How do you stop your clients from blowing up their plans?

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I hear the stories from advisers every day… the client who simply knows better, who knows that now is the time to enter / exit the markets or to switch asset allocations because of a stroke of genius that they have had. I’m not proud to admit it, but I have been that client too, thankfully not in the recent past.

All the research shows you, and you’ve seen on many occasions with your own eyes that more often than not this ends in failure. Clients are better off taking a long-term approach and sticking to the plan and the portfolio constructed to achieve their goals. However it’s not you that needs to be convinced, the question is how do you prevent your clients from blowing up their plans?

First of all, it’s useful to recognise and understand some of the behaviours that clients may display, that can result in significant damage.

 

The stroke of genius

Clients unfortunately are usually not as clever as they think they are when it comes to market timing and expected future investment trends. Experienced investors learn time and time again that time in the market is better than investment timing. So be awake to that client coming to you with a great investment idea or wanting to “tweak” their strategy where the reason is based on their instinct as opposed to the long-term objectives of their financial plan.

 

The herd mentality

People are influenced by their peers. We all learn a lot from them, some good, some not so good. Unfortunately when it comes to investments, your clients are better off shutting out the noise and staying focused on their own plan, listening to you as their financial expert. More often than not, you are going to prevent them from making mistakes. Listening to pals is how people ended up buying apartments in Bulgaria, borrowing to buy into already geared property funds etc. Remind them of this, bluntly if you have to. They’ll thank you later.

 

Recency bias

Another dangerous one for your clients. They give more weight to recent information and trends, as opposed to longer-term trends. However you know that markets work in cycles, they go up and down, but that over time stock markets climb inexorably upwards. Remind your clients of this, and just because markets have taken a bit of a dip, now is certainly not the time to sell up and run.

 

Loss aversion

This is a really interesting one – clients feel the pain of losing money more than twice as much as they experience the joy of gaining the equivalent amount of money. This makes your job harder – clients remember the bad days and forget the good and you bear the brunt of this aversion to loss. You need to constantly remind clients of the gains made and help them to maintain perspective of the overall picture, as opposed to the small blips along the way.

 

So these are a few ways in which client behaviours can result in them blowing up their plans. The question is how do you stop them from doing so? After all, this is where you can add enormous value to your clients…

First of all, you need to keep coming back to the plan and ensure your clients stay focused on their goals. Keep reminding them to shut out the noise that comes from the media, friends or wherever, attempting to drag them away from the plan. Changes in investment strategy should be driven by changes in their goals, not the other way around.

Of course it is critical to start with a well-constructed, diversified portfolio. But to most investment advisers, that is actually the more straightforward part. Whether you do this yourself or you have outsourced this to an expert 3rd party, it is important that you have a tested process that will help your clients to achieve the best results possible.

Finally, talk to your clients about behavioural finance and about the types of biases and negative behaviours as outlined above. Let them know that you’re not just making this up, that there is a real science sitting behind this! Introduce them to some of the leading experts in this field such as Daniel Kahneman, Robert Shiller and Richard Thaler. When clients understand the impact their behaviour can have, they will hopefully be less likely to succumb to displaying these negative traits. Your life then becomes a lot easier, and your clients grow their wealth without the frustration of suffering by their own mistakes.

Are you happy your value and cost propositions are right?

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Lots of the conversations that we’re having with financial advisers are in relation to the ongoing value you are providing, and the cost being charged for delivery of that value. However if we are to be completely truthful, it doesn’t always start out from that point….

Quite a number of the conversations start out from the point of, “I’m charging 25bps / 50bps and I’m not comfortable that I can really stand over it and justify it if pushed”. Advisers are looking over the horizon and seeing potentially greater levels of scrutiny from clients (and the regulator?) in relation to trail commission. You recognise that you must be able to comfortably justify your trail commission if you want to grow the levels of it, or even to maintain it. This inevitably results in advisers remaining in the supposed easier place of a low trail commission rate, in order to avoid any pushback around price.

After all, trail commission has been extremely good to many advisers, who have seen recurring income rise substantially for relatively little effort in some cases, while also building long-term value in your business. Investment markets have delivered excellent returns over the last decade, and your trail commission has increased accordingly. You don’t want to lose this growth, hence the pressure to justify it. However you’re now looking at investment markets today and recognising the significant fall in your income that will happen, should there be a biggish correction in the market. Also if your income is very tied to the investment of your client’s assets, any under-performance against benchmarks also raises a question over the validity of your fees.  These issues arise when the only determinant of your trail income is asset levels. The problem is that when you’re only thinking about asset values and your costs, you’re starting from the wrong place.

The only place that this whole conversation can start is with the value that you are providing. Otherwise, it is a serious case of the cart before the horse… When you work out in detail the different levels of value that you are providing to your different clients, it is only then that you can start to price your services in a structured and robust way. Your income is now tied to the services that you are providing, giving you certainty and control over your income stream. Many advisers who do this properly continue to collect their income via trail commission, however now they have minimum charges for each of their service levels. These minimums protect them against falls in the market, and indeed enable them to meet the demands of clients for high service levels where their asset levels alone do not justify them.

When you get crystal clear about your service levels and can easily articulate and communicate the value that you are adding, that nervousness around your trail levels subside. Instead it goes the other way – it gives you the confidence to maintain and increase your trail levels, when you know that your services warrant these higher levels.

Now you can be firm and brave in relation to pricing. When you are clear about your services on offer, you can stand over your pricing as a premium advice provider to relevant clients. With clients who demand premium service levels from you, you can demonstrate the breadth and value of your services, and then justify that you are more expensive. Yes you can have lower cost packages, but within these packages the clients should be left in no doubt about what is included and more importantly what is not.

Clarity around your value gives you a strong position when negotiating your price. Without it, you’re forced to keep watching your competitors and make sure you are undercutting them. A race to the bottom… However if you want to charge higher prices than your competitor, you have to able to deliver more. So it is very important that you can actually deliver what you promise. The last place you want to end up in is the dreaded “over-promising and under-delivering” experience for clients. This is the certain road to losing clients.

 

Spend your time now looking at the value that you add. Do this piece well, and the cost side will fall easily into place, giving you confidence and greater certainty around your future income stream.