road mark, your benchmark, we often use the required return. So out of your financial plan, you do derive a required return that's necessary to best achieve the client's goals based on what they have and what they're trying to achieve. We actually have a short research paper explaining that, and that's a by-product of the investment policy statement or the financial plan, so it's also about the client; it's not arbitrary like just beating the market; the market doesn't care if you beat it.

But the idea is that we recommend using that as that sort of that benchmark of success, you know, or in our investing are we keeping up with what we need to keep up with; the required return actually serves as that benchmark for success; so I'd recommend starting there.

You’ve emphasised in the past, and you've mentioned it here in your answers, the investment plan, that early initial conversation; how important is that?

I think it can be critically important; I think one it's all about the client. Actually as we talked about earlier, some things are becoming more table stakes – they're baseline expectation because they've become sort of an industry standard. Advisers here and advisers in many places I've visited in Australia are having these similar conversations. Many advisers are beginning the relationship with a plan because it's about the clients, they need to know about the clients to help them, and it actually serves as really the blueprint for what you're investing for and why.

I would say that building that financial plan at the beginning is important because it gives you a reference point to go back to, so that when that event occurs, you can actually go in and say remember we talked about this, that there's going to be changes in the headlines or there's going to be changes in the media; when we go back to our financial plan, what has changed here?

It's a very useful way of actually helping people kind of see yes I hear the headlines and I hear all the talking heads in the media, but really nothing has really changed for me other than what the market returns are, and we know how those are; they kind of come and go with the headlines, but generally if you are a diligent saver and you have a long-term horizon, and you have a reasonably diversified portfolio, and low costs, you're going to end up in a pretty good state.

Thank you to everyone for listening.

Important information:

This video is directed at professional investors and should not be distributed to, or relied upon by, retail investors.

This video is designed for use by, and is directed only at, persons resident in the UK.

This video was produced by The Vanguard Group, Inc. It is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

The opinions expressed in this video are those of the individual speakers and may not be representative of The Vanguard Group, Inc.

Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.

Issued by Vanguard Asset Management, Limited, which is authorised and regulated in the UK by the Financial Conduct Authority.

VAM-2017-07-24-4954

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