New Clients, New Technology, Same Value

New investment services technologies will strain existing financial advice models, but the same factors should continue to define who succeeds in the marketplace.

Those factors can be boiled down to two broad themes, explains Craig Martin, a financial services director at consumer research firm J.D. Power and Associates. First, firms that actively investigate and manage the subjective value experience of their clients are better at protecting existing relationships and securing new business. The second trend is that investors will continue to seek the type of expert insight experienced financial advisers can provide as self-directed portfolio technologies gain popularity among younger generations—but they will demand a more collaborative relationship built around their own goals and aspirations, not simply maximizing investment performance.

Martin took a deep dive into the future of financial advice models during the opening presentation of the Money Management Institute’s (MMI) annual member convention in New York. He told audience members J.D. Power may be best known for its consumer research in the automotive industry, but the firm is also strongly active in financial services.

Over about 10 years of collecting and analyzing financial services consumer data, Martin says J.D. Power has observed some interesting differences in client satisfaction among advice and service providers. For instance, Martin says clients who receive the same portfolio returns in a given year often show widely different levels of satisfaction with those returns. Their level of satisfaction, the data suggests, hinges on the two-fold matter of what their advisers coached them to expect and how the performance fits into the long-term investment plan.

For advisers this highlights the importance of the first main theme, Martin says, i.e., that subjectivity and expectations matter hugely when it comes to managing relationships in the financial services and advice space. Clients should not be enormously surprised by either positive or negative gains, Martin says, because one of the reasons they seek advice is to prepare them for the news. 

“If you don’t have solid investment performance and your returns are losing out to the market year in and year out,then obviously you’re not going to succeed in the advice business,” Martin explains. “But what we’ve found what isn’t so intuitive is that success is not just a matter of the numeric performance of the portfolio. It also hinges on whether the client is satisfied with what’s happening in that portfolio.”

Martin concedes that it’s somewhat hard to imagine how an investor could be dissatisfied with returns that outpace the market, but it does happen. For instance, perhaps an investor has a strong safety net in the form of home equity or other holdings outside a retirement or brokerage account, and therefore he is willing to take on high levels of risk when markets are expected to perform well. In this case, the investor could feel dissatisfied if the adviser did not factor these into portfolio allocation recommendations—leaving the investor more conservatively allocated than necessary and missing even more in potential returns.

Martin is quick to add that advisers do not perform better on client satisfaction rankings simply by contacting their clients more than others in the industry. What seems to matter is what gets discussed when communication does take place, and how much attention clients feel their advisers are paying to their specific needs and goals.

Martin points to five key elements that, along with the obvious requirement of generally strong investment portfolio performance, seem to go hand-in-hand with high levels of client satisfaction:

  • Adviser clearly communicates reasons underlying investment performance;
  • Adviser puts a plan in place and reviews it with client at least once a year;
  • Adviser has regular and specific discussions on risk tolerance and investment timelines;
  • Adviser actually puts the financial plan down on paper; and
  • Adviser answers calls and questions within one or two days at most.

Martin says that a client with both strong investment returns and a strong level of satisfaction is willing to give the adviser a positive recommendation about 70% of the time. Clients who receive the same level of returns but report being unsatisfied are only willing to make positive recommendations about 30% of the time.

That 40-point gap highlights the importance of the second main theme, Martin says. More and more, a successful advice relationship does not hinge merely on the recommendation of products that post strong performance relative to the market. Rather, an important feature of any advice relationship both today and moving forward is goal setting and helping inexperienced clients understand how markets and investment performance relate to their particular needs and circumstances. There will also be substantial demand for advice about how to withdraw and spend assets once they’ve been accumulated and investors enter retirement, he says.

While it’s easy to see how online platforms and portfolio building tools will be able to help investors identify strong products and even diversify their holdings, Martin says it’s less apparent how general online tools will help investors set reasonable goals and create a roadmap for retirement or other life stages.