bridging the trust divide - the advisor - client relationship

8/2/2019 Bridging the Trust Divide - The Advisor - Client Relationship

1/21http://www.ssgads.com http://kowledge.wharto.pe.ed

Special Report

Bidi t Tt Diid:The Financial Advisor-ClientRelationship


2/21

Tab f Ctt

I. A Matter o Trst 3

Three Leels o Trst 3

Trst i Techical Competece & Kow How 3

Trst i Ethical Codct ad Character 4

Trst i Empathic Skills ad Matrit 4

How Adisors Ca Damage Trst 5

Fiess abot Fees 6

Trasparec i Fees 7

The Risks o Trasitioig to Trasparec 7

Ratioaliig the Fee Strctre 8

II. What Adisors Kowad Dot KowAbot Their Cliets 0

Ke Research Fidigs 0

Respodet Details 4

III. Adisor Best Practices: Bildig Trst with the Fee Discssio 5

For Steps to Sccess Whe Discssig Fees 6

Coclsio 9


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At oe time, acial adice sall came olded ito aother serice,

sometimes i the orm o sggestios rom a ta accotat, more

reetl i the orm o stock tips oered b a broker-dealer. Ote,

it was good adice. At times, howeer, it was coficted, becase

moig particlar prodcts sometimes took precedece oer doig

what was right or the cliet.

Oer the last 5 ears, that model has chaged. First, adaces i

techolog ad reglator reorms led to the rise o discot brokers,

makig it diclt or the old-ashioed stockbroker to sstai the

same ee strctre. Later, partl i respose to that assalt, the

acial serices idstr looked to deelop a more stable ad less

cclical reee stream. This t i eatl with cosmer cocers

abot coficts o iterest, ad has led to a ew paradigm i acial

adicethe moemet toward oerig cosltatie serices istead

o prodct pshes ad straightorward ee strctres rather tha

comple or opae oes.

I this report, State Street ad Kowledge@Wharto look at how

acial adisors are egotiatig the bodaries o this eolig

relatioship. Specicall, the report eamies how adisors ca:

. Stregthe relatioships b egederig trst;

2. Best commicate the ale the brig to their cliets

gie how cliets geerall perceie ale; ad

3. Sccessll discss ees with cliets.


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3

I. A Matt f Tt

THREE LEvELS OF TRuSTTRuST In TECHnICAL COMPETEnCE & KnOW HOW

There are certain components to trust that every client,

consciously or even instinctively, looks or in a nancial

advisor. First, by and large, investors are looking or

someone whose level o competence inspires trust.

In other words, an investor generally seeks an advisor

who is experienced and knowledgeable, one who can

help the investor make, or single-handedly make on the

investors behal, dicult nancial and personal decisions.

According to experts at Wharton and a survey o advisors and clients, trust is the

oundation o the advisorclient relationship. Although that might sound elementary,

it is evidently overlooked by many advisors. In act, some advisors take serious risks

when it comes to cultivating and preserving it through their communication practices,empathic skills, and competence in discussing what can be awkward topics, like ees

or sensitive personal and amily issues.

Charlotte Beyer, CEO o the Institute or Private Investors (IPI) in New York, an educational

and networking group or ultra high net worth individual investors, concedes that, at one

time, wealth management was a business shrouded in mysteryand very, very high

prot margins. Since the model has changed, via a transition rom product to service,

many nancial advisors have had to master the art o a new sales tactic. Call it the sales-

ree sale, this approach is now an essential part o every successul advisors repertoire.

The distinction is noteworthy because there is much less o an emphasis on pitching stocks

and mutual unds, and more on personal counseling and education, say Wharton marketing

experts. As with selecting other service providers, such as a amily physician, the advisor

the client chooses is requently the one the client eels she can trust the most.

As with selectig

other serice

proiders, sch

as a amil

phsicia, the

adisor the

cliet chooses is

reetl the

oe the clieteels she ca

trst the most.

According to Rachel Croson, proessor o operations and

inormation management at Wharton, this type o trust is

encapsulated by the question, Do I trust that you know

what youre doing?

This report ound that although most advisors believe

they understand the importance o trust to the success

o the advisor-client relationship quite well, they may


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4/State Street Global Adisors | Kowledge@Wharto

be hurting their credibility by not emphasizing their expertise enough. In Part II o this report, both a survey and a

ocus group conducted by State Street and Knowledge@Wharton ound that there is a sizable gap between the value

consumers place on expertise and the value advisors place on it. Additionally, and perhaps not coincidentally, a similar

gap was ound between how well clients think their advisors are doing and the advisors much higher opinion o their

own perormance.

But how do you convey expertise to a non-expert? Croson says burying the investor with

talk about means and standard deviations isnt the way to do it. Neither will the remark:

Just trust me. Whats needed are explanations that are clear and yet not overly simplistic

As with a doctor or lawyer, insists Croson, the nancial advisor consumers prize most is

the one who can tell them just enough about the subject.

TRuST In ETHICAL COnDuCT AnD CHARACTER

While many advisors tend to think o trustworthiness as simply a unction o persona

and/or industry ethics, Croson believes consumers distill this level o trust into one basic

yet critical question: Do I trust you not to steal money rom me?

And this is precisely where an advisors reputation comes in. Consumers tend to look wel

on advisors who are associated with companies that they have heard o. Advisors who

belong to one o the 10-15 nancial service companies that are household names may

have an edge with many clients, according to Eric Bradlow, a proessor o marketing at

Wharton who teaches marketing strategy to nancial advisors. Marketing proessor David

Reibstein points out that most o the advertising rom the big nancial rms is ocused

simply on establishing the rm as part o what marketers call an evoked setthe group

that consumers consider when they think o a given category.

TRuST In EMPATHIC SKILLS AnD MATuRITy

The nal element o trust ocuses exclusively on the interpersonal relationship. Dr. James

Grubman, one o only a handul o specialized psychologists who provide wealth counseling

and training services to nancial proessionals and their clients, conrms that there is a

third dimension o trust present in every successul advisor-client relationship. This leve

o trust, which we might call relationship competence, may be the most critical because

without it, as Grubman points out, the relationship is extremely ragile. Essentially, thistrust is built on the clients premise that i I tell you personal things about mysel or my

amily, I need to trust that you, the advisor, will handle that well.

...icreasigl the

ale o acial

adice is ot reall

maagig the

moe, bt i the

soter adisorelemetspersoal

coselig ad

istrctio.


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5

Grubman points out that because wealth brings

unexpected stresses to many individuals and amilies,

coping with money issues can be dicult. Many advisors

struggle with the skills needed to solve the interpersonal

issues associated with wealth management. Grubmans

bottom line: clients are more comortable and more

likely to continue their relationship with advisors who are

able to integrate the nancial and the personal into their

nancial advising practices. Those advisors who dont,

will likely ace limitations in the advisor-client relationship

and may nd that they are ultimately unable to satisy the

client. Without the personal dimension, or without the

clients trust in the advisor to handle personal issues and

sensitive inormation with empathy and tact, the client

will not eel connected to the advisor. Consequently, the

advisor is oten unable to get to the heart o a clients

nancial situationthe personal issues that underlie

ones relationship with money.

According to Richard Marston, proessor o nance at

Wharton, increasingly the value o nancial advice is not

really managing the money, but in the soter advisory

elementspersonal counseling and instruction. The

advisor has to understand the logic behind the advice

and work the argument through with the client so the

client really understands it.

Clients are looking or advisors whom they trust

enougha trust grounded in the rapport established

to make dicult decisions or them. Barbara Kahn, a

proessor o marketing at Wharton, conveys the need is

similar to what people are looking or in their doctors. In

several research projects on how consumers make high-stake decisions in health care, Kahn ound that while

consumers are good at identiying the most important

actors to consider, such as quality o lie, survival rates,

and cost, they tend to have a hard time putting those

actors together on one weighted scale or in a single

rule. Thats where a trusted advisor comes in: in one o

her surveys, only 15% o respondents said they would

be comortable making a trade-o on a dicult health

care choice or themselves, but 61% said they would

be comortable with their physicians use o a similar

model.

Kahn notes that similar results were ound when

consumers were asked to make hypothetical nancial

investment decisions. Since the choices that need to be

made in nancial advice are similar to health care issues in

that they are oten unpleasant or dicult (such as saving

money versus spending it now, or taking on additional

risk versus accepting a lower return), her theory is that

people want to nd someone who can make those kinds

o choices or them. Because theyre stressul and not

un to think about, they would rather ask a nancial agent

to make those decisions, she says.

HOW ADvISORS CAn DAMAGE TRuST

Even once trust has been established between the client

and the advisor, other variables can serve to compromise

the relationship. As with any relationship, advisors must

understand that trust is not a xed quantity and is easily

diminished. Weak investment returns might seem like

the biggest way in which clients lose condence in their

advisor. However, Whartons Bradlow contends advisors

tend to underrate the importance o proessionalism

among every person on the team o sta supporting the

relationship.

In act, Bradlow suggests that oten times only 15-20% o

the clients contact is with the nancial advisor; the other

80% o the contact is with the advisors assistant and

support sta. Those people are likely to have a very large

impact on the clients opinion o the advisors brand.


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Bradlow argues that proessional, well-trained support

sta are essential, especially with a relatively new client.

It can take between six months and a year or people to

orm a solid sense o an advisors persona and brand,

and that image can be shattered i multiple sources o

contact introduce a view that is somehow incongruous

or inconsistent with what the advisor has presented.

FuzzInESS ABOuT FEES

Fees are another critical area where trust can be easily

diminished. The challenges the industry aces with ees

are well-documented, but the results o the State Street /

Knowledge@Wharton survey suggest that the credibility

o many advisors may be hurt simply because o the way

they are discussing their compensation.

In act, the survey results (see Part II o this report) suggest

that many advisors nd ees a dicult subject to discuss.

And theyre not alone. Z. John Zhang, a proessor o

marketing at Wharton, agrees: In all service industries,

nobody really wants to talk about the prices. You want

the customer to ocus on the service you provide and the

results that you can deliver. I think or nancial advisors

its the same.

Ironically, although advisors may try to skirt the issue o

ees, leading nancial advisors interviewed or this report

say that most o their clients arent all that concerned

about the absolute levels o the ees. What they are

concerned about is clarity. This isnt surprising: Financial

advisors and marketing experts at Wharton suggest that

or most people, the issue isnt really whether ees are

high or low, but that they know what they are.

Yet, despite years o negative publicity and controversy,

some Wharton scholars are skeptical that consumers

are getting as much clarity as they desire rom the

nancial services industry. The most important thing

is transparencyso people know what is going on

unequivocallyand Im not sure that thats happening,

says Leonard Lodish, a proessor o marketing at Wharton

Fuzziness about ees seems to be endemic at every

stratum o the market. Even the ultra-high-net-worth

investors, who presumably are getting the most

sophisticated advice money can buy, are not satised

with the degree o transparency they are getting rom

their advisors, according to a recent Institute or Private

Investors (IPI) survey.

Charlotte Beyer, CEO o IPI, reveals that in the most

recent survey o members in her organizationwho are

generally worth $50 million or morea large majority

elt that while they believe the advice they receive

is objective, they are concerned that they are not

getting quite the ull story about the ees they pay o

the service provided.

In particular, she says, many members o her organization

explain that the way advisors present their ees oten

makes it very dicult or the investors in her group to

assess whether one rm is charging more than another

While the intent o such bundling is to keep clients rom

seeing the service as a commodity, Beyer argues that

the practice is ultimately corrosive to the relationship

I I dont eel that I completely understand the ee

structure and Im not sure I can compare one rm against

the other...it puts a little chink in the trust I have. And

once that trust begins to erode, she adds, the client

becomes increasingly vulnerable to being snagged by acompetitor.

When attempts are made to clariy ee structures, advisors

shouldnt discount the potential or conusion or a lack o


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7

1 Choi,JamesJ.,Laibson,DavidI.andMadrian,BrigitteC.,WhyDoestheLawofOnePriceFail?AnExperimentonIndexMutualFunds(May2006).NBERWorkingPaperNo.W12261AvailableatSSRN:http://ssrn.com/abstract=905518

understanding o what the ees mean on the client side, either. In a recent study1, Wharton proessor o business and

public policy Brigitte Madrian and two colleagues gave MBA and undergraduate business students prospectuses or our

index unds. One group received an additional ee sheet that compared the ees and their impacts on earnings across

the our unds, and another group received a returns sheet showing each unds average annual returns since the

und was started. The participants were then asked to make hypothetical investments o $10,000, choosing among the

our index unds.

Since the unds were identical, the only dierence between them was the ees.

What Madrian and her colleagues discovered, however, was that the participants

overwhelmingly ailed to minimize the index und ees by neglecting to put all o their

money in the und with the lowest ee. The students who received the ee sheet did

better than the others, investing more money in the lower-ee unds. What we draw

rom this is that disclosure matters, Madrian says, but how inormation is disclosed

also matters.

Beyer predicts that this kind o uzziness over ees wont be around orever. I you think

about a lot o other things that you pay ori you go to buy a car, you know what the blue

book says, you know what the sticker price is. Increasingly, nancial services are going to

become more and more transparent, she says.

TRAnSPAREnCy In FEESTHE RISKS OF TRAnSITIOnInG TO TRAnSPAREnCy

This lack o transparency in ees has helped make many advisors much more vulnerable

than they realize, claims Mitch Anthony, a Minneapolis-based consultant to the nancial

advisory industry. No matter how much you think you realize the level o distrust over

ees, we underestimate it. Its easy or the industry to say were changing the way we do

business because we want to build trust with our clients, and then come out with a bunch

o touchy-eely ads, but all it does is increase the level o cynicism to the consumer.

Already, some experts believe that the pressure or more transparent pricing is pulling

the market in two directions. I think its increasingly barbell-shaped, says Whartons

Marston.

The winners, say Marston and others, are increasingly either advisors who oer custom

service (typically on a percentage-o-assets basis) or cheaper, almost automated solutions,

utilizing some o the increasingly popular low-cost index und amilies and exchange

traded unds (ETFs). The losers in the market are those who havent adapted to a world

I o thik

abot a lot o

other thigs that

o pa or

i o go to

b a car, o

kow what the

ble book sas,

o kow what

the sticker price

is. Icreasigl,

acial serices

are goig to

become more

ad moretrasparet.


9/21


divided between providers o higher-ee, custom-tailored

services and inexpensive solutions geared or the mass

market. The people who rely on current sales o stock

and so on are having problems, insists Marston.

Much o the industry is already proceeding on this theory.

Many wirehouses, or example, have developed both

online and ull-service options, with the intent o trying to

reach both ends o the market. Others have responded

by making acquisitions, either o discount brokers at one

end or trust service providers at the other, to reach the

ull spectrum o the market.

Another sign that nancial services rms are aware o

this change is that their training programs are evolving.

At one time, Marston adds, advisors were taught how

to sell a stock or a bond, and not much more. Those

days are over, he says. These rms are becoming much

more sophisticated in their training.

To make sure that their advisors are going to be able to

satisy the increasing demands o their high-end clients,

a number o rms are spending enormous amounts o

money educating their advisors, according to Marston.

Some o the largest rms are even paying or tuition

that will enable their nancial proessionals to earn a

proessional credential, such as a CFP (Certied Financial

Planner) designation, he says.

RATIOnALIzInG THE FEE STRuCTuRE

In courting new clients, the shit to a ee-only model is a

challenging one or rms and advisors alike, proessors

say. One o the biggest hurdles is learning to articulateto the client what services they are actually getting in

exchange or their ee or or an annual percentage o

assets. This may be particularly the case in high-end

accounts, i the advisor is no longer picking the stocks,

but picking managers. I thats the case, what is the

advisor actually adding? One way to address this issue

Marston contends, is to create rigorous methods o

choosing managers. Its a much more serious business

than it used to be, he says.

But what i the advisor is just buying index unds or ETFs,

which the client could buy through a broker relatively easily

and cheaply? How can the advisor justiy the right to an

annual percentage o assets or as long as that relationship

continues? Easily, in Marstons view. He believes that there

is actually a lot o value being created by the advisor even

when nothing is happening in the portolio. My belie is

that the number-one source o value added is getting the

client into the portolio and keeping them invested through

dierent market cycles, he says.

A lot o evidence supports Marstons view that many

investors need to be kept rom acting on behaviora

biases. Its well known that people think they are

better at basically doing anything than they actually are,

maintains Whartons Croson. Investing is no dierent.

At the same time, advisors shouldnt be araid to alert

their clients to the mistakes they may be making within

the sel-directed portions o their portolios. This type o

consult can provide the advisor with an anecdote that

assists them in legitimizing their ees. A study conducted

by Wharton nance proessor Olivia Mitchell and severa

co-authors urther illustrates the consequences resulting

rom investors not managing their portolios actively

enough. The study ound that the average 401(k) account

contains only 3.5 unds out o what is on average a seo 18 available undsand 80% o the sample neve

traded at all over a two-year period. In act, average

turnover or a proessional is about 117% while among

the aster-trading 401(k) subscribers, its more like 24%


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9

While that is undoubtedly better than daytrading, such

ultra-low turnover may carry its own set o risks: For the

overwhelming majority o retirement savers, there is no

evidence o portolio rebalancing, shits in risk tolerance

with age, or tactical portolio changes.2

A trusted advisor can also add value by raming investment

choices around a manageable number o options, because

the evidence indicates that individual investors have a

dicult time when aced with too many choices. A study

o the investment choices o 857,000 employees o 657

dierent companies ound that participation declined as

the number o unds oered by their 401(k) plans grew.

For every ten option increase, participation in the program

declined by 2% on average, despite nancial incentives

to participate.3

One actor that Glenn Frank, a senior investment strategist

or Calibre Advisory Services, Inc., a unit o Wachovia

Wealth Management, o Waltham, Massachusetts, keeps

in mind is that or some clients, convenience is a major

reason they send their money to be managed by someone

else. Its similar to how they might eel about plumbing,

suggests Frank, who in 2006 was ranked as one o

Worth Magazines 100 top advisors: Gee, I can do my

own plumbing, but Id probably get all wet and Id pay more

or parts.

However clear the need or an objective, non-emotional

advisor may be, Marston concedes that clients may not

like the idea that they are really buying a kind o nancial

caretaker. The client is not going to be willing to pay a ee

or tying the clients hands, Marston says. Thereore, increating the perception o value, he argues, many advisors

nd it easier to convince clients that they are adding value

by choosing good managersthough conventional wisdom

indicates that the vast majority o actively-managed large

cap unds underperorm the index.

Framing value in this way has its obvious limits. Todays

investor is becoming more and more sophisticated, both

in terms o his access to investment research and his

ability to manage a portolio, which means that proposing

that the primary value an advisor brings to a relationship

is that o manager selection may not work over the long

term. Advisors need to move toward oering their clients

a consultative approach to nancial managementone

that blends the nancial aspects o the relationship with

the personal.

In this way, with the right communication skills and

tools, the advisor adds real value by ocusing not only

on a clients nancial well-being, but on the underlying

personal and amilial issues that could urther promote

or cripple the clients nancial health. These are oten the

issues a client is unaware o, or reluctant to ace, due to

anxiety or embarrassment. Experts and the State Street /

Knowledge@Wharton survey suggest, however, that an

advisor who is able to build and preserve trust on all three

levelscompetence, ethics and empathic skillsis in a

better position to help clients ace these issues head-on

and create more satisying and long-lasting relationships

with them.

Part II o our report oers empirical evidence on precisely

what nancial advisory clients are looking or rom their

advisors. The results may be surprising to some, but they

reinorce what Wharton proessors and other industry

experts believethat clients want straight talk rom a

trusted proessional.

2 Mitchell,OliviaS.,Mottola,GaryR.,Utkus,StephenP.andYamaguchi,Takeshi,TheInattentiveParticipant:PortfolioTradingBehaviorin401(k)Plans(2006).AvailableatSSRN:http://ssrn.com/abstract=881854

3 SheenaSethi-Iyengar,etal.,HowMuchChoiceisTooMuch?Contributionsto401(k)RetirementPlans,Pension Design and Structure: New Lessons from Behavioral Finance,83-95.Oxford:OxfordUniversityPress.(2004)


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II. Wat Adi Kwad Dt KwAbt Ti Cit

Although clients desire clearer communication rom their advisors, the ndings o a survey o nancial advisors and,

separately, afuent individuals, conducted or this report ound that many advisors relationships are much shakier than

they believe.

The survey, conducted by State Street and Knowledge@Wharton to assess the strength o the client-advisor relationship

revealed a material gap between advisors perceptions about their client relationships and the clients perceptions o

those relationships. While people are notoriously likely to discount the importance o emotional actors such as congenia

personality in their choice o proessional relationships, this discrepancy may still be a cause or concern or advisors and

or the marketers o advisory services particularly as clients surveyed rated advisors perormance about hal as highly

as advisors themselves believe their clients rate them. And that may place some advisors at risk.

Key ndings o the research ollow:

FEES ARE An AREA OF MISCOMMunICATIOn BETWEEn

ADvISORS AnD CLIEnTSFIgure 1

In both the ocus group and the survey, ees were revealed

to be an area where there is a wide gap between what

advisors say and what their clients hear.

The actual degree o communication advisors and clients

have about ees is unclear. Almost all advisors surveyed

(95%) indicated they discuss their ees with their clients;

yet, only 61% o customers say that their advisor initiates

ee discussions with them.

Why the gap in perception between advisors and clients

on the issue? Bradlow believes its wishul thinking on

the part o advisors who are uncomortable discussing

ees. Its almost like they want to believe that this is

something thats understood. I you believe that its

already been covered, then you dont have to do it.

For a graphical depiction o the complete set o raw survey results (advisors and clients), visitwww.ssgaunds.com.

100%

80%

60%

40%

20%

0%

ClIenTADvIsor

FIgure 1: CoMMunICATIon ABouT Fees:

The FrequenCy oF Fee DIsCussIons (PresenT sTATe)

yeArly

44%

29%

When An

Issue ArIses

18%20%

ClIenT rAIses

The suBjeCT

16%

34%

quArTerly

15%10%

onCe every

2-5 yeArs

7% 7%


12/21

Ironically, although advisors presumably dont discuss

ees out o ear o scaring away clients, the clients who

participated in a State Street ocus group agreed that

they would preer knowing. I have more o a problem

with not knowing, said one woman.

FIgures 2 & 3

Perhaps as a result o this lack o contact, only a minority

o advisors surveyed believe their clients understand their

ee structure airly well or completely. Clients conrmed

that they generally do not understand their advisors ee

structures all that well.

TRuST IS ESSEnTIALFIgure 4

Among advisors, more than two-thirds ranked trust-

worthiness as the most important attribute in the selection

o a nancial advisor. For clients, trust is also the key

element (69%).

Most advisors said they believed their clients elt that

they were receiving a air value or the ees they paid.

Most clients are, in act, relatively satised with the value

they receive or the ees they pay, but generally less so

than advisors think.

In addition, costs matter much more to clients than

advisors believe. A striking 41% o advisors believed thatcost was their clients least important concern. Although

still the lowest-ranked actor, reasonable cost was

believed to be an important aspect (rated as one o the

top two most important attributes) by 31% o clients.

KnOWLEDGE IS MORE IMPORTAnT THAn

ADvISORS THInK

FIgure 5

Another discrepancy between advisors and clients is the

dierent weight they place on knowledge. While only

26% o advisors ranked knowledge as a top attribute,

nearly hal o all clients gave it their highest rating.

100%

80%

60%

40%

20%

0%

ClIenTADvIsor

FIgure 2: unDersTAnDIng The Fee sTruCTure:

hoW Well Do They unDersTAnD?

CoMPleTely

12%

23%

soMeWhATunDersTAnD

31%29%

FAIrly Well

20%25%

jusTunDersTAnD

29%22%

noT AT All

3%6%

100%

80%

60%

40%

20%

0%

ClIenTADvIsor

FIgure 3: reCeIvIng FAIr vAlue For servICes ProvIDeD

exTreMelysATIsFIeD

4%6%

sATIsFIeD

52%

36%

verysATIsFIeD

16%21%

soMeWhATsATIsFIeD

25%30%

noT AT All

3%7%

100%

80%

60%

40%

20%

0%

ClIenTADvIsor

FIgure 4: The IMPorTAnCe oF TrusT:

MosT IMPorTAnT ChArACTerIsTICs oF A FInAnCIAl ADvIsor

TrusTWorThIness

69%74%

unDersTAnDs

FAMIly neeDsAnD goAls

24%20%

PerForMAnCe

4%

10%

CoMMunICATIon

PrACTICes

13%16%

loW CosT

For servICesProvIDeD

5%

12%


13/21


Some members o the ocus group also saw competence

as extremely importantand ignorance as nearly a deal-

breaker. In the ocus group, or instance, one woman

who was asked to sell some holdings beore she moved

her account to a new rm, said that she was unable to

get her new rm to tell her what the tax consequences

o the sale would be, not even an estimate. I wasnt

really able to get any clear answers, she says.

CLIEnTS BELIEvE THEIR ADvISORS ARE OBjECTIvE

TO A DEGREEFIgure 6

Most clients are not entirely satised with the advisors

degree o objectivity. Perhaps, this is an indication

that, or most clients, their level o trust in their advisor

is not absolute, especially as it pertains to the ees or

commissions the advisor collects.

BuT ADvISORS DOnT HAvE MuCH TIME TO

quELL CLIEnTS DOuBTS

FIgures 7-10

One challenge or advisors in correcting some o these

preconceptions is that their clients dont actually want to

communicate more with them than they already do. The

burden, then, is on the quality o the communication and

not necessarily the quantity.

While some advisors would preer meeting with theiclients a little more oten, clients dont actually want more

contact. In general, a ew more would like to hear rom

their advisor on a monthly and quarterly basis.

100%

80%

60%

40%

20%

0%

CoMPleTelyAgree

sTronglyAgree

soMeWhATAgree

ClIenT

FIgure 6: Degree oF ADvIsor oBjeCTIvITy

soMeWhATDIsAgree

sTronglyDIsAgree

CoMPleTelyDIsAgree

19%

30% 31%

14%

3% 3%

100%

80%

60%

40%

20%

0%

ClIenTADvIsor

FIgure 5: The IMPorTAnCe oF KnoWleDge:

The MosT IMPorTAnT ATTrIBuTes To servIng ClIenTs Well

KnoWleDgeABle

26%

47%

PersonAlFACTors

38%

14%

ProACTIve

14% 14%

sTABle

4% 6%

TrAnsPArenT

7% 13%

resPonsIve

25%

15%

100%

80%

60%

40%

20%

0%

ClIenTADvIsor

FIgure 8: CoMMunICATIon MeDIuM CurrenTly eMPloyeD

TelePhone

43%38%

FACe-To-FACe

32%25%

eMAIl

25%30%

WeBsITe

0%

7%

100%

80%

60%

40%

20%

0%

ClIenTADvIsor

FIgure 7: CurrenT FrequenCy oF CoMMunICATIon

yeArly

9%17%

quArTerly

45% 46%

MonThly

39%

24%

WeeKly

7%6%

AlMosTnever

0%7%


14/21

3

Most advisors believe their clients are either very satised

or extremely satised with their service. Yet, the survey

ound that clients are actually much less happy with their

advisors.

How hard advisors are working to correct such aults

seems to be a matter o perspective. Advisors are much

more likely to say they have asked their clients how to

improve their relationship than clients say they do. In fact,

70% of clients reported that they had not been asked

how their advisor might improve the relationship.

Theres a massive gap between what clients think and

what advisors think, concludes Bradlow. He says the data

reminded him o market research on companies where the

ocus is on the product rather than the customer. These

are the classic percentages o a product-centric company

as opposed to a consumer-centric company, he says.

In a product-centric company, most o the emphasis

is on the products, rather than on making sure thatthe products are actually designed around the needs

o a customer. Many consumer product companies

have made this transition, but Bradlow believes nancial

services is urther behind.

An interesting divergence exists in that advisors preerred

ace-to-ace communication even though clients preerred

email.

Advisors and clients do share one area o agreement

when it comes to communication: Clients dont like

hearing rom their advisor via a website any more than the

advisor wants to share inormation through that medium.

InvESTORS ARE MuCH LESS SATISFIED WITH THEIR

ADvISORS THAn THEIR ADvISORS BELIEvE THEM TO BE

FIgure 11

Perhaps as a consequence o the deviating perspectives

noted above, clients are less happy with their advisors

than advisors believe them to be.

100%

80%

60%

40%

20%

0%

ClIenTADvIsor

FIgure 9: DesIreD FrequenCy oF CoMMunICATIon

MonThly

51%

38%

quArTerly

35%

49%

WeeKly

8%9%

yeArly

5%5%

100%

80%

60%

40%

20%

0%

ADvIsor

FIgure 10: DesIreD CoMMunICATIon MeDIuM

eMAIl

ClIenT

22%

41%

FACe-To-FACe

57%

34%

TelePhone

18%

26%

WeBsITe

9% 8%

100%

80%

60%

40%

20%

0%

ClIenTADvIsor

FIgure 11: CurrenT level oF overAll sATIsFACTIon WITh ADvIsor

exTreMelysATIsFIeD

9% 7%

verysATIsFIeD

56%

24%

soMeWhATsATIsFIeD

6%

28%

sATIsFIeD

29%34%

noT AT All

0%

7%


15/21


I the survey is refective o general attitudes, many clients

eel disconnected rom their advisors. Instead o ignoring

clients once theyve signed on, Anthony believes advisors

should tell them that part o my value proposition is that

Im going to pay attention to you.

The results o both the survey and the ocus group

suggest that advisors need to think about their clients

more on an ongoing basis. As one participant in the ocus

group said, The act is, I work too hard to put my money

with someone who doesnt care.

Ultimately, or advisors, increasing the level o trans-

parency and clarity in communications will help build

trust and improve their ability to develop productive, long

lasting and satisying relationships with clients. The next

section o the report ocuses on a best practices method

or discussing ees that can help advisors to build trust

early on and throughout the relationship.

RESPOnDEnT DETAILS

eall diided53% to 47%, respectiel. A maorit

said that their ees were egotiable. Thirt-eight percet

said that the were egotiable or all cliets, bt 44%

said that egotiabilit depeded o asset sie. Ol 8%

said that their ees were eer egotiable.

CusToMer resPonDenTs. Cliet respodets were

eall diided betwee people who sed priate

baks or priate wealth maagemet rms (33%);

acial plaers (28%); or broker-dealers (27%). More

respodets worked with large proiders (49%) tha

was represeted i the adisors sample.

Most respodets paid or acial plaig/wealth

maagemet o a percetage o assets basis (42%),

bt commissio ol was also poplar (23%). Fees are

bdled or most o them (62%). Few egotiated their

ees with their adisor (74% did ot).

More cosmers had portolios o less tha $500,000

(48%), bt more were oer $5 millio tha represeted

o the adisor side (6% reported portolios o oer

$5 millio). The remaider ell ito the $500-999K

(20%) ad $ millio to $5 millio (26%) categories.Most didt pa perormace ees (7%) or didt kow

whether the paid a perormace ee (22%).

FoCus grouP. A ocs grop o afet iestors

who had respoded to the sre was moderated b

a proessioal moderator. The discssio was held i

new york Cit i jl 2006.

A total o 866 idiidals completed the State Street/

Kowledge@Wharto olie sre, which was held

betwee je 4 ad je 29, 2006. Two idetical sre

tracks (i.e., lies o estioig) were preseted to each

grop, which iclded: () 500 Cosmers ad (2) 366

acial adisors. Fiacial adisors comprised a wide

rage o iestmet ad acial serice proessioals,

ad cliets represeted a eall wide rage o portolio

sies.

ADvIsor resPonDenTs. O the adisors, 42% o respo-

dets were proiders o acial or wealth maagemet

serices; 30% worked or a priate wealth maagemet

rm or a priate bak; 28% were acial plaers; ad

6% worked or a wirehose. Sies were also diided

almost eall betwee large (32%); small (25%); ad

botie (29%). The ol derrepreseted segmet

was adisors at mid-sied rms (4%).

Adisors represeted a srprisigl broad cross sectio o

the bsiess. Media accot sie or the oerwhelmig

maorit o respodets was $5 millio or less. Respodets

agai were diided almost eall betwee accots o

less tha $500,000 (33%); accots o $500,000-$999,000(30%); ad accots o $ to $5 millio ( 25%).

Amog the 360 proiders, 58% charged a percetage

o assets, 2% charged a ee pls commissio. Eight-

see percet said the did ot collect a perormace

ees.The remaider was diided almost eall betwee

fat ee (5%); commissio ol (6%); ad fat ee b

proect (0%). Bdled ees ad bdled were abot


16/21

5

III. Adi Bt Pactic: Bidi Tt wit t F Dici

Frank also tries to keep ee discussions very clear. I like to

put them all out on the table including our own potential

conficts, and I like clients to be really pragmatic in their

search. He also has them ask the competition some

key questions: Whats your retention rate? How many

clients do you actually serve or try to serve? Whats your

perormance?

Frank says he always tells prospective clients, Either

were the best or the second best choice or you. The

other choice is themselves...They could go out and put

together an array o index unds and do it themselves,

and the cost would be less. They generally appreciate

the candor, he says.

The successul advisors interviewed or this study arm

that the clearer and more direct the advisor is about ees,

the better. Talking about ees isnt always the most

comortable thing, but i you say it as a matter o course

and thats the ee, clients are usually pretty accepting,

states Glenn Frank.

Among ultra-high-net-worth investors, this already seems

to be the case. My experience with investors and

nancial proessionals is that, increasingly, a discussion

o the business model is beginning to be held at the

beginning o the courtship, says, Beyer o IPI.

As or ees, its

clear that obod

wats to talkabot them; bt

eperts ad the

sre propose

that there is a

high price to be

paid or aoidig

the sbect.

Years o perceived conficts o interest have made some consumers suspicious that their

nancial advisors are truly there to help them. As the survey and the ocus group results

demonstrate, some clients are in act alienated rom their advisors. Ive gotten to the

point where I listen to their spiel, but not really, because I really just dont believe it, saidone participant in the ocus group.

As or ees, its clear that nobody wants to talk about them; but experts and the survey

propose that there is a high price to be paid or avoiding the subject. They say a lack o

transparency about ees negates trust on all levels. Bradlow says that the survey suggests

advisors may even talk themselves into thinking that they have discussed ees enough,

when in act they havent. Dr. James Grubman, psychologist and consultant to wealth

managers and high net worth amilies, concurs that many times advisors avoid ee

discussions due to their own anxiety about the outcome. So, what is the right way to talk

about ees with prospects and clients?


17/21


Candor has paid o or Frank in more direct ways as well.

Frank relays that once he even had a client ask to be given a

higher ee, ater he had rst inquired about a ee reduction.

We can do a lower ee, Frank told him, but youre probably

not going to be the rst call that I answer. In response, his

new client changed his mind and said hed pay more. You

get what you pay orand he wanted to get more, so he paid

more, Frank recalls.

I possible, most successul advisors interviewed believe a

single, simple ee schedule is usually the best way to go.

Besides appealing to clients, that kind o simplicity pays

other dividends as well. Jeannie Gibson Sullivan o Back Bay

Financial Group in Boston, remembers that at one point, her

rm oered 13-15 dierent ee structures. Now they have

one, on a single sliding scale. Its a lot simpler and its a lot

easier to automate.

To help ensure that the client is perectly clear about the

ees, Patrick Carrigan, a senior investment management

consultant at Smith Barney in Dallas, reveals that his team

has put together a chart that shows what his rms oerings

cost and what their competitors oerings cost. Clients

have really responded well to the chart, he adds. Its been

extremely well received. Its one o the most powerul things

weve doneit deuses the ee question right o the bat.

FOuR STEPS TO SuCCESS WHEnDISCuSSInG FEES

According to Dr. Grubman, there is a lesson to be learned

rom these advisors approaches and, specically, rom

Patrick Carrigans method. He rmly believes all advisors

have it within their power to replicate Carrigans success.

Its a matter o developing procedures that really work,

says Grubman. Just as doctors can be taught how best

to deliver dicult news to a patient, he says, so too can

advisors be taught how to best talk about ees. The

discussion about ees has at least our components to it. I

you dont ollow these pieces, it can go badly. I you ollow

all the components, then it goes well, says Grubman

He describes a recipe o sorts or the ee discussion

identiying the active ingredients necessary or successu

conversations about ees that oster client trust.

. DOnT PROCRASTInATE

One key ingredient is to simply disclose. Advisors would do

well to tell clients what their ees are in as straightorward

a manner as possible. The reality is, says Grubman

many advisors are really nervous about this. They ea

that they will be put in the position o having to deal with

a negative or contentious response rom the prospect

or client. He oten nds that advisors dont tolerate thei

own anxiety all that well and this causes them to avoid

the ee discussion as long as they can.

I I dont tell you how many basis points Im going to

charge, says Grubman, we cant ght over it. I I do

tell you, you might want to ght, and I dont know how

to handle that. So instead Im going to avoid the whole

thing. The advisors discomort with assertiveness is a

huge issue in communication skills.

In pointing to Carrigans success, Grubman notes Just

simply the act that the rm didnt avoid and dealt with it

openly is an active ingredient. They didnt procrastinate

They didnt avoid. They did itthey disclosed.

2. DESCRIBE FEES WITH CLARITy

Setting up ees simply and describing them clearly is a

critical second ingredient, asserts Grubman. Advisors

oten mess this up, because out o their own anxietyor their own issues about ees, they will obuscate

They think that they are being specic in showing all the

shades o gray with ees. In reality, clients do not want

shades o gray. They want it pretty black and white.


18/21

7

For many reasons, advisors oten get incredibly detailed when it comes to describing ees. Instead o clearly stating a

ee o 70 basis points, or example, theyll talk about the ranges in ees they charge or various types o clients. They may

then urther cloud the ee discussion by talking about an array o special circumstances that may or may not drive urther

modications in ees. Though the advisor may be well-intentioned in doing so, Grubman says that oering an excessive

variety o contingencies actually erodes trust. What advisors perceive as detailed disclosure o shades o gray, explains

Grubman, is experienced by clients as loopholes, udging and being untrustworthy. Intricately detailed ee menus just

contribute to ambiguity and generate mistrust, warns Grubman, so communicate ees directly with clarity.

3. PROvIDE COnTExTBEnCHMARK FEES

Providing clients with context by benchmarking your ees, says Grubman, is the third step to

success in the ee discussion. Patrick Carrigan is immediately able to convey trustworthiness

and credibility by giving his clients a chart that not only discloses what his ees are but what

his competitors oerings cost. Because i I know that the range o oerings typically is

somewhere between 0.95% and 1.3%, and you quote me 1.25%, says Grubman, at least

I know were in the range.

Advisors are acutely aware o industry ee schedules and what their competitors may be

charging. However, many wealthy individuals do not know whether a ee being charged

is good, bad or indierent, according to Grubman, and that is unsettling or them. Money

and the ees charged or money management are not a water-cooler topic o conversation

or most wealthy clients. For a host o reasons, people can be rather secretive, preerring

not to talk with riends or acquaintances about their wealth or what they pay or services.

Context is key, according to Grubman, particularly or those clients who are working with a

trusted advisor or the rst time.

Market research demonstrates that embedding inormation in context actually conveys more

than i you deliver data without context. Grubman points to the Energy Eciency Rating on

appliances as an example o how context adds value. The eciency rating conveys not just

what the estimated annual operating cost is o the appliance youre thinking o purchasing,

but also a comparison scale o that appliance against other models and brands. It shows

you exactly where your appliance alls within the ull range o possible ratings, giving the

consumer a much better vantage point rom which to evaluate the product.

What adisors

perceie as

detailed

disclosre o

shades o

gra, eplais

Grbma,

is eperieced

b cliets as

loopholes,

dgig

ad beig

trstworth.


19/21


There are ultimately a huge number o ways advisors can

communicate ees to clients these days. The ideal manner,

contends Grubman, would be to very clearly present up-

ront what the typical industry rates are or the advisors

type o rm, or a clients particular net worth, or or a

specic category o client, etc. As Grubman points out,

Patrick Carrigan doesnt just tell clients what his rms ee

ishe presents his ee in context with the range o ees

industry-wide. Yes, this is scary, recognizes Grubman.

You may have to justiy your ee to the client i it is on

the high side. But, ultimately this is better than hiding

behind a lot o gures and then having the client nd out

later anyway.

So when we talk about what my ee is compared to

others, Ive told the client many things. Ive said Look,

Im honest. Look, Im consistent with industry rates.

Plus, Ive educated you, states Grubman. By providing

the client with inormation in context, he says, the advisor

conveys trustworthiness and provides real value to the

prospect or client.

4. PuT IT In WRITInGGIvE CLIEnTS SOMETHInG

TO REFER BACK TO

Finally, advisors would do well, Grubman adds, to put

their inormation about ees in writing, because generally

people dont retain inormation all that well in a ace-to-ace

meeting. We know people simply dont remember hal o

what goes on, he says. So, what an advisor says to a client

is almost never what the client walks away remembering

This phenomenon explains both the discrepancy in

perceptions about ees revealed by the survey, and

also where mistrust can sneak into the relationship. An

advisor may know he told a client the ee was 90 basis

points with one exception. The client remembers it as

90 basis points, no exceptions. Both parties, then, begin

to think that the other is being untruthul or trying to get

away with something should a disagreement arise.

Grubman points out that there are a lot o lessons to

be learned rom the medical eld and that a host o

similarities exist between the advisor-client and doctor

patient relationships. In the medical eld, or instance

a lot o procedural training takes place around how toprescribe medications. Doctors are being trained to ask

patients to repeat back instructions regarding when and

how to take their medications, or the reason that patients

simply do not retain inormation well.

Why Carrigans method works, asserts Grubman, is that

he gave them a chart they could take home with them

So i they orget or theyre not sure, they can reer back

to something and say, Oh, yes, thats right, they said it

[the ee] was 1.25%.

I advisors want people to retain important inormation in

detail, says Grubman, they must write it down: Written

and visual lasts. Oral and verbal fies away.


20/21

9

FOCuS On THE PROCESS, nOT THE FInAL COnvERSATIOn

Ultimately, where many advisors ail in building trust about ees, says Grubman, is by ocusing only on the end o thediscussionor on the conrontation they ear will ensue once they tell the client what the ee is. Everybody is ocused

on that last segment o the conversation, says Grubman. In actuality, i you havent done the component pieces the

correct way leading up to that point, how are you going to have that last [bit o the] conversation? Its liable to go wrong

in a zillion ways.

According to Grubman, competence in the ee discussion can be achieved easily when there

is a well-dened, repeatable roadmap or the conversation. By ollowing the aorementioned

steps, which are independent o who the client is, says Grubman, advisors build trust and

place themselves in a more capable place rom which to address client-dependent variables,

such as the clients personality or situation in lie. That is the bottom line in the relationship:

responding well to a clients concerns, states Grubman. Here is where the advisor must

be equipped with the communication skills so integral to the relationship competence

discussed earlier.

COnCLuSIOn

Ultimately, the nancial advisory business is changing and becoming more transparent.

Wharton experts, as well as those like Dr. Grubman and successul nancial advisors

themselves, say that this way o doing business is better or the client as well as the

advisor, in that it tends to build a stronger, longer-lasting relationship. But as the State

Street / Knowledge@Wharton survey suggests, doing business in this way may require

un-learning behaviors and attitudes, and acquiring new methods or communicating

eectively and openly with clients. What is needed, states Grubman, is a paradigm

shit. And its happening.

In a world where investment solutions and services are becoming increasingly commo-

ditized, experts agree that, or advisors, the extent to which they can act as trusted

counselors and educators to their clients will be the real dierentiator or measure o value.

And the surest way to build trust, according to Wharton aculty and other industry experts,

is by demonstrating through ones actions and words competence in three critical areas:

knowledge, ethics and perhaps most importantly, interpersonal communications.

Accordig to

Grbma,

competece

i the ee

discssio ca

be achieed

easil whe

there is a

well-deed,

repeatable

roadmap or the

coersatio.


21/21

ttp://www.afd.cm

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