Investors Want Responsive and Transparent Advisers

Ninety percent of investors say being able to resolve problems and answer questions quickly are critical characteristics of consumer-focused financial advisers, according to a John Hancock survey.

Investors polled for the second quarter 2014 edition the John Hancock Investor Sentiment Survey said only about four in 10 (38%) financial services companies deliver both speedy problem solving and high levels of responsiveness to client questions. The same sample of investors said that overall, about 49% of companies are genuinely consumer-focused—i.e., able to deliver features like individualized client servicing and 24/7 support.  

“Consumers consistently express the desire for companies to focus on their needs, yet the perception is low that companies actually accomplish this,” explains Oscar Gonzalez, a John Hancock economist. “This disconnect is something that all companies concerned about the health of their businesses should monitor.”

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A vast majority of investors (87%) also said transparency in fees and expenses (87%), as well as the presence of customer services representatives who are friendly and knowledgeable (84%), are very important in defining a financial services company as consumer-focused. Next in order of importance in are the availability of easy-to-read and accurate statements/bills and the client’s ability to reach a live representative easily, each at 81%.

Other investors say consumer-focused financial services companies must make investment materials available in simpler language (76%) and grant clients access to a user-friendly digital tools and websites (70%). When asked to rank other major attributes of a consumer-focused financial services company, investors also noted the following:

  • Offers creative solutions to problems (62%);
  • Offers the ability to do business online (58%);
  • Makes regular, in-person meetings with representatives and advisers available (49%);
  • Maintains nearby physical office locations (38%); and
  • Offers online or call center help around the clock (44%).

John Hancock’s Investor Sentiment Survey is a quarterly poll of affluent investors. A total of 1,107 investors were surveyed from May 12 to May 23. To qualify, respondents were required to participate at least to some extent in their household’s financial decision-making process, have a household income of at least $75,000, and assets of $100,000 or more.

More information is available at www.johnhancock.com.

Rethinking Risk Tolerance for Retiring Clients

The traditional approach to evaluating the risk tolerance of retiring clients has some problems, according to Michael E. Kitces, director of research at Pinnacle Advisory Group.

He notes that most advisers probably use questionnaires with 15 or so questions to evaluate a client’s risk tolerance. The questionnaires ask about such things as when the client needs to withdraw assets; what other assets the client has; the client’s knowledge level about investments; and what the client would do if markets declined. The client gets a total risk score based on his or her responses.

Kitces told attendees of the National Tax-deferred Savings Association’s (NTSA) 2014 403(b) Summit that advisers are really asking questions about three different things through these questionnaires. First is risk capacity, or the capacity to take risk based on the ability of the investor to absorb losses without getting wiped out. Next is risk perceptions, or what does the client actually define as risky investment behavior. Last is risk attitude or tolerance, based on considerations around how the client feels about risk/return tradeoffs, whereby taking risk means there could be a bad outcome or there could be great gains.

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Kitces said there needs to be some way to account for the difference between risk capacity and attitude, separating time horizon and income needs from people’s willingness to trade off. “For example, we tell young folks, ‘You’re young, you should take more risk,’ but we don’t even ask if that’s going to make them nervous.”

For retiring clients, Kitces posed two scenarios. One retiring client doesn’t need much money, and doesn’t need it for many years because he has a large portfolio, and another client needs lots of money immediately and has less in his portfolio. Both are conservative investors. The first one’s questionnaire scores will average out to indicate he should invest in a moderate portfolio, Kitces explains, but because of his low risk tolerance, it’s just a matter of time before he has losses that are personally devastating to him. In addition, just because the client has the capacity doesn’t mean he should take the risk. The second client’s questionnaire scores will indicate he should invest in the most conservative portfolio, but this portfolio will fail to meet his need to accumulate lots of money.

“These are some of the core, essential problems with traditional risk evaluation,” Kitces said, noting that there is no easy solution for the second person in his example. “If he has a low risk tolerance, he cannot get high income, so he needs a different goal.”

A high risk capacity allows for any risk attitude, but a low risk capacity requires a high tolerance, he added. Risk attitude defines the upper limit of risk to take.

Risk perception presents another problem. Kitces said it seems clients have high risk tolerance in good markets and low tolerance in bad markets. But the problem is not that their tolerance changes, he warns. The problem arises when clients start thinking a short-term market trend is indicative of long-term results. This could lead them to misjudge risk and make bad decisions. Clients tend to remember most clearly what has happened most recently.

“This is where education and financial literacy matters,” Kitces said. “Advisers must do constant educating so client perception is realistic. Perception is something we can actually help clients with.”

However, advisers need to start separating risk capacity from risk tolerance, according to Kitces. “Just because someone may have a large portfolio or a long time horizon, we shouldn’t violate their risk tolerance and give them an overly risky portfolio,” he concluded.

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