As we close in on the first anniversary of the current recession, the financial landscape for affluent investors and their advisors is very different from what it was just a year ago. Double-digit annual returns are now a distant memory, the Enron situation has thoroughly rattled the confidence of every 401(k) participant, and most investors have had to watch as the values of their portfolios have steadily declined.
Yet research that we conducted this year among affluent investors demonstrates that there has been one constant. Indeed, when it comes to the No. 1 expectation that affluent investors have of their financial advisors, the answer during the recession of 2002 was the same as the one we heard during the market boom of the late 1990s: They're more interested in the quality of their relationship with their financial advisors than they are in investment performance. It's a poor relationship, and not poor performance, that leads clients to break their bonds with their advisors.
Of course, that doesn't mean that money management isn't important. In fact, as often as not, top-notch investment performance is what attracts clients to an advisor in the first place. But, as we shall see, affluent clients are far more likely to leave because of an unsatisfactory relationship than because of less-than-average investment returns. And the depth and breadth of the relationship is what's most important in terms of maintaining and expanding the financial advisor's relationship with the affluent client. Just as important from the advisor's standpoint, it's far easier to exert control over a relationship than it is over investments; even the most astute money manager can't outmaneuver a recession.
The good news is that the three key elements of relationship-building have also remained unchanged: contact, consultation and trust. And while most successful advisors already know this, the rub can be consistency. It's not always possible to find the time for every client. And the problem is compounded by the fact that it's not just their own standards that advisors have to maintain. Advisors to the affluent are not working in a vacuum; clients have a point of comparison in other advisors.
In research that we've conducted over the past few years, we've found that clients with more than $1 million in investable assets have anywhere from three to six advisors. They're no more likely to put all their assets with one advisor than they are to invest in just one stock. That means each advisor's performance is continually being measured against that of his or her peers. Advisors may even think they're doing a great job when it comes to the best practices of relationship management only to find out-too late-that they came up short.
A Rough Year
All things considered, investors have been amazingly patient over the last year or so when it comes to the state of their portfolios, possibly because they're still well ahead of where they were a decade ago. Research that we conducted in the fourth quarter of 2001 showed that, even though they were actively hedging their bets by moving money from equity mutual funds to bond and money market funds, affluent investors still believed that the stock market was the best place to be for the long term. They also said that they would rather work with a financial advisor than go it alone. Finally, they had accepted the fact that they were not going to see double-digit returns anytime soon, a relief from the money-management standpoint.
But while they have been patient when it comes to their portfolio, the affluent have been less so when it comes to their relationships with advisors. Again and again, our research has shown that a lack of interaction can be the undoing of a client/advisor relationship. In 1999, for instance, we conducted a survey of 652 people with at least $1 million in investable assets and asked those who had changed advisors why they had switched. More than four out of five said they had switched because they were disappointed with the interpersonal relationship.
The same 652 multimillionaires also told us their level of satisfaction with the relationship was directly linked to any referrals they might make, new products or services in which they might invest, or any additional assets they might turn over to their advisors.
The Three Best Practices
When it comes to relationship management best practices, as noted, affluent clients expect three things from their advisors: contact, consultation, and trust.
In terms of contact, clients are different with regard to how often they want to hear from their advisors, what they want to talk about and how they feel about face-to-face meetings, as opposed to phone calls, e-mail and mailings. Some are low-maintenance, and some will make advisors earn every penny. For the advisor, the key is consistency, of working with a client to set the contact parameters and then making sure to maintain them. Few messages have come through more clearly in our research over the past several years than the need for proactive contact. Whether it was a wildly volatile day for the market or the tragedy of September 11, clients wanted to be contacted. Those advisors who called their clients improved their standing. Those who did not call damaged their credibility, not to mention their chances for getting referrals and more assets to manage.
A 2002 research study of 191 investors with at least $500,000 in investable assets once again validated the importance of contact. Those advisors who took the time to set parameters for contact with their clients and then kept up with the agenda were six times more likely to get additional assets from that client within a six-month time frame than those advisors who did not set contact parameters or failed to adhere to them. The only problem is that just 31 of those 191 investors were getting what they wanted.
When it comes to consultation, clients want to have an advisor who knows what's right for them from a financial standpoint, whether they want to play it safe or roll the dice, whether they have three children to put through college or none and whether they want to retire at 50 or 70. In most cases, the framework for the consultative relationship will be worked out in the early stages of the client/advisor relationship when there's a lot of information gathering going on. But consultation is not stagnant. If a client inherits $200,000 or loses $125,000 on the sale of a house in a down market, it's the advisor's job to keep up with those changing circumstances, talk it through and make recommendations in keeping with that client's profile.
Among the 191 investors already cited, only 11.5% reported that any of their financial advisors really understand them. But those advisors were rewarded with an average of 4.1 referrals per client.
Finally, there's the issue of trust. The good news is that most clients will give the advisors the benefit of the doubt when it comes to their trustworthiness, figuring that the advisor wouldn't still be in business if he or she was not to be trusted. And most advisors will earn their clients' trust simply by doing what they say they will do when they say they will. People also tend to trust others whom they see as being most like themselves, so finding touchpoints and common ground will help build trust.
While it may be surprising to find that a good relationship is more important to clients than an advisor's money-management skills, it's not exactly front-page news that clients crave-and appreciate-attention. We all know that a better diet and more exercise is good for us, but that doesn't mean we do it. And we all know that the more attention clients get, the happier-and the more profitable-the relationship will be for the financial advisor. But it doesn't always mean they get it. Advisors have lots of clients, lots of paperwork, and not a lot of time. So how can they find the time to build and maintain relationships?
First, they should take another look at their client roster. Most advisors have a handful of clients who do not necessarily warrant the extra attention, and it's important to decide which ones to focus on because there's not enough time to give all of them the attention they require. In some cases, it's far from the worst thing if less affluent clients move on (or are transitioned) to another advisor. The economics are pretty simple: If an advisor can make a relationship with an affluent client more profitable by being more proactive, it will make up for any less affluent clients they might lose.
Second, advisors simply have to make the time for their clients-and this is the biggest roadblock to success. As mentioned in a column in this magazine last year, top advisors devote 80% of their time to client relationships and outsource everything else. Again, the cost of bringing on an administrative resource should be a no-brainer if the time gained leads to more revenue.
In the end, the formula is pretty straightforward, as it has been for years: client satisfaction leads to loyalty, referrals and more assets to manage. A lack of client satisfaction leads to a lack of loyalty, no referrals, fewer assets and, as often as not, one less client to manage.
Hannah Shaw Grove is managing director and chief marketing officer of Merrill Lynch Investment Managers. Russ Alan Prince is president of the consulting firm Prince & Associates.