A recent Cerulli report, “U.S. Retail Investor Advice Relationships 2013: Sorting Out the Winners and Losers,” examines the relationship between financial advisers and retail investors. From client acquisition and advice delivery to investment management, pricing, and client retention strategies, Cerulli takes a deep dive into the importance of advice. The report breaks down primary and secondary relationships, investor concerns, investor preferences for adviser compensation, and the strategies advisers can use to address and capture retail investor assets.

Obviously investment performance is a factor investors consider, Cerulli says, but in strong markets, investors do not distinguish the difference between returns of, say, 25% and 26%. In these cases, advisory firms must consider other metrics to differentiate their firms from the competition.

During the most recent market downturn, for example, investors felt betrayed by providers and advisers who failed to protect them on the downside, the report points out. This led to many investors seeking out other providers for advice and expanding the number of relationships with financial providers.

Cerulli strongly suggests that firms rethink the effectiveness of positioning themselves using the hallmark of investment performance. Most important to investors is finding an adviser they trust who will work with them to attain their financial goals, Cerulli finds. To strengthen client relationships, advisers need to be more straightforward about the products they place in a portfolio. Advisers need to explain how and why products make sense for a given situation, and use a thorough financial planning process to identify the solutions most appropriate for a client’s needs.

Trusted advisers walk their clients through all performance outcomes and what those can mean to a client’s long-term goals, the report contends. Investors want advisers who not only know their needs and goals, but who truly understand what those goals mean to the client.

Some of the factors investors were asked to rate as extremely important in choosing an adviser are:

• Taking time to understand needs and goals (46%);
• Explaining analysis clearly (43%);
• Keeping an eye on portfolio, alerting clients to problems and opportunities (41%);
• Looking at entire financial picture (39%);
• Performance of investments relative to the overall market (37%);
• Providing a comprehensive review on a periodic basis (36%); and
• Keeps clients informed of current market conditions (31%).

Compensation Confusion

More than half of investors (60%) can’t understand the compensation structures their providers use, the report finds. This is despite the fact that more firms have increased efforts to highlight fee structures, particularly fee-based advisers.

The report admits that investor lack of understanding can stem from inattention. But, Cerulli contends, financial services firms must acknowledge that when such a vast number of clients are unable to understand how and what they pay, the financial services industry itself is to blame.

As more firms transition to fee-based relationships, the report says, the industry will have an uphill climb as the lines between transaction business and fee-only business blur. Even when firms choose to disclose their fee and commission structures during onboarding, it quickly becomes an afterthought, not often revisited by clients until it is too late.

With only a 62% satisfaction rate with their providers, the data clearly supports the notion that investors who are not sure what they pay become the least-satisfied clients, the report finds. Also contributing to this system-wide shortfall in understanding compensation is the fact that most investors believe their adviser is acting in their best interest.

Indeed, as long as advisers are truly acting as a fiduciary, fee confusion may not be as important. However, many are still not yet legally obligated to act as a fiduciary. Firms that are clear and upfront about what fee their clients are paying ultimately will have better relationships.

“One of the challenges facing the advisory industry is simply helping potential clients understand the value an adviser can provide,” says Roger Stamper, senior analyst at Cerulli. “The good news for advisers is that investors are expressing increased interest in seeking advice regarding their portfolios. Overall, 37% of our survey respondents indicate an increased need for investment advice.”

More information about “U.S. Retail Investor Advice Relationships 2013: Sorting Out the Winners and Losers,” including how to purchase a copy of the report, is available on Cerulli’s website.